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

Heading: Whether the FCC has Changed its Policy Without Explanation

Text: 22 The LECs argue, first, that the FCC's Order constitutes arbitrary decision making in violation of APA § 706(2)(A) because it is an unexplained departure from prior rules that authorize and encourage LECs to offer new wireless communication services. Along these lines, the LECs note that in 1981 the FCC set aside one cellular service license per market exclusively for the use of the incumbent LEC. See Final Brief of Petitioners United States Telephone Association, et al., at 14-15, citing In the Matter of an Inquiry into the Use of Bands 825-845 MHz and 870-890 MHz for Cellular Communications Systems, 86 F.C.C.2d 469, 483, 488, 491-92 (1981). Similarly, although the FCC was initially concerned that LECs might use the Personal Communications Service (PCS), another wireless communications technology, for anticompetitive ends, it decided in 1993 to include LECs in the bidding on the ground that LEC participation would promote the rapid development of the technology and yield a broader range of services at a lower price. See id. at 15, citing In the Matter of Amendment of the Commission's Rules to Establish New Personal Communications Services, 7 F.C.C.R. 5676, 5705 (1992); 8 F.C.C.R. 7700, 7751-52 (1993). The LECs contend that the FCC's reasons for permitting LECs to acquire and use these other wireless services apply as strongly in the LMDS context and that the FCC has failed to differentiate its prior decisions from the instant eligibility restriction. 23 Although the portion of the FCC's Order devoted to this issue is relatively brief, we find that it adequately explains why the FCC reached a different conclusion about LEC eligibility in the case of LMDS than in the earlier technologies. In balancing the advantages and disadvantages--in terms of competition and technological development--of granting incumbent LECs unrestricted access to a new wireless technology, the FCC's Order indicates that there are at least three important factors that differentiate the LMDS situation. 24 The first factor is the number of licenses available per area. In the earlier cases, there were several licenses available in each market. With LMDS, in contrast, the Commission found that the temptation for preemptive acquisition is particularly compelling ... because of the unusually large size of the LMDS spectrum allocation. A single, large spectrum block of relatively unused spectrum will be auctioned in each service area. Order p 173. 25 The second factor, which is related to the first, is the unprecedented capacity of an 1,150 megahertz LMDS license, which is the single biggest license that the FCC has ever issued. As the FCC's Order explains: 26 LMDS licenses may be used to provide service in the local MVPD [Multichannel Video Programming Distributor] market, the local telephone market, a broadband data market, or a combination of these possibilities.... LMDS offers a significant amount of capacity, larger than currently available wireless services. For instance, according to TI [Texas Instruments, Inc.], the LMDS system they have manufactured for use in other countries can be used to serve 16,000 telephone subscribers, in each LMDS cell with a three-mile radius, concurrently with about 200 video-on-demand channels.... 27 .... 28 ... [T]he capacity of an LMDS license is unprecedented. 29 Id. pp 170, 173. In other words, a single LMDS license can simultaneously support 16,000 telephone calls and 200 video channels on demand, a capacity that makes the FCC extremely wary about the possibility that incumbent LECs would devote their in-region LMDS licenses only to communications services that do not compete with the LECs' existing telephone services. 30 The third differential factor is that the FCC's earlier decisions, none of which purported to announce any general policy against eligibility restrictions on LECs, were made at a time when the prospects for generating competition in the local telephone market, and for developing new technologies without maximum participation from incumbent LECs, were significantly less. The FCC's Order observes: 31 We recognize that as a result of ongoing technological changes and passage of the 1996 Act, there are other sources of potential and actual competition to the incumbent LEC and cable firms in the local telephony and local MVPD [Multichannel Video Programming Distributor] markets. For multichannel video distribution, likely sources of competition include open video systems (OVS), MMDS [Multichannel Multipoint Distribution Service], DBS [Direct Broadcast Satellite], FSS [Fixed Satellite Service] program distributors, and satellite master antenna television systems. For fixed voice and broadband data services, the competitive alternatives include new facilities-based, wireline entrants, such as interexchange carriers (IXCs), competitive access providers (CAPs), and cable firms, non-facilities-based entrants utilizing the new local competition provisions of the 1996 Act, and a variety of wireless possibilities, including PCS [Personal Communications Service] and cellular service providers. In many of the foregoing cases, LECs may enter MVPD markets and cable television firms may enter local exchange markets. 32 Id. p 163. 33 In light of the discussion in the FCC's Order that reviews these three differential factors, we find that the Commission has adequately explained why it came to a different conclusion about LEC eligibility in the case of LMDS than it reached in earlier cases involving different technologies. 34 2. The LECs' Claim That the FCC Order is Not Supported by Substantial Record Evidence or Market Analysis 35
36 Might Acquire Exclusive LMDS Licenses in Order to Preempt Competition in Their Local Telephone Markets 37 The LECs' second argument challenges the three propositions that they contend underlie the FCC's preemptive acquisition rationale: (1) that the LECs exercise monopoly power; (2) that a LEC could prevent in-region competition from eroding this monopoly power by acquiring the LMDS license for its service area; and (3) that an unaffiliated entity would likely use a LMDS license to compete both in the local telephony market and in the local subscriber video market. 38 The LECs contend that the first premise, that of monopoly power, is factually inaccurate. Here, they cite to the existing regulatory scheme that is designed to counteract the LECs' monopoly position. They further observe that in one recent proceeding the FCC itself found that applicable statutory and regulatory safeguards [were] likely to be sufficient to prevent the BOCs [Bell Operating Companies] from improperly allocating costs between their monopoly local exchange and exchange access services and their affiliates' competitive interLATA services to such an extent that their interLATA affiliates would be able to eliminate other interLATA service providers and subsequently earn supra-competitive profits by charging monopoly prices. In the Matter of Regulatory Treatment of LEC Provision of Interexchange Services Originating in the LEC's Local Exchange Area, at p 104 (released Apr. 18, 1997). All that statement demonstrates, however, is the FCC's belief that, in the particular context of interLATA affiliate services, regulatory controls would be able to offset the risk of LECs abusing their monopoly. The LECs have not shown that the FCC's conclusion in the present case, that the LECs would likely resist competing against themselves in the telephony market, is unreasonable or that it lacks substantial evidence in the record. As the FCC's Order elaborates, the Commission's judgment about the precise situation at issue in this case rests not only on economic theory and analysis, but on predictive comments from the Department of Justice, the Federal Trade Commission, and several state attorneys general, three outside economists' conclusions that LECs have substantial market power and are likely to behave preemptorily, as well as the agency's own expertise. See Order pp 157-78. Moreover, the FCC has found in recent proceedings other than the one petitioners cite that LECs do currently exercise monopoly power over the provision of local telephone service and that eroding that power is in the public interest. See id. p 163 & n. 251. 39 The LECs challenge the FCC's second and third premises for the eligibility restriction--that a LEC could prevent competition from eroding its monopoly power by acquiring the LMDS license for its service area and that an unaffiliated entity would likely use a LMDS license to compete both in the local telephony and local subscriber video markets--as unduly speculative. With regard to the second premise, the LECs contest the relevance of an analogy that the FCC's Order draws to anticompetitive behavior that occurred in the cable industry in the early 1990s when satellite broadcast service providers emerged as potential competitors to local cable companies. See id. pp 166-69. In that situation, incumbent, monopolist local cable companies were alleged to have stifled competition from their non-cable competitors, such as DBS [Direct Broadcast Satellite] operators, and to have attempted to suppress the development of DBS technology as a competitor to cable television service. Id. p 166. The LECs point to what they regard as controlling distinctions between that case and the present one, noting particularly that the earlier case involved different market conditions and that the anticompetitive concern in the cable situation stemmed from the vertical integration between certain cable operators and programmers, whereas vertical integration is not a factor in the present case. With regard to the third premise, the LECs observe that the FCC has not established that LMDS will be used by non-LEC licensees to compete with the existing local telephone network, pointing to portions of the Order that instead state that [i]t is expected that many [of the telecommunications services that may be provided in LMDS] may be offered in the local telephony marketplace as an alternative to the wired telephone network. Id. p 210 (emphasis added); see also id. p 176 ([W]e do not know at this time whether the LMDS spectrum is best used for local telephone, video, or something else.). The LECs also point to other means by which competitors can enter the local exchange market, although the FCC is substantially less confident that these other technologies will actually create significant competition in the local telephone market. See id. pp 164-65. 40 In considering these claims, we must keep in mind our standard of review. As both the Supreme Court and this circuit have made clear, our review of the FCC's exercise of its predictive judgment is particularly deferential. In FCC v. National Citizens Committee for Broadcasting (NCCB), 436 U.S. 775, 98 S.Ct. 2096, 56 L.Ed.2d 697 (1978), another case in which FCC rulemaking that established eligibility criteria for communications licenses was challenged as arbitrary, the Supreme Court held that the FCC was not required to conclusively establish the factual validity of the agency's premises. Id. at 796, 98 S.Ct. at 2112. As the Supreme Court explained, 41 to the extent that factual determinations were involved in the Commission's decision ..., they were primarily of a judgmental or predictive nature.... In such circumstances 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. 42 Id. at 813-14, 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)). This circuit has similarly noted that our arbitrary or capricious review of the FCC 43 is a narrow one; we must affirm the decision if we find that it is not contrary to law, that it is supported by substantial evidence and based upon a consideration of the relevant factors, and if we determine that the conclusions reached have a rational connection to the facts found. FCC v. National Citizens Comm. for Broadcasting, 436 U.S. 775, 803, 814-15, 98 S.Ct. 2096, 2116, 2121-22, 56 L.Ed.2d 697 (1978); NAACP v. FCC, 682 F.2d 993, 997-98 (D.C.Cir.1982). 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. National Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095, 1140 (D.C.Cir.1984) (NARUC) (internal quotations omitted), cert. denied, 469 U.S. 1227, 105 S.Ct. 1224, 1225, 84 L.Ed.2d 364 (1985). 44 AT&T v. FCC, 832 F.2d 1285, 1291 (D.C.Cir.1987). 45 These precedents indicate why the LECs' arguments cannot prevail. Where, as here, the FCC must make judgments about future market behavior with respect to a brand-new technology, certainty is impossible. The Commission must rely (within the limits of reason and rationality) on its expertise and its evaluation of the existing evidence in deciding whether the risk of harm is large and/or important enough to merit regulatory action. Our review for arbitrariness does not demand total assurance on the part of the agency; such a standard would substantially hobble agencies working in new and rapidly developing fields. In this light, it is not unreasonable for the FCC to have drawn guidance from another recent situation in which a local communications monopoly actively set about suppressing the development of a new technology that could foster competition in its market. Similarly, the FCC's prediction that an unaffiliated entity will be more likely than a LEC to use a LMDS license to compete both in the local telephony and local subscriber video markets is plausibly rooted in the unprecedented size and capacity of a LMDS license and in the unprecedented opportunity to foster competition in the local telephone market that the current window of opportunity may represent. 46
47 as a Way to Afford Opportunities to Small Providers 48 In paragraph 159 of their Order, the FCC Commissioners note that: Our primary goal in the present proceeding is to encourage efficient competition in the telephony and MVPD markets. We have also expressed a corresponding concern with providing opportunities for smaller operators. These objectives are drawn from the direction given us by Congress. The rest of the Order continues to place the smaller operator rationale in a distinctly secondary status, and the FCC does not highlight it before this court. 49 In challenging this latter rationale, the LECs rely on the reasoning in Cincinnati Bell Telephone Co. v. FCC, 69 F.3d 752 (6th Cir.1995), a Sixth Circuit case holding that eligibility rules that restricted cellular communications providers from participating in Personal Communications Service (PCS) auctions were arbitrary because inadequately explained, see id. at 756. The Cincinnati Bell opinion noted that the eligibility restriction at issue there, like the one in the instant case, permitted incumbent monopolists to acquire new licenses as long as they did so outside of their current geographic service areas, and reasoned that the restriction would therefore do little if anything to stem the accretion of communications giants, while disproportionately hurting smaller providers who would most likely only be financially able to offer new communications services within their existing service area. Id. at 764. 50 Considering the FCC's downplaying of the smaller-provider-based rationale before this court and in its Order, we need not tarry on the argument long. We note, however, that the Sixth Circuit's case involved a different technology and a different market. The Sixth Circuit had before it only the question of cellular communications provider access to PCS. Moreover, the Cincinnati Bell court addressed this question in 1995, a year before Congress passed the 1996 Telecommunications Act, which was intended, inter alia, to make the development of competition in the telephony market a more realistic possibility. As indicated above (see II.A.1.), the FCC's Order adequately differentiates LMDS from earlier technologies like PCS, and present market conditions from those prevailing before the passage of the 1996 Act. In this light, the Sixth Circuit's opinion gives us no reason to question the reasonableness of the FCC Commissioners' judgment that restricting the power of incumbent local telephone company monopolists to acquire the LMDS license for their existing service area will promote competition. Certainly, it is reasonable to believe that many smaller providers who do not currently hold LEC monopolies will benefit if the FCC's Order prevents the incumbent LECs monopolists from dominating the LMDS market to the exclusion of smaller potential competitors. 51 We accordingly find that the LECs' challenges to the FCC's Order all fail.