Opinion ID: 785238
Heading Depth: 3
Heading Rank: 2

Heading: Impairment in provision of mass market switching

Text: 42 Without the (unlawful) innovation of transforming a national impairment finding into a provisional national impairment finding from which state commissions could deviate if they found no impairment under local market conditions, the FCC's Order on mass market switches must stand or fall as a nationwide determination that CLECs are impaired in the mass market without unbundled access to ILEC switches. After reviewing the record, we conclude that we must vacate the (no longer provisional) national impairment finding as inconsistent with our conclusion in USTA I that the Commission may not loftily abstract[] away from all specific markets, 290 F.3d at 423, but must instead implement a more nuanced concept of impairment, id. at 426. 43 The Commission's national finding of impairment for mass market switches is based on entry barriers related to the need for ILECs to perform hot cuts (manual connections) for CLECs if the latter choose to self-provision mass market switches. See Order ¶¶ 459, 464-76. A hot cut requires an ILEC technician to physically disconnect a customer loop from the ILEC switch (to which the loop was hard-wired) and re-wire the loop to the CLEC switch, while simultaneously reassigning the customer's phone number from the ILEC switch to the CLEC switch. Order ¶ 465 n.1409. A hot cut must be performed every time a CLEC seeks to connect a new customer. In contrast, ILEC connection of a customer generally only requires a software change (unless the customer had already switched to a CLEC switch, in which case the hot cut must be undone via the same physical re-connection). Order ¶ 465. The Commission explains that, according to evidence in the record, the need to perform hot cuts can delay a CLEC in providing service with its own switch and can cause service disruptions, and that these delays and disruptions, even if minor, can damage customer perceptions of CLEC service and impede the CLECs' ability to compete. Order ¶¶ 466-67. 44 Though the Commission in its brief alludes to other operational and economic factors that might create barriers to competition in mass market switching, FCC Br. at 36, the Order makes clear that the national impairment finding was based solely on hot cuts. Order ¶¶ 459 n.1405 & 476. (The other factors were to be considered by state commissions in the exercise of the unlawfully delegated authority.) There appears to be no suggestion that mass market switches exhibit declining average costs in the relevant markets, or even that switches entail large sunk costs. The Commission nonetheless concluded that hot cut costs are not the sort of cost disparity that a new entrant into any market might face, since they arise due to the fact that incumbent LECs' networks were designed for use in a single carrier, noncompetitive environment, which means that CLECs face operational costs that the ILECs do not. Order ¶ 465. 45 Though certain sections of the Order suggest that impairment due to hot cut costs might be sufficiently widespread to support a general national impairment finding even in the absence of more nuanced determinations to be made by the state commissions, Order ¶¶ 459, 470, 473, the Commission at other points concludes that a national finding, without the possibility of market-specific exceptions authorized by state commissions, would be inconsistent with USTA I. See Order ¶¶ 186-88, 196, 425, 485, 493. At the very least, these latter passages demonstrate that the Commission's own conclusions do not clearly support a non-provisional national impairment finding for mass market switches, and thus require us to vacate and remand. 46 Moreover, we doubt that the record supports a national impairment finding for mass market switches. In another context the Commission has already addressed a kindred issue. Under § 271 of the Act, the subset of ILECs that used to be operating companies of AT&T before its break-up (the Bell Operating Companies, or BOCs) can enter the interLATA market (the market for calls between different local access and transport areas) only by showing, among other things, that they are providing CLECs adequate unbundled access to various network elements, including local loops. See Act § 271(c)(2)(B)(iv). The Commission acknowledges that in that context it has in fact found that the BOCs were doing so in the quantities that competitors demand and at an acceptable level of quality, see, e.g., Memorandum Opinion and Order, Application by SBC Communications, Inc., et al., Pursuant to Section 271 of the Telecommunications Act of 1996 To Provide In-Region, InterLATA Services in Texas, 15 FCC Rcd 18354, 18480 (2000), ¶ 247; Memorandum Opinion and Order, Application of Ameritech Michigan Pursuant to Section 271 of the Communications Act of 1934, as Amended, To Provide In-Region, InterLATA Services in Michigan, 12 FCC Rcd 20543, 20601-02 (1997), ¶ 110. In none of those proceedings did the Commission find the hot cut process inadequate to meet this standard. See Separate Statement of Chairman Michael K. Powell Approving in Part and Dissenting in Part, FCC 03-36 (Powell Statement) at 4. But it distinguished those cases on the ground of uncertainty about whether ILECs would be able to handle the increases in hot cut demand that would flow from denying CLECs access to switches as UNEs. Order ¶ 469 & n.1435. The ILECs contend that in fact hot cut processes are scalable, so that existing sufficiency can be projected onto larger-scale usage. See ILEC Br. at 16 (citing Powell Statement at 5; Memorandum Opinion and Order, Application by Bell Atlantic New York for Authorization Under Section 271 of the Communications Act to Provide In-Region, InterLATA Service in the State of New York, 15 FCC Rcd 3953, 4114 (1999), ¶ 308). 47 The record on the matter is mixed, perhaps sufficiently so that the Commission's provisional assumption to the contrary might be sustainable as an absolute finding, given the deference we would owe the Commission's predictive judgment and the inevitability of some over- and under-inclusiveness in the Commission's unbundling rules. But the Commission implicitly conceded that hot cut difficulties could not support an undifferentiated nationwide impairment finding. Order ¶¶ 425, 485, 493. Moreover, we made clear in USTA I that the Commission cannot proceed by very broad national categories where there is evidence that markets vary decisively (by reference to its impairment criteria), at least not without exploring the possibility of more nuanced alternatives and reasonably rejecting them. 290 F.3d at 425-26. One can imagine the Commission successfully identifying criteria based, for example, on an ILEC's track record for speed and volume in a market, integrated with some projection of the demand increase that would result from withholding of switches as UNEs. The Commission, however, has made no visible effort to explore such possibilities. 48 Additionally, the ILEC petitioners suggested several more narrowly-tailored alternatives to a blanket requirement that mass market switches be made available as UNEs. Considering such narrower alternatives is essential in light of our admonition in USTA I that the Commission must balance the costs and benefits of unbundling. 290 F.3d at 429. Rolling hot cuts are one such proffered alternative. Under that concept the Commission could require unbundled access to ILEC switching on new lines for 90 days (or some other period of time) in order to give the ILEC time to perform the accumulated backlog of hot cuts simultaneously, Order ¶¶ 463, 521-24, or the Commission could require the ILEC to provide unbundled access to its switch only until it was able to perform the hot cut. The FCC's only real answer to these proposed alternatives, at least the only answer that appears in the Order or the FCC's brief, is that the Commission directed the state commissions to consider these alternatives and to implement them if they would remedy impairment. See FCC Br. at 38-39; Order ¶¶ 463, 521-24. But since we have held such subdelegation unlawful, that response is unavailable. 49 Moreover, even if the FCC had adopted some lawful mechanism for making exemptions from its general national rule, it could not necessarily rely on the existence of that mechanism as the sole justification for not adopting a more narrowly tailored rule. While a rational rule that would otherwise be impermissibly broad can be saved by safety valve waiver or exception procedures, the mere existence of a safety valve does not cure an irrational rule. See ICORE, Inc. v. FCC, 985 F.2d 1075, 1080 (D.C.Cir.1993); ALLTEL Corp. v. FCC, 838 F.2d 551, 561-62 (D.C.Cir. 1988). And a rule is irrational in this context if a party has presented to the agency a narrower alternative that has all the same advantages and fewer disadvantages, and the agency has not articulated any reasonable explanation for rejecting the proposed alternative. 50 We therefore vacate the FCC's determination that ILECs must make mass market switches available to CLECs as UNEs, subject to the stay discussed in Part VI below, and remand to the Commission for a re-examination of the issue. 51