Court Opinion

ID: 4516147
Source: CourtListenerOpinion
Date Created: 2020-03-13 16:00:32.777335+00
Date Added: 2024-06-11T10:41:49.314870
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 17, 2020               Decided March 13, 2020

                        No. 19-1085

                   IRREGULATORS, ET AL.,
                        PETITIONER

                       v.
   FEDERAL COMMUNICATIONS COMMISSION AND UNITED
               STATES OF AMERICA,
                  RESPONDENTS

           On Petition for Review of Orders of the
           Federal Communications Commission

     W. Scott McCollough argued the cause and filed briefs for
petitioners.

    Matthew J. Dunne, Counsel, Federal Communications
Commission, argued the cause for respondents. With him on
the brief were Robert Nicholson and Kathleen Simpson
Kiernan, Attorneys, U.S. Department of Justice, Thomas M.
Johnson Jr., General Counsel, Federal Communications
Commission, Ashley Boizelle, Deputy General Counsel, and
Richard K. Welch, Deputy Associate General Counsel. Robert
J. Wiggers, Attorney, U.S. Department of Justice, Jacob M.
Lewis, Associate General Counsel, Federal Communications
Commission, and Thaila Sundaresan, Counsel, entered
appearances.
                                 2
    Gregory J. Vogt, Regina McNeil, and Robert Deegan were
on the brief for amici curiae National Exchange Carrier
Association, Inc., et al. in support of respondents.

   Before: ROGERS and KATSAS, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.

   Opinion for the court filed by Senior Circuit Judge
WILLIAMS.

     WILLIAMS, Senior Circuit Judge: Six individual
petitioners challenge a Federal Communications Commission
order approving the continued use of admittedly outdated
accounting rules for an ever-dwindling number of telephone
companies whose pricing is governed by those rules. But those
individuals have presented no evidence that the continuing
application of the frozen rules has harmed them or is likely to
harm them. The individuals don’t purchase telephone service
from a provider whose rates are directly affected by the rules.
And they have not shown how the rules distort the market to
their disadvantage or otherwise harm them indirectly. The
petitioners therefore lack the necessary Article III standing to
challenge the Commission’s order, and we must dismiss their
petition for review.

                              ***

     Understanding this case requires something of a trip down
memory lane through the history of regulatory control over
telephone rates.

     Until the early 1990s, the Commission regulated wireline
interstate telephone providers by the “rate-of-return” method,
allowing a firm to charge “rates no higher than necessary to
obtain ‘sufficient revenue to cover their costs and achieve a fair
return on equity.’” Nat’l Rural Telecom Ass’n v. FCC, 988
                               3
F.2d 174, 178 (D.C. Cir. 1993) (quoting In re Policy & Rules
Concerning Rates for Dominant Carriers, 3 F.C.C. Rcd. 3195
(1988)). Roughly thirty years ago, the Commission “began to
take serious note of some of the inefficiencies inherent in rate-
of-return regulation.” Id. Because firms “can pass any cost
along to” their customers, rate-of-return carriers have little
incentive to pursue innovative cost-reductions. Id. Rate-of-
return carriers also have perverse incentives to shift costs
“away from unregulated activities (where consumers would
react to higher prices by reducing their purchases) into the
regulated ones (where the price increase will cause little or no
drop in sales because under regulation the prices are in a range
where demand is relatively unresponsive to price changes).”
Id.

     The Commission’s solution was price-cap regulation, in
which it sets a maximum rate, subject to later periodic
adjustments. The caps initially chosen were the firms’ then-
existing rates, which were to be subject in the future to various
adjustments—adjustments that were unlikely, for any one firm,
to be significantly affected by its success or failure at cost
reduction. Besides improving the regulated firms’ incentives,
price-cap regulation has a benefit quite relevant here: it
eliminates the need for the costly, cumbersome accounting
rules inherent in the rate-of-return method. Id.

     The Commission first adopted price-cap regulation in
1989, and we upheld its choice against a number of challenges.
Id. at 177–85. The shift was at first mandatory only for the Bell
companies and GTE, with other local exchange carriers entitled
to remain under rate-of-return regulation at their option. See
id. at 179; In re Policy & Rules Concerning Rates for Dominant
Carriers, 6 F.C.C. Rcd. 2637 ¶ 10 (1991). Today, the
Commission reports and the petitioners do not contest, 93% of
the phone lines currently subject to either of these two forms of
rate regulation are under price caps. See Resp. Br. 4.
                               4
     This case involves the separations processes set forth by
the Commission in 47 C.F.R. Part 36 and which are today used
(as we shall soon see) by rate-of-return carriers. The
Commission devised the system in fulfillment of its statutory
mandates to “prescribe a uniform system of accounts for use by
telephone companies,” 47 U.S.C. § 220(a)(2), and to regulate
interstate—but not intrastate—telecommunications service, 47
U.S.C. § 221; see also Louisiana Public Service Comm’n v.
FCC, 476 U.S. 355 (1986).

     Jurisdictional separations involve two steps: The first is
for a firm to assign its costs (already recorded in various
Commission-prescribed “accounts”) to categories specified by
the Commission. These categories seem generally to represent
aggregations of the various “accounts” in which firms initially
record their costs, but are in some cases disaggregated into
subcategories. See In re Jurisdictional Separations & Referral
to Fed.-State Joint Bd., 16 F.C.C. Rcd. 11,382 ¶ 4 & n.12
(2001) (“2001 Freeze Order”); see also, e.g., 47 C.F.R.
§ 36.123. The categories are presumably designed to facilitate
application of the second step: apportionment of the costs in
each category between intrastate and interstate jurisdictions.

     The apportionment is governed by rules which vary
depending on the cost in question. Some have for example a
“fixed allocator.” 2001 Freeze Order ¶ 4. Others fluctuate with
use as between interstate and intrastate service and thus vary in
their application from year to year. See id.; see also, e.g., 47
C.F.R. § 36.123.

     In 2001, the Commission realized that its complicated Part
36 jurisdictional separations rules, initially developed for a
world of analog “circuit-switched networks,” no longer
reflected an increasingly digital reality. 2001 Freeze Order ¶ 1.
What’s more, the separations process required carriers to
perform cumbersome separations studies, id. ¶ 13, measuring
                                 5
for instance the “the relative number of weighted standard work
seconds” a switchboard handled, 47 C.F.R. § 36.123(b).

     So the Commission decided to effectuate a temporary,
five-year freeze “pending comprehensive reform.” 2001
Freeze Order ¶ 2. To the extent that the law required price-cap
carriers to continue to report costs according to a “uniform
system of accounts,” 47 U.S.C. § 220(a)(2), the Commission
simply froze the category relationships and allocations factors
based on “the carriers’ calendar-year 2000 separations studies.”
2001 Freeze Order ¶ 9. For rate-of-return carriers for whom
the rules still determined the actual prices those carriers could
charge, the Commission froze the allocation factors and gave
the rate-of-return carriers the option, but not the requirement,
to also freeze their category relationships. Id. ¶ 11.

     As a result of the freeze, all carriers were spared the need
“to measure usage in order to develop jurisdictional allocation
factors for interstate purposes, as frozen factors [would] be
carried forward from year to year,” and many carriers no longer
needed “to perform the analyses necessary to categorize annual
investment changes for interstate purposes.” See In re
Jurisdictional Separations Reform & Referral to Fed.-State
Joint Bd., 15 F.C.C. Rcd. 13,160 ¶ 19 (2000).

     The five years provided for in the 2001 Freeze Order came
and went—and the Commission extended the jurisdictional
separations freeze for three more years. In re Jurisdictional
Separations & Referral to Fed.-State Joint Bd., 21 F.C.C. Rcd.
5516 ¶ 16 (2006). Over the next several years, the Commission
extended the freeze seven more times, the last such extension
being the Order now before us: In re Jurisdictional
Separations & Referral to the Federal-State Joint Board, No.
CC80-286, 2018 WL 6629368 (2018) (“2018 Order”). See id.
¶ 12 (outlining prior freeze extensions); see also id. ¶ 4
(extending the freeze “for up to six years”). The Commission
                               6
has also allowed those rate-of-return carriers that froze their
category relationships in 2001 (the first step in Part 36’s two-
step process) a one-time option to “unfreeze and update” those
relationships. Id. ¶ 19.

                                ***

     The petitioners challenge the most recent iteration of the
freeze as established in the 2018 Order. But because none of
them possesses Article III standing, we do not rule on the merits
but instead dismiss their petition for lack of jurisdiction.1

    The Constitution permits us to rule only on tangible
“Cases” or “Controversies,” not abstract hypotheticals or
requests for advisory opinions. U.S. Const. art. III, sec. 2. A
party seeking review of an agency’s action must therefore have
standing to pursue the action before our court, a rule that has
come to require that the party has suffered or will likely suffer
an injury in fact traceable to an act of the defendant and
redressable by a favorable decision. See Lujan v. Defs. of
Wildlife, 504 U.S. 555, 560 (1992).

     The petitioners in this case are six individuals and two
informal, unincorporated organizations formed to advance the

    1
      The petitioners set forth arguments for standing and associated
evidence in a lengthy, unpaginated document attached to their
docketing statement, part but not all of which they reproduce in a
sequentially paginated addendum to their opening brief. Though we
will consider these materials, we do not pass on whether this
submission complies with D.C. Circuit Rule 15(c)(2), which permits
“a brief statement” regarding a “claim of standing.” For legal
arguments, we cite to a brief-like section of the docketing statement
styled “Petitioners’ Standing Argument,” using its internal
pagination.
                                 7
petitioners’ chosen positions on telecommunications policy.
Because the petitioners offer no evidence of injury unique to
the organizations themselves, those organizations will have
associational standing only if a member possesses standing.
We therefore focus our attention on the individual petitioners.
See NARUC v. FCC, 851 F.3d 1324, 1327 (D.C. Cir. 2017) (per
curiam) (“An association has standing to bring suit on behalf of
its members when its members would otherwise have standing
to sue in their own right . . . .” (cleaned up)). The individual
petitioners bear the burden of establishing a substantial
probability of standing, which they may meet with affidavits
submitted to this court or evidence already in the administrative
record. Id.

     We address each of petitioners’ theories of standing below,
and show where the petitioners fall short, beginning with the
petitioners’ theories about how the jurisdictional separations
freeze still affects price-cap carriers and ending with the
petitioners’ arguments that they suffer harms from the Part 36
rules’ effects on rate-of-return carriers.

     1. The petitioners’ apparent main concern and their chief
theory of injury is that the freeze distorts price-cap carriers’
rates.    As the petitioners see things, state regulators
(particularly those of New York) still use Commission-
established jurisdictional separations to regulate major price-
cap carriers’ intrastate rates and, when doing so, are subject to
the Commission’s freeze. If, as petitioners allege, the frozen
separations cause intrastate rates to be higher than they would
under a modernized system, individual petitioners purchasing
intrastate service from price-cap carriers are likely to be
harmed. Critical to this theory is the idea that state regulators
are compelled by federal law to apply the frozen federal
separations to the intrastate rates of price-cap carriers.
                                 8
      Petitioners offer no basis to believe that such compulsion
exists. In fact the Commission appears to have extinguished
such compulsion, using its authority under the
Telecommunications Act of 1996, 47 U.S.C. § 160, to “forbear
from applying” provisions of the Act when it determines (1)
that they are “not necessary to ensure” “just and reasonable”
rates, (2) that they are not needed to protect consumers, and (3)
that forbearance is “consistent with the public interest,” in
particular that such forbearance “will promote competitive
market conditions.” Id. § 160(a), (b). In the years since the
initial 2001 freeze order, it has issued orders, initially
conditional and later unconditional, forbearing from requiring
price-cap carriers to apply the Part 36 separations process at all.
2018 Order ¶ 16 n.45. Because that process was useful only for
rate-of-return price regulation, it had no further role in federal
regulation of these carriers’ interstate rates.

     That federal forbearance is naturally consistent with states’
having authority to impose their own accounting methods on
price-cap carriers for the purpose of regulating intrastate rates.
The relevant portion of the initial forbearance order, which the
Commission subsequently incorporated by reference for all
price-cap carriers, is worth quoting in full:

    We recognize that state commissions may exercise
    their own state authority to conduct their rate and other
    regulation as permitted under state law.              We
    emphasize that we do not in this Order preempt any
    state accounting requirements adopted under state
    authority. We recognize, as the State Members point
    out, that section 10(e) [47 U.S.C. § 160(e)] states that
    “[a] State commission may not continue to apply or
    enforce any provision of this Act that the Commission
    has determined to forbear from applying” under
    section 10. Although states will not have authority to
    enforce the federal Cost Assignment Rules as they
                               9
    apply to AT&T once this relief is effective, we do not
    read section 10(e) to prevent states from adopting
    similar provisions to the extent that they have
    authority under state law. In the wake of this decision,
    we would expect that any states that may rely on the
    Cost Assignment Rules and resulting data for state
    regulatory purposes would assert their jurisdiction to
    obtain the needed information from AT&T.

In re Petition of AT&T Inc. for Forbearance, 23 F.C.C. Rcd.
7302 ¶ 33 (2008); see also In re Petition of USTelecom for
Forbearance, 28 F.C.C. Rcd. 7627 ¶ 49 (2013) (incorporating
the AT&T Order’s preemption analysis when granting
remaining price-cap carriers similar forbearance from Part 36
rules). This means that any injuries the petitioners suffer
through the application of outmoded Part 36 rules to price-cap
carriers are traceable not to the Commission’s freeze order but
to the states’ voluntary and independent decisions to use the
rules of Part 36 for their own purposes.

     To be sure, the petitioners have identified one state
commission that in a brief dictum expressed the belief that the
federal separations rules “likely preempted” any different state
accounting methods. See Northern New England Tel.
Operations LLC, 2014 WL 6722276, at *32 (Me. Pub. Util.
Comm’n, 2014) (“We reject the notion that a novel (and likely
preempted) attempt at reforming the cost allocation rules . . .
would in any manner be helpful in establishing an appropriate
level of MUSF support.”). To the extent the “likely preempted”
parenthetical is more than a throwaway phrase, we see no basis
for it in light of general preemption principles and the language
of the Commission’s forbearance decisions. Petitioners’ claim
of a direct effect from the freeze on price-cap carriers’ intrastate
rates is thoroughly mistaken. See United States v. Ruiz, 536
U.S. 622, 628 (2002) (“[A] federal court always has jurisdiction
to determine its own jurisdiction.”).
                              10
     2. Petitioners generally claim that “frozen separations
over-allocate costs to intrastate [service]. . . whereas they
under-allocate costs to interstate, thereby allowing for
artificially low interstate rates.”      Petitioners’ Standing
Argument, 19. As we just saw, only rate-of-return carriers are
governed by the frozen separations, so any injury in this
category must derive from their pricing.

     Petitioners’ difficulty is that even if they are correct that
rate-of-return intrastate prices are too high, they have presented
no evidence—and certainly not enough evidence to show a
substantial probability—that these intrastate prices affect them
personally.

     For starters, none of the petitioners claims to purchase
intrastate service from a rate-of-return carrier directly—hardly
a surprise, given the reduced role of rate-of-return carriers. One
petitioner states that he has traveled on business to every state
in the Union except New Mexico and Alaska, and he has
“consumed local telecommunications services” while on the
road. Pet. Br. Addendum 166. But he does not claim that he
has paid for these local services directly, only that he has, like
many travelers, used a phone while away from home.

     The petitioners indeed do claim that they pay the prices
charged by rate-of-return carriers indirectly. Their providers,
they say, pay inflated prices for wholesale service from rate-of-
return carriers to complete long distance calls into rate-of-
return networks; the providers then pass those inflated costs
along to customers such as petitioners.

     The underlying economic principle invoked by petitioners
is sound at a high level of generality (firms generally pass on
the costs of necessary inputs), but the record undermines their
claim that it links the separations freeze to any impact on them.
When adjusted for market size, comparatively few phone
                               11
companies are subject to the jurisdictional separations rules in
setting prices. Once we include (unregulated) mobile wireless
providers in the mix, according to the Commission, the frozen
rules apply to just 0.8% of all total phone connections. See
Resp. Br. 13 n.4. That means the wholesale rates charged
petitioners’ providers by rate-of-return carriers are, by any
metric, a very small portion of the former’s total costs. While
a perfectly efficient and completely competitive
telecommunications market would transfer those inflated
wholesale costs to retail customers, the petitioners provide no
tangible evidence and offer only naked assertions that any such
transfer has had an impact on them. This theory of harm
“stacks speculation upon hypothetical upon speculation” and
thus “does not establish an actual or imminent injury.” Kansas
Corp. Comm’n v. FERC, 881 F.3d 924, 931 (D.C. Cir. 2018)
(quotation omitted).

     3. The petitioners believe that the frozen jurisdictional
rules distort the telecommunications marketplace generally.
See Petitioners’ Standing Argument, 30; Reply Br. 14. Though
the petitioners don’t detail the nature of the distortion, one can
imagine some.

     For instance, the frozen rules may lead rate-of-return
carriers to charge inflated prices for local service. Where a
price-cap carrier or a wireless carrier competes with a rate-of-
return carrier to provide local service, and the rate-of-return
carrier’s rates have been inflated by the freeze order, the price-
cap carrier will be able to raise its prices without losing
customers to the disproportionately expensive rate-of-return
competition.

     Again, petitioners offer no relevant evidence. Specifically
they offer nothing to show that their providers—or any
providers competing with rate-of-return carriers—artificially
inflate their prices for local service. Moreover, the price-cap
                                12
carriers serving the petitioners might be charging the maximum
amount permitted under the price cap anyway. Given the
infinitesimally small share of phone calls provided by rate-of-
return carriers, we can see no justification for converting
petitioners’ suppositions into fact.

     Alternatively, a similar market distortion might arise if
carriers can cross-subsidize unregulated activities by charging
inflated prices for intrastate regulated services. In particular,
petitioners believe that such cross-subsidization occurs in states
that allegedly use federal separations results to set price-cap
carriers’ intrastate rates. Reply Br. 14–15. But to the extent
that such cross-subsidization exists at all and to the extent that
it meaningfully impairs competition, it is due to the states’
independent decisions to apply the Part 36 rules, as discussed
above.

      4. The petitioners’ fourth and final theory of injury rests
on the idea that frozen category relationships allow rate-of-
return carriers to receive inflated sums from the federal
Universal Service Fund (USF), which causes the petitioners to
pay higher USF charges on their phone bills. Again petitioners
fail to demonstrate a substantial probability of a tangible injury.

     Today, USF directly subsidizes (among other things)
telephone companies serving high-cost areas of the country.
See Federal Communications Commission, Universal Service
Fund, https://www.fcc.gov/general/universal-service-fund; see
also 47 U.S.C. § 254 (providing statutory authority). USF is
funded by mandatory contributions from all telephone
companies, which the companies may “recover” by including a
separate USF charge on their customers’ retail phone bills. See
47 C.F.R. § 54.712.

    It is true that the administrator of universal service support
uses aspects of Part 36 for some support calculations. See 2018
                                13
Order ¶ 18. But see id. ¶ 17 (describing changes in the universal
service systems that give rate-of-return carriers the right to
calculate high-cost universal service support by means that
“eliminated the need for those carriers to perform cost studies
that required jurisdictional separations”). But the administrator
in 2011 froze high-cost support in order “to transition universal
service from focusing on voice networks to supporting and
expanding broadband availability.”           Universal Service
Administrative Company, Frozen High Cost Support,
https://www.usac.org/high-cost/funds/frozen-high-cost-
support/. Petitioners have offered no reason for us to conclude
that, despite this freeze, a shift to updated and more accurate
separations results would actually lower the support received
by rate-of-return carriers, and thus lower the USF charges the
petitioners pay.

                              ***

     Because the petitioners lack standing to bring this petition,
we lack jurisdiction to adjudicate their claims and so dismiss
their petition.

                                                     So ordered.