Court Opinion

ID: 8981255
Source: CourtListenerOpinion
Date Created: 2022-11-27 11:22:13.704272+00
Date Added: 2024-06-11T17:10:40.174359
License: Public Domain

BOOCHEVER, Circuit Judge,
concurring in part, and dissenting in part:
I concur in the majority opinion except for Part II. As to Part II, I respectfully dissent from the majority’s conclusion “that the Commission’s decision to release the BOCs from the structural separation requirements is arbitrary and capricious and therefore in violation of § 10(e) of the Administrative Procedure Act.” Op. at 1239.
The FCC imposed structural separation on predivestiture AT & T in 1980 as part of Computer II. Phase I Order, 104 F.C.C.2d at 969. The enormous power of that huge corporation was considered a threat to the burgeoning computer enhanced services industry. After the breakup of AT & T in 1984, the FCC promulgated its BOC Separation Order in which it continued to require structural separation of the BOCs’ enhanced services, id. at 975-77, “as a protective measure to ensure that emerging competitive forces would not be undermined and to protect ratepayers during the uncertainty surrounding divestiture.” Id. at 1000. The Commission promised to reevaluate the need for separation of the BOCs’ enhanced services in two years. Id. Computer III, which eliminates the structural separation requirements, represents that reevaluation.
As the majority points out, in our review of the FCC’s Computer III decision, we can set aside that decision only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A) (1982); Op. at 1230.
The scope of review under the “arbitrary and capricious” standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a “rational *1247connection between the facts found and the choice made.”
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2866, 77 L.Ed.2d 443 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 245, 9 L.Ed.2d 207 (1962)).
We therefore must determine whether the FCC examined the relevant data and articulated a satisfactory explanation for its action. I agree with the majority that the Commission’s cost/benefit analysis is the basis for its decision to eliminate structural separation requirements. I also agree that “[wjhile we scrutinize the FCC’s evaluation of each individual cost and benefit, we make no attempt to exercise the judgment required in striking the balance between the competing costs and benefits.” Op. at 1231. I fear, however, that the majority has substituted its own judgment in striking that balance.
In the course of its cost/benefit analysis, the Commission found “that the inefficiencies and other costs to the public associated with structural separation significantly outweigh the corresponding benefits.” Phase I Order, 104 F.C.C.2d at 987. Reviewing the relevant costs, the Commission found that “[structural separation effectively prohibits the offering of all enhanced services that could be efficiently integrated or collocated with AT & T’s basic services, but that cannot be offered on a cost-effective basis subject to structural separation.” Id. at 1002-1003. A similar cost exists with respect to the BOCs, on whom “[structural separation imposes opportunity costs by discouraging [the designing of] innovative enhanced services that utilize the resources of the public switched network.” Id. at 1007. Other costs noted by the FCC are the “direct costs on the BOCs from the duplication of facilities and personnel, the limitations on joint marketing, and the inability to take advantage of scope economies.” Id. at 1008. The ultimate result of these costs is poorer consumer service in the forms of “delayed services and innovation,” “direct duplicative costs,” and “organizational inflexibility.” Id. The majority “conclude[s] that the FCC could reasonably decide on this record that structural separation impairs the BOCs’ ability to achieve certain economies of scale and has impeded the development and marketing of some new forms of enhanced services.” Op. at 1232.
In assessing the benefits of structural separation, the FCC “concludefd] that the benefits of structural separation in protecting ratepayers and the enhanced services market from potential anticompetitive practices by the BOCs are not significantly greater than such benefits provided by nonstructural safeguards.” Phase I Order, 104 F.C.C.2d at 1010. The Commission analyzed two benefits which it previously had hoped to gain from the imposition of structural separation. One of these benefits was preventing AT & T and the BOCs “from using [their] control of local and interexchange network facilities to discriminate against users or suppliers of competing unregulated offerings.” Id. at 1006. “The FCC found that technological and market developments in the last few years have reduced the danger that the BOCs will discriminate against their competitors in providing access to the telephone network.” Op. at 1232-33. The majority agrees that “the record supports the Commission’s finding that technologies for ensuring equal access have improved, and may be effective in preventing discrimination in ways not feasible in the past.” Id. at 1233.
The other previous benefit identified by the FCC was limiting AT & T’s and the BOCs’ “ability to cross-subsidize [their] unregulated offerings by improperly allocating some costs of those offerings to [their] regulated operations.” Phase I Order, 104 F.C.C.2d at 1004-05. The Commission found that this “ability to shift costs from [their] regulated to [their] unregulated services has been reduced to some extent by industry changes.” Id. at 1005 (emphasis added); accord id. at 1010. Recognizing that the BOCs retain some ability to shift costs, the Commission announced that it is “committed to developing cost allocation methods that will be required to minimize the ability of the BOCs to shift costs,” id. *1248at 1010, and proceeded to implement some of these methods. See id. at 1012-92.
The majority finds that “the record yields no support for the Commission’s position that market and technological changes since Computer II and the BOC Separation Order have reduced the danger of cross-subsidization by the BOCs.” Op. at 1238. On this basis, the majority concludes that the Commission’s entire balancing of costs and benefits was arbitrary and capricious. Id. The majority takes two positions on the issue of cross-subsidization as it relates to the FCC’s ultimate decision: 1) recent market and technological developments in the telecommunications industry have not reduced the risk of BOC cross-subsidization, and 2) the nonstructural regulations proposed by the FCC were previously rejected by the agency as ineffective and so cannot be used now to justify the FCC’s decision. I find neither of these positions tenable.

Recent Developments

Two of the numerous justifications the FCC advanced for its conclusion that recent developments have reduced the danger of cross-subsidization deserve particular attention. First, the Commission found that the monolithic power of AT & T was greatly diluted with its breakup and the creation of the smaller local BOCs. “Divestiture eliminated AT & T’s control over the most significant operations it could use for cross-subsidization — its former local exchange companies.” Phase I Order, 104 F.C.C.2d at 1005. “After the divestiture of the BOCs from AT & T, ... [t]he BOCs were smaller than the predivestiture AT & T, ... were unable to provide interexchange services, and in many respects individually resembled GTE, which we had exempted from the structural separation requirements.” Id. at 999.
The majority rejects this analogy to GTE, “find[ing] no coherence in the Commission’s policy shifts in deciding which carriers to subject to separation requirements.” Op. at 1236. The majority is troubled that in Computer I, the Commission imposed structural separation based on gross revenues, but in Computer II exempted all carriers except AT & T from these requirements. The majority also looks suspiciously on the fact that “in its tentative ruling in Computer II, the Commission decided that GTE should be required to maintain structural separation but then reversed itself in the final decision.” Op. at 1236 n. 23. The propriety of the Commission’s ruling in Computer II is not before us. To the extent we may consider the Commission’s past decisions to guide our evaluation of the FCC’s current policy choice, however, I do not share the majority’s bewilderment at the Commission’s earlier decision to single out AT & T for continued imposition of structural separation requirements. That issue was presented to the D.C. Circuit in Computer and Communications Indus. Ass’n v. FCC, 693 F.2d 198 (D.C.Cir.1982), cert. denied, 461 U.S. 938, 103 S.Ct. 2109, 77 L.Ed.2d 313 (1983). That court concluded that “the basis for the Commission’s decision is rational and adequately explained,” and found that
[i]n reaching its decision to impose separation only on AT & T, the Commission considered four factors: (1) the carrier’s ability to engage in anti-competitive activity through its control of local exchange facilities, (2) the carrier’s ability to cross-subsidize its competitive activities through its monopoly services, (3) the degree to which the carrier possesses integrated research and manufacturing capabilities, and (4) the carrier’s economic ability to enter the market through a separate subsidiary. The Commission also noted statistics regarding each carrier’s revenues, market share, and market size.
Id. at 218-19 (footnote omitted). Thus, in contrast to the majority’s characterization, the FCC did not use .“national market power” in any talismanic sense, but as a shorthand notation for a multifactor inquiry. Moreover, “the Commission exhibited thoughtful deliberation by exempting GTE from the separation requirement after receiving more information about the nature and extent of GTE’s resources.” Id. at 219. I cannot agree with the majority that “[t]he FCC’s classification of GTE has been at best inconsistent and at worst totally *1249random,” Op. at 1237, or that the FCC’s prior inquiry provides us with “no basis on which to discern whether the FCC’s current, policy choice is rational.” Id. at 1236.
The second recent development affecting the BOCs’ ability to cross-subsidize is “[t]he availability of bypass and other new technologies [which] places some limits on the BOCs’ ability to shift costs from their unregulated services to their regulated offerings without reducing the demand for those offerings.” Phase I Order, 104 F.C. C.2d at 1010. Specifically, the FCC cites the development of private networks and shared tenant services which would allow telephone users to bypass the BOCs’ local exchange facilities. The majority rejects this justification, stating that “although the record contains an impressive array of evidence demonstrating the technical feasibility of bypass, the record contains no evidence that bypass has become a realistic option for any appreciable number of ordinary telephone users.” Op. at 1235. It is reasonable to conclude, however, that if the BOCs charged higher rates to basic telephone ratepayers through cross-subsidization, the economic benefit of alternative services would accelerate development of bypass networks. In this area of rapidly evolving telecommunication technology, the line between feasibility and availability is not as bright or inflexible as the majority believes. Moreover, the agency stated that these new technologies would limit, not eliminate, the opportunities for cross-subsidization. I believe the record adequately supports such a proposition.
The FCC specifically did “not conclude ... that the BOCs’ motivation to cross-subsidize has decreased because of these developments. Nor do[es it] underestimate the potential danger that BOCs could mis-allocate costs.” 104 F.C.C.2d at 1010. Rather, the agency found “that even if structural separation has a net positive benefit in an absolute sense, if alternative safeguards are on the whole more beneficial to society, then it would be incumbent upon [the Commission] to replace structural separation with those alternative safeguards.” Id. at 1001.
The FCC concluded, based on what I believe was a sufficient record, that the danger of cross-subsidization by the BOCs has been reduced with the breakup of AT & T and the availability of bypass technologies. Even if that reduction has been slight, it is for the Commission to weigh that reduction with the other relevant factors in reaching its ultimate decision. The majority agrees with the FCC that the costs of structural separation are at least as high as they were at the time of the FCC’s decision in Computer II and the BOC Separation Order. Op. at 1232. The majority also agrees that prevention of discriminatory access is not as great a benefit of structural separation as it once was. Id. at 1233. Viewing the FCC’s finding on cross-subsidization in light of these other factors, as I believe we must, I cannot say that the FCC’s ultimate decision to abandon structural separation is unsupported by the record, or that it was arbitrary and capricious.

Nonstructural Regulations

The FCC also stated that “[w]hile we have found that structural separation no longer serves the public interest, that finding was explicitly conditioned on the adoption and implementation of an effective set of nonstructural regulations to guard against the continued potential for improper cost shifting and discrimination by dominant carriers.” Id. at 1013. The question then becomes whether the nonstructural regulations proposed by the FCC to guard against cross-subsidization provide additional support for the FCC’s decision to abandon the structural separation requirements. The majority is unable to “find any record support for the FCC’s abandonment of its original position that cost-accounting regulations are relatively ineffective means of preventing improper cost-shifting.” Op. at 1233. I disagree.
In connection with its abandonment of structural separation, the FCC established numerous nonstructural safeguards to reduce the danger of cross-subsidization and anti-competitive action by the BOCs, including: 1) adoption of the principle of full *1250allocation of costs across services, rejecting the view that unregulated activities should bear only the incremental or marginal costs they cause, Joint Cost Order, 2 F.C.C.Rcd at 1312-13; (2) requiring that the additional costs of upgrading or replacing facilities primarily for the benefit of unregulated services be excluded from the regulated accounts, id. at 1313; (3) adoption of specific allocation rules requiring that a carrier charge nonregulated activity at the tariff rate for any tariffed services it uses, id. at 1318; (4) requiring allocation of costs directly to the relevant activity where possible, and otherwise assigning costs on the basis of a formula related to the allocation of other costs and expenses, id.; (5) adoption of rules governing transactions between affiliates, id. at 1337-38; (6) imposition of comparably efficient interconnection (CEI) and open network architecture (ONA) requirements, Phase I Order, 104 F,C.C.2d at 1018-68;1 (7) imposition of the Network Information Disclosure requirement, id. at 1077-86;2 and (8) imposition of the Customer Proprietary Network Information requirement, id. at 1086-92.3
These requirements and the regulatory scheme they embody warrant our maximum deference. Reviewing the FCC’s initial imposition of structural separation requirements in Computer II, the D.C. Circuit noted:
No aspect of the Computer II rules more warrants our deference than these requirements. The Commission, having chosen a permissible regulatory tool— structural separation — set out detailed plans for implementing it. These plans were based upon the Commission’s own expertise and experience in regulating the communications industry and upon the comments of the members of that industry. This court is ill-prepared to decide which mechanical requirements would best implement the structural separation scheme. Our only province is to determine whether the separation requirements were “based on a consideration of the relevant factors and whether there has been a clear error of judgment.”
Computer and Communications Indus., 693 F.2d at 219 (quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971)). In Computer III, the FCC has chosen different regulatory tools, nonstructural safeguards, and set out detailed plans for implementing them. I believe that we, too, are ill-prepared to decide which nonstructural safeguards would best implement the FCC’s regulatory scheme. Moreover, the environment in which the FCC examined its previous rejection of nonstructural safeguards has changed. In light of the technological and market changes that have occurred since 1980 when Computer II was decided — including the reduced market power of individual BOCs compared with predivestiture AT & T, the increased strength and stability of other providers of enhanced services, the competitiveness between the BOCs, and the Commission’s finding that the benefits of structural separation no longer outweigh its costs — the FCC’s decision to impose nonstructural *1251safeguards as opposed to structural separation requirements represents a different means of effecting an established policy rather than “an unexplained change from the FCC’s original position.” Op. at 1233-34.
More fundamentally, however, just as we cannot look at the Commission’s cross-subsidization determination in isolation, we cannot view the FCC’s decision to impose nonstructural safeguards separately from its cost/benefit analysis of structural separation. The FCC’s cross-subsidization and nonstructural safeguard determinations are simply factors in the weighing process which resulted in the Commission’s ultimate decision to abandon structural separation. The FCC did not decide that the danger of cross-subsidization has been eliminated — only that it has been reduced, like the danger of inferior access, to the point where it is outweighed by the costs of structural separation. Similarly, the Commission did not determine that nonstructural safeguards are more effective than structural separation, or even as effective as structural separation — rather, it found that they are preferable to structural separation in light of the relative costs and benefits. The FCC rationally reached this conclusion based on the record before it.
As the majority opinion and this dissent make clear, the FCC considered numerous relevant factors before reaching its decision, including “the comments of various parties, business practices in the communications industry, the costs and benefits of various degrees of separation, and the efficacy of various separation tools.” Computer and Communications Indus., 693 F.2d at 219. I find that the Commission’s decision to eliminate structural separation requirements in favor of nonstructural constraints was based on a consideration of these factors, and I cannot say that this decision is the result of a clear error of judgment. Accordingly, I cannot agree with the majority that the decision was arbitrary and capricious.
We are engaged in reviewing decisions made in a highly technical, rapidly changing industry. I believe that the FCC has given adequate reasons for its decision to abandon structural separation and to substitute nonstructural safeguards.

. CEI requires "that if a carrier offers an enhanced service, it should be required to offer network interconnection (or collocation) opportunities to others that are comparably efficient to the interconnection that its enhanced service enjoys.” Id. at 1019. ONA differs from CEI only in that it is "broader in concept” than CEI, and that it deals not with service-specific standards but with "the overall design of a carrier’s basic network facilities.” Id. ONA requires that "all users of the basic network ... [be allowed] to interconnect to specific basic network functions and interfaces on an unbundled and ‘equal access’ basis.” Id.

. Pursuant to this safeguard, "AT & T and the BOCs ... will be required, for all new network services or changes to existing network services that affect the interconnection of enhanced services with the network, to notify the enhanced services industry that such a change is planned.” Id. at 1083.

.Under this requirement, AT & T and the BOCs’ enhanced services operations are permitted to have access to information about customer use of the basic network services, “provided that [they] establish] ] procedures to honor requests from customers that their [information] (i) be withheld from ... enhanced services personnel, and (ii) be released to other enhanced services vendors." Report and Order, 2 FCC Rec. 3072, 3093 (1987).