Ace Telephone Assoc. v. Leroy Koppendrayer

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 05-1170/1171
___________
Ace Telephone Association; *
Hometown Solutions; Hutchinson *
Telecommunications, Inc.; Mainstreet *
Communications, LLC; Northstar *
Access, LLC; Otter Tail Telecom, *
LLC; Paul Bunyan Rural Telephone *
Company; Tekstar Communications, *
Inc.; US Link, Inc., *
*
Appellees, * Appeals from the United States
* District Court for the District
v. * of Minnesota.
*
Leroy Koppendrayer, in his official *
capacity as Chairman of the Minnesota *
Public Utilities Commission; R. *
Marshall Johnson, in his official *
capacity as a member of the Minnesota *
Public Utilities Commission; Kenneth *
Nickolai, in his official capacity as a *
member of the Minnesota Public *
Utilities Commission; Phyllis Reha, in *
her official capacity as a member of the *
Minnesota Public Utilities Commission; *
Gregory Scott, in his official capacity as *
a member of the Minnesota Public *
Utilities Commission; The Minnesota *
Public Utilities Commission, *
*
Appellants, *
*
Qwest Corporation, *
*
Intervenor Defendant/Appellant. *
___________
Submitted: September 12, 2005
Filed: December 29, 2005
___________
Before ARNOLD, HANSEN, and GRUENDER, Circuit Judges.
___________
ARNOLD, Circuit Judge.
The Minnesota Public Utilities Commission (MPUC) and Qwest
Communications, Inc., appeal the district court's grant of a motion for judicial review
and declaratory relief. We reverse.
I.
The phone companies that filed the motion, Ace Telephone Association,
Hometown Solutions, Hutchinson Telecommunications, Inc., Mainstreet
Communications, LLC, NorthStar Access, LLC, Otter Tail Telecom, LLC, Paul
Bunyan Rural Telephone Company, Tekstar Communications, Inc., and US Link, Inc.,
are so-called competitive local exchange carriers (CLECs), i.e., they compete to
provide local telephone service. We will refer to the phone companies that brought
this court action as the CLEC Coalition.
The Coalition's members compete in the Minnesota local telecommunications
market against Qwest, and thus Qwest customers and CLEC customers often call one
another. When this occurs, federal law allows the telephone company of the person
called to collect from the caller's telephone company the additional costs, if any, that
it incurred in sending the call to its final destination, referred to as "terminating the
call." See 47 U.S.C. § 251(b)(5). Evidently because both parties frequently agree to
-2-
pay one another the costs of terminating calls, the charge in telecommunications
parlance is known as "reciprocal compensation." This charge can be set either through
negotiations by the carriers or by the state utilities commission. Here the MPUC set
the reciprocal compensation rate (RCR) for Qwest and members of the CLEC
Coalition at zero. The CLEC Coalition argues that the MPUC's action was arbitrary
and capricious and not supported by substantial evidence. The MPUC and Qwest
disagree and contend that the MPUC's decision was neither arbitrary nor capricious
and was properly based on evidence generated in a related MPUC proceeding. In
addition, Qwest maintains that an order entered in the related proceeding required the
MPUC to set the RCR at zero.
The CLEC Coalition's motion for judicial review and declaratory relief is a
creature of 47 U.S.C. § 252(e)(6), a provision of the Telecommunications Act of 1996
(the Act) that empowers federal district courts to review state commission
determinations like the one challenged here to ensure that they meet the requirements
of § 251 and § 252. We review the district court's order granting the CLEC
Coalition's motion de novo, applying the same standards as the district court. Cf.
Luckes v. County of Hennepin, 415 F.3d 936, 938 (8th Cir. 2005). These standards
require us to review a state commission's interpretation of federal law de novo. See
Qwest Corp. v. Minnesota Pub. Utilities Comm'n, 427 F.3d 1061, 1064 (8th Cir.
2005); Michigan Bell Tel. Co. v. MFS Intelenet of Mich., Inc., 339 F.3d 428, 433 (6th
Cir. 2003). But we recognize the state commission's superior technical expertise, and
we review its factual determinations under the arbitrary and capricious standard, see
Qwest, 427 F.3d at 1064; Michigan Bell Tel. Co. v. MCIMetro Access Transmission
Servs., Inc., 323 F.3d 348, 354 (6th Cir. 2003).
II.
One of the purposes of the Act is to foster competition in local telephone
markets. It offers so-called incumbent local exchange carriers (ILECs), i.e., in
general, dominant providers of local telephone service in a particular region, see
-3-
47 U.S.C.A. § 251(h), the opportunity to compete in the long-distance market; to gain
entry, however, an ILEC must facilitate competition for local service. It does so by
entering into interconnection agreements with competing carriers and leasing elements
of its network to them at cost-based rates. See 47 U.S.C. § 271(c)(2)(B). The Act
prefers that these rates be set through negotiation, see 47 U.S.C. § 252(a), but when
the ILEC and the competitor cannot agree upon a rate they may turn to the state
commission. The state commission is to set the lease rate based on the total long-run
incremental costs of the network element at issue. 47 C.F.R. §§ 51.501, 51.505. To
make sure that competitors make efficient investment and operating decisions, it is
vital that competing telephone companies, when leasing equipment, face the same
costs that the ILEC faces: For instance, if Qwest (an ILEC) incurs some small cost
for every minute that a switch is used, then its competitors should as well. Otherwise,
competitors may over- or under-consume network resources, which would undermine
effective competition in the local exchange market. For that reason, state
commissions must set lease rates that reflect an ILEC's actual cost structure. See In
re Implementation of the Local Competition Provisions in the Telecommunications Act
of 1996, First Report and Order, 11 FCC Rcd 15499, 15874 para. 743 (1996) (Local
Competition Order) (subsequent history omitted).
In a previous proceeding brought by AT&T and Worldcom (both CLECS
though not plaintiffs here), the MPUC set out to determine the rates at which Qwest
should lease certain network elements to CLECs. One such element was end-office
switching. An end-office switch routes telephone calls to their final destination.
Previously, Qwest had charged competitors $1.08 per month for each telephone line
connected to a switch, as well as $0.00181 for each minute that they used the switch.
While Qwest argued in favor of continuing this pricing structure, the CLEC Coalition
and others contended that the per-minute part of the charge was outdated and that the
MPUC should price end-office switching at a fixed, per-line rate only.
-4-
After hearing testimony in the network-element proceeding, the MPUC's
administrative law judge concluded that the most reasonable method for leasing end-
office switching was on a fixed, per-line basis. The ALJ concluded that Qwest's cost
model was out-of-date and not adequately supported by the evidence in the record.
The ALJ also noted that allowing Qwest to charge a usage-sensitive fee while
competitors charged customers a fixed rate for their telephone service would stifle
competition. The MPUC adopted the ALJ's report and required Qwest to submit a
compliance filing listing the charge for the end-office switch at a fixed, monthly, per-
line rate with no per-minute usage charges.
In its compliance filing, Qwest priced end-office switching at a fixed rate of
$3.12 per line per month, with no per-minute usage charge. In that same filing, Qwest
also set its RCR at zero. (The previous RCR had been $0.00181 per minute, the same
rate that Qwest had charged competitors when leasing them an end-office switch).
The regulations promulgated pursuant to the Act require that, except in limited
circumstances, the ILEC and all CLECs in the state pay one another the same rate for
terminating each other's calls (RCR). 47 C.F.R. § 51.711(a). Like Qwest, therefore,
CLEC Coalition members would collect nothing for terminating another carrier's call.
A CLEC could deviate from this zero rate only by developing its own cost study and
proving to the MPUC that its costs were higher than Qwest's. 47 C.F.R. § 51.711(b).
After complaints from the CLEC Coalition, the MPUC opened a separate
proceeding to investigate the proper RCR. After the issue had been briefed and
argued, the MPUC decided to approve Qwest's zero RCR. In doing so, the MPUC
cited the Act, which states that the RCR should be merely "a reasonable
approximation of the additional costs of terminating such calls." 47 U.S.C.
§ 252(d)(2)(A)(ii) (emphasis added). Since the provision of the Act that addresses the
RCR does not "authorize ... any State commission to engage in any rate-regulation
proceeding to establish with particularity the additional costs of transporting or
-5-
terminating calls," 47 U.S.C. § 252(d)(2)(B)(ii), the MPUC felt it proper to use the
earlier network-element proceeding to establish the RCR.
III.
The Coalition argues, and the district court held, that the MPUC's decision to
order a zero RCR was arbitrary and capricious. With respect to reviewing the
MPUC's factual determinations, we believe that the arbitrary-and-capricious standard
is the same as the substantial-evidence standard. See GTE South, Inc. v. Morrison,
199 F.3d 733, 745 & 745 n.5 (4th Cir. 1999); cf. Association of Data Processing v.
Fed. Reserve Sys., 745 F.2d 677, 683 (D.C. Cir. 1984). As long as the MPUC's factual
findings are supported by substantial evidence in the record as a whole, we will
uphold those findings and the reasonable inferences that the MPUC drew from them.
See Michigan Bell Tel. Co. v. MCIMetro Access Transmission Servs., Inc., 323 F.3d
348, 354 (6th Cir. 2003).
We conclude that the district court erred in holding that the MPUC's decision
was arbitrary and capricious. Under federal law, the MPUC was to base the RCR on
"a reasonable approximation of the additional costs" of termination. 47 U.S.C.
§ 252(d)(2)(A)(ii) (emphasis added). Furthermore, Minnesota law required the
MPUC to assume the use of "the most efficient telecommunications technology
currently available." Minn. Stat. § 237.12(4)(1). The MPUC therefore could not
continue to impose an RCR that it concluded was founded on "clearly outdated cost
studies." Instead, it had to make a reasonable approximation of what additional costs,
if any, telephone companies incurred in terminating a call. To do so, the MPUC
looked back to its recent network-element proceeding.
In the network-element proceeding, the ALJ recognized that usage-based costs
were theoretically possible, but determined that no party had actually demonstrated
that usage-based costs in fact existed or, if they did, how much they were. In that
proceeding, the MPUC accepted the ALJ's reasoning, and it determined that all the
-6-
costs of the end-office switch were arguably recovered through the fixed-rate price.
The MPUC thus had reason to believe in the RCR proceeding that the costs of modern
end-office switching did not vary significantly with usage. Multiple parties in the
earlier proceeding had introduced evidence consistent with that supposition. On this
record, the MPUC reasonably concluded that the additional costs for terminating a
telephone call were approximately zero.
The MPUC was entitled to look to the previous network-element proceeding
when deciding the appropriate RCR. We know of no rule that limits a regulatory
agency to considering evidence within a particular record in making a decision;
instead, it may use findings made in one context to help decide a related matter in
another. The CLEC coalition was a party to the previous proceeding. All the parties
to the RCR proceeding recognized that the end-office switch issue and the reciprocal
compensation issue were economically related inquiries. FCC regulations permitted
the MPUC to use the same "forward-looking, economic cost-based pricing standard"
for both proceedings. See Local Competition Order, 11 Fcc Rcd at 16023 para. 1054.
In fact, the MPUC established the earlier $0.00181 RCR using the same information
that was used to establish the previous end-office switch lease rate. And the CLEC
Coalition members, in their initial comments to the MPUC concerning reciprocal
compensation, repeatedly referred to the previous record. Rather than reinvent the
wheel, the MPUC looked back to the network-element proceeding to supplement the
record in the instant matter. The parties had ample opportunity in the reciprocal-
compensation proceeding to present contrary evidence. Because the findings from the
network-element proceeding were relevant to the reciprocal-compensation proceeding,
and because the FCC permitted state commissions to use a similar standard in
addressing both issues, the MPUC did not err in considering the earlier record.
We also conclude that the district court erred in holding that a zero RCR
violated the plain language of the Act. The court relied on 47 U.S.C. § 251(b)(5),
which states that each local exchange carrier has "[t]he duty to establish reciprocal
-7-
compensation arrangements for the transport and termination of telecommunications."
It is true that each carrier has to set up procedures by which to pay other carriers for
the costs of terminating its traffic, and a carrier would violate the Act if it simply
refused to establish any way to reimburse others for their additional costs. But this
duty to deal does not necessarily imply that the RCR must be some non-zero amount.
An ILEC like Qwest can collect reciprocal compensation charges from others only if
it negotiates a non-zero rate with them or if the state commission finds that it incurs
additional costs in terminating other carriers' traffic, see 47 U.S.C. § 252(d)(2)(A)(ii).
Put another way, telephone companies have to establish ways to pay one another their
additional costs. But if no additional costs are incurred, there is nothing to pay. The
district court's reading of § 251(b)(5) would force carriers to pay one another
regardless of whether they incurred additional costs or not. Such a reading would
directly contradict the plain meaning of § 252(d)(2)(A)(ii). For the reasons indicated,
the district court erred in reversing the MPUC's order.
IV.
We conclude, moreover, that the district court's order must be reversed for
another, independently sufficient reason: Once the MPUC ordered Qwest to charge
only a fixed per-line rate for end-office switching, federal law prevented the MPUC
from imposing any non-zero RCR.
The Act, as the Supreme Court has noted, is often difficult to interpret. AT&T
Corp. v. Iowa Utils. Bd., 525 U.S. 366, 397 (1999). This is true of the term
"additional costs" as used in § 252(d)(2)(A)(ii); it is hardly free from ambiguity. But
the Federal Communications Commission (FCC) has clarified the meaning of the
phrase. In its first order implementing the local competition provisions of the Act, the
FCC stated that "the 'additional cost' to the LEC of terminating a call ... primarily
consists of the traffic-sensitive component of local switching." Local Competition
Order, 11 FCC Rcd at 16024-25 para. 1057. After finding that the cost of other
related network elements do not vary with traffic, the FCC turned to the end-office
-8-
switch. It determined that "only that portion of the forward-looking, economic cost
of end-office switching that is recovered on a usage-sensitive basis constitutes an
'additional cost' to be recovered through termination charges." Id. (emphasis added).
Regulations promulgated by a federal agency pursuant to an act of Congress carry
with them the force of law. See Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 843-44
(1984).
The phrase "is recovered on a usage-sensitive basis" is, we think, best read as
referring to the usage-based portion of the end-office switch lease rate. It would make
little sense to say that this phrase refers to the recovery of termination charges
themselves. We agree with Qwest that this phrase refers to the usage charge that is
recovered when the end-office switch is leased as a network element. Therefore, if
a state commission decides that the switch should be leased on a fixed, per-line basis,
paragraph 1057 precludes it from establishing a non-zero termination charge for that
same switch. This is the case regardless of the state commission's rationale for the
fixed-rate pricing. Paragraph 1057 looks to the MPUC's action, not to its motivation.
It is immaterial whether the MPUC ordered a fixed rate for cost-based or public-policy
considerations.
Once the MPUC determined that there were no grounds for a per-minute usage-
based charge on end-office switching and that there were public policy reasons to
impose only a fixed-rate price, the die was cast. The CLEC Coalition asked for a
fixed end-office switching lease rate, and the MPUC gave them one. The
consequences of that decision may prove more costly than the Coalition expected, but
we believe that that is what the law requires.
-9-
V.
For the reasons stated above, we reverse the district court's order granting the
motion for judicial review and declaratory relief.
______________________________
-10-