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Citizens Telecommunications Company of Minnesota, LLC v. Federal Communications Commission

United States Court of Appeals, Eighth Circuit

August 28, 2018

Citizens Telecommunications Company of Minnesota, LLC Petitioner
v.
Federal Communications Commission; United States of America Respondents Ad Hoc Telecommunications Users Committee; BT Americas, Inc.; Granite Telecommunications, LLC; INCOMPAS; Sprint Corporation; Windstream Services, LLC Intervenors Ad Hoc Telecommunications Users Committee; BT Americas, Inc.; Granite Telecommunications, LLC; INCOMPAS; Sprint Corporation; Windstream Services, LLC Petitioners
v.
Federal Communications Commission; United States of America Respondents NCTA-The Internet & Television Association; Comcast Corporation; AT&T Services, Inc.; USTelecom; CenturyLink, Inc. Intervenors Consumer Federation of America; New Networks Institute; Public Knowledge Amici on Behalf of Petitioners CenturyLink, Incorporated Petitioner
v.
Federal Communications Commission; United States of America Respondents Ad Hoc Telecommunications Users Committee; BT Americas, Inc.; Granite Telecommunications, LLC; INCOMPAS; Sprint Corporation; Windstream Services, LLC Intervenors Access Point, Inc.; Alpheus Communications, LLC; New Horizons Communications Corp.; XChange Telecom, LLC Petitioners
v.
Federal Communications Commission; United States of America Respondents NCTA-The Internet & Television Association; Comcast Corporation; AT&T Services, Inc.; USTelecom; CenturyLink, Inc. Intervenors Consumer Federation of America; New Networks Institute; Public Knowledge Amici on Behalf of Petitioners

          Submitted: May 15, 2018

          Petitions for Review of an Order of the Federal Communications Commission

          BEFORE SHEPHERD, MELLOY, AND GRASZ, CIRCUIT JUDGES.

          GRASZ, Circuit Judge.

         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 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 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&T[4] 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 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.

         The FCC took three actions in light of these conclusions regarding competition. First, it continued forbearance from ex ante regulation[6] 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 data[7] 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.

         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 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]

          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).

         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;
(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 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 ΒΆ 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 ...


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