Tenth Circuit lets FCC “move the goalpost” in on-going development of forbearance policy.

Despite its obvious concern about the fact that the FCC had “moved the goalposts” with little notice, the U.S. Court of Appeals for the Tenth Circuit has cut the Commission some slack. The court has upheld the FCC’s denial of a request by Qwest Corporation for forbearance from the application of certain dominant common carrier obligations for its local exchange operations in the Phoenix market. Qwest is the former U.S. West Bell Operating Company, later acquired by and now doing business as CenturyLink. Its request, which it framed to fit within analytical requirements the FCC had previously used, fell short when the FCC shifted the regulatory goalposts for such matters.

Two general principles are at work here. First, thanks to the 1996 Telecom Act, incumbent local exchange telephone carriers (ILECs) that are considered “dominant” in their market must, in effect, “share” their networks with competitors by providing those competitors with access to their networks, and on top of that providing access existing network elements on an unbundled basis (i.e., you don’t have to buy packages that include services or facilities you don’t want) at “just” and “reasonable” rates. For ILECs, that’s the bad news.

The good news is that the Act also requires the FCC to forbear from imposing those obligations on any particular ILEC if those obligations are: (a) not necessary to ensure just, reasonable and nondiscriminatory practices; (b) not necessary for the protection of consumers; and (c) consistent with the public interest. If an ILEC wants forbearance, it files a petition asking for it; that petition is “deemed granted” unless the FCC denies it within a year.

The FCC’s approach to analyzing the three statutory factors has shifted repeatedly since the Commission’s earliest efforts to give effect to the 1996 Act. In its forbearance petition for the Phoenix market, Qwest tried twice to keep up with the FCC’s shifting standards, to no avail – the Commission shifted yet again, leaving Qwest with the short end of the stick. Frustrated, Qwest complained to the Tenth Circuit that the Commission was acting arbitrarily. The court acknowledged that the FCC’s analysis had zigged and zagged and that Qwest had been given only limited notice of what might be expected of it. Despite that, the court concluded that the FCC’s approach was not fatally flawed.

The zig-zagging most relevant here started in 2004, when the FCC tackled a Qwest forbearance petition in Omaha. In that instance the Commission agreed that forbearance was justified, using an analysis based on market share, because Cox Cable provided sufficient facilities-based competition in the market, and wireless cellphone services also constrained the ILEC’s behavior.

On the heels of that decision other ILECs sought similar treatment. In one case, Verizon asked for forbearance in a half dozen markets. The Commission denied Verizon’s request, using a different approach to forbearance analysis. Verizon took that decision to the U.S. Court of Appeals for the D.C. Circuit.

Shortly after Verizon’s request was filed with the Commission, but before the Commission had acted on it, Qwest also filed for forbearance in four markets (including Phoenix). It, too, was turned down, and it, too, appealed to the D.C. Circuit. The court held Qwest’s case in abeyance while it considered Verizon’s, and ultimately remanded the Verizon case to the FCC, concluding that the FCC had not adequately explained the changed analysis underlying the denial of Verizon’s request.   Since the denial of the Qwest request was also based on that unexplained analytical change, the Qwest case, too, was sent back to the FCC at the FCC’s request.

Qwest then renewed its petition for forbearance, this time limited to Phoenix. Qwest modified its showing to include more market-specific information that the FCC had, in its first denial of Qwest’s Phoenix request, said would be necessary. Overall, Qwest argued, the competition figures relative to the Phoenix market, were essentially as good as those that had led to forbearance in Omaha – so forbearance in Phoenix should be a no-brainer.

Maybe, maybe not, replied the FCC. We have a few problems with the analysis, once again.

For example, how to gauge the competitive effect on ILECs of wireless services. In 2004-2007, the Commission had included wireless-only customers in determining an ILEC’s market share – the theory being that customers who had “cut the cord” had done so in reaction to the ILEC’s prices. Since precise information about the prevalence of “cut-the-cord” customers in particular markets wasn’t generally available, the Commission applied a national estimate to the market in question.   But in addressing the re-filed Phoenix request, the FCC changed its mind and decided that better data were available, so it wanted market-specific data on cord-cutters.

In its post-remand Phoenix forbearance request, Qwest provided market-specific information as best it could, but the Commission had by then moved on in its thinking. Cord-cutting statistics might be relevant if the cord-cutting occurred in response to ILEC pricing, but only if the availability of wireless service would have a “material price-constraining effect” on wireline voice services. Qwest hadn’t shown that to be the case – whether or not it knew that the FCC expected it to provide that information being beside the point.

Another problem with relying on the Omaha precedent: as it turned out, the behavior that the FCC had anticipated after granting forbearance in Omaha did not come to pass. One competitor, McLeod USA, cut its operations way back, and the ILEC didn’t make any enticing offers to encourage McLeod to change its mind. Integra, another potential competitor, decided not come out and play in Omaha at all. And ILEC prices did not go down. Net result: the competitive playing field was worse following the Omaha forbearance decision. Perhaps our analysis there missed the mark, mused the FCC.

So the Commission concluded that there are apparently reasons other than price that drive customers to abandon wireline in favor of cellphones. Plus, its earlier notion that two competitors in a market might really compete price-wise had turned out to be a bit off base, possibly because in such circumstances there is considerable opportunity for tacit price coordination.

With its confidence in its previous analytical approaches thus shattered, the Commission zigged again. It said that the real test here, based on antitrust law, should be whether competition will constrain the ILEC from imposing a “small but significant and nontransitory” price increase. Such constraint didn’t occur in Omaha, so maybe we had better look at just conventional wireline and VoIP competition, leave wireless out of it, and go from there. Under that analysis, it doesn’t look like anyone else is poised to enter the Phoenix market, and a duopoly of Qwest and Cox is not enough to justify forbearance. So Qwest’s Phoenix request was denied yet again. At that point Qwest took its case to the Tenth Circuit. (Why Qwest chose the Tenth rather than the D.C. Circuit is not clear – but, given Verizon’s earlier success in D.C. and Qwest’s lack of success in the Tenth, Qwest may now regret its decision to switch courts.)

Qwest howled about the FCC’s repeated zig-zags, and the Court said that the FCC surely did “move the goalposts.” But the FCC managed to prevail: while it may not have engaged in an “optimal mode of administrative decision-making,” the decision wasn’t illegal because it wasn’t not arbitrary and capricious.

The Courts have often bashed the FCC for changing its mind without adequate explanation. Here, however, the agency’s explanation was found to be sufficient: the FCC had applied an analytical framework in Omaha, and the results were not what the Commission had anticipated. That’s a fair enough reason for re-thinking the analytical framework, particularly since the ultimate objective – i.e., to retain regulation unless and until market power is no longer significant – remained unchanged. The Omaha approach apparently did not result in constraints on market power, so the FCC was well within its authority to try to come up with a reasonable alternative analysis. Most importantly, that effort was entitled to the deference that courts normally show to administrative agency interpretations of their own governing statute.

The FCC squeaked by here – it’s not often that a court approves agency action after chiding the agency for “moving the goalposts” and engaging in something other than an “optimal mode” of decision-making. The Commission succeeded in convincing the court that the FCC is not just flailing around blindly, but rather is struggling, rationally and deliberately, to get a handle on an enormously complicated problem. In particular, the court confirmed that the FCC can change its regulatory course as long as it gives the public adequate notice and opportunity on anticipated changes (which it did here, although just barely?). It’s not carte blanche to do anything to anyone any time, but this is one more court decision that will help the FCC craft future actions to meet changing circumstances in the rapidly evolving communications environment.

In the wake of the Tenth Circuit decision, Chairman Genachowski wasted no time issuing a press release celebrating the fact that the FCC “is now winning court cases more than 90 percent of the time.” Such claims tend to raise eyebrows. To be sure, the FCC’s track record in the appellate arena seems to have improved in recent years, but a lot of appeals from FCC decisions are of limited merit and, thus, relatively easy wins for the agency. If the Chairman is using all FCC appellate wins to get to his 90% figure, that’s a little like calculating an MLB team’s overall record based not only on regular season play, but also on pre-season scrimmages with various farm teams.

What the win percentage may be in cases of major importance has not been advertised. The FCC has indeed had some significant victories in the past few years, but it has also suffered its share of setbacks. Perhaps more importantly, it’s currently facing a number of major court challenges involving high-stakes issues, with aggressive, well-heeled appellants on the other side. Check back here for updates (but not necessarily statistics – we’ll leave those to the Chairman for now.)