Sbc Inc. v. Federal Communications Com'n

Page 486

414 F.3d 486

SBC INC., Petitioner v. FEDERAL COMMUNICATIONS COMMISSION; United States of America, Respondents.

No. 03-4311.

United States Court of Appeals, Third Circuit.

Argued November 16, 2004.

Decided July 14, 2005.

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James D. Ellis, Paul K. Mancini, SBC Communications, Inc., San Antonio, Texas, Gary L. Phillips, James P. Lamoureux, SBC Communications, Inc., Washington, D.C., Michael K. Kellogg, Colin S. Stretch (Argued), Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, D.C., for Petitioner.

R. Hewitt Pate, Assistant Attorney General, Makam Delrahim, Deputy Assistant Attorney General, Robert B. Nicholson, Robert B. Wiggers, Attorneys, United States Department of Justice, Washington, D.C., John A. Rogovin, General Counsel, Richard K. Welch, Daniel M. Armstrong (Argued), Associate General Counsel, John E. Ingle, Deputy Associate General Counsel, Rodger D. Citron, Counsel, Federal Communications Commission, Washington, D.C., for Respondent.

Before: MCKEE and CHERTOFF,^* Circuit Judges, and BUCKWALTER Senior District Judge.^**

OPINION

MCKEE, Circuit Judge.

SBC Communications, Inc., petitions for review of an order of the Federal Communications Commission captioned, Cost-Base Terminating Compensation for CMRS Providers, 18 FCC Rcd 18441, 2003 WL 22047787, released on September 3, 2003 (the "Order Under Review"). SBC contends that the Order Under Review violated the Administrative Procedure Act by improperly revising an FCC rule without first affording notice and an opportunity for comment as required by the APA. SBC also argues that the Order Under Review cannot be upheld because it is arbitrary and capricious. For the reasons explained below, we will deny the petition for review.

I. GENERAL BACKGROUND

The technological sea change that has occurred in the telecommunications industry has revolutionized the manner in which local telephone service is provided. It has also resulted in dramatic changes in federal and state regulations of the industry. Prior to the passage of the Telecommunications Act of 1996 (the "1996 Act"), Pub.L. 104-104, 110 Stat. 56, "[s]tates typically granted an exclusive franchise in each local service area to a local exchange carrier ("LEC")." AT & T Corp. v. Iowa Utilities Board, 525 U.S. 366, 371, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999). The LEC typically owned, "among other things, the local loops (wires connecting telephones to switches), the switches (equipment directing calls to their destinations), and the transport trunks (wires carrying calls between switches) that constitute a local exchange network."¹ Id. The 1996 Act restructured local telephone markets by preempting state and local franchise arrangements, 47 U.S.C. § 253, and by requiring "incumbent local exchange carriers (ILECs) to share their networks and services with competitors seeking entry into the local service market." MCI Telecommunication Corp. v. Bell Atlantic-Pennsylvania, 271 F.3d 491, 498 (3d Cir.2001).

Congress recognized that without allowing new entrants to use the incumbents' local exchange networks and other technology and services, the incumbents would maintain a stranglehold on local telephone service: no new entrant could realistically afford to build from the ground up the massive communications grid the incumbents had developed through years of monopolistic advantage.

Indiana Bell v. McCarty, 362 F.3d 378, 382 (7th Cir., 2004) (footnote omitted).

Among other things, the 1996 Act required that ILECs allow competitors to "interconnect" to their networks. See 47 U.S.C. § 251(c)(2). Interconnection is critically important to a competitive local exchange market. Without it, customers of one carrier — e.g., the ILEC, that has historically served that area — would not be able to call customers of another carrier — e.g., a competitive LEC ("CLEC"), that has recently initiated service in that same area.

When local carriers establish interconnection arrangements, the 1996 Act requires them to include compensation terms, known as "reciprocal compensation arrangements," for delivery of the traffic they exchange. 47 U.S.C. § 251(b)(5). When a customer of carrier A makes a local call to a customer of carrier B, and carrier B uses its facilities to connect, or "terminate," that call to its own customer, the "originating" carrier A is ordinarily required to compensate the "terminating" carrier B for the use of carrier B's facilities. See Global NAPs, Inc. v. FCC, 247 F.3d 252, 254 (D.C.Cir.2001) (Reciprocal compensation arrangement "means that when a customer of Carrier X calls a customer of Carrier Y who is within the same local calling area, Carrier X pays Carrier Y for completing or `terminating' the call."). With respect to the compensation a carrier may recover for the transport and termination of traffic that originates with another carrier, the 1996 Act requires just and reasonable rates that provide for "the mutual and reciprocal recovery by each carrier of costs associated with the transport and termination on each carrier's network facilities of calls that originate on the network facilities of the other carrier." 47 U.S.C. § 252(d)(2)(A)(i). The 1996 Act effectively defines a reasonable rate as one that is "a reasonable approximation of the additional cost of terminating such calls," and prohibits any regulatory proceeding to establish such costs "with particularity." 47 U.S.C. §§ 252(d)(2)(A)(ii), 252(d)(2)(B)(ii).

The 1996 Act directs competing LECs to address "reciprocal compensation" terms in the first instance through voluntary negotiations. See 47 U.S.C. §§ 251(b)(5), 252(a); MCI Telecommunication, 271 F.3d at 500. When they are unable to do so, the 1996 Act permits either party to petition the appropriate state utilities commission to arbitrate the dispute in accordance with the terms of the 1996 Act and the FCC's implementing regulations. See 47 U.S.C. § 252(b)(1). The 1996 Act also required the FCC to adopt regulations to implement the Act, including its reciprocal compensation provisions. See generally Iowa Utilities Board, 525 U.S. at 377-78, 384, 119 S.Ct. 721. Within six months of the adoption of the 1996 Act, the FCC issued a comprehensive rulemaking decision to satisfy that requirement. See First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 FCC Rcd 15499, 1996 WL 452885 (1996) (the "Local Competition Order").²

In the Local Competition Order, the FCC established a presumption that the reciprocal compensation rates that two interconnecting carriers may charge each other are symmetrical. Accordingly, the ILECs' rates generally serve as the proxy for other telecommunications carriers' additional costs of transport and termination. Local Competition Order, 11 FCC Rcd at 16031-44 (¶¶ 1069-1093); see also 47 C.F.R. § 51.711(a) (symmetrical reciprocal compensation rules). The FCC adopted symmetric rates because, among other things, they are easy to administer, can prevent ILECs' from taking advantage of their "unequal bargaining position," and do not discourage carriers' incentives to reduce costs. 11 FCC Rcd at 16040-41 (¶¶ 1086, 1087, 1088); see also Id. at 16040 (¶ 1086). The FCC explained that it adopted the ILECs' rates as a proxy for the rates of other carriers because "[b]oth the incumbent LEC and the interconnecting carriers will be providing service in the same geographic area, so the[ir] forward-looking economic costs should be similar in most areas." Local Competition Order, 11 FCC Rcd at 16040 (para.1085). This ratemaking scheme thus allows carriers to recover, through reciprocal compensation, "a reasonable approximation" of their costs. See 47 U.S.C. § 252(d)(2)(A)(ii).

The older, established telephone networks that traditionally have been built by ILECs utilize a hub-and-spoke design. The outside of the network — the ends of the spoke — are switches,³ known as "end-office" switches, that directly serve customers in a particular local calling area. These end-office switches may be connected directly, one to another. In addition (or alternatively), the end-office switches are connected to a "tandem" switch — the hub of the wheel. These tandem switches do not directly serve customers, but instead route calls to the appropriate end-office switch (sometimes via another tandem switch) and, therefore, serve a number of local calling areas. See MCI Telecommunication, 271 F.3d at 502. When a call goes through the ILEC's tandem switch, the ILEC incurs additional costs because it then has to transport the call from the tandem switch to the end-office switch. Local Competition Order, 11 FCC Rcd at 16042 (¶ 1090). See also Indiana Bell Tel. Co. Inc. v. McCarty, 362 F.3d at 384. Moreover, interconnecting carriers do not always have identical networks and therefore must sometimes terminate calls over different types of facilities.

The FCC recognized that "[n]ew entrants cannot hope to replicate the incumbents' network switch for switch" and would instead deploy "new technology" to terminate calls on their network. Local Competition Order, 11 FCC Rcd at 16042 (¶ 1090). Nevertheless, the FCC's Local Competition Order adopted a general regime of symmetrical reciprocal compensation rates and directed the states to establish "presumptive symmetrical rates based on the incumbent LEC's costs for transport and termination of traffic. . . ." 11 FCC Rcd at 16042 (¶ 1089). Given the advantages it perceived from using symmetrical rates, the FCC found that the ILECs' costs "serve as reasonable proxies for other carriers' costs of transportation and termination for the purpose of reciprocal compensation." Id. at 16041 (¶ 1088).

The FCC separately addressed the special situation that occurs when a competing carrier's newer technology does not precisely replicate the traditional "tandem switch" routing typically employed by the ILEC. The FCC offered the following explanation of its...