United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 30, 2000 Decided February 2, 2001

No. 99-1395

WorldCom, Inc., et al.,

Petitioners

v\.

Federal Communications Commission and

United States of America,

Respondents

United States Telephone Association, et al.,

Intervenors

Consolidated with

99-1404, 99-1472

On Petitions for Review of an Order of the

Federal Communications Commission

Carl S. Nadler argued the cause for petitioners and supporting
intervenors. With him on the briefs were Ian Heath Gershengorn, Thomas
F. O\'Neil, III, William Single, IV, Jeffrey A. Rackow, Mark C.
Rosenblum, Peter H. Jacoby, Judy Sello, Gene C. Schaerr, James P. Young,
Brian Conboy, Thomas Jones, Albert H. Kramer, Robert J. Aamoth, Charles
C. Hunter and Catherine M. Hannan. Maria L. Woodbridge entered an
appearance.

Lisa S. Gelb, Counsel, Federal Communications Commission, argued the
cause for respondent. With her on the brief were Christopher J. Wright,
General Counsel, and John E. Ingle, Deputy Associate General Counsel.
Robert B. Nicholson and Robert J. Wiggers, Attorneys, U.S. Department of
Justice, Daniel M. Armstrong, Associate General Counsel, Federal
Communications Commission, and Laurence N. Bourne, Counsel, entered
appearances.

Before: Edwards, Chief Judge, and Sentelle and Randolph, Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: Petitioners, WorldCom, AT&T, Time Warner
Telecom, and other long distance telephone service providers, seek
review of the FCC\'s Fifth Report and Order and Further Notice of
Proposed Rulemaking in In Re Access Charge Reform, 14 F.C.C.R. 14,221
(1999) (hereinafter \"Order\" or \"Pricing Flexibility Order\"). That
order grants local exchange carriers (\"LECs\") immediate pricing
flexibility for some interstate access services and establishes
procedures through which LECs may seek substantial additional relief
from existing price cap regulation. Petitioners maintain that the Order
is arbitrary, capricious, and contrary to law in that it violates the
FCC\'s statutory mandate to ensure \"just and reasonable\" prices for
telecommunication services and promote the public interest. Several
LECs\--BellSouth, Qwest, SBC Communications, and Verizon\--intervene in
support of the FCC.

We hold that the FCC\'s decision to grant additional pricing flexibility
to incumbent LECs through a series of collocation based triggers,
deregulation of new services, and deaveraging of rates was neither
arbitrary and capricious nor contrary to law. The FCC made a reasonable
policy determination that collocation was a sufficient proxy for market
power in determining whether to grant pricing flexibility to LECs and
sufficiently explained the basis for its decision to grant immediate
pricing flexibility for some services. For these reasons, we uphold the
FCC\'s order and deny the petitions for review.

I. Background

A. Legal and Regulatory Context

In recent years, the FCC has sought to facilitate greater competition in
the provision of both long-distance and local telephone service. See,
e.g., AT&T v. FCC, 220 F.3d 607 (D.C. Cir. 2000); Bell Atl. Tel. Cos. v.
FCC, 79 F.3d 1195 (D.C. Cir. 1996); Nat\'l Rural Telecom Ass\'n v. FCC,
988 F.2d 174 (D.C. Cir. 1993). Competition for telephone services, where
it exists, serves the FCC\'s statutory goal of ensuring fair and
reasonable prices for telecommunications services. Therefore, as
telephone markets become more competitive, the FCC has lessened
regulatory control over those markets, including the market for
interstate access services. It is within this evolving regulatory
context that this case arises.

1\. Interstate Access Services

Local telephone service is provided by local exchange carriers. 47
U.S.C. § 153(26). Typically, one LEC is the dominant, or \"incumbent,\"
service provider in each local area. Until relatively recently, the
incumbent LECs had virtual monopolies over the provision of local phone
service in their territories.

Long distance service\--that is, service between local access and
transport areas (\"LATAs\") or \"InterLATA\" service\--is, for the most
part, provided by interexchange carriers (\"IXCs\"), such as petitioners
WorldCom and AT&T. Long distance providers are reliant upon LECs to
reach their customers. When a customer makes a long distance call, the
IXC must have \"access\" to the local networks at both the originating
and receiving end of the call in order to complete the connection.
Generally, the LEC connects the call from the caller to a switch or
\"end office,\" which is in turn connected to a \"serving wire center\"
(SWC), which is itself connected to an interconnection point, or \"point
of presence\" (POP), with the long distance carrier. This same series of
connections will also be made at the receiving end of the phone
call\--from POP to SWC to switch to call recipient. LECs charge the IXCs
for providing this \"access service\" in accordance with 47 C.F.R. Part
69. IXCs then bill customers directly for long distance calls.

There are two types of access service: \"switched access\" and \"special
access.\" Switched access service requires the creation of a connection
between the caller and the long distance company on a \"call-by-call\"
basis. This entails (1) a connection between the caller and a local LEC
switch, (2) a connection from the LEC switch to the SWC (\"interoffice
transport\"), and (3) an entrance facility which connects the SWC and
the long distance company\'s POP. Switched access can either be
dedicated to a particular IXC (\"dedicated transport\" or \"direct
trunked transport\") or shared among IXCs. \"Special access\" service,
on the other hand, uses dedicated lines between the customer and the
IXC\'s local POP. Switched access is used by most residential customers.
Most users of special access services are companies with high call
volumes.

For quite some time incumbent LECs dominated access service markets. In
recent years, however, other companies have begun to enter these
markets. Market entrants typically provide a portion of full access
service, such as from the IXC POP to the SWC, in any given market. This
development was facilitated by changes in FCC regulations. Beginning in
1992, the FCC required incumbent LECs to permit competitors to
\"collocate\" their equipment at LEC wire centers and connect directly
to the LEC networks as a means of spurring additional competition in
access service. See Expanded Interconnection with Local Tel. Co.
Facilities, 7 F.C.C.R. 7369, p P1-3, 39, reconsidered 8 F.C.C.R. 127
(1992), vacated in part and remanded in part, Bell Atl. Tel. Cos. v.
FCC, 24 F.3d 1441 (D.C. Cir. 1994). Now, the FCC believes, there may be
sufficient competition for access services to justify deregulatory
measures.

2\. Regulatory Framework

For years the FCC imposed traditional rate of return regulation on the
LECs. Beginning in 1990, however, the FCC substituted \"price cap\"
regulation for the largest LECs. See Nat\'l Rural Telecom Ass\'n, 988
F.2d at 178-79. Price cap regulation imposes a \"cap\" on aggregate
prices charged by LECs for certain services in a given area. See 47
C.F.R. §§ 61.41-.49. For the purposes of setting the caps, services are
grouped in various \"baskets.\" See 47 C.F.R. § 61.42(d). These are the
common line basket, traffic-sensitive basket, trunking basket, and
special access basket, the latter two of which are at issue in this
case. LECs are also required to charge averaged (i.e., uniform) rates in
given service areas, absent substantial cost differentials. See 47
C.F.R. § 69.3(e)(7). This averaging requirement is designed to pre-vent
price discrimination by LECs.

Price cap regulation offers more pricing flexibility than rate of return
regulation, as companies are relatively free to set their own prices so
long as they remain below the cap. A company can raise the price for one
service so long as that increase is offset by a price decrease in
another. Prices that are below upper price \"bands\" for a given service
are also presumed lawful and given streamlined review by the FCC. See
Bell Atl. Tel. Cos., 79 F.3d at 1198. The FCC implemented price cap
regulation for LECs as \"a transitional regulatory scheme until actual
competition makes price cap regulation unnecessary.\" Order p 11.

Price cap regulation is supplemented by tariff requirements for
\"dominant carriers\" (including all regional Bell Operating Companies
in their local service areas), under which companies are required to
publish rate changes before they are implemented. 47 U.S.C. § 203(a), §
204(a). Tariffs must be filed fifteen days in advance of price increases
and seven days in advance of price decreases. 47 U.S.C. § 204(a)(3).
This allows both the FCC and affected customers to review and challenge
price changes by LECs. The tariff requirement is waived for those
carriers that are deemed non-dominant because they face substantial
competition from other firms.

3\. The 1996 Act

In 1996, Congress enacted the Telecommunications Act of 1996 to
\"promote competition and reduce regulation in order to secure lower
prices and higher quality services for American telecommunications
consumers and encourage the rapid deployment of new telecommunications
technologies.\" Pub. L. No. 104-104, 110 Stat. 56, 56 (Introductory
Statement). The 1996 Act requires incumbent LECs to grant competitors
(such as the IXCs) greater access to their local networks through
collocation of facilities, the purchase and resale of \"unbundled
network elements\" and services, and mandated interconnection. 47 U.S.C.
§ 251(c)(2)-(4). In response to the 1996 Act, the FCC has sought to move
toward greater competition for, and less regulation of,
telecommunications services.

B. The FCC\'s Pricing Flexibility Order

On August 5 1999, the FCC adopted the Fifth Report and Order and Further
Notice of Proposed Rulemaking in In Re Access Charge Reform, 14 F.C.C.R.
14,221 (1999). In accordance with the stated goals of the 1996 Act, the
Order granted immediate pricing flexibility for some services and set
competition thresholds to trigger additional relaxation of regulatory
controls. According to the FCC, the Order was the \"logical next step in
the Commission\'s ongoing effort to coordinate reduced regulation with
competitive developments.\" Brief for Federal Communications Commission
at 9.

1\. Immediate Pricing Flexibility

The Order provides immediate pricing flexibility for LECs in three
important respects: (1) LECs may introduce \"new services\" subject to a
streamlined approval process; (2) LECs may offer deaveraged rates for
services in the trunking basket; and (3) interstate interLATA and
intraLATA toll services are removed from price cap regulation. Order p p
34-66. Petitioners challenge the first and second changes as unlawful.

New services are those services that, by definition, \"expand\[ \] the
range of service options available to consumers.\" Id. p 37. Previously,
an LEC needed a waiver to offer a new switched access service that did
not fit into the preexisting rate structure. The LEC was required to
demonstrate that such a waiver was in the \"public interest.\" Finding
that existing \"new service rules impede the introduction of new
services,\" id. p 37, the FCC Order eliminates the required \"public
interest\" showing and allows LECs to file tariffs for new services with
only one-day\'s notice. LECs are still prohibited from offering \"new
services outside of price cap regulation.\" Id. p 43.

Under the FCC\'s regulations, price cap LECs are generally required to
geographically average charges for access elements across a given
\"study area\" (typically a state or region). 47 C.F.R. § 69.3(e)(7).
Deaveraging\--the disaggregation of charges for specific service access
elements\--was only allowed in up to three zones per LEC and only
subject to certain conditions, such as intensity of use. Under the new
rules, LECs may define up to seven zones subject to the requirements
that (1) each zone other than the highest price zone accounts for at
least fifteen percent of the LEC\'s trunking basket revenues in the
study area, and (2) annual price increases in a zone cannot exceed
fifteen percent. Order p 62. According to the FCC, this new flexibility
\"enhances the efficiency of the market for those services by allowing
prices to be tailored more easily and accurately to reflect costs and,
therefore, promotes competition.\" Id. p 59.

The Pricing Flexibility Order also removes interLATA and intraLATA toll
services from price cap regulation upon an LEC\'s implementation of toll
dialing parity. See id. p 45. Toll service is \"telephone service
between stations in different exchange areas for which there is made a
separate charge not included in contracts with subscribers for exchange
service.\" 47 U.S.C. § 153(48). When an LEC provides toll dialing
parity, it permits its local service customers within a given calling
area \"to make a local telephone call notwithstanding the identity of
the customer\'s or the called party\'s telecommunications service
provider.\" 47 C.F.R. § 51.207. LECs are required to implement toll
dialing parity throughout their service areas. See 47 C.F.R. §§ 51.205,
.209, .211, .213. Upon meeting this requirement for all interLATA and
intraLATA toll services, an LEC\'s provision of these services is
removed from price cap regulation. This portion of the Pricing
Flexibility Order is not challenged in this case.

2\. Future Pricing Flexibility

The FCC order also provides for additional pricing flexibility once an
LEC shows that certain competitive thresholds (\"triggers\") have been
met in a given metropolitan statistical area (MSA). According to the
FCC, this step is merely the latest effort to \"allow incumbent LECs
progressively greater pricing flexibility as they face increasing
competition.\" Order p 67. The triggers measure market competition based
upon investments in infrastructure by potential competitors. The FCC\'s
stated aim is to balance the benefit of further deregulation with the
potential risk of exclusionary behavior or increased prices for
consumers. See id. p 69 (noting that the relief \"if granted
prematurely, might enable price cap LECs to (1) exclude new entrants
from their markets, or (2) increase rates to unreasonable levels\").
Therefore, the more relief sought, the higher the trigger is set\--that
is, a greater level of investment by competitors is required.

The relief comes in two phases. In Phase I, LECs may offer contract
tariffs and volume and term discounts, while remaining subject to some
price cap rules and tariff requirements. In addition, for LECs subject
to Phase I relief, new tariffs only require one day advance notice as
opposed to seven or fourteen days notice under current rules. Phase I
relief is available upon a showing \"that competitors have made
irreversible investments in the facilities needed to provide the
services at issue, thus discouraging incumbent LECs from successfully
pursuing exclusionary strategies.\" Id. p 69. Phase I relief is
potentially available for dedicated transport (entrance facilities,
direct-trunked transport), channel terminations, and common line and
traffic-sensitive services.

In order to obtain Phase I relief for dedicated transport services an
incumbent LEC must show collocation in fifteen percent of wire centers
within the MSA in which relief is sought, or in wire centers accounting
for at least thirty percent of revenues for services in question. Id. p
93. In addition, at least one competitor must rely on transport
facilities provided by a non-incumbent LEC in each wire center relied on
in the applicant LEC\'s petition. Phase I relief is available for
channel terminations upon a showing of collocation in fifty percent of
wire centers within the MSA in which relief is sought or in wire centers
accounting for at least sixty-five percent of revenues for services in
question. Id. p p 105-06. The trigger for common line and
traffic-sensitive services is that a competitor must offer service to
fifteen percent of incumbent LEC\'s customer locations using its own
transport and switching facilities. Id. p 120.

In each case Phase I relief is subject to several conditions to prevent
price discrimination or other potentially predatory behavior. Under
Phase I, contract tariff rates must be available to all similarly
situated customers, and volume discounts must be available to all
similarly situated customers willing to make equivalent term
commitments. Id. p p 124, 130. Incumbent LECs must continue to offer
services pursuant to price caps as well. Id. p 24. Finally, LECs remain
subject to FCC enforcement actions for anticompetitive behavior. See,
e.g., id. p p 127, 131; 47 U.S.C. § 208.

In Phase II, LECs are given greater freedom to raise and lower rates
outside of price cap regulation. Phase II relief is available for the
same services and may be sought once \"competitors have established a
significant market presence in the provision of the services at issue.\"
Order p 69. Phase II relief allows LECs to offer services outside of
price cap regulation, though LECs must still file generally available
tariffs and remain subject to FCC enforcement actions for
anticompetitive behavior.

In order to obtain Phase II relief for dedicated transport services an
incumbent LEC must show collocation in fifty percent of wire centers
within the MSA in which relief is sought or in wire centers accounting
for at least sixty-five percent of revenues for services in question.
Id. p p 148-49. In addition, as with Phase I relief, at least one
competitor must rely on transport facilities provided by non-incumbent
LECs in each wire center relied on in the applicant LEC\'s petition. Id.
p 82. Phase II relief is available for channel terminations upon a
showing of collocation in sixty-five percent of wire centers within the
MSA in which relief is sought or in wire centers accounting for at least
eighty-five percent of revenues for services in question. Id. p 150. The
FCC has not yet set a collocation trigger for common line and
traffic-sensitive services Phase II relief.

As with Phase I relief, LECs must file tariffs and remain subject to FCC
enforcement actions for anticompetitive behavior under the relevant
statutory provisions. Id. p 151. The FCC acknowledged that its rule may
allow Phase II relief before the manifestation of actual competitive
alternatives for interstate access service customers but that \"the
costs of delaying regulatory relief outweigh the potential costs of
granting it before IXCs have a competitive alternative for each and
every end user.\" Id. p 144.

Both Phase I and Phase II relief are available on an MSA-wide basis.
This is because, according to the FCC, \"MSAs best reflect the scope of
competitive entry, and therefore are a logical basis for measuring the
extent of competition.\" Id. p 72. Relief is not available on a rural
service area basis. Rather relief is available for the \"non-MSA parts
of a study area\"\--typically one or more rural service areas\--if the
triggers are satisfied for the entire area. Id. p 76. The FCC
acknowledges the \"theoretical possibility\" that granting relief on an
MSA-wide basis could enable LECs to engage in predatory behavior. Id. p
83. However, the Commission concluded \"the costs, particularly the
administrative costs, of granting pricing flexibility on a wire
center-by-wire center basis outweigh the benefits of protecting against
such theoretical harms.\" Id. The Commission declined to provide relief
on a LATA basis, as in some states the relevant LATA encompasses the
entire states. Id. p 73.

The triggers relied upon by the FCC are largely based upon collocation
by competitors at LEC facilities. The FCC adopted this trigger for two
reasons. First, the FCC concluded that collocation is a reasonable proxy
for competitive conditions in a given MSA. Id. p 78. Specifically, the
FCC found that \"collocation by competitors in incumbent LEC wire
centers is a reliable indication of sunk investment by competitors.\"
Id. p 81. Sufficient sunk investment of this sort, in the FCC\'s view,
will discourage \"exclusionary pricing behavior.\" Id. p 78. In
addition, the FCC determined that the collocation level is \"an easily
verifiable, bright-line test\" that serves \"to avoid excessive
administrative burdens.\" Id. In this sense, the trigger balances the
FCC\'s desire for an accurate measure of actual competitive conditions
in a given MSA, while also establishing a clear administrative standard.

The FCC acknowledged that adopting specific thresholds, like utility
ratemaking, \"is not an exact science.\" Id. p 96; accord United States
v. FCC, 707 F.2d 610, 618 (D.C. Cir. 1983). \"Rather, the thresholds are
policy determinations based on our agency expertise, our interpretation
of the record before us in this proceeding, and our desire to provide a
bright-line rule to guide the industry.\" Id. p 96 (footnote omitted).
Moreover, the FCC claimed its \"effort to select triggers that precisely
measure competition for particular services also is hampered by the lack
of verifiable data concerning competitors\' revenues and facilities.\"
Id.

To set the proper trigger thresholds the FCC examined a few local
markets to assess the extent of market penetration that correlates with
a given level of collocation investment, and scaled the various triggers
to correlate with the level of relief sought. Thus, the Phase II
triggers are higher than those for Phase I, and different services have
different trigger levels depending upon the FCC\'s estimation of the
threat of predatory or anticompetitive conduct. Thus, the amount of
collocation required to obtain Phase I relief for channel terminations
is higher than for dedicated transport services.

II\. Analysis

A. Collocation Thresholds for Pricing Flexibility

Petitioners challenge the FCC\'s decision to offer LECs relief from
price cap regulation based upon a showing that one or more competitors
have made substantial local investments in collocation. Petitioners
contend that this decision was arbitrary and capricious and contrary to
law because the FCC failed to condition this relief upon a finding of
competition sufficient to protect consumers from anticompetitive
conduct. Collocation, petitioners contend, is a poor proxy for actual
competition in the provision of interstate access services. As a result,
petitioners claim that the Order violates the Commission\'s statutory
duty to ensure that prices are \"nondiscriminatory, \'just,\' and
\'reasonable.\' \"

Petitioners specifically challenge three aspects of the FCC\'s new
pricing flexibility framework: (1) basing the triggers for pricing
flexibility on collocation rather than an analysis of actual competitive
conditions; (2) granting pricing flexibility on an MSA-wide basis based
on collocation in only a portion of the MSA; and (3) selecting specific
triggers in an arbitrary fashion and without sufficient explanation. In
assessing these claims, we consider whether the FCC\'s actions are
\"arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.\" 5 U.S.C. § 706(2)(A). This is a \"deferential
standard\" that \"presume\[s\] the validity of agency action.\"
Southwestern Bell Tel. Co. v. FCC, 168 F.3d 1344, 1352 (D.C. Cir. 1999);
accord Jersey Shore Broad. Corp. v. FCC, 37 F.3d 1531, 1537 (D.C. Cir.
1994). Like agency ratemaking, price cap regulation of local carriers
\"involves policy determinations in which the agency is acknowledged to
have expertise.\" Time Warner Entm\'t Co. v. FCC, 56 F.3d 151, 163 (D.C.
Cir. 1995) (per curiam) (internal quotation omitted). Therefore, it is
not our role to second guess the FCC\'s policy judgment, so long as it
comports with established standards of administrative practice. \"The
FCC\'s judgment about the best regulatory tools to employ in a
particular situation is \... entitled to considerable deference from the
generalist judiciary.\" Western Union Int\'l, Inc. v. FCC, 804 F.2d
1280, 1292 (D.C. Cir. 1986).

1\. Collocation

Under the Pricing Flexibility Order, LECs are eligible for regulatory
relief upon a showing that there is sufficient collocation by one or
more competitors. In this fashion, the FCC uses investment in
collocation as a proxy for competition in access service. Petitioners
contend that this is arbitrary and capricious because collocation is not
a sufficient measure of actual market competition. Therefore,
petitioners argue, the FCC can offer no assurance that LECs will
continue to offer \"just\" and \"reasonable\" rates once they are
granted pricing flexibility. To petitioners, the regulatory relief
provided for by the FCC\'s Order is tantamount to foregoing dominant
carrier regulation altogether, and can only be justified upon a finding
of actual competition.

It may well be that collocation is a poor measure of market share, as
petitioners attest. That competing firms have invested in collocation
does not mean that they have captured a significant portion of the
market for access services. Yet the FCC did not conclude that a loss of
market share was necessary to prevent an incumbent LEC from raising
prices. The FCC has long held that market share is not the be-all,
end-all of competition. See AT&T Corp. v. FCC, No. 99-1535, slip op. at
13 (D.C. Cir. Jan. 23, 2001) (\"the FCC has never viewed market share as
an essential factor\" in evaluating market competition) (emphasis in
original). It is merely one of several relevant factors considered when
making a market power determination. For example, in Motion of AT&T
Corp. to Be Declared Non-Dominant for International Service, 11 F.C.C.R.
17,963, 17,976 p 34 (1996), the FCC wrote that

market shares, by themselves, are not the sole determining factor of
whether a firm possesses market power. Other factors, such as demand and
supply elasticities, conditions of entry and other market conditions
must be examined to define a relevant market, and determine whether a
particular firm can exercise market power in the relevant market.

The FCC is free to change this policy so long as it provides an adequate
explanation for the shift, AT&T, slip op. at 13-14, but it has not done
so.

As the FCC noted in its Order, the presence of substantial sunk
investment, and the resulting potential for entry into the market, can
limit anticompetitive behavior by LECs. Specifically, the FCC found
that:

Once multiple rivals have entered the market and cannot be driven out,
rules to prevent exclusionary pricing behavior are no longer necessary.
Investment in facilities, particularly those that cannot be used for
another purpose, is an important indicator of such irreversible entry.
If a competitive LEC has made a substantial sunk investment in
equipment, that equipment remains available and capable of providing
service in competition with the incumbent, even if the incumbent
succeeds in driving that competitor from the market.

Order p 80. Even if a rival LEC is unsuccessful at challenging an
incumbent, \"the presence of facilities-based competition with
significant sunk investment makes exclusionary pricing behavior costly
and highly unlikely to succeed.\" Id. Collocation, in the FCC\'s expert
view, \"is a reliable indication of sunk investment by competitors.\"
Id. p 81. Therefore, collocation can reasonably serve as a measure of
competition in a given market and predictor of competitive constraints
upon future LEC behavior.

Whatever its faults as a measure of competition, the FCC found
collocation to be superior to the various alternatives proposed by
petitioners during the notice and comment period. See id. p p 84, 104.
Petitioners, for their part, offer no alternative save a painstaking
analysis of market conditions such as that which is required when an LEC
seeks classification as a non-dominant carrier or the forbearance of
dominant carrier regulation under Section 10 of the Communications Act.
See, e.g., AT&T Corp. v. FCC, No. 99-1535 (D.C. Cir. Jan. 23, 2001). The
FCC determined that this would be burdensome and time-consuming\--a
point which petitioners do not contest\--and thus not appropriate in all
cases. It therefore sought an alternative for the purpose of providing
pricing flexibility, in addition to the statutory procedure under
Section 10, 47 U.S.C. § 160, which remains a \"viable and independent
means\" for carriers to seek regulatory relief. AT&T, slip op. at 16.

That the FCC chose to rely upon an admittedly imperfect measure of
competition does not render its use arbitrary and capricious. Nat\'l
Ass\'n of Regulatory Util. Comm\'rs v. FCC, 737 F.2d 1095, 1116 (D.C.
Cir. 1984) (\"NARUC\"). Nor is the FCC\'s decision to make ease of
administration and enforceability a consideration in setting its
standard for regulatory relief. So long as the FCC\'s proxy is
reasonable, as it is here, we have no basis upon which to require the
FCC to engage in a more searching analysis of competition before
granting pricing flexibility. Cf. United States v. FCC, 652 F.2d 72,
90-91 (D.C. Cir. 1980) (en banc) (\"Someone must decide when enough data
is enough. In the first instance that decision must be made by the
Commission\.... To allow others to force the Commission to conduct
further evidentiary inquiry would be to arm interested parties with a
potent instrument for delay.\").

Petitioners emphasize the FCC\'s concession that the pricing flexibility
contained in the Order could \"if granted prematurely \... enable price
cap LECs to (1) exclude new entrants from their markets, or (2) increase
rates to unreasonable levels.\" Order p 68. Petitioners contend it is
reversible error for the FCC to fail to show that its new regulations
will result in \"just and reasonable\" rates for consumers. See Farmers
Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1510 (D.C. Cir. 1984).

The FCC readily admits that its decision to adopt the thresholds
contained in the Pricing Flexibility Order was dependent, at least in
part, on the agency\'s predictive forecasts. Despite their inherent
uncertainty, there is little question that agency prognostications of
this sort may be used in the formulation of policy; \"it is within the
scope of the agency\'s expertise to make such a prediction about the
market it regulates, and a reasonable prediction deserves our deference
notwithstanding that there might also be another reasonable view.\"
Envtl Action, Inc. v. FERC, 939 F.2d 1057, 1064 (D.C. Cir. 1991). There
is no statutory requirement that the FCC be confident to a metaphysical
certainty of its predictions about the future of competition in a given
market before it may modify its regulatory scheme.

Petitioners also contend that the FCC\'s reliance upon a proxy for
competition is arbitrary and capricious because it is contrary to
Commission precedent. Petitioners argue that since the Pricing
Flexibility Order would grant incumbent LECs much of the relief afforded
to carriers that are declared non-dominant, the FCC should be precluded
from granting such relief without engaging in the sort of competition
analysis it conducted when considering whether to declare a carrier
non-dominant. We do not agree.

The Commission readily admits it made different findings when declaring
AT&T to be non-dominant, as petitioners claim. See Motion of AT&T Corp.
to Be Reclassified as a Non-Dominant Carrier, 11 F.C.C.R. 3271 (1995).
However, the Pricing Flexibility Order expressly does \"not grant
incumbent LECs all the regulatory relief \... afford\[ed\] to
non-dominant carriers.\" Order p 151. Even those LECs which receive
Phase II relief must still file tariffs. This is not insignificant;
tariff filing is the \"centerpiece of \... common carrier regulation.\"
Southwestern Bell Tel. Co. v. FCC, 19 F.3d 1475, 1479 (D.C. Cir. 1994).
Therefore, the fact that the FCC did not engage in the thorough
competition analysis common in non-dominance proceedings does not render
the FCC\'s action arbitrary and capricious.

Petitioners\' appeal to other FCC precedent is equally unavailing. For
instance, petitioners note that in the UNE Remand Order, the FCC
preferred actual measures of competition to a \"bright-line test\" in
determining when to relieve LECs of specific regulatory burdens. In re
Implementation of the Local Competition Provisions of the Telecomms. Act
of 1996, 15 F.C.C.R. 3696 (1999). However, this proceeding concerned the
conditions upon which local service providers are given access to
unbundled transport in the first place, not whether deregulatory
measures are warranted once competitive providers have used such access
to gain a foothold in a given market.

There is no rule against agencies adopting new policy positions.
\"Everyone agrees that an agency\'s change of mind does not itself
render the agency\'s action arbitrary.\" Bell Atl., 79 F.3d at 1202.
Rather \"\[w\]hat matters is the Commission\'s explanation.\" Id.
Agencies are \"not bound to the service of any single regulatory
formula; they are permitted, unless their statutory authority otherwise
plainly indicates, to make pragmatic adjustments which may be called for
by particular circumstances.\" Permian Basin Area Rate Cases, 390 U.S.
747, 776-77 (1968) (internal quotation omitted). Here, the Commission
determined that there was reason to modify the regulatory requirements
imposed upon LEC provision of access services and, unlike in its
consideration of US West\'s forbearance petition, thoroughly explained
why the Commission found it appropriate to grant incumbent LECs relief
from existing regulations upon certain competitive showings. See AT&T
Corp. v. FCC, No. 99-1535 (D.C. Cir. Jan. 23, 2001) (remanding FCC
denial of forebearance petition for failure to adequately explain
departure from FCC precedent).

More broadly, the FCC contends that the Order should not be viewed in
isolation, but rather as an additional step along the road of greater
deregulation and pricing flexibility in the interstate access market.
See, e.g, Order p 67. Beginning in 1990, the FCC has taken several steps
to encourage innovation, cost-reduction, and greater efficiency by
reducing regulatory strictures in favor of market discipline. See, e.g.,
id. p p 11-18 (summarizing replacement of rate-of-return regulation with
price-cap regulation and subsequent developments). Much as the FCC
decided that replacing rate-of-return regulation with price cap
regulation furthered the public interest, it has now determined that
relaxing price cap regulation, when certain levels of collocation have
been achieved, furthers its statutory mandate and promotes the public
interest. Petitioners fail to show how this conclusion is arbitrary and
capricious or otherwise contrary to law.

2\. MSA-Wide Deregulation

Petitioners contend that the FCC was arbitrary and capri-cious and
abdicated its statutory obligations by authorizing MSA-wide relief upon
a showing of collocation in only a portion of the MSA. According to
petitioners, due to this provision of the Pricing Flexibility Order the
FCC cannot ensure that interstate access service prices will be just and
reasonable, and therefore the collocation triggers are unlawful.
According to petitioners, the FCC\'s previous orders establish that in
analyzing competitive issues, the proper \"geographic market aggregates
those consumers with similar choices regarding a particular good or
service in the same geographical area.\" NYNEX Corp., 12 F.C.C.R. 19,985
p 54 (1997). With the Pricing Flexibility Order, however, the FCC lumped
together customers that do not have similar competitive alternatives
into larger geographic markets\--MSAs\--for the purpose of regulatory
relief. As a result, petitioners contend, LECs will gain regulatory
relief while maintaining substantial bottlenecks and market power.

The FCC considered this objection in devising its Order and nonetheless
concluded that pricing flexibility should be granted on an MSA-wide
basis. The FCC defined \"the geographic area that it should use for
purposes of reviewing requests for pricing flexibility \... narrowly
enough so that the competitive conditions within each area are
reasonably similar, yet broadly enough to be administratively
workable.\" Order p 71. Commenters proposed both larger and smaller
relief areas. The FCC settled upon MSAs because, in the FCC\'s expert
view, they \"best reflect the scope of competitive entry.\" Id. p 72.
Upon review, the FCC decided that smaller geographic areas would require
incumbent LECs to file too many pricing flexibility petitions to achieve
meaningful relief\--a conclusion petitioners do not dislodge with any
evidence to the contrary.

At bottom, petitioners\' objection to the FCC\'s decision to offer
pricing flexibility on an MSA-wide basis amounts to a difference in
policy preferences. This is not a sufficient basis upon which to upset
the FCC\'s determination. See Time Warner Entm\'t, 56 F.3d at 163. The
FCC considered alternatives to MSA-wide relief and determined that, on
balance, these alternatives would be less beneficial to consumers and
regulated entities. As the FCC provided an adequate explanation for this
conclusion, we uphold the Commission\'s conclusion.

3\. Trigger Level Selection

Petitioners\' objections to the specific collocation thresholds
established by the FCC are no more than policy differences with the
Commission. Like any agency, the FCC must provide a rational basis when
setting a number for a standard, but it is not held to a standard of
perfection. The standard for reviewing such determinations was outlined
in WJG Telephone Co. v. FCC:

It is true that an agency may not pluck a number out of thin air when it
promulgates rules in which percentage terms play a critical role. When a
line has to be drawn, however, the Commission is authorized to make a
\"rational legislative-type judgment.\" If the figure selected by the
agency reflects its informed discretion, and is neither patently
unreasonable nor \"a dictate of unbridled whim,\" then the agency\'s
decision adequately satisfies the standard of review.

675 F.2d 386, 388-89 (D.C. Cir. 1982) (citations omitted); accord NARUC,
737 F.2d at 1141.

Petitioners are correct that the Commission may not evade review of its
decision-making merely by asserting that the thresholds were \"policy
determinations.\" See San Antonio v. United States, 631 F.2d 831, 852
(D.C. Cir. 1980) (That a decision involves a policy judgment \"does not
excuse the \[agency\] from articulating fully and carefully the methods
by which, and the purposes for which, it has chosen to act.\") (internal
quotes omitted). Yet the FCC is not required to identify the optimal
threshold with pinpoint precision. It is only required to identify the
standard and explain its relationship to the underlying regulatory
concerns. The FCC notes that this court is \"generally unwilling to
review line-drawing performed by the Commission unless a petitioner can
demonstrate that lines drawn \... are patently unreasonable, having no
relationship to the underlying regulatory problem.\" Cassell v. FCC, 154
F.3d 478, 485 (D.C. Cir. 1998) (internal quotations omitted). The
relevant question is \"whether the agency\'s numbers are within a \'zone
of reasonableness,\' not whether its numbers are precisely right.\"
Hercules Inc. v. EPA, 598 F.2d 91, 107-08 (D.C. Cir. 1978). Indeed, just
last term we held that \"the Commission has wide discretion to determine
where to draw administrative lines, and appellants point to nothing
suggesting that the agency abused its discretion in drawing the
line\[s\]\" where it did. AT&T Corp., 220 F.3d at 627.

The FCC made a predictive judgment that the amount of collocation
required for each trigger will be sufficient to constrain
anticompetitive practices by incumbent LECs. The FCC also looked at
areas where there was substantial collocation to determine whether that
correlated with substantial involvement in competitive transport
facilities. See, e.g., Order p p 81, 95. For example, the FCC reviewed
evidence that collocation in approximately eighteen percent of wire
centers corresponded to over 2,000 miles of competitive fiber
facilities. See id. p 95. The FCC also notes that there are reasons to
believe that, if anything, collocation underestimates competition in
relevant markets as \"it fails to account for the presence of
competitors that \... have wholly by-passed incumbent LEC facilities.\"
Id. Weighing these factors, the FCC concluded that its collocation
triggers were sufficiently protective of the public interest. This is
precisely the sort of \"rational legislative-type judgment\" the FCC is
empowered to exercise and we are required to respect.

B. Immediate Pricing Flexibility for New Services

Petitioners also challenge the FCC\'s decision to grant LECs immediate
pricing flexibility for new services. Prior to the new rule LECs were
required to tariff new services fifteen days in advance and to
demonstrate that prices were reasonable given the carrier\'s direct
costs of providing the service. As a result of the FCC\'s Pricing
Flexibility Order, LECs may tariff with only one day\'s notice and (with
the exception of loop-based services) need not show that the prices for
new services bear any relation to costs. As noted above, the FCC granted
pricing flexibility for new services because it found that existing
regulatory requirements delayed the development and introduction of new
services to the detriment of consumers. See id. p 37.

Petitioners contend that the FCC\'s decision to grant immediate pricing
flexibility for new services is unlawful because it compromises the
Commission\'s \"fundamental obligation\" to ensure that rates are just
and reasonable. Section 201(b) of the Communications Act provides that
\"\[a\]ll charges \... shall be just and reasonable, and any such charge
\... that is unjust or unreasonable is declared to be unlawful.\" 47
U.S.C. § 201(b). Citing the Second Circuit, petitioners argue that there
is \"no authority for the proposition that the FCC may abdicate its
responsibility\" under section 201(b) to regulate dominant carriers so
as to ensure \"just\" and \"reasonable\" rates. AT&T v. FCC, 572 F.2d
17, 25 (2d Cir. 1978).

Contrary to petitioners\' claims, there is nothing inherently
unreasonable in the Commission\'s shift to streamlined review of new
services. Cf. Nat\'l Rural Telecom Ass\'n v. FCC, 988 F.2d 174, 185
(D.C. Cir. 1993) (\"In light of the FCC\'s objective of eliminating the
filing burdens of both itself and the carriers, and its reasonable
finding that caps and bands render the prospect of unreasonable filings
sufficiently improbable, we find streamlined review to be
reasonable.\"). The Commission is free to reduce regulatory requirements
where, as here, it finds that less regulation will better serve its
statutory goals. As we noted above, \"\[t\]he FCC\'s judgment about the
best regulatory tools to employ in a particular situation is \...
entitled to considerable deference from the generalist judiciary.\"
Western Union Int\'l, 804 F.2d at 1292. Here, the Commission determined
that consumers are better served by loosening the government\'s grip on
new service offerings and prices.

Petitioners further argue that insofar as new services represent
significant technological advances over existing services, failure to
offer that service to consumers or competitors at a reasonable price can
produce competitive harm. Although the FCC did not remove new services
from price cap regulation altogether, petitioners contend incumbent LECs
may nonetheless incorporate a new service into the price caps at an
inflated monopolistic price, thereby inflating the overall price cap and
enabling LECs to raise the prices of other services. The FCC also
rejected this contention, noting that price caps are determined on a
revenue-weighted basis. Therefore, should an LEC offer a new service at
an inflated price, it would have little revenue weight so it would not
enable the LEC to inflate the rates for other services.

C. Rate Deaveraging for Transport Basket Services

As part of the Pricing Flexibility Order, the FCC gave LECs additional
flexibility to deaverage rates for transport basket services, subject to
certain limitations, because averaged rates have the potential to
\"create a pricing umbrella for competitors that would deprive customers
of the benefits of more vigorous competition.\" Order p 60. The FCC
believes that deaveraged rates promote efficiency, and existing
regulations discouraged carriers from pursuing deaveraged rates.
Petitioners challenge this decision on the grounds that allowing rate
deaveraging will result in \"predatory pricing and
cross-subsidization.\" In particular, petitioners contend that LECs will
use this new pricing flexibility to lower their transport rates in
competitive markets and increase their rates where competition is
minimal.

Merely because WorldCom disagrees with the FCC\'s conclusion that
deaveraging rates will produce more consumer benefits than maintaining
the existing regulatory structure is no reason for this court to strike
down the FCC\'s decision. As noted above, the FCC\'s policy judgments
are entitled to due deference from this court so long as the agency\'s
conclusions are reasonable and supported by substantial evidence, and
the agency complies with the applicable procedural requirements. As
above, the FCC\'s decision with regard to deaveraging rates meets this
minimal test.

Petitioners\' concerns were raised by both AT&T and WorldCom during the
notice and comment period, were considered by the FCC, and rejected. The
FCC concluded that petitioners\' fears are exaggerated, and there is no
basis upon which this court could conclude that this determination was
arbitrary, capricious or otherwise contrary to law. Indeed, \"there is a
consensus among commentators that predatory pricing schemes are rarely
tried, and even more rarely successful.\" Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 589 (1986). Moreover, the FCC took
specific steps to guard against the possibility of anticompetitive
conduct. In particular, the Order limits annual price increases within
pricing zones to fifteen percent, and the annual increases in the study
area are limited to five percent. See Order p 63; 47 C.F.R. § 61.47(e).
According to the Commission, this safeguard ensures \"that incumbent
LECs cannot define zones that are, for all practical purposes, specific
to particular customers.\" Order p 62. Finally, LECs can still be
subject to prosecution should they engage in predatory behavior. After
thorough review, the FCC considered these safeguards to be sufficient in
this instance, and we can find no reason to upset that result.

III\. Conclusion

For the foregoing reasons, we affirm the FCC, and the petitions for
review are denied.