Opinion ID: 185358
Heading Depth: 2
Heading Rank: 1

Heading: Collocation Thresholds for Pricing Flexibility

Text: 30 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.'  31 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 32 from the generalist judiciary. Western Union Int'l, Inc. v. FCC, 804 F.2d 1280, 1292 (D.C. Cir. 1986).
33 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. 34 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, 236 F.3d 729, 736 (D.C. Cir. 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 35 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. 36 The FCC is free to change this policy so long as it provides an adequate explanation for the shift, AT&T, at 737, but it has not done so. 37 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: 38 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. 39 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. 40 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, 236 F.3d at 737. 41 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 enforce ability 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.). 42 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). 43 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. 44 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. 45 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 nondominant 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. 46 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. 47 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). 48 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.
49 Petitioners contend that the FCC was arbitrary and capricious 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. 50 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. 51 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.
52 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: 53 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. 54 675 F.2d 386, 388-89 (D.C. Cir. 1982) (citations omitted); accord NARUC, 737 F.2d at 1141. 55 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. 56 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 bypassed 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. 57