S. New England Tel. Co. v. Delgobbo

THE SOUTHERN NEW ENGLAND TELEPHONE COMPANYd/b/a AT&T CONNECTICUT, Plaintiff, v. KEVIN M. DELGOBBO, ANTHONY J. PALERMINO,JOHN W. BETKOSKI III, AMALIA VASQUEZ BZDYRA,and ANNA M. FICETO, in their official capacity as Commissionersof the Connecticut Department of Public Utility Control, Defendants.

No. 3:10-cv-00806 (JAM)

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

March 31, 2015

ORDER AFFIRMING THE DECISION OF THE CONNECTICUT DEPARTMENT OF PUBLIC UTILITY CONTROL

This is a civil action arising under the Telecommunications Act of 1996 and its implementing regulations. Plaintiff, the Southern New England Telephone Company d/b/a AT&T Connecticut, seeks judicial review of a decision by defendant commissioners of the Connecticut Department of Public Utility Control (DPUC) concerning rates that plaintiff may charge competitors to use parts of plaintiff's local telephone network facilities ("interconnection" rates). The DPUC decision evaluated cost studies plaintiff had provided to support its proposed interconnection rates, found them to be sorely inadequate, and ordered plaintiff to file rates that included adjustments to portions of its studies. The resulting rates were lower than plaintiff's initial cost studies had supported.

Several of plaintiff's concerns with the DPUC decision have been resolved by related litigation. Remaining in the case are claims that DPUC acted arbitrarily and capriciously when itmade adjustments to plaintiff's cost studies with regard to two of the approximately 15 elements that went into the rate-setting analysis: the "fill factor" and the "line mix." For the reasons set forth below, I affirm the decision of the DPUC.

BACKGROUND

The Telecommunications Act of 1996 imposes obligations on established, formerly monopolistic phone companies (generally referred to as "incumbent local exchange carriers" (ILECs)) to provide certain services to newer entrants in a local telecommunications market ("competitive local exchange carriers" (CLECs)), in order to foster greater competition in the market. ILECs must share their networks by "interconnecting" with CLECs' networks, and must negotiate fair contracts by which CLECs will pay for the interconnection services.¹

If voluntary negotiations fail, the parties may petition a state utility commission to step in and arbitrate the dispute. In order to ensure that the resulting interconnection rates are "just, reasonable, and nondiscriminatory," 47 U.S.C. § 251(c)(3), state agencies that resolve a dispute must determine the appropriate rates using "forward-looking" cost methodology, see 47 C.F.R. § 51.505, and they may not consider the historic or embedded costs that an ILEC incurred for an element in the network. See id.(d)(1); see also 47 U.S.C. §252(d)(1)(A)(i) (a state commission's determinations of the interconnection rate must be "based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the [service]").

As Judge Easterbrook has explained, this forward-looking methodology means that "[i]ncumbents that have aging and inefficient equipment thus must sell for less than their historical cost; the old system that calculated rates based on actual cost of equipment plus a reasonable rate of return on capital is out the window." AT&T Commc'ns of Illinois, Inc. v.Illinois Bell Tel. Co., 349 F.3d 402, 405 (7th Cir. 2003) (Easterbrook, J.) (hereinafter Illinois Bell). The forward-looking "total element long-run incremental cost" (TELRIC) methodology (47 C.F.R. § 51.505(b)) attempts to approximate rates based on the costs that a hypothetical ILEC would incur to provide the services in an efficient market, and this methodology has been approved by the Supreme Court as an appropriate forward-looking methodology for state commissions to apply. See generally Verizon Commc'ns., Inc. v. F.C.C., 535 U.S. 467 (2002).²

TELRIC is not a precise algorithm; it is "a framework rather than a formula," with "considerable play in the joints." Illinois Bell, 349 F.3d at 405. For example:

Incumbent carriers may be unable to agree with would-be entrants about what the most efficient technology is, how much it would cost to construct, and what the incremental costs of a given network element would be. Moreover, even when the parties can agree on the technology, they may be unable to agree on vital details.

Ibid. Ultimately, a state commission must ensure that the interconnection rate is "just, reasonable and nondiscriminatory." 47 U.S.C. § 251(c)(3). In order to do so, it will ask the ILEC to submit a cost study that shows that the rates it offers do not exceed the forward-looking economic cost of the service. See 47 C.F.R. § 51.505(e).

The present case arises from a series of disputes between an ILEC, plaintiff Southern New England Telephone Company d/b/a AT&T Connecticut, and competitor CLECs in Connecticut. In October 2008, wireless carrier Youghiogheny Communications-Northeast, LLC d/b/a Pocket Communications (Pocket) petitioned defendant, the Connecticut Department of Public Utility Control (DPUC), for arbitration of its dispute with plaintiff over rates plaintiffcould charge CLECs for "reciprocal compensation" See Doc. #39 at 51.³ Reciprocal compensation refers to the per-minute rate plaintiff would charge a CLEC if that CLEC's customer made a local call to an AT&T Connecticut customer, thereby using plaintiff's network. Pocket argued that plaintiff's rates, which relied on a ten-year-old cost study, were out of date and unreasonably expensive. An arbitrator appointed by DPUC evaluated the parties' filings and, in March 2009, recommended that there be a new cost study for reciprocal compensation rates. See id. at 59. DPUC agreed, and in April 2009, it ordered plaintiff to file a new cost study to support its desired reciprocal compensation rates by July 2009. Id. at 63.

Meanwhile, in December 2008, Pocket filed a second petition, this time requesting declaratory judgment with regard to plaintiff's rates for the provision of transit services. See id. at 67. Such rates reflect the per-minute price plaintiff would charge a CLEC when that CLEC's customer made a local call to a customer of a third telecommunications carrier, if plaintiff's network were used as an intermediary to connect the call. Plaintiff argued, inter alia, that transit traffic did not qualify as "interconnection" under the Telecommunications Act of 1996, and that it therefore did not need to be provided via TELRIC-based rates. Id. at 71-72. DPUC disagreed. In October 2009, it entered an order stating that transiting qualified as interconnection and therefore required TELRIC-based rates. Id. at 97-101. DPUC imposed an interim rate pending the resolution of the docket assigned to the cost study for reciprocal compensation, to which at some point DPUC had also asked plaintiff to include a study of transit rates. Id. at 103-04.

Plaintiff filed its cost studies in July 2009, as required, and filed additional materials on several occasions in the subsequent months, at DPUC's request. In September 2009, plaintiff and several intervening companies (Pocket, Sprint, Comcast, Cablevision, and Cox) filed testimonyregarding the new cost studies. DPUC held evidentiary hearings over several days and issued its final decision in April 2010, ordering plaintiff to file rates for both reciprocal compensation and transit services in accordance with several changes to the TELRIC calculation undertaken in its cost studies. See Doc. #29-1 at 4.

That decision made repeated references to plaintiff's failures in supporting its proposed rates. To begin with, DPUC found that plaintiff's cost studies "initially . . . could not be analyzed in any level of detail," because the filings "consisted of a single Excel spreadsheet for each service containing only summary cost information" that "failed to meet the requirement established . . . for cost studies to be documented in a manner that the source of the data can be audited." Id. at 16-17. Even after plaintiff provided additional information in response to interrogatories, DPUC found that "even then, it was difficult to understand [plaintiff's] explanation as to how these various spreadsheets should be utilized in order to understand the costs that were in the July 17, 2009 filings." Id. at 17. And plaintiff's several delays in providing information upon DPUC's request "resulted in the Department and the parties receiving [one study] only four calendar days (including a weekend) before the evidentiary hearing began." Ibid. All in all, DPUC found that "[plaintiff's] failure to provide its cost studies on a timely basis negatively impacted [DPUC] and the parties' ability to thoroughly analyze [plaintiff's] cost studies. Ibid.

DPUC also found that the problems of plaintiff's "incomplete cost studies were further exacerbated by [plaintiff's] inadequate job of supporting them during cross-examination," in that "[t]he testimony of [plaintiff's] witnesses was decidedly deficient as the basis for the validity of the cost studies." Ibid. Nevertheless, DPUC utilized plaintiff's "inadequate" studies, with several adjustments, to determine appropriate cost-based rates for reciprocal compensation and transitservices.

Most of the costs in the studies related to the costs of using plaintiff's switches, which channel incoming data to the appropriate outgoing port. One of the adjustments DPUC ordered was to the proportion of "replacement" versus "growth" lines that plaintiff anticipated purchasing for its network. It is critical to this case to understand the distinctions between replacement and growth lines. Plaintiff based its switching cost studies on contracts with switch vendors, who provide per-line prices based on the number and type of lines expected to be purchased by plaintiff over the term of a contract. Replacement lines are added to a switch to fully replace another switch, while growth lines are simply added to an existing switch....