Opinion ID: 184452
Heading Depth: 3
Heading Rank: 1

Heading: The Rural LECs' Argument Under Chevron's First Step

Text: 54 The rural LECs argue, first, that the FCC's inclusion of rural telephone companies in its eligibility restriction contravenes the plain language of section 309(j)(3)-(4) and therefore fails under the first prong of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). This prong of the two-part Chevron test asks only whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, of course, the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. Id. at 842-43, 104 S.Ct. at 2781. According to the rural LECs, section 309(j)(4)(D) requires the FCC to ensure through its auction rules that LMDS licenses are actually disseminated to rural telephone companies, and section 309(j)(3)(B) mandates that rural telephone companies be given the opportunity to participate in the provision of LMDS. Joint Brief of Intervenors Rural Telecommunications Group and Independent Alliance in Support of Petitioner National Telephone Cooperative Association, at 8-10 (Rural LEC Brief). We cannot see how the plain language or clear meaning of section 309(j) bars the FCC from imposing the eligibility restriction on rural LECs at issue here.a. Section 309(j)(3) 55 First, keep in mind that section 309(j)(3) grants the FCC the authority to establish eligibility restrictions on communications licenses. See 47 U.S.C. § 309(j)(3) (In identifying classes of licenses and permits to be issued by competitive bidding, in specifying eligibility and other characteristics of such licenses and permits, and in designing the methodologies for use under this subsection, the Commission shall include safeguards to protect the public interest in the use of the spectrum and shall seek to promote the purposes specified in section 151 of this title and the following objectives ....) (emphasis added); see also Cincinnati Bell, 69 F.3d at 762 (A plain reading of Section 309(j)(3)(B), which directs the FCC to promote 'economic opportunity and competition ... by avoiding excessive concentration of licenses and disseminating licenses among a wide variety of applicants,' indicates that Congress clearly conferred authority on the FCC to place restrictions and limitations on the bidding process.). 56 Second, section 309(j)(3)(B) does not state that rural telephone companies must be given the opportunity to participate in the provision of LMDS. Instead, it requires the FCC to seek to promote a number of objectives, including promoting economic opportunity and competition and ensuring that new and innovative technologies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women. This provision is subject to a variety of reasonable interpretations. Most importantly, it articulates a number of potentially conflicting objectives, including both the promotion of competition and the dissemination of licenses to rural telephone companies. [O]nly the Commission may decide how much precedence particular policies will be granted when several are implicated in a single decision. MobileTel, Inc. v. FCC, 107 F.3d 888, 895 (D.C.Cir.1997). In this case, the Commission determined that allowing incumbent LECs, including incumbent rural LECs, to participate without restriction in bidding for in-region LMDS licenses would ultimately inhibit the development and use of the LMDS spectrum, whereas the FCC's eligibility restriction on rural LECs would promote economic opportunity and competition, and ... avoid excessive concentration of licenses by disseminating licenses among a wide variety of applicants. Order p 181. In addition, while section 309(j)(3)(B) calls for the wide dissemination of licenses, it lists a number of indications of diversity, rather than confining its concern to rural telephone companies. Moreover, section 309(j)(3)(B) refers to new and innovative technologies as a group, indicating that diversity within this group might be enough to meet the statute's requirements even if the licensees for one technology within this group are less diverse. Finally, as we discuss below, the FCC concluded that many rural LECs would actually to able to acquire in-region LMDS licenses under its Order. 57 b. Section 309(j)(4) 58 Section 309(j)(4)(D) does not state that the FCC must ensure through its auction rules that licenses for LMDS, which is a spectrum-based service, are actually disseminated to rural telephone companies. Instead, it insists only that rural telephone companies have the opportunity to participate in the provision of spectrum-based services and accordingly instructs the FCC to consider the use of tax certificates, bidding preferences, and other procedures (emphasis added). The meaning of opportunity in the context of section 309(j)(4)(D) is necessarily ambiguous. At the extremes, the term is capable of supporting a range of interpretations extending from the licensee guarantees that the rural LECs advocate to a regime in which there are no guarantees (and perhaps little realistic chance) that rural LECs will actually end the day with access to LMDS. Under the three-year eligibility restriction in issue, a rural LEC does have an opportunity to: (a) acquire LMDS licenses immediately in all areas but its existing service area; (b) acquire a LMDS license in its existing service area once three years have passed; (c) bid immediately for a smaller LMDS license (150 megahertz instead of 1,150 megahertz) in its service area; (d) acquire the LMDS license for its service area as long as the LEC does not provide telephone service to more than ten percent of the population within the basic trading area (BTA) assigned to each LMDS license; (e) acquire an in-region LMDS license immediately on the condition that the LEC divest its overlapping telephone interests; and (f) seek a waiver of the eligibility restriction, subsequent to the initial award of LMDS licenses, upon a showing of good cause. See Order pp 178-80, 188, 160. Moreover, section 309(j)(4)(D), like section 309(j)(3)(B), speaks of spectrum-based services as a unit, rather than stating that rural telephone companies must have access to each spectrum-based service. Finally, section 309(j)(4)(D) does not mandate that the rural LECs receive preferential treatment in the form of tax certificates, bidding preferences, and other procedures; it just instructs the FCC to consider that possibility. 59 In short, we do not believe that the present eligibility restriction violates the text or intent of section 309(j)(3)(B) or section 309(j)(4)(D) so as to violate the first prong of the Chevron test. 60 One of the rural LEC petitioners, the National Telephone Cooperative Association (NTCA), also makes a brief argument under Chevron's second prong. NTCA contends that the FCC abused its discretion by ignoring section 309(j)'s concern for rural residents and rural LECs, and the 1996 Telecommunications Act's overarching desire to foster competition. This argument is baseless for the reasons elaborated elsewhere in this opinion. The FCC's imposition of the three-year eligibility restriction on rural LECs is fully consistent with a reasonable interpretation of section 309(j), (see II.B.1.), and the Commission has clearly explained its basis for believing that this eligibility restriction will foster competition, see, e.g., Order p 162. 61 2. The Rural LECs' Argument That Including Them in the Eligibility Restriction Was Arbitrary and Capricious 62 The rural telephone companies also argue that the FCC has failed to supply a reasoned basis in the record for its decision to include the rural LECs in the LMDS eligibility restriction. They accordingly contend that the application of the in-region eligibility restriction to rural telephone companies is arbitrary and capricious, an abuse of discretion, and otherwise contrary to law. 63
64 and That the Commission's Actions Fail to Satisfy 65 the FCC's Stated Objectives 66 The rural telephone companies engage in the same error that the LECs committed: They assert that the FCC was required to establish that limiting rural telephone company participation is necessary to ensure that rural America receives LMDS at reasonable charges. Rural LEC Brief, at 13-14 (emphasis added). The rural LECs do not locate this requirement in any statute, but instead point to a statement in the FCC's Order that appears in the introduction to the Commission's explanation of its decision to impose an eligibility restriction: 67 Our overall goal in assessing the need to restrict the opportunity of any class of service providers to obtain and use spectrum to provide communications services has been to determine whether the restriction is a necessary step in ensuring that consumers will receive efficient communications services at reasonable charges. Since we are of the view that competitive markets are the most direct and reliable means for ensuring that consumers receive the benefits described in the Communications Act, we have evaluated the need for spectrum licensing restrictions in terms of whether the restrictions are necessary to promote competition in the telecommunications marketplace and whether these restrictions are otherwise consistent with our obligation to promote the public interest. 68 Order p 157 (emphasis added). We believe that the rural LECs have over-read this introductory passage, which speaks in general terms about any class of service providers, any communications service, and eligibility restrictions as a category. Id. As the FCC's Order makes clear when it begins its detailed discussion of the Commissioners' decision to impose a three-year eligibility restriction on LEC acquisition of in-region LMDS licenses, the Commission did not conclude--or believe that it needed to conclude--that imposing the eligibility restriction on rural LECs was a necessary, unavoidable step if the Commission was to ensure that rural America receives LMDS at reasonable charges. Rather, the FCC determined that: [t]he [last] element of our inquiry is whether eligibility restrictions are the best means of achieving our goal of increasing competition in the LEC and MVPD markets. We find that they are. Id. p 176 (emphasis added); see also id. p 162 ([W]e find on balance that a policy favoring restricted eligibility for a limited time would result in the greatest likelihood of increased competition in the local telephony and MVPD markets.) (emphasis added). 69 The rural LECs also argue that, even if the FCC's Order defends its eligibility restriction as the best approach rather than the necessary one, the FCC cannot rely on economic theory, its evidence indicating that LECs exercise monopoly power, and its predictive judgment as to the future behavior of markets in deciding to include the incumbent rural LECs in its eligibility restriction. Instead, the rural LECs contend, the FCC had to provide what the rural telephone companies characterize as supporting data, which would presumably contain more specific and exact factual information. Rural LEC Brief, at 15. NCCB and AT&T defeat this claim. Both cases recognize that where, as here, the FCC has to establish eligibility criteria based on how it predicts the market and regulated entities will react, complete factual support in the record for the Commission's judgment or prediction is not possible or required; 'a forecast of the direction in which future public interest lies necessarily involves deductions based on the expert knowledge of the agency.'  NCCB, 436 U.S. at 814, 98 S.Ct. at 2121 (quoting FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 29, 81 S.Ct. 435, 450, 5 L.Ed.2d 377 (1961)). When, as in this case, 'an agency is obliged to make policy judgments where no factual certainties exist or where facts alone do not provide the answer,' our role is more limited; we require only that the agency 'so state and go on to identify the considerations it found persuasive.'  AT&T, 832 F.2d at 1291 (quoting National Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095, 1140 (D.C.Cir.1984)). 70 Here, the FCC acknowledged that absolute certainty was impossible, but presented its reasoning clearly, cogently, and based on the agency's best understanding of the available information. This explanation is too lengthy to present completely here, but the following passage from the Order summarizes many of its essential points: 71 Based on the record here, standard economic theory, our experience, an analogous situation in the cable TV industry, and our assessment of competitive and regulatory developments in the local telephony and MVPD [Multichannel Video Programming Distributor] markets, we find on balance that a policy favoring restricted eligibility for a limited time would result in the greatest likelihood of increased competition in the local telephony and MVPD markets. By restricting in-region LEC and cable companies, we ensure the entry of a new LMDS operator that could provide competition in the LEC market, the MVPD market, or both. An incumbent, on the other hand, would have a strong incentive to obtain an LMDS license in order to prevent a new entrant from obtaining the license and competing directly in the incumbent's current market. In so doing, such an incumbent will have forestalled market entry by an entity that could provide both telephony and MVPD and will have deprived consumers of an opportunity to choose between a possible two providers in each market and the lower prices for such services that consumer choice necessarily implies. Furthermore, either incumbent would have no incentive to use the LMDS spectrum to provide the service in which it has market power because this could result in lower prices for the service, and lower profits. By temporarily restricting incumbents' eligibility to acquire in-region LMDS licenses, this policy maximizes the likelihood of increasing competition in both the LEC and MVPD markets. 72 As we have unanimously observed in recent proceedings, both incumbent LECs and cable television firms currently possess substantial market power. An in-region LMDS license would be valuable to these firms not only because they could use it as other firms would, but also because, by obtaining the license, they could preserve excess profits that an independent LMDS competitor would erode.... 73 .... 74 Our concern regarding LEC and cable eligibility is educated by the substantial record collected in this proceeding on the capabilities of LMDS.... LMDS offers a significant amount of capacity, larger than currently available wireless services.... [W]e believe that the likelihood that LMDS can increase competition in either the local multichannel video or local telephone exchange markets (or both simultaneously) is high and warrants analysis in order to determine whether in-region LEC and cable TV incumbents should be permitted to acquire and hold initial licenses. 75 While all bidders in an auction for LMDS licenses can be expected to base their bids on their individual assessment of the most efficient use of the spectrum, LECs and cable companies assessing the value of in-region LMDS licenses would have the additional incentive to protect their market power and preserve a stream of future profits. 76 Order pp 162-63, 170-71. We find that this explanation is both reasonable and adequate support for the FCC's predictive judgment. 77
78 The rural LECs next argue that the FCC's Order failed to address comments in the record from the rural telephone community that contended that an in-region eligibility restriction on rural LECs would harm the ability of rural telephone companies to provide LMDS in their service areas. Rural LEC Brief, at 17. This argument is somewhat odd. One would naturally expect that an eligibility restriction on rural LEC acquisition of in-region LMDS licenses would, by its very nature, harm--to some degree--the ability of rural telephone companies to provide LMDS in their service areas; that, in fact, is the restriction's purpose. Indeed, no one, including the FCC, disputes this point, although the FCC has determined for the reasons elaborated below that ultimately the in-region restriction will have a relatively small impact on the rural LECs' ability to participate in the LMDS auction. See Order pp 179-80. We believe the real question presented here is whether the FCC can exercise its judgment that a restriction on the incumbent rural LECs is merited in order to counteract the rural LECs' present monopoly power. Moreover, while the rural LECs assert that the FCC failed to consider record evidence, they point to no evidence in the record. Instead, the portions of the record that the rural LECs cite simply assert that the eligibility restriction will harm rural LECs. See Rural LEC Brief, at 17, citing Joint Appendix, at 665-67, 672-74, 765-66, 774-76. 79 The rural LECs go on to cite the Order at paragraph 179 for the proposition that the FCC has established a standard whereby in order for a rural telephone company to be entitled to an opportunity to participate in a new service, the rural telephone company must first demonstrate that it is the only entity that can provide the service [in rural areas]. Id. Instead, however, paragraph 179 only rejects the rural LECs' contention that they are the only entities that can provide service in their service territories. It reads: 80 Commenters from the rural telephone community .... reason that unless rural telephone companies are able to participate in the LMDS market, consumers in rural areas are likely to be deprived of the benefits of this new service. We agree that it would be undesirable to impair the provision of LMDS service to rural consumers. Although we have decided to impose some short-term restrictions in LECs, including rural telephone companies, we do not believe that these restrictions, as crafted, will hinder the introduction of LMDS in rural areas. Rural LECs have not made the case that they are the only entities that can provide LMDS in their service territories. 81 Order p 179. 82 The rural LECs have mischaracterized the FCC's rationale for its Order and pointed to no record evidence that the Commission failed to consider. 83
84 Restriction Will Not Compromise Rural Telephone Company Participation in LMDS is Arbitrary and Capricious 85 As we indicated above (see II.B.2.b.), we have not been able to find (and, for the reasons discussed above, would not expect to find) any statement within the FCC's Order asserting that the eligibility restriction will have no negative effect on rural LEC participation in LMDS. Instead, the FCC's Order conclude[s] that the interests of rural telephone companies are adequately addressed by the LMDS rules we adopt herein, Order p 362, and explains the various opportunities that remain open to rural LECs. We evaluate the specific claims that the rural LECs make about that FCC conclusion in this light. 86 1. The Claim That the FCC's Conclusion That Rural Telephone Companies Will Not Trigger the Eligibility Restriction is Arbitrary and Capricious 87 The rural LECs take issue with the FCC's determination that because rural LECs are generally small, they are unlikely to have the degree of overlap with BTAs [basic trading areas] necessary ... to trigger our eligibility restriction. Id. p 180. This statement refers to the fact that the FCC's eligibility restriction only applies to a LEC if ten percent or more of the population in the BTA that the desired LMDS license covers is also within the LEC's authorized telephone service area. See id. p 188. This determination appears in the FCC's Order as one of several reasons why the FCC concluded that its restriction on rural LECs will not hinder the introduction of LMDS in rural areas. Id. p 179. The rural LECs argue that the FCC's prediction of relatively modest effects on rural LEC eligibility is arbitrary and capricious because the application of the restriction turns on the overlap between a LMDS license's BTA and a LEC's telephone service area, rather than on the size of a rural LEC. However, it is not difficult to see a logical connection between the FCC's overlap criteria and a rural LEC's size: The smaller a LEC, the less likely it is to be servicing a customer base that constitutes ten percent or more of the population within a BTA, particularly because the BTAs for LMDS licenses, which are quite large, have no necessary correlation to the boundaries of rural telephone companies' service areas. See id. pp 135, 138, 180. 88 The rural LECs also claim that the FCC's determination is arbitrary and capricious because the FCC did not conduct an analysis of the actual degree of overlap between LMDS license areas and rural telephone company service areas. Rural LEC Brief, at 19. The rural telephone companies do not claim to have the detailed information that such an analysis covering hundreds of rural LECs would require, or to have offered to collect it for the FCC; they argue, instead, that the FCC should have secured this information during its rulemaking. Given that all the data needed for an overlap analysis presumably exists--the boundaries of the BTAs for LMDS licenses and the current authorized service areas for rural LECs are both established--the FCC might profitably have undertaken such a factual investigation. However, we do not believe that the comprehensive factual analysis that the rural LECs would have liked was actually required of the FCC in this case. The FCC was entitled to conduct, and did conduct, a general analysis based on informed conjecture. Specifically, a BTA is typically constructed around an urban commercial center, where the population of the BTA will be most concentrated; BTAs are not designed to follow the same lines as rural LEC service areas. Order p 138. BTAs also tend to be quite large: The FCC divided the fifty states into only 487 BTAs. See id. p 135. The FCC accordingly drew a reasonable inference from its general knowledge that rural LECs are generally small, and concluded that rural LECs were unlikely to have the necessary overlap, although some number of rural LECs will presumably meet the overlap requirement's threshold. Id. p 180. 89 In the final analysis, the number of rural LECs that will or will not fall within the ten percent overlap rule was not the determinative issue. The FCC was operating on the premise that if a LEC services a customer base that constitutes more than a small percentage of a BTA, then the risk of impeded competition in the telephony market is great enough to warrant an in-region eligibility bar. The exact percentage of rural LECs covered under a ten percent overlap rule was not the primary question, and the precise identification of that percentage through a detailed and expensive study would not likely have led the FCC to a different conclusion about whether to impose a ten percent overlap rule. 90