Puerto Rico Tel. Co. v. Telecomms. Regulatory Bd. of Puerto Rico

54 Communications Reg. (P&F) 1187

665 F.3d 309

PUERTO RICO TELEPHONE COMPANY, INC., Plaintiff, Appellant,

v.TELECOMMUNICATIONS REGULATORY BOARD OF PUERTO RICO; Sandra Torres–López, in her official capacity as President of the Telecommunications Regulatory Board of Puerto Rico; Gloria Escudero–Morales, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico; Nixyvette Santini–Hernández, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico; WorldNet Telecommunications, Inc., Defendants, Appellees.WorldNet Telecommunications, Inc., Plaintiff, Appellee,

v.Puerto Rico Telephone Company, Inc., Defendant, Appellant,Telecommunications Regulatory Board of Puerto Rico; Sandra Torres–López, in her official capacity as President of the Telecommunications Regulatory Board of Puerto Rico; Gloria Escudero–Morales, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico; Nixyvette Santini–Hernández, in her official capacity as Associate Member of the Telecommunications Regulatory Board of Puerto Rico, Defendants.

Nos. 10–1983

10–2028.

United States Court of Appeals, First Circuit.

Heard Sept. 12, 2011.Decided Dec. 9, 2011.

Eduardo R. Guzmán–Casas, with whom Joe D. Edge and Drinker Biddle & Reath LLP, was on brief for appellant.

Robert F. Reklaitis, with whom Leslie Paul Machado and LeClairRyan, were on brief for appellees Telecommunications Regulatory Board of Puerto Rico.

Lawrence R. Freedman, with whom Fleischman & Harding LLP, Frank A. Rullán, and Gray Robinson, P.A., was on brief for appellee WorldNet Telecommunications, Inc.

Before TORRUELLA, LIPEZ, and HOWARD, Circuit Judges.

TORRUELLA, Circuit Judge.

This appeal arises out of negotiations for interconnection ¹ between two telecommunications companies—the incumbent Puerto Rico Telephone Company, Inc. (“PRTC”) and its competitor, WorldNet Telecommunications, Inc. (“WorldNet”). After several failed attempts to forge a voluntary interconnection agreement (“ICA”) with PRTC, WorldNet filed a Petition for Arbitration with the Telecommunications Regulatory Board of Puerto Rico (“the Board”). PRTC and WorldNet contested hundreds of provisions in the developing agreement before an arbitrator, then continued to contest a subset of those issues before the Board. After the Board issued its decision on the ICA, both sides filed complaints with the district court seeking review of the Board's decision. Following remand from the district court, the Board issued a final ICA between PRTC and WorldNet. Before the district court for a second time, Plaintiff–Appellant PRTC challenged various provisions in that final agreement. The district court granted the Board's motion for summary judgment, with which WorldNet concurred, and dismissed PRTC's complaint with prejudice.

PRTC now appeals, arguing primarily that it has been denied meaningful judicial review, that the end results of the Board's rate determinations were unjust and unreasonable, and that several pricing provisions in the final ICA resulted from arbitrary and capricious decisions by the arbitrator and the Board. Finding no reversible error, we affirm.

I. Background

A. The Regulatory Context

PRTC and its competitor WorldNet both provide local and long-distance telephone services in Puerto Rico. PRTC was the first telephone company in Puerto Rico, and it historically had a monopoly on local telephone services. See J. Gregory Sidak, Foreign Investment in American Telecommunications 194 (1997).

Other local telecommunications markets in the United States were monopolistically controlled first by the American Telephone and Telegraph Company (AT & T) and then by its “Baby Bell” ² offspring. Verizon Commc'ns, Inc. v. FCC, 535 U.S. 467, 475–76, 122 S.Ct. 1646, 152 L.Ed.2d 701 (2002); AT&T Commc'ns of Ill., Inc. v. Ill. Bell Tel., 349 F.3d 402, 404 (7th Cir.2003). By the mid–20th century, AT & T and its satellites “had come to possess overwhelming monopoly power in all telephone markets nationwide, supplying local-exchange and long-distance services as well as equipment.” Verizon, 535 U.S. at 480, 122 S.Ct. 1646. In 1982, facing an antitrust suit by the Government, AT & T agreed to a settlement divorcing its long-distance operations from its local-exchange services, retaining the former while birthing the Baby Bells and bequeathing them the latter. See id. at 475–76, 122 S.Ct. 1646. The Baby Bells inherited their genitor's monopolistic control over their respective local markets—the national trust had been busted but local monopolies lived on. See id.

Fourteen years later, seeking to foster competition in the industry, Congress passed the Telecommunications Act of 1996, 47 U.S.C. § 251 et seq. Verizon, 535 U.S. at 476, 122 S.Ct. 1646. Among other things, the Act sought to encourage competition in local telecommunications markets ³ by requiring incumbent local-exchange carriers (“ILECs”), such as the Baby Bells and PRTC, to share their facilities and networks with aspiring competitors (“competitive LECs” or “CLECs”) in those markets. See 47 U.S.C. § 251(c); Verizon, 535 U.S. at 476, 122 S.Ct. 1646. Accordingly, under the mandates of the Federal Telecommunications Act, PRTC is obligated to share elements of its facilities and networks with its competitors, including WorldNet.

These sharing arrangements are effectuated through ICAs between the phone companies. The ICAs establish, among other things, how much a competitive carrier must compensate the incumbent carrier for the use of the incumbent's equipment and networks. If the carriers themselves are unable to successfully negotiate a voluntary agreement, the Act provides that a carrier may petition the governing state commission—here, the Telecommunications Regulatory Board of Puerto Rico—to compel arbitration to produce an ICA. See 47 U.S.C. § 252(b). The Board may choose to arbitrate the dispute itself or delegate the authority to do so to an arbitrator. Any ICA forged through compulsory arbitration must be submitted to the Board for approval; the Board may only reject the agreement or individual provisions therein on narrow grounds. See 47 U.S.C. § 252(e)(2)(B); WorldNet Telecomms., Inc. v. P.R. Tel. Co. ( WorldNet I ), 497 F.3d 1, 5–8 (1st Cir.2007).

B. Principles Governing Compensation Rates

The 1996 Act also established principles for determining the rates that incumbent carriers can charge to competitors for use of the incumbents' equipment and networks. Historically, telephone companies had been regulated as monopolistic public utilities. Verizon, 535 U.S. at 477, 122 S.Ct. 1646. In order to prevent monopoly power from leading to exorbitant prices, legislatures and administrative agencies became involved in setting the rates utilities could charge consumers, both at the wholesale and retail levels. Id. at 477–78, 122 S.Ct. 1646. Regulation of retail prices focused on setting “just and reasonable rates,” balancing the utility provider's interest in a fair return on investment against the public's interest in a fair price for services. See id. at 480–81, 122 S.Ct. 1646. Put more bluntly, “[t]he traditional regulatory notion of the ‘just and reasonable’ rate was aimed at navigating the straits between gouging utility customers and confiscating utility property.” Id. at 481, 122 S.Ct. 1646 (citing Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 88 L.Ed. 333 (1944)).

However, determining effective standards for such a balancing test—with the vague, amorphous goal of achieving “just and reasonable” rates and a “balance” between the interests of the utility and those of consumers—proved elusive. Over the years, the Supreme Court applied various tests and standards to determine “just and reasonable” prices—concepts such as the fair-value test, the prudent-investment rule, and price caps. See Verizon, 535 U.S. at 481–88, 122 S.Ct. 1646. The constant underlying those standards was the idea that calculating the utility's cost “and then allowing a fair rate of return on it was a sensible way to identify a range of rates that would be just and reasonable to investors and ratepayers.” See id. at 487–88, 122 S.Ct. 1646. Under this rate-of-return model, a utility had a strong incentive to inflate its costs and to make costly but unnecessary investments, in order to raise its “rate base” and thus increase its incomes. See id. at 488, 122 S.Ct. 1646.

The Telecommunications Act of 1996, however, “appears to be an explicit disavowal” of this rate-of-return model. Verizon, 535 U.S. at 489, 122 S.Ct. 1646. Under the Act, “Congress called for rate making different from any historical practice, to achieve the entirely new objective of uprooting the monopolies that traditional rate-based methods had perpetuated.... in favor of novel ratesetting designed to give aspiring competitors every possible incentive to enter local retail telephone markets, short of confiscating the incumbents' property.” Id. at 488–89, 122 S.Ct. 1646. The Act does retain references to the goal of achieving “just and reasonable” and nondiscriminatory rates. See 47 U.S.C. § 252(d)(1) (providing that “[d]eterminations by a State commission of the just and reasonable rate for the interconnection of facilities and equipment” shall be “nondiscriminatory” and “based on the cost ... of providing the interconnection or network element,” and “may include a reasonable profit”). However, the Act is “radically unlike all previous statutes in providing that rates be set ‘without reference to a rate-of-return or other rate-based proceeding.’ ” Verizon, 535 U.S. at 489, 122 S.Ct. 1646 (quoting 47 U.S.C. § 252(d)(1)(A)(i)).

Now prohibited from depending on rate-of-return or any other rate-based method of setting prices, the Federal Communications Commission (“FCC”) chose instead to treat “cost” for purposes of § 252(d)(1)(A)(i) as “forward-looking economic...