Citizens Telecommunications v. FCC ( 2018 )

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 17-2296
___________________________
Citizens Telecommunications Company of Minnesota, LLC
lllllllllllllllllllllPetitioner
v.
Federal Communications Commission; United States of America
lllllllllllllllllllllRespondents
Ad Hoc Telecommunications Users Committee; BT Americas, Inc.; Granite
Telecommunications, LLC; INCOMPAS; Sprint Corporation; Windstream
Services, LLC
lllllllllllllllllllllIntervenors
___________________________
No. 17-2342
___________________________
Ad Hoc Telecommunications Users Committee; BT Americas, Inc.; Granite
Telecommunications, LLC; INCOMPAS; Sprint Corporation; Windstream
Services, LLC
lllllllllllllllllllllPetitioners
v.
Federal Communications Commission; United States of America
lllllllllllllllllllllRespondents
NCTA-The Internet & Television Association; Comcast Corporation; AT&T
Services, Inc.; USTelecom; CenturyLink, Inc.
lllllllllllllllllllllIntervenors
------------------------------
Consumer Federation of America; New Networks Institute; Public Knowledge
lllllllllllllllllllllAmici on Behalf of Petitioners
___________________________
No. 17-2344
___________________________
CenturyLink, Incorporated
lllllllllllllllllllllPetitioner
v.
Federal Communications Commission; United States of America
lllllllllllllllllllllRespondents
Ad Hoc Telecommunications Users Committee; BT Americas, Inc.; Granite
Telecommunications, LLC; INCOMPAS; Sprint Corporation; Windstream
Services, LLC
lllllllllllllllllllllIntervenors
___________________________
No. 17-2685
___________________________
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Access Point, Inc.; Alpheus Communications, LLC; New Horizons
Communications Corp.; XChange Telecom, LLC
lllllllllllllllllllllPetitioners
v.
Federal Communications Commission; United States of America
lllllllllllllllllllllRespondents
NCTA-The Internet & Television Association; Comcast Corporation; AT&T
Services, Inc.; USTelecom; CenturyLink, Inc.
lllllllllllllllllllllIntervenors
------------------------------
Consumer Federation of America; New Networks Institute; Public Knowledge
lllllllllllllllllllllAmici on Behalf of Petitioners
____________
Petitions for Review of an Order of the
Federal Communications Commission
____________
Submitted: May 15, 2018
Filed: August 28, 2018
____________
Before SHEPHERD, MELLOY, and GRASZ, Circuit Judges.
____________
GRASZ, Circuit Judge.
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Two groups of petitioners ask this Court to review a 2017 order of the Federal
Communications Commission (“FCC”) that alters the FCC’s regulations for business
data services (“BDS”). One group, the “ILEC Petitioners,”1 challenges new price cap
rates in the order. The second group, the “CLEC Petitioners,”2 challenges most of the
other changes in the order, both on the adequacy of notice and on the merits. For the
reasons discussed below, we grant the CLEC Petitioners’ petition in part, regarding
notice. We deny the petitions in all other respects.
I. Background
A. Business Data Services
The term BDS generally refers to communications lines for businesses, which
offer dedicated service with guaranteed performance and speed. BDS is currently
1
The ILEC Petitioners are Citizens Telecommunications Company of
Minnesota, LLC and CenturyLink, Inc. The term “ILEC” refers to “Incumbent Local
Exchange Carriers.” Local exchange carriers are companies that provide local
telephone service or access. 47 U.S.C. § 153(32). The “incumbent” local exchange
carriers are the carriers that held virtual monopolies in the provision of telephone
service in their areas for many years before changes in law encouraged competition.
2
The CLEC Petitioners are: Ad Hoc Telecommunications Users Committee; BT
Americas, Inc.; Granite Telecommunications, LLC; COMPTEL d/b/a INCOMPAS
(“INCOMPAS”); Sprint Corp.; Windstream Services, LLC; Access Point, Inc.;
Alpheus Communications, LLC; New Horizons Communications Corp.; and
XChange Telecom, LLC. Several of these petitioners are “CLECs” or “Competitive
Local Exchange Carriers,” while a few are BDS customers rather than any type of
local exchange carrier. INCOMPAS is a national trade association representing
competitive communications service providers and their supplier partners. We refer
to the entire group as the CLEC Petitioners for ease of reference.
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transitioning from being provided through phone line-based “TDM” services,3 which
are heavily regulated, to being provided through packet-based “Ethernet” services,
which are lightly regulated. Regulations limit prices on BDS in several ways,
including imposing caps on aggregate prices (“price caps”). See WorldCom, Inc. v.
F.C.C., 238 F.3d 449, 454 (D.C. Cir. 2001). Regulations also require certain
providers to tariff these services, which essentially means to publish any changes in
the prices they charge before the changes take effect. See id.The services at issue in this case are two different subsets of BDS: (1) end user
channel terminations (or “channel termination services”), which connect the main
provider’s office to a customer’s building; and (2) dedicated “transport services,”
which connect a provider’s offices to other network locations. Currently, some of the
CLEC Petitioners compete for customers by purchasing BDS from the main providers
in order to reach specific customers. A competitor uses one or both services
depending on whether it has equipment in a particular office or connects its network
to the main provider’s network at a different point.
Prior to issuance of the order under review in this case (Business Data Services
in an Internet Protocol Environment, 32 FCC Rcd. 3459 (2017) (the “2017 Order”)),
the FCC had relied on a “temporary” formula for calculating the price caps on BDS.
These price caps are generally subject to two adjustments: an annual increase to
account for inflation; and an annual decrease to account for productivity in
telecommunications that exceeds productivity in the general economy. The FCC
refers to the annual decrease as the “X-factor.” In 2000, the FCC adopted a proposal
that set temporary X-rates of 3.0% for 2000, 6.5% for 2001 through 2003, and a rate
equivalent to the inflation rate pending the FCC revisiting the issue by 2005. Access
3
“TDM” refers to “time division multiplex,” which is how providers transmit
information over phone lines.
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Charge Reform, 15 FCC Rcd. 12962, 13025 ¶ 149 (2000). However, the FCC never
revisited the issue until the 2017 Order.
The FCC also avoided permanent rules for applying BDS price caps before the
2017 Order. 2017 Order at ¶ 1. In 1999, the FCC sought to remove price caps on
channel termination services and transport services in areas of the country with more
competitive markets through what is known as the “Pricing Flexibility Order.” See
generally Access Charge Reform, 14 FCC Rcd. 14221 (1999) (“Pricing Flexibility
Order”). The Pricing Flexibility Order provided some immediate changes and also
established two forms of broader relief available in metropolitan statistical areas
(“MSAs”) for service providers that could prove a particular MSA met certain
designated competitive thresholds. See WorldCom, Inc., 238 F.3d at 454–55. In
2002, AT&T4 petitioned the FCC to reconsider its Pricing Flexibility Order, alleging
that the order was not fostering competitive entry and seeking a moratorium on
further grants of pricing flexibility. See Special Access Rates for Price Cap Local
Exchange Carriers, 20 FCC Rcd. 1994, ¶¶ 1–6 (2005). In 2005, the FCC rejected
AT&T’s requests but sought comment on the BDS price cap regulations and on any
appropriate interim relief. See id. That 2005 Notice of Proposed Rulemaking started
a proceeding that continued from January 2005 until the 2017 Order at issue in this
case. 2017 Order at ¶ 1.
B. The 2016 Notice and the 2017 Order
In 2016, the FCC issued the most recent Further Notice of Proposed
Rulemaking regarding BDS price caps. See Business Data Services in an Internet
Protocol Environment, 31 FCC Rcd. 4723 (2016) (the “2016 Notice”). The 2016
4
The 2002 version of AT&T was acquired by Southwestern Bell Company,
which then rebranded as AT&T. Thus, the AT&T intervenor in this case does not
necessarily share the views of the 2002 version of AT&T on BDS.
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Notice “propos[ed] to end the traditional use of tariffs for BDS services and discard[]
the traditional classification of ‘dominant’ and ‘nondominant’ carriers,” pairing this
deregulation “with the use of tailored rules where competition does not exist.” Id. at
¶ 4. The 2016 Notice articulated “four fundamental principles” for the new proposed
regulations. Id. “First, competition is best.” Id. at ¶ 5. “Second, the new regulatory
framework should be technology-neutral.” Id. at ¶ 6. “Third, Commission actions
should remove barriers that may be inhibiting the technology transitions.” Id. at ¶ 7.
“Fourth, the Commission should construct regulation to meet not only today’s
marketplace, but tomorrow’s as well.” Id. at ¶ 8.
In the 2017 Order, the FCC began by analyzing competition in the market. It
stated that its competition analysis was “informed by, but not limited to, traditional
antitrust principles” and addressed “technological and market changes as well as
trends within the communications industry, including the nature and rate of change.”
2017 Order at ¶ 12. Based on data collected in the proceeding, it concluded there was
reasonable competition, now or at least over the medium term, in TDM services with
bandwidth above 45 Mbps,5 all transport services, and all Ethernet services. See id.
at ¶¶ 16, 73–76. It also concluded that a competitor with nearby BDS facilities
restrained prices for lower bandwidth TDM services in the short term and provided
reasonable competition in three to five years. See id. at ¶¶ 13–15. The FCC further
stated that “ex ante pricing regulation is of limited use—and often harmful—in a
dynamic and increasingly competitive marketplace” and that “[w]e intend to apply ex
ante regulation only where competition is expected to materially fail to ensure just
and reasonable rates.” Id. at ¶¶ 4, 86.
5
Throughout the 2017 Order, the FCC referred to two types of lower bandwidth
phone lines: “Digital Signal 1” or “DS1,” referring to a line with a data rate of
approximately 1.5 Mbps; and “Digital Signal 3” or “DS3,” referring to a line with a
data rate of approximately 45 Mbps. See 2016 Notice at ¶ 25 (defining those terms).
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The FCC took three actions in light of these conclusions regarding competition.
First, it continued forbearance from ex ante regulation6 of higher bandwidth TDM
services and of all Ethernet services, emphasizing that packet-based
telecommunications services remain subject to Title II regulations. Id. at ¶¶ 87–89.
Second, it extended its forbearance from ex ante regulation to include TDM transport
services. Id. at ¶¶ 90–93. Third, it established a Competitive Market Test for lower
bandwidth TDM channel termination services. Id. at ¶¶ 94–171.
When creating the Competitive Market Test, the FCC assessed what it believed
would be the (1) relevant geographic area, (2) the relevant data, and (3) the
appropriate level of competition. See id. On the first issue, it narrowed the relevant
geographic area from MSAs to counties. See id. at ¶¶ 108–16. On the second issue,
it used its “Form 477” broadband service availability data7 along with data collected
in the rulemaking proceeding for the initial assessment of competitiveness, and it
required reliance on the Form 477 data for later reassessments. See id. at ¶¶ 103–07.
On the third issue, it concluded that a single competitor, even if merely within a half
mile of a set of customers rather than directly servicing those customers, significantly
affected prices such that the costs of price caps would exceed the benefits in that
market. See id. at ¶¶ 117–29. Relatedly, the FCC also concluded in its competition
analysis that a residential cable network could substitute for low-bandwidth BDS for
some customers. See id. at ¶¶ 27–31.
6
“Ex ante regulation” refers to any regulation of prices in advance, including
price caps.
7
The FCC requires all facilities-based broadband providers to report every
census block where they offer broadband exceeding 200 kbps in either upload or
download bandwidth speed. 2017 Order at ¶ 105. The FCC collects this data semi-
annually and makes the data available to the public. Id.
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Based on these conclusions, the FCC established two criteria for
competitiveness. First, a business location is competitive if a competitive provider’s
facilities are within half a mile. Id. at ¶ 132. Second, a business location is
competitive if a cable provider’s facilities are within the same census block.8 Id. at
¶ 133.
After deciding on its Competitive Market Test, the FCC engaged in data
analysis to determine the thresholds for each of the criteria. Id. at ¶¶ 135–44. It
examined what thresholds for the two criteria have the least risk of both
overregulation on one hand and underregulation on the other. See id. The FCC then
selected thresholds that were higher than any of its analytics demanded “out of an
abundance of caution” and so “that counties [it] deregulate[s] will be predominantly
competitive.” Id. at ¶¶ 141–42. Thus, it determined that a county is competitive if
50% of the BDS customer locations within that county have a facilities-based
competitor within half a mile (as opposed to a competitor who relies on ILECs in the
area and lacks its own facilities nearby) or if 75% of the census blocks within that
county have cable broadband service. See id. The FCC also directed the FCC’s
Wireline Competition Bureau to retest non-competitive counties every three years to
determine competitiveness. See id. at ¶¶ 145–52.
For counties deemed non-competitive under the Competitive Market Test, the
FCC left price cap regulation in place with some modifications. First, it declined to
re-impose price caps in any counties where it had previously granted related relief
under the Pricing Flexibility Order. Id. at ¶¶ 178–82. Second, it extended some
8
The FCC reasoned that a cable provider has incentive to invest in serving
locations within a census block where it is already present. 2017 Order at ¶ 133. A
census block is the smallest geographic measurement used by the United States
Census Bureau for data collection, generally referring to “statistical areas bounded
by visible features.” U.S. Census Bureau, Geographic Terms and Concepts - Block,
https://www.census.gov/geo/reference/gtc/gtc_block.html.
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limited pricing flexibility to all non-competitive counties. Id. at ¶¶ 183–86. Third,
the FCC prohibited non-disclosure agreements (“NDAs”) in specified BDS contracts
in non-competitive counties, to the extent the NDAs forbade or prevented disclosure
of information to the FCC. Id. at ¶¶ 187–96. Finally, it set the X-factor for annual
price cap adjustments to DS1 and DS3 end user channel terminations at 2%. Id. at
¶¶ 197–99.
In addition to creating a Competitive Market Test, the FCC also removed the
tariff (filing) requirement from a few services. It expanded its removal of the tariff
requirement for BDS with higher bandwidth, extending that relief to all companies
rather than just those companies that had successfully petitioned for such relief about
a decade ago. Id. at ¶¶ 155–59. It also newly removed the tariff requirement for
transport services and for any BDS within counties previously granted certain relief
under the Pricing Flexibility Order. Id. at ¶¶ 160–65.
After the FCC published the 2017 Order in the Federal Register, the respective
petitioners sought review in different circuits. The FCC notified the Judicial Panel
on Multidistrict Litigation of the multiple petitions for review, and the panel
consolidated proceedings in this Court for review. The nature of the ILEC
Petitioners’ and CLEC Petitioners’ challenges to the 2017 order were very different,
leading several petitioners in each group to intervene in opposition to the relief
sought by the other group.9
9
The following entities intervened to oppose the ILEC Petitioners: Ad Hoc
Telecommunications Users Committee; BT Americas, Inc.; Granite
Telecommunications, LLC; INCOMPAS; Sprint Corporation; and Windstream
Services, LLC. CenturyLink, Inc., intervened along with non-petitioners AT&T
Services, Inc., and USTelecom to oppose the CLEC Petitioners. Some stakeholders
in the cable industry (NCTA-The Internet & Television Association and Comcast
Corporation) also intervened to oppose the CLEC Petitioners.
-10-
II. Standard of Review
On review of an agency order, we must “hold unlawful and set aside agency
action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2). An agency
rule is arbitrary and capricious “if the agency has relied on factors which Congress
has not intended it to consider, entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be ascribed to a difference in
view or the product of agency expertise.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v.
State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
“A court is not to ask whether a regulatory decision is the best one possible or
even whether it is better than the alternatives.” FERC v. Elec. Power Supply Ass’n,
136 S. Ct. 760, 782 (2016). Instead, we ask whether the agency “examine[d] the
relevant data and articulate[d] a satisfactory explanation for its action including a
‘rational connection between the facts found and the choice made.’” Motor Vehicle
Mfrs. Ass’n, 463 U.S. at 43 (quoting Burlington Truck Lines, Inc. v. United States,
371 U.S. 156, 168 (1962)). We cannot “supply a reasoned basis for the agency’s
action that the agency itself has not given” but may “uphold a decision of less than
ideal clarity if the agency’s path may reasonably be discerned.” Id. (citations
omitted).
“[W]hen the resolution of the dispute involves primarily issues of fact and
analysis of the relevant information requires a high level of technical expertise, we
must defer to the informed discretion of the responsible federal agencies.” Minnesota
Pub. Utils. Comm’n. v. F.C.C., 483 F.3d 570, 577 (8th Cir. 2007) (alteration in
original) (quoting Cent. S. Dakota Co-op. Grazing Dist. v. Sec’y of U.S. Dep’t of
Agric., 266 F.3d 889, 894–95 (8th Cir. 2001)). Our review is narrow in scope and we
will not “substitute our judgment for that of the agency.” Id. (quoting same).
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If a petitioner challenges the agency’s compliance with the Administrative
Procedure Act’s (“APA’s”) procedural requirements, then de novo review is required
“because compliance ‘is not a matter that Congress has committed to the agency’s
discretion.’” United States v. Brewer, 766 F.3d 884, 887–88 (8th Cir. 2014) (quoting
Iowa League of Cities v. E.P.A., 711 F.3d 844, 872 (8th Cir. 2013)).
III. Analysis
The CLEC Petitioners’ arguments fit into five categories: (1) the adequacy of
notice, (2) the ending of ex ante regulations for transport services, (3) the Competitive
Market test, (4) the rules regarding Ethernet services, and (5) the Interim Wholesale
Access Rule. The ILEC Petitioners’ arguments solely concern the X-factor. We
address each of these issue categories in turn.
A. Notice
The CLEC Petitioners advance three specific arguments as to lack of sufficient
notice: (1) the 2017 Order was broadly deregulatory while the 2016 Notice requested
comment on a heightened regulatory scheme; (2) they had no meaningful opportunity
to analyze the specific criteria adopted in the 2017 Order; and (3) at minimum, they
had no notice of the complete deregulation of transport services.
The APA provides the following requirements for notice:
(b) General notice of proposed rule making shall be published in the
Federal Register, unless persons subject thereto are named and either
personally served or otherwise have actual notice thereof in accordance
with law. The notice shall include—
(1) a statement of the time, place, and nature of public rule
making proceedings;
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(2) reference to the legal authority under which the rule is
proposed; and
(3) either the terms or substance of the proposed rule or a
description of the subjects and issues involved.
5 U.S.C. § 553. “[A]n agency’s notice is sufficient if it allows interested parties to
offer ‘informed criticism and comments.’” Missouri Limestone Producers Ass’n, Inc.
v. Browner, 165 F.3d 619, 622 (8th Cir. 1999) (quoting Northwest Airlines, Inc. v.
Goldschmidt, 645 F.2d 1309, 1319 (8th Cir. 1981)).
1. Notice of a broadly deregulatory order
The CLEC Petitioners complain that the 2016 Notice requested comment on
a heightened regulatory scheme while the 2017 Order was broadly deregulatory. A
somewhat Orwellian approach to proposing rules in the 2016 Notice creates much of
the dispute here. One of the FCC’s stated goals was “large scale de-regulation,” but
it requested comment on several suggestions that would have increased regulation.
2016 Notice at ¶ 4; e.g., id. at ¶ 354. The FCC, whose composition changed in 2017,
emphasized the stated goal in the 2017 Order and followed only the proposals in the
2016 Notice that adhered to that stated goal. The CLEC Petitioners argue that we
should vacate the 2017 Order because the 2016 Notice requested comment on a
heightened regulatory scheme and that it was impossible for them to anticipate
deregulation. We find it significant that the CLEC Petitioners base their argument
here on their expectation that the FCC in 2017 would not follow through on its 2016
stated goal.
More specifically, the 2016 Notice proposed “large scale de-regulation” that
“goes hand in hand with the use of tailored rules where competition does not exist.”
2016 Notice at ¶ 4. It observed that “the data and our analysis suggests that
competition is lacking in BDS at or below 50 Mbps in many circumstances” and
requested comment on the issue. Id. at ¶ 271 & n.690. It stated that the Pricing
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Flexibility Order’s “collocation test,” which assessed competitive equipment
collocated with an ILEC’s equipment, (1) failed because it was “a poor proxy for
predicting the entry of facilities-based competition,” (2) “retained unnecessary
regulation in areas that were very likely to be competitive,” and (3) “deregulated over
large areas where competition was unlikely to occur.” Id. at ¶ 275. The 2016 Notice
requested comment on whether census blocks were an appropriate geographic area
for a Competitive Market Test or whether a larger or more granular area was
appropriate, strongly implying that MSAs were too broad by stating that “[o]ur goal
is to learn from past experiences and to not repeat the errors of the 1999 pricing
flexibility regime by granting relief too broadly to cover areas where competition is
not present or unlikely to occur.” Id. at ¶¶ 289–90.
The CLEC Petitioners necessarily argue at a high level of abstraction because
their arguments are based on their own interpretation of the 2016 Notice. The CLEC
Petitioners read these provisions in light of their understanding that the FCC, as
composed in 2016, believed that the 1999 Pricing Flexibility Order was wrong and
did not really mean to pursue large-scale deregulation.
We reject their arguments because their reading of the 2016 Notice entails an
interpretation whose basis is not present in the text. The 2016 Notice discussed how
the prior test was both over-inclusive and under-inclusive, which implies shifting the
rules in favor of a better-tailored deregulatory approach. The 2016 Notice’s only
limits on new criteria for a Competitive Market Test were its disavowal of both the
collocation test from the Pricing Flexibility Order and the MSA geographic area.
2016 Notice at ¶¶ 275, 290. The CLEC Petitioners may be correct that the FCC, as
composed in 2016, would have expanded the use of price caps and applied a stricter
competitive market test favoring their use, but nothing in the 2016 Notice compelled
the FCC to abandon “large scale de-regulation” in favor of that approach. From the
2016 Notice’s plain text, the CLEC Petitioners had adequate notice of large scale
deregulation.
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2. Notice of specific criteria
The CLEC Petitioners argue that the criteria the FCC adopted in the
Competitive Market Test were not proposed in the 2016 Notice. The FCC applied
two criteria for the Competitive Market Test: (1) competitive providers within half
a mile, or (2) competitive cable providers within the relevant census block. See 2017
Order at ¶¶ 132–33. If the 2016 Notice “described in significant detail the factors that
would animate a new standard,” and the 2017 Order used those factors, then the
commenters had adequate notice of the final rule despite not knowing its final
application of those factors. See United States Telecom Ass’n v. F.C.C., 825 F.3d
674, 735 (D.C. Cir. 2016).
Broadly speaking, the 2017 Order followed the 2016 Notice’s framework for
the new standard it adopted. As the 2016 Notice proposed, the 2017 Order set
“objective criteria,” “subject[ing] markets determined competitive to minimal
regulation,” and “subject[ing] relevant markets, determined non-competitive, to
specific rules.” 2016 Notice at ¶ 270.
The 2016 Notice’s request for comment described the type of criteria it was
considering:
On the criteria for the Competitive Market Test, we invite comment.
Initially, we are proposing a test, which focuses on multiple factors,
including bandwidth, different customer classes, business density, and
the number of providers in areas consisting of census blocks where each
block in the relevant market meets the specified criteria. As described
above, the data and our analysis suggests that competition is lacking in
BDS at or below 50 Mbps in many circumstances, and that competition
is present in BDS above 50 Mbps in many circumstances. Such evidence
will guide how the Commission uses product market characteristics in
applying the Competitive Market Test to a relevant market. We seek
comment on the appropriate factors to include in the test and, in
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particular, the appropriate weight to attribute to the various factors in
application of the test.
2016 Notice at ¶ 271 (footnote omitted). The 2016 Notice then sought comment on
many particular facets of these criteria categories, including (1) whether a 50 Mbps
bandwidth demarcation was the correct demarcation, id. at ¶ 285, (2) the number of
competitors necessary for the area to be deemed competitive, id. at ¶ 294, (3) whether
a nearby cable company with DOCSIS 3.0 (a particular standard for sending high
speed internet over cable wires) on its network counted as a competitor, id., and (4)
whether a census block was the appropriate geographic area for the Competitive
Market Test or whether the test should use a larger or more granular area, id. at
¶¶ 287–91.
At a broad level, the Competitive Market Test adopted in the 2017 Order
addressed the multiple factors suggested in the 2016 Notice: “bandwidth, different
customer classes, business density, and the number of providers in areas consisting
of census blocks where each block in the relevant market meets the specified
criteria.” 2016 Notice at ¶ 271. The Competitive Market Test assessed the number
of providers in the area. See 2017 Order at ¶¶ 132–33. It also assessed bandwidth
indirectly, rejecting the suggestion of a 50 Mbps demarcation but applying regulation
to BDS at or below 45 Mbps.10 See id. at ¶¶ 130–33. It narrowed the geographic
area, but it rejected the suggestion of a census block area, finding that a county was
a sufficiently granular area without creating administrative complications that arose
with smaller units. Id. at ¶¶ 108–16. The FCC completely rejected criteria based on
customer classes or business density, reasoning “they are largely unnecessary to
achieve our policy goals and, importantly, [] including them in a competitive market
test would make it administratively unwieldy.” Id. at ¶ 99 & n.305.
10
The 2017 Order demarcated higher and lower bandwidth at 45 Mbps rather
than 50 Mbps because existing regulation ended there and because it found evidence
in the record that services above a DS3 were competitive. See 2017 Order at ¶ 87.
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At a more narrow level, both criteria in the Competitive Market Test adhered
to the particularized requests for comment in the 2016 Notice. While not all of those
particularized requests fell under the “Competitive Market Test” subheading of the
2016 Notice, all of them were within the 2016 Notice.
It is true that the first criterion in the 2017 Order (regarding nearby
competitors) is not in the Competitive Market Test subsection of the 2016 Notice.
Despite that omission, other subsections of the 2016 Notice found “that fiber-based
competitive supply within at least half a mile generally has a material effect on prices
of BDS with bandwidths of 50 Mbps or less, even in the presence of nearby
UNE-based [relying on “unbundled network elements” from a major competitor] and
HFC-based [“hybrid fiber-coaxial” or cable] competition.” 2016 Notice at ¶¶ 161,
211. The 2016 Notice then requested comment on “how close competition must be
to place material competitive pressure on supply at a given location.” Id. at ¶ 215.
That request for comment is precisely on point to the adopted criterion. The 2016
Notice would have been better organized if it had placed that request for comment
under the “Competitive Market Test” subsection. Nevertheless, because the FCC
requested comment on the proximity of competitors, the failure to include that
concept in all relevant subsections is not fatal to the notice afforded the final rule.
We agree with our sister circuit that a significant difference exists between instances
“where the [notice] expressly asked for comments on a particular issue” and where
the notice mentioned an issue but “gave no indication that the agency was considering
a different approach.” CSX Transp., Inc. v. Surface Transp. Bd., 584 F.3d 1076, 1081
(D.C. Cir. 2009) (collecting cases). Because the 2016 Notice expressly asked for
comments on this particular issue, the CLEC Petitioners had adequate notice of this
criterion.
The second criterion in the 2017 Order, regarding nearby cable companies, is
in the 2016 Notice’s Competitive Market Test subsection. The 2016 Notice requested
comment on whether “two facilities-based competitors” are sufficient for competition,
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whether to weigh “competition from a cable company” differently than other
competition, and whether it is “enough for a cable company to just have DOCSIS 3.0
coverage over their HFC network in the area.” 2016 Notice at ¶ 294. After reviewing
the comments, the FCC essentially answered those three questions with yes, no, and
yes, respectively. 2017 Order at ¶¶ 29, 120–21, 133. The possibility that the FCC
might have selected different answers in 2016 does not alter the conclusion that the
CLEC Petitioners had notice of the range of alternatives being considered.
For the foregoing reasons, the CLEC Petitioners had adequate notice of the
adopted Competitive Market Test.
3. Notice of ending ex ante regulation of transport services
The CLEC Petitioners’ third argument challenging the sufficiency of notice
is that they had no notice of the complete deregulation of transport services. The
CLEC Petitioners are correct that there is no notice of completely ending ex ante
regulation of transport services in the 2016 Notice. The 2016 Notice proposed a
Competitive Market Test for both channel termination services and transport services.
2016 Notice at ¶ 278. The FCC argues that it gave adequate notice of the different
treatment for transport services because the 2016 Notice stated that transport services
are more competitive than channel termination services. Id. at ¶ 281. We reject this
argument because the 2016 Notice also proposed addressing the two services under
the same regulations notwithstanding the difference in the very next paragraph. Id.
at ¶ 282. Nothing in the 2016 Notice requests comment on treating the two services
differently. Yet, the 2017 Order treated transport services differently when it ended
ex ante regulation of TDM transport services. See 2017 Order at ¶¶ 90–93. Thus, the
FCC failed to provide adequate notice of its ending of ex ante regulation of transport
services.
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We reject the FCC’s suggestion that any notice of the subjects and issues
involved is sufficient notice. The APA states that an agency must include “either the
terms or substance of the proposed rule or a description of the subjects and issues
involved.” 5 U.S.C. § 553(b)(3). We have stated that “[t]he notice should be
sufficiently descriptive of the ‘subjects and issues involved’ so that interested parties
may offer informed criticism and comments.” Northwest Airlines, 645 F.2d at 1319(quoting Ethyl Corp. v. E.P.A., 541 F.2d 1, 48 (D.C. Cir. 1976) (en banc)). As the
Tenth Circuit has explained, § 553(c) constrains what level of notice satisfies
§ 553(b)(3) because the notice must be sufficient to “give[] interested persons an
opportunity to participate in the rule making.” See Mkt. Synergy Grp., Inc. v. United
States Dep’t of Labor, 885 F.3d 676, 681 (10th Cir. 2018) (quoting 5 U.S.C.
§ 553(c)).11 Because the FCC did not propose completely ending ex ante regulation
of transport services, it did not allow for informed participation by interested parties
in that portion of the rulemaking, and its notice was insufficient.
4. Prejudice
The FCC alternatively argues that, even if the 2016 Notice did not satisfy its
obligations under the APA, the FCC’s release of a draft of the 2017 Order three
weeks before adoption made any procedural error harmless since the FCC was able
to review and address comments on the draft 2017 Order. See 5 U.S.C. § 706 (“due
account shall be taken of the rule of prejudicial error”). We reject this argument
11
Other courts have focused this fair notice inquiry on the rule rather than the
notice, asking whether the rule is a “logical outgrowth” of the proposal rather than
whether the parties had fair notice of the final rule. See, e.g., CSX Transp., 584 F.3d
at 1079. There is no meaningful difference between the two approaches. See Long
Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007). Thus, we do not
separately address the CLEC Petitioners’ arguments about whether the remainder of
the final rule was a logical outgrowth because our discussion of notice addresses the
substance of those arguments.
-19-
because we do not believe that the FCC providing a few weeks to review the 2017
Order cured the deficient notice regarding transport services.
The only authority the FCC cites in support of its harmless error argument
discussed the adequacy of notice and did not address the timing issue here. See Nat’l
Ass’n of Broadcasters v. F.C.C., 789 F.3d 165, 176–77 (D.C. Cir. 2015) (holding
there was no prejudice where an FCC bureau released a staff-level notice of a
proposed rule, and the FCC later adopted the rule without issuing its own notice).
Nothing in that opinion suggests that a three-week notice of a complex issue is
sufficient. See id. We have not found any other authority supporting such a
contention, and we are also not persuaded that a few weeks of review cured the
deficient notice regarding transport services here. The APA’s procedural rules are
designed to allow parties the opportunity for informed criticism and comments, see
CSX Transp., 584 F.3d at 1083, and creating any exceptions to the procedural
requirements would allow agencies to significantly alter the course of a proceeding
without authorization. We hold that the early release of a draft order does not cure
the harm from inadequate notice under these facts.
Some intervenors raised a separate prejudice argument, insisting that the CLEC
Petitioners failed to demonstrate prejudice because they only vaguely referenced
additional “economic analysis” regarding transport services without explaining how
such analysis would differ from their numerous submissions in the proceeding. While
the intervenors may be correct that everything that needed to be said regarding
transport services was said during the twelve years preceding the 2017 Order, the law
regarding prejudice under the APA ensures procedural integrity. Losing the
opportunity to dissuade an agency from adopting a particular rule is prejudicial. See
CSX Transp., 584 F.3d at 1083 (“[T]hey were prejudiced by their inability to persuade
the Board not to adopt the four-year rule in the first place, thus requiring them to
litigate the issue in individual proceedings.”). In a slightly different context, this
Court has applied similar reasoning, finding injury for purposes of standing when an
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APA procedural right is violated. See Iowa League of Cities, 711 F.3d at 870–871
(violation of a procedural right constitutes injury in fact where the procedure is
designed to protect some threatened concrete interest, including the ability to meet
one’s regulatory obligations). Requiring more than a procedural violation of the
notice requirement in order to find prejudice would risk virtually repealing the APA’s
procedural requirements. See Sprint Corp. v. F.C.C., 315 F.3d 369, 376–77 (D.C.
Cir. 2003).
It may be true that the numerous comments received in the proceeding already
discussed all relevant aspects of transport services. Other parties’ comments may
have raised the prospect of treating transport services differently, including the
decision adopted in the 2017 Order, and the CLEC Petitioners may have responded
to those comments. These comments, however, would not cure inadequate notice.
Agencies “cannot bootstrap notice from a comment.” Shell Oil Co. v. E.P.A., 950
F.2d 741, 760 (D.C. Cir. 1991) (quoting Small Ref. Lead Phase-Down Task Force v.
U.S. E.P.A., 705 F.2d 506, 549 (D.C. Cir. 1983)). The APA requires interested
parties wishing to play a role in the rulemaking process to comment on the agency’s
proposals, not on other interested parties’ proposals. We cannot divine whether the
CLEC Petitioners have any additional arguments against ending ex ante regulation
of transport services, but we believe they were prejudiced because any chance to
make their case did not come from the FCC’s notice.
5. Conclusion regarding the adequacy of notice
We grant the petitions of the CLEC Petitioners on the notice issue, in part,
vacating solely the portions of the final rule affecting TDM transport services and
remanding them to the FCC for further proceedings. We otherwise deny the petitions
of the CLEC Petitioners on the remainder of the notice issue.
-21-
B. Ex Ante Regulations for Transport Services
The CLEC Petitioners also challenged the merits of the 2017 Order’s rules
regarding ex ante regulations for transport services. Because we hold that the FCC
provided inadequate notice of this issue, and we are remanding it on that basis, we do
not need to reach this argument.
C. The Competitive Market Test
The CLEC Petitioners challenge the economic theory behind the Competitive
Market Test, the respective merits of the criteria in the test, the reasonableness of
finding duopolies competitive under the test, and the adequacy of the cost-benefit
analysis in the test. We address each of those challenges in turn.
1. Economic theory
The FCC did not assess the ILECs’ market power before granting regulatory
relief, and the CLEC Petitioners insist that this was an error. The argument presumes
the FCC is bound to apply the traditional market power framework from the
guidelines for horizontal mergers issued by the Federal Trade Commission and the
U.S. Department of Justice (the “Horizontal Merger Guidelines”). The CLEC
Petitioners are correct that the FCC has applied that framework in other orders in
other contexts, such as Petition of Qwest Corp. for Forbearance Pursuant to 47
U.S.C. § 160(c) in the Phoenix, Arizona Metro. Statistical Area, 25 FCC Rcd. 8622
(2010) (the “Qwest/Phoenix unbundling adjudication”), but nothing indicates the
FCC was bound to extend that framework to the BDS context. The Pricing Flexibility
Order specifically rejected the traditional market power framework in the BDS
context, finding that the benefits of regulatory relief outweighed any costs of granting
relief while an incumbent still had some market power, see Pricing Flexibility Order
-22-
at ¶¶ 90–91, and there is no evidence in the record that the FCC adopted another
economic rule in the BDS context until the 2017 Order.
Perhaps recognizing this problem, the CLEC Petitioners also advocate a
finding that the FCC adopted the traditional market power framework since it cited
to the Horizontal Merger Guidelines in the 2017 Order. The FCC relies on its overall
disavowal of traditional antitrust principles in the 2017 Order, observing that it was
only informed by those principles on a limited basis and did not adopt them
completely. The CLEC Petitioners question whether that disavowal was effective
based on citations in the 2017 Order to the Horizontal Merger Guidelines.
The CLEC Petitioners’ attempts to impose the Horizontal Merger Guidelines
on the 2017 Order ignore the portions of the 2017 Order that rejected the traditional
market power framework. The FCC criticized the industry concentration measures
of a traditional market power framework because, viewed in isolation, they are
“largely poor indicators of whether market conditions exist that will constrain
business data services prices, and overstate the competitive effects of concentration.”
2017 Order at ¶ 66. The FCC offered three reasons for this conclusion: (1) nearby
facilities can “expand [their] presence to timely reach a customer,” (2) a competitor
does not need to be physically serving a location to act as a competitive constraint on
the market, and (3) concentration metrics largely reflect power in declining “legacy”
TDM services. Id. at ¶ 67.
The CLEC Petitioners advance three arguments against the FCC’s approach,
but none of them are persuasive.
First, the CLEC Petitioners accuse the FCC of wholly disregarding market
power after the FCC dismissed the relevance of market concentration and the
traditional market power framework. This accusation is incorrect because the FCC
addressed two aspects of market power: deciding that no market power existed in
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Ethernet services, see id. at ¶ 67, and concluding that ILEC market power in TDM
services had been largely eliminated and was declining where it remained, see id. at
¶ 84.
Second, the CLEC Petitioners argue that the FCC’s own expert report
undermined its conclusions. The report stated that ILECs charge higher prices for
lower bandwidth TDM BDS in areas without a competitor, reflecting use of market
power. Importantly, this conclusion from the report did not survive peer review. See
id. at ¶ 74. The problem with the CLEC Petitioners’ argument, as well as with
drawing definitive conclusions from the expert report, is that the FCC recognized
different fixed costs in serving different customers may be causing the increased
prices in certain areas. See id. at ¶ 75 & n.243. The FCC’s expert report was unable
to completely account for this potential alternate cause for high prices and thus a
causal connection could not be established. See id.Finally, the CLEC Petitioners accuse the FCC of “not even attempt[ing] to
show that its ‘nearby potential competitors’ currently drive prices to ‘reasonably
competitive’ levels, or will ever do so in the near term.” This accusation wrongly
presumes that the FCC needed to find competition in the short term. If the FCC
chose to follow a traditional market power framework, then it would need to look to
short term results. Under the public interest balancing that the FCC applied, however,
it could weigh competition in the medium term, meaning that the omission of short
term assessments is not fatal to its analysis.
In sum, the CLEC Petitioners offer no persuasive reason to convert mere
citations to the Horizontal Merger Guidelines into wholesale adoption of an economic
theory that the FCC explicitly rejected, especially in light of the multiple reasoned
-24-
rejections of both the CLEC Petitioners’ economic theory and their evidence.12 Thus,
the FCC was not bound to apply the traditional market power framework, either by
past orders or by partial use of the Horizontal Merger Guidelines. We hold that the
FCC applied a permissible economic theory for its Competitive Market Test.
2. Reasonableness of the first criterion of the Competitive Market Test
The first criterion of the Competitive Market Test stated that a business
location is competitive if a competitive provider’s facilities are within half a mile.
2017 Order at ¶ 132. The dispute here is whether the evidence shows that the CLEC
Petitioners cannot economically build out to low bandwidth customers in areas
deemed competitive by the Competitive Market Test. The FCC did not believe the
CLEC Petitioners’ evidence, and the CLEC Petitioners protest that the evidence
compels a finding in their favor.
We note that the FCC made several findings in support of its conclusions. The
FCC observed in the 2017 Order that most of the buildings at issue are far closer to
competitive fiber than half a mile, as the average distance between buildings served
by ILEC BDS and a competitive fiber line is 364 feet. Id. at ¶ 42. In addition, half
of these buildings are within 88 feet of competitive fiber, and the next quarter are
within 456 feet, leaving only the last quarter of buildings at issue in the Competitive
Market Test approaching a half mile distance. See id. The FCC also cited evidence
12
The Third Circuit case cited by the CLEC Petitioners is not on point. It
involved an order where the FCC applied the Horizontal Merger Guidelines for local
television ownership and a completely different economic theory for local radio
ownership that contradicted the Horizontal Merger Guidelines without explaining
why it adopted two different economic theories to assess ownership limits in the same
Order. See Prometheus v. F.C.C., 373 F.3d 372, 433 (3d Cir. 2007). The 2017 Order
did not rely on two contrary economic theories and thus did not suffer from the same
defect found in Prometheus.
-25-
that some competitors will build as far as a mile out, although it noted that these
competitors are an exception to the general trend. See id. at ¶ 41 & n.136. The FCC
believed that these nearby networks exist because competitive providers build their
fiber rings so that they can market to multiple customers near a lateral line,
aggregating demand for a build out. Id. at ¶ 42, 54, 119 n.363. The FCC also
predicted that cable’s aggressive build outs since the collection of data in 2013 had
likely brought most of the locations that were within half a mile of competition in
2013 within a quarter mile of competition in 2017. See id. at ¶ 43. The FCC argues
that the CLEC Petitioners’ studies inflate costs by selecting the most expensive build
(entirely underground lines), presuming a separate lateral line for each individual low
bandwidth customer, and treating the main fiber ring as part of the cost of reaching
new customers rather than as an existing “sunk” cost near a potential new customer.13
The CLEC Petitioners focus on evidence about what conditions justify build-
outs while dismissing the concept of building circuitous routes as the exception rather
than the rule. They argue that their networks are near low-bandwidth customers
because they built lines near high-bandwidth customers in the same area, while the
FCC argues that the CLEC Petitioners’ networks are near low-bandwidth customers
because they build networks to facilitate lower cost expansion to low-bandwidth
customers. It is difficult to parse the evidence because the costs of building to a low
bandwidth customer rely heavily on what costs count as sunk costs and on how
expensive of a build-out each company performs. The evidence in support of both
arguments is credible. As a result, there is no reason the FCC was obligated to favor
the CLEC Petitioners’ interpretation of the evidence over the interpretation it
adopted, and the FCC was not arbitrary and capricious in adoption of its first
criterion.
13
The FCC refers to fixed costs already incurred before serving a new customer
as “sunk” costs in wireline telecommunications. 2017 Order at ¶ 120 & nn.370–71.
-26-
3. Reasonableness of the second criterion of the Competitive Market
Test
The second criterion of the Competitive Market Test stated that a business
location is competitive if a cable provider’s facilities are within the same census
block. 2017 Order at ¶ 133. The CLEC Petitioners argue that this criterion is wrong
because cable is not in the BDS market and is generally not building fiber BDS
connections to low bandwidth areas.
The FCC freely conceded in the 2017 Order that Ethernet over Hybrid Fiber-
Coaxial (“EoHFC”) (cable’s symmetrical connection that sometimes has performance
guarantees) and cable’s best efforts network (cable’s asymmetrical residential
connection without performance guarantees) are not in the same market as BDS
because they are not perfect substitutes. Id. at ¶¶ 27–31. The FCC also observed,
however, that businesses substitute EoHFC and best efforts service for BDS anyway
at lower bandwidths, where they are willing to sacrifice some of the service
guarantees of BDS for a lower price. See id. Thus, it concluded that cable companies
are building fiber connections to target high-bandwidth locations while using their
lower cost options to target low-bandwidth locations. See id. at ¶¶ 27–31, 55–62.
The CLEC Petitioners correctly characterize cable’s relationship to BDS, but
nothing in their arguments impugns the FCC’s analysis. As the intervening cable
stakeholders observed, the fact that their services are not the same as BDS does not
undermine the other fact that cable services are increasingly functioning as substitutes
for BDS anyway. See id. Thus, in view of the FCC’s entire analysis rather than the
portions selectively quoted by the CLEC Petitioners, the FCC was not arbitrary and
capricious in adoption of its second criterion.
-27-
4. Reasonableness of finding duopolies competitive
The CLEC Petitioners protest that duopolies (markets with only two
competitors) have anticompetitive effects and that a Competitive Market Test cannot
reasonably produce duopolies. As a procedural matter, they again cite the
Qwest/Phoenix unbundling adjudication, arguing that the FCC was compelled to
disfavor duopolies in this context based on its prior statements in another context.
This is wrong both because the Qwest/Phoenix unbundling adjudication was focused
on a particular market at a particular time and because, by its own terms, it has no
binding effect on this BDS proceeding. Even if the Qwest/Phoenix unbundling
adjudication were somehow binding, it did not create any bright line rule about when
duopolies are competitive. 2017 Order at ¶ 121. Thus, the FCC was not compelled
to agree with the CLEC Petitioners that the Competitive Market Test cannot
reasonably produce duopolies.
On the merits, the problem with the CLEC Petitioners’ duopoly argument is
that it presumes their conclusion about high incremental costs. The FCC observed
that the sunk costs to reach an area are high while the incremental costs of supplying
new customers are low, causing ILECs to restrict prices to those low incremental
costs when at least one competitor has spent the sunk costs. Id. at ¶ 120. As a result,
it concluded that duopolies can sufficiently increase competition to make regulation
unnecessary. The CLEC Petitioners may reasonably disagree with the FCC on what
the evidence shows regarding incremental costs, but their disagreement is no basis for
finding the FCC’s interpretation of a conflicting record to be arbitrary and capricious.
Furthermore, even if the FCC misinterpreted the evidence on incremental costs,
it receives deference when it predicts what will happen in the market in the future.
“[J]udicial deference to agency action is ‘especially important’ when [an] agency’s
judgments are ‘predictive.’” Southwestern Bell Tel. Co. v. F.C.C., 153 F.3d 523, 547
(8th Cir. 1998) (quoting City of St. Louis v. Dep’t of Transp., 936 F.2d 1528, 1534
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(8th Cir. 1991)). The FCC explained in the 2017 Order that it relied on the
Competitive Market Test and the related market data to predict what will happen in
the market. 2017 Order at ¶ 124. The FCC also cited sufficient evidence to justify
removing ex ante regulation in a market with two competitors. Regardless of whether
its predictions based on uncertain data prove true, the FCC is not acting arbitrarily
and capriciously when it makes such predictions in choosing how to regulate the
market under its jurisdiction.
5. Cost-benefit analysis
The CLEC Petitioners further argue that the FCC’s cost-benefit analysis
supporting the 2017 Order failed to quantify the costs or measure them against the
benefits. The CLEC Petitioners seemingly shift their argument in their reply brief,
focusing on undervaluation of the benefits and alleging overvaluation of costs.
Although this Court has not elaborated on the appropriate standard of review for
challenges to an agencies’ economic calculations, the D.C. Circuit has deferred to
agencies, allowing them to “arrive at a cost figure within a broad zone of reasonable
estimate.” Nat’l Ass’n of Home Builders v. E.P.A., 682 F.3d 1032, 1040 (D.C. Cir.
2012) (quoting Nat’l Wildlife Fed’n v. E.P.A., 286 F.3d 554, 563 (D.C. Cir. 2002)).
Under this deferential review, an agency need not quantify all costs “with rigorous
exactitude,” but it must consider them all. See GTE Serv. Corp. v. F.C.C., 782 F.2d
263, 273 (D.C. Cir. 1986). We agree with this approach.
The problem with the CLEC Petitioners’ argument is that it presumes that only
price caps produce affordable rates, while the FCC found that competition would
drive prices to competitive levels. 2017 Order at ¶ 102. The FCC agreed that the
benefits of price caps outweighed the costs in areas with few competitive alternatives,
which is why it adopted a Competitive Market Test. See id. at ¶ 101. It further
explained that BDS has unique characteristics that make price cap regulations highly
unlikely to be accurate measures of the correct price in a competitive market.
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Specifically, the FCC explained BDS has “high uncertainty due to frequent and often
large unforeseen changes in both customer demand for services and network
technologies that are hard to anticipate and hedge against in contracts with
customers,” 2017 Order at ¶ 127, “a complex set of products and services, which are
tailored to individual buyers,” id., as well as “costs of provision that vary
substantially across different customer-provider combinations,” id., and “large
irreversible sunk-cost investments that a provider is required to make before offering
service,” id. Reasonable minds could disagree with the FCC’s cost-benefit analysis,
but there is nothing unreasonable about its conclusions, as it considered all of the
relevant factors. Thus, the FCC was not arbitrary and capricious in its cost-benefit
analysis.
6. Conclusions regarding challenges to the Competitive Market Test
We recognize that the relevant data presents radically different pictures of the
competitiveness of the market depending on the economic theory applied and the
weight given to conflicting pieces of evidence. But the FCC may rationally choose
which evidence to believe among conflicting evidence in its proceedings, especially
when predicting what will happen in the markets under its jurisdiction. Thus, we
deny the petitions for review as to the Competitive Market Test because the FCC’s
resolution of competing evidence was not arbitrary and capricious.14
14
Because we find that the removal of ex ante regulation through a Competitive
Market Test was reasonable without reference to ex post regulation, we need not
further address whether the ex post regulation retained in the 2017 Order would save
an unreasonable rule.
-30-
D. Ethernet Services
The CLEC Petitioners argue the FCC unreasonably excluded low bandwidth
Ethernet BDS from price caps. A brief discussion of the 2016 Notice is necessary
before reaching the arguments here.
Although the 2016 Notice stated that it wanted a “technology and provider
neutral” framework, implicitly treating both Ethernet and TDM services the same, it
emphasized several times that it would still, as necessary, treat TDM services
differently than Ethernet services “based on past experience and historical practice.”
2016 Notice at ¶¶ 270 & n.689, 507. The 2016 Notice requested comment on how
previous grants of forbearance would impact any regulatory approach. Id. at ¶ 311.
While it requested comment on extending some type of rate regulation to Ethernet
BDS in non-competitive areas, it proposed that the rate regulation would not be price
caps but instead would be an anchor or benchmark pricing system based on the price
caps for TDM BDS. Id. at ¶¶ 352–54. It noted that price caps incurred disadvantages
that anchor or benchmark pricing did not, and it sought commentary on using anchor
or benchmark pricing. Id. at ¶ 425. Finally, it proposed expanding the tariff
forbearance for Ethernet BDS from the companies that had previously petitioned for
such forbearance to all companies offering Ethernet BDS. Id. at ¶ 434. The 2016
Notice suggested applying price caps to Ethernet BDS only in a request for comment
on whether to allow services to voluntarily include Ethernet BDS in their aggregate
price caps, although it did also request comment on a Verizon/INCOMPAS letter
suggesting the mandatory use of price caps in non-competitive areas. See id. at
¶¶ 426, 512.
In view of the 2016 Notice, the question facing the FCC and commenters was
how to create a technology neutral framework that “take[s] account of legitimate
differences” between technologies. Id. at ¶ 507. The CLEC Petitioners’ arguments
on the rule are flawed for two reasons: they overstate the importance of a mistake in
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the 2017 Order, and they mischaracterize the 2016 Notice as proposing eliminating
the distinction between TDM and Ethernet BDS.
The first flaw in the CLEC Petitioners’ argument is that, while they are correct
the 2017 Order misstated their comments, that error does not compromise the FCC’s
conclusions regarding low-bandwidth Ethernet. The FCC stated that the CLEC
Petitioners would only extend their fiber networks, not their TDM networks, in low
bandwidth situations. 2017 Order at ¶ 88. The record portions cited in ¶ 88 of the
2017 Order show that the CLEC Petitioners would not extend any network in low
bandwidth situations. See id. Nevertheless, the CLEC Petitioners overstate the
importance of that error. The FCC broadly found increasing revenue for cable and
CLECs and decreasing prices in BDS even at low bandwidths. Id. at ¶¶ 68–73. It
also found that the increased revenue combined with reduced sunk costs made
Ethernet BDS competitive, especially because ILECs needed to incur the same sunk
costs. Id. at ¶ 83. In view of the competition that the FCC found on the record, it was
not unreasonable for the FCC to conclude both that entrants are better placed to win
customers with Ethernet BDS than they would be if the market only included TDM
BDS and that regulation would dissuade competitors from continuing with the rapid
growth of Ethernet BDS. See id. at ¶ 88. As we observed in our discussion of the
Competitive Market Test, there is conflicting evidence about whether competitors are
building fiber networks to reach low bandwidth customers, and there is no reason the
FCC was obligated to favor the CLEC Petitioners’ interpretation of the evidence over
the interpretation it adopted. The FCC’s footnote regarding the CLEC Petitioners
was errant, but it was also not essential to the economic analysis.
The second flaw in the CLEC Petitioners’ argument is that it fails to
acknowledge that the 2016 Notice proposed that Ethernet services not be subjected
to tariffs or price caps. 2016 Notice at ¶¶ 420–26. Likely as a result, the CLEC
Petitioners do not discuss the benchmarking versus price cap nuance contained in the
2016 Notice. The statement in the CLEC Petitioners’ brief that “the Commission
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proceeded to create the exact regulatory disparity that it rejected a year before” is
false because the 2016 Notice proposed regulatory disparity. The FCC followed the
economic analysis that it noted in its 2016 Notice, concluding that it is easier to enter
the market using Ethernet BDS because of the higher profits relative to sunk costs and
the need for both ILECs and competitors to build out a fiber network. The CLEC
Petitioners simply misread the 2016 Notice.
While the CLEC Petitioners may have some reasonable arguments against
treating Ethernet services differently, there is still no basis here for this Court to
conclude that the FCC acted arbitrarily and capriciously in its choice of whether to
exclude Ethernet services from price caps.15
E. The Interim Wholesale Access Rule
The CLEC Petitioners argue the FCC unreasonably declined to extend the
Interim Wholesale Access Rule to BDS. That rule requires ILECs to continue selling
wholesale access to certain services when they discontinue a TDM input in favor of
newer technology. We agree with the FCC that its elimination of the Interim
Wholesale Access Rule moots the issue of whether the FCC unreasonably declined
to extend that rule in this context. We also decline the CLEC Petitioners’ invitation
to adopt their characterization of the relevant “community” in 47 U.S.C. § 214(a)
because the argument invites proxy review of an order not before us.
15
Because we find the FCC’s actions regarding ex ante regulation reasonable
without reference to ex post regulation, we need not further address whether ex post
regulation would save an unreasonable rule.
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F. The “X-factor”
We next consider the ILEC Petitioners’ sole challenge, which concerns the
FCC’s decision to set the “X-factor” annual price cap reduction at 2.0%. The FCC
explained in its 2017 Order that it believed the 2.0% rate, which was based on the
U.S. Bureau of Labor Statistics’ Capital, Labor, Energy, Materials, and Services data
for the broadcasting and telecommunications industries (“KLEMS (Broadcasting and
Telecommunications)” or “KLEMS”) data set, was likely too high, but that it did not
have information in the record from which it could quantify either the magnitude or
direction of bias. 2017 Order at ¶¶ 231, 236.
The ILEC Petitioners attack this rationale on two related grounds. First, they
argue that the FCC failed to account for the overstated productivity in the KLEMS
data set despite relevant information in the record that would have enabled such an
adjustment. The ILEC Petitioners also fault the FCC for failing to adjust the KLEMS
data set downward for the effect of declining utilization of TDM services on ILECs’
unit costs. After carefully considering these arguments and the underlying record, we
do not find that the FCC made an arbitrary or capricious decision.
We acknowledge the 2017 Order is not a model of clarity as it relates to the X-
factor analysis. Nevertheless, a court may “uphold a decision of less than ideal clarity
if the agency’s path may reasonably be discerned.” Motor Vehicle Mfrs. Ass’n, 463
U.S. at 43 (quoting Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419
U.S. 281, 286 (1974)).
The best reading of this section of the 2017 Order is that the FCC rejected all
of the data offered to it for adjusting the KLEMS data set as insufficiently precise.
It acknowledged that the X-factor could reasonably be as low as 1.7%, which is the
percentage proposed by CenturyLink’s study for 2006–2014, the approximate
midpoint time period in the FCC’s data. 2017 Order at ¶¶ 224–25, 235. The FCC
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then concluded that it would prefer a higher X-factor based on (1) a mistaken
comment about lack of studies with lower numbers16 and (2) another study based on
the KLEMS data set alone that favored a slightly higher X-factor. Id. at ¶ 235.
We see no reason in the record why the FCC would be compelled to adjust the
KLEMS data set, especially in light of the conflicting evidence on what sort of
adjustment was appropriate. As some intervenors observed, the CLECs offered
significant evidence that the KLEMS data set understates the productivity level
because the broadcasting industry has declining productivity while the
telecommunications industry has increasing productivity, and the KLEMS data set
included both industries. Also, the FCC found some evidence that cost-sharing
between TDM and Ethernet services was increasing productivity for both, leaving it
uncertain whether any adjustment to the KLEMS data set was necessary even when
price caps are applied to TDM services alone. Id. at ¶¶ 227–30. All of these reasons
support the FCC’s decision not to adjust the KLEMS data set and to reach the
resulting 2.0% X-factor from an unadjusted KLEMS data set.
16
We are troubled by the FCC’s statement in the 2017 Order that “[n]o party has
submitted an X-factor study or similar data-based analysis purporting to show that the
X-factor should be lower than 2.0 percent.” CenturyLink submitted just such a study.
2017 Order at ¶ 235 n.595. The FCC cited the relevant study for other propositions
in the 2017 Order, indicating that it was aware of the study. See, e.g., id. at ¶ 206
n.534. It also expressed multiple reasons for rejecting any adjustment in light of the
conflicting evidence. If the FCC did not accept the credibility of the proposed
adjustment data before it, any adjustment based on that data would be arbitrary and
capricious. See Sierra Club v. E.P.A., 884 F.3d 1185, 1195 (D.C. Cir. 2018) (holding
that the EPA was arbitrary and capricious when it based a conclusion on data it found
unreliable). Thus, because the FCC reasonably found any adjustment to the KLEMS
data set inappropriate, we are not convinced that its mistaken statement was anything
more than a failure to expressly acknowledge all of the adjustment options it was
rejecting.
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The ILEC Petitioners’ argument that the FCC failed to account for relevant
evidence showing overstated productivity in the KLEMS data set is flawed because
the FCC found conflicting evidence both as to whether the KLEMS data set
overstated productivity and, if so, the magnitude of that overstatement. “When neither
of two suggested adjustments applied to inaccurate data is completely satisfactory[,]
a rate-making body may fashion its own adjustments within reasonable limits.”
United Parcel Serv., Inc. v. U.S. Postal Serv., 184 F.3d 827, 839 (D.C. Cir. 1999)
(quoting Ass’n of Am. Publishers, Inc. v. Governors of U. S. Postal Serv., 485 F.2d
768, 773 (D.C. Cir. 1973)). The FCC declined to impose any adjustment because it
determined it needed an extensive set of company specific data and inputs to
accurately resolve the conflicting evidence. 2017 Order at ¶ 231. While it may have
some of that data in the record, the FCC was not unreasonable in declining to use the
limited data at hand when it had doubts about the reliability of that data.
The ILEC Petitioners’ argument that evidence of declining utilization of TDM
services on ILECs’ unit costs required a downward adjustment to the KLEMS data
set is wrong for two reasons. First, the FCC found conflicting evidence on the effect
of declining utilization on ILECs’ unit costs, and therefore was not required to accept
the ILEC Petitioners’ favored data. Id. at ¶¶ 226–30. If cost sharing was increasing
productivity, as some evidence indicated, then the FCC reasonably declined to adjust
the KLEMS data set downward. Second, contrary to the ILEC Petitioners’ assertion,
the FCC did take account of the declining utilization when selecting an X-factor
within its proposed range. Id. at ¶¶ 233–36. While it may have been preferable for
the FCC to adjust the proposed range of X-factors rather than the selection within the
range, the FCC was not required to account for declining utilization at all. The FCC
reasonably declined to adjust the KLEMS data set considering the limited and
potentially unreliable data at hand.
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While the FCC’s analysis regarding the X-factor was not a model of clarity, we
conclude that the FCC was not arbitrary and capricious in declining to adjust the
KLEMS data set in its selection of a new X-factor.
IV. Conclusion
We grant the CLEC Petitioners’ petitions, in part, vacating the portions of the
final rule affecting TDM transport services and remanding that issue alone to the FCC
for further proceedings. We deny the petitions for review on all other issues.
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