Opinion ID: 77289
Heading Depth: 2
Heading Rank: 2

Heading: The Inflation Factor Is Consistent with Federal Law.

Text: 52 MCI and Florida Digital Network argue that the use of the inflation factor in the BellSouth model violates TELRIC. MCI and Florida Digital Network contend that including the inflation factor results in double counting because the BellSouth model already includes a factor to account for its cost of capital. MCI and Florida Digital Network argue that, by allowing double counting, the Florida Commission granted BellSouth more than a normal economic profit in violation of TELRIC. MCI and Florida Digital Network also contend that neither TELRIC nor the Telecommunications Act allows the additional inflation factor. 53 BellSouth and the Florida Commission dispute that the inflation factor constitutes double counting. BellSouth and the Florida Commission contend that there are two types of inflation: (1) inflation reflected in the increased cost of money over the period of years in which the rates will be in effect, and (2) inflation that will affect the cost of equipment that BellSouth will purchase over a period of several years. BellSouth and the Florida Commission argue that TELRIC authorizes both forms of inflation because they both contribute to the cost of maintaining the hypothetical most efficient network. We agree with BellSouth and the Florida Commission. 54 BellSouth and the Florida Commission correctly argue that the two types of inflation are independent of one another. The first type of inflation is general inflation for which investors demand compensation through the cost of capital. The second type of inflation reflects specific inflation related to an investment or asset ( i.e., inflation related to the acquisition of materials and services over the duration of the agreement). The two inflation rates, one general and one specific, need not be the same; as MCI concedes, the latter form of inflation may even be negative ( i.e., deflation) if the costs associated with the hypothetical network decrease due to improved technology. 55 The argument of MCI and Florida Digital Network that TELRIC does not authorize recovery for inflation likewise fails. The TELRIC of an element is based on the forward-looking cost of the hypothetical most efficient, lowest cost network. 47 C.F.R. § 51.505(b). Inflation (or deflation) of the cost of materials and services for the hypothetical network is not listed as one of the factors that may not be considered in calculating the cost. Id. § 51.505(d). Because interconnection agreements span several years, it is necessary to account for changes in industry-specific costs over that period. Nothing in the Telecommunications Act or TELRIC bars the Florida Commission from including an inflation factor for costs associated with the hypothetical network in the pricing model, and the decision of the Florida Commission was not arbitrary and capricious. 56 C. The Geographic Cost-Based Deaveraging Method Adopted by the Florida Commission Complies with Federal Law. 57 Florida Digital Network argues that the district court erroneously approved the geographic cost-based deaveraging method employed by the Florida Commission. Florida Digital Network contends that the method adopted by the Florida Commission lacks a basis in the record and fails to promote competition. We disagree. 58 The regulations provide, State commissions shall establish different rates for elements in at least three defined geographic areas within the state to reflect geographic cost differences. Id. § 507(f). For states, such as Florida, that do not have existing density-related zone pricing plans, the state commissions must create a minimum of three cost-related rate zones. Id. This requirement recognizes that deaveraged rates more closely reflect the actual costs of providing interconnection and unbundled elements. Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, 15,882 ¶ 764 (1996) (hereinafter  Local Competition Order ). It costs less per unit to provide local carrier service for an urban area than for a rural area, for example, so costs for these areas should not be averaged together but instead treated separately. See id. at 15,879-80 ¶ 760. 59 Before the Florida Commission, BellSouth advocated for a three-zone method that was based on geography, but left wide variance in prices within each zone. MCI and Florida Digital Network advocated for the Sprint approach, which group[ed] wire centers into zones based on the average cost of all UNE loops in the wire center, regardless of geographic or political subdivisions. Each element in the rate zone would be no more than 20% above and no less than 20% below the average rate for all elements in the zone. The Sprint approach, as executed by MCI and Florida Digital Network, resulted in six pricing zones. 60 The Florida Commission ultimately adopted neither approach. The Florida Commission rejected the BellSouth model because it was not cost-based, and it rejected the Sprint approach because it resulted in too many rate zones and was therefore administratively burdensome. Instead, the Florida Commission ran a revised iteration of the Sprint approach that produced five rate zones and then consolidated the two least expensive zones into a new zone and the two most expensive zones into another. This resulted in a three-zone model. 61 The argument of Florida Digital Network that the decision of the Florida Commission to adopt its own methodology is not supported by the record fails because the initial step in the methodology adopted by the Florida Commission was presented as the Sprint approach. Florida Digital Network concedes that the manner in which the number of zones was reduced from five to three was a variation on the Sprint approach. The further requirement that the cost data available in the proceeding implies that three zones is the most reasonable choice for BellSouth is supported by the record. We conclude that the record supports the decision of the Florida Commission. 62 Although Florida Digital Network argues that the methodology fails to promote competition, section 51.507 does little to cabin the discretion of a state commission when devising a geographic cost-based deaveraging method. See 47 C.F.R. § 51.507(f). The only requirements imposed by the section are (1) the method must be based on geographic areas within the state, (2) the method must reflect geographic cost differences, and (3) there must be a minimum of three cost-related rate zones. Id. The methodology adopted by the Florida Commission complies with each of these requirements. The methodology chosen by the Florida Commission is based on the Sprint approach, and Florida Digital Network concedes this satisfies the first and second requirements. The third requirement is satisfied because there are three cost-related zones. 63 The argument advanced by Florida Digital Network ultimately turns on its dissatisfaction with the zones chosen by the Florida Commission, not with the failure of the zones to comport with federal law. Neither Congress nor the FCC required a specific degree of deaveraging ( e.g., a maximum variance within each zone) even though either could have imposed such a restriction. Instead, the FCC chose to impose only a requirement that there be at least three zones. See Local Competition Order, 11 F.C.C.R. at 15,832 ¶ 765 (We conclude that three zones are presumptively sufficient to reflect geographic cost differences in setting rates for interconnection and unbundled elements.). The Florida Commission complied with this requirement, and it was within its discretion to choose among the many methods that would do so. Because the decision of the Florida Commission to adopt this method of geographic cost-based deaveraging was not arbitrary and capricious, we affirm the decision of the district court upholding the deaveraging model.