Opinion ID: 795390
Heading Depth: 2
Heading Rank: 2

Heading: Reciprocal Compensation Rate

Text: 48 The district court determined that all calls between Western Wireless and Great Plains that originate and terminate in the Western Wireless major trading area are subject to reciprocal compensation. Neither party appeals the district court's finding in this regard. See supra note 6. What the parties dispute is the actual reciprocal compensation rate. 49 The parties agree that the rate must be based on a forward-looking, long-term network model that attempts to determine the incremental cost per minute of use on a modern network. This model includes costs calculated using the Total Element Long Run Incremental Costs (TELRIC) method. The FCC defines TELRIC as: 50 The total element long-run incremental cost of an element is the forward-looking cost over the long run of the total quantity of the facilities and functions that are directly attributable to, or reasonably identifiable as incremental to, such element, calculated taking as a given the incumbent LEC's provision of other elements. 51 47 C.F.R. § 51.505(b). In addition, the rate may include [a] reasonable allocation of forward-looking common costs. Id. at § 51.505(a)(2). The parties disagree as to whether the evidence in the current record is adequate to support certain of the cost elements claimed by Great Plains. In addition to this evidentiary skirmish, there are outstanding disputes regarding the propriety of including certain specific switching and transport costs. Because of the fact intensive nature of this inquiry into pricing, we owe deference to the Nebraska Commission's rate determination and must affirm unless it acted arbitrarily and capriciously when it set the rate. See Qwest Corp. v. Koppendrayer, 436 F.3d 859, 863 (8th Cir.2006) (applying the arbitrary and capricious standard of review to determinations by a state commission concerning rate-setting issues). 52 In front of the arbitrator, Great Plains submitted the results of a cost study based on a forward-looking model. Western elected not to conduct its own study, but rather, offered a critique of the Great Plains study. Both parties had submitted initial rate proposals, and both parties compromised to a limited extent before submitting final offers to the arbitrator. The arbitration was issue-by-issue arbitration as mandated by the Nebraska Commission, and the arbitrator was forced to choose one of the two parties' proposed rates without amendment. Great Plains had proposed a final rate of $0.0232 per minute of use. Western had proposed a final rate of $0.00609 per minute of use. The arbitrator determined that the most appropriate rate would be in the range of $0.01-0.014 per minute of use and, reluctantly, selected the Western rate. 53 Unlike the arbitrator, the Commission was not bound to accept one party's proposal without amendment. It considered both parties' final proposals as well as the arbitrator's analysis. It then took the arbitrator's mid-range number as a starting point and adjusted upward to a final rate of $0.0208 per minute of use, resolving several individual points of dispute to reach the final rate. The district court affirmed the Nebraska Commission's rate determination. 54 We need not address each individual cost element that contributed to the Nebraska Commission's overall, composite figure of $0.0208 per minute of use. Rather, we focus only on those elements that remain in dispute. The rate is comprised of two categories of cost elements. $0.0079 per minute of use is allocated to termination or switching costs, and $0.0129 per minute of use is allocated to transport costs. The parties dispute both of these cost element categories. 55 (1) Switching/Termination Rate 56 Regarding switching costs, Western argues that $0.0060 per-minute-of-use out of the $0.0079 total fails to meet the pricing standards set forth in 47 U.S.C. § 252(d)(2). Section 252(d)(2) requires that costs be determined on the basis of a reasonable approximation of the additional costs of terminating such calls. Western argues that the disputed $0.0060 per minute of use is based on the cost of certain switches that Great Plains included in its cost study. Western argues that these switches are necessary for Great Plains to have a network capable of servicing its own local exchange customers even without consideration of traffic with Western. Western therefore argues that the cost of these switches should be considered part of the necessary equipment for a local network (like wire loops), should be charged on a flat-rate, per-line basis to Great Plains's network customers, and should not be included in the reciprocal compensation rate. Western also argues that the current and reasonably anticipated volume of traffic on the networks is so small, and that the smallest available switches are so powerful, that it is not appropriate to characterize the switches as having any cost that varies with use or that contributes additional cost to the termination of calls. Thus, Western argues the entire cost should be allocated to Great Plains's customers on a flat rate basis. In making this argument, Western relies on the FCC's First Report and Order, cited above, which sets forth a principle of cost causation as follows: 57 Only those costs that are incurred in the provision of the network elements in the long run shall be directly attributable to those elements. Costs must be attributed on a cost-causative basis. Costs are causally-related to the network element being provided if the costs are incurred as a direct result of providing the network elements, or can be avoided, in the long run, when the company ceases to provide them. 58 First Report and Order at ¶ 691. 59 Although Western's argument has some appeal, it fails to recognize that the FCC has interpreted the Act to permit state commissions to assign some common costs, like switching costs, not only on a flat-rate, per-line basis, but also on a perminute-of-use basis, or on some combination of the two methods. See 47 C.F.R. § 51.505(a)(2) (stating that forward looking costs are a combination of TELRIC and a reasonable allocation of forward-looking common costs); 47 C.F.R. § 51.509(b) (Local switching costs shall be recovered through a combination of a flat-rated charge for line ports and one or more flat-rated or per-minute usage charges for the switching matrix and for trunk ports.). This is in contrast to costs such as local loop and subloop costs that must be recouped on a flat-rate basis. See id. at § 51.509(a) (Loop and subloop costs shall be recovered through flat-rated charges.). Because the Commission permissibly used a combination of the two methods prescribed by Rule 51.509(b), we cannot say that it acted arbitrarily or capriciously when it found that it was reasonable to apportion some of the cost of the switches to the termination of calls on a per-minute basis rather than charging all switch costs on a flat, per-line basis. 60 To reach the $0.006 per-minute-of-use switching figure for inclusion in the overall rate, the Commission specifically found that the disputed switching costs were attributable 70% to usage and 30% to flat-rate loop costs. It is a much closer question whether the Commission acted arbitrarily or capriciously when it found that it was reasonable to attribute, specifically, 70% of the cost of the switches on a perminute, usage basis. We note that state commissions enjoy wide latitude on this issue because not only is our review deferential, but also because the substantive standard applied by state commissions is only one of reasonableness. Still, the only reference we find in the present record to the 70%/30% figure is a conclusory statement by Great Plains's cost model expert that 30 percent of the switching costs were excluded as nontraffic sensitive to account for line equipment of the switch. 61 This conclusory statement from an expert likely would not be sufficient for us to rely upon under a de novo standard of review. However, our deferential review is due in part to the superior technical expertise of state commissions. As such we should not lightly reverse a state commission's assessment of reasonableness. Further, Western has not attacked the particular election of the 70%/30% split as unreasonable; rather, Western attacks the inclusion of switching costs in general as impermissible. As a result, we do not fault the Commission for the absence of an extensive record setting forth the complete foundation for the precise apportionment. Further, we note that the Great Plains expert testified and was subject to cross-examination in arbitration and there is no allegation that the arbitration was tainted by procedural irregularities. Although this issue is close, given our conclusion that it is permissible to include some switching costs, we are not prepared to declare the Nebraska Commission's reasonableness determination arbitrary and capricious merely because that body was willing to rely on the expert's conclusion. 62 (2) Transportation Rate 63 Regarding the transportation rate, there are two points of dispute, one evidentiary and one substantive. The evidentiary dispute arises because, after evidence was submitted, Great Plains included a table of figures in its briefing that the Commission relied upon to set the transportation rate. Western argues that many of the figures in the table enjoy no support in the record, and therefore, should not be treated as evidence. Having carefully reviewed the testimony of Great Plains's pricing expert, it is clear that the figures in the table do, in fact, enjoy support in the record. As explained more fully below, the specific figures at issue concern the allocation of certain costs between functions to be included or excluded from the transportation rate. In his testimony, the Great Plains expert identified the appropriate percentage allocation for inclusion in the transportation rate as 70-75%. The disputed table includes figures not found in the record, but generated from data found in the record modified to take into account the expert's range, using an assumption of 72%. There is no error in relying on specific data points not in the record if those data points are derived from evidence that is in the record. 64 Regarding the substantive dispute, we again affirm the Nebraska Commission's rate determination. The $0.0129 per-minute-of-use transportation rate is a final number that Great Plains arrived at by calculating a larger, gross transportation rate and subtracting a percentage from that gross rate based on the fact that some transportation services provided by Great Plains are related to services not charged on a per-minute-of-use basis. Western does not currently challenge the determination of the larger, gross transportation cost figure, and the parties agree that it is necessary to subtract at least a portion of the gross transportation figure. Rather Western challenges the particular apportionment of 72% of the transportation costs to functions that can be included in the net transportation rate of $0.0129 per-minute-of-use. 65 Specifically, the forward-looking network proposed by Great Plains for the purpose of rate calculations is a network that provides functions over different kinds of circuits, including functions above and beyond those necessary to carry traditional usage-based switched services. The parties refer to these other functions as special access services and state that such functions include elements such as high capacity transport circuits dedicated to single users who pay flat monthly charges rather than charges based on per-minute rates. An example of a special access service provided by Great Plains is dedicated video service to schools. 66 In determining the proper method to reduce the gross transport figure to isolate proper, cost-causative transport functions from costs that are unrelated to the provision of per-minute, usage-based services, it is necessary to choose a method of calculation. The Act and the regulations do not mandate the use of a particular method. Of three possible methods cited and discussed by the parties, Western attacks one method as impermissible. This one method is the method employed by Great Plains. 67 The three possible methods for determining a proper allocation are identified as (1) the circuit count method, (2) the rate equivalency method, and (3) the bandwidth method. It suffices to note that Great Plains and Western agree that there is no legal impediment to the use of the circuit count or bandwidth methods. Roughly speaking, these two methods apportion costs between usage-based and special access services, respectively, based on the number of circuits dedicated to each function or based on the percentage of total bandwidth dedicated to each function. Using the circuit count method, the Great Plains cost expert initially recommended the allocation of 89% of the gross transportation rate to usage-based services. Western advocated use of the bandwidth method, and, before the arbitrator, concluded that 14-25% of the gross transport costs should be allocated to usage-based services. 68 Using the challenged rate equivalency method, the Great Plains expert testified that an allocation of 70-75% would be appropriate, and Great Plains provided calculations that the Commission relied upon using an allocation of 72%. This rate is within the broad range (14%-89%) defined using the two unchallenged methods. As such, we should not reject the Commission's final transportation rate determination as arbitrary and capricious even if the precise method used appears problematic. 69 That having been said, even if the resulting percentage were not within the permissible range, it is not clear that use of the rate equivalency method in this context would rise to the level of reversible error. Under the rate equivalency method, Great Plains looked at its retail rates for both types of services (per-minute usage services and special access services) as those retail rates then existed under state tariffs. Great Plains then used the percentage break-down in rates to infer a percentage break-down for the allocation of transportation costs. In general, the use of retail costs and historical, embedded costs as reflected in existing tariffs rather than costs based on forward-looking networks is prohibited. See 47 C.F.R. § 51.505(d)(2) (stating that retail costs shall not be considered in a calculation of the forward-looking economic cost of an element). Here, however, the rates were not used to determine the costs, i.e., the gross transportation rate. That gross figure was based on a forward-looking network model. The retail tariffs were only used to estimate a distribution between special and usage-based services. It is not clear that Rule 51.505(d)(2) prohibits the use of existing tariff rates in this manner. 70 We need not firmly resolve the question of whether this particular use of retail rates runs afoul of the Rule 51.505(d)(2) prohibition on considering retail costs. As already noted, the challenged method resulted in an allocation well within the range established by the unchallenged methods, and it was not arbitrary and capricious for the Nebraska Commission to select an allocation within that range. As a result, we affirm the district court and Commission as to the rate determination.