8th Circuit Judges Go Easy on Attorneys in Argument Over FCC BDS Deregulation

ST. PAUL -- Federal judges mostly let attorneys make their arguments for and against FCC decisions easing regulation of the business data service rates of major incumbent telcos. The three-judge panel of the 8th U.S. Circuit Court of Appeals asked only a handful of questions in oral argument that stuck close to its scheduled 40 minutes in Citizens Telecommunications v. FCC, No. 17-2296. About half the questions were related to whether the FCC gave parties adequate notice. Hotly contested FCC cases often draw scores of judicial questions and comments at oral argument. The commission's 2017 order largely removed price caps from incumbent BDS offerings to business customers and competitors (see 1704200020 and 1705010019).

Competitors often need wholesale access to ubiquitous incumbent BDS connections, particularly for low-bandwidth "channel terminations" in office buildings, said Harris Wiltshire's Christopher Wright, representing petitioners Ad Hoc Telecom Users Committee, Sprint, Windstream and other BDS competitors. He said the FCC must ensure rates are "just and reasonable," but it deemed "competitive" (and lifted price caps on) more than 90 percent of low-bandwidth ILEC channel terminations even though 86 percent didn't face a rival connection into the building, and another 13 percent only had one rival connection. The FCC relied on the "outlandish" theory that nearby potential competitors restrained ILEC rates, yet they are "imaginary," he said.

Judge Michael Melloy said the FCC had a "somewhat inconsistent position" on cable but "seemed" to have data to "back up" its cable competition argument. Wright disagreed, saying many cable offerings are "best efforts" without service-quality guarantees, making it "absurd" to count them as BDS competitors. He said it's "obviously wrong" for the FCC to cite competitive fiber within half a mile of buildings, given how few had built the connections to the buildings. When Judge Bobby Shepherd asked if the agency wasn't entitled to use its expertise to make a predictive judgment on the potential competition, Wright said it would have to explain why the change is expected. He suggested the regulator made an "embarrassing error" in justifying deregulation of ILEC "interoffice transport" based on distances between customer locations and competitive fiber, which competitors considered irrelevant.

Petitioners Citizens and CenturyLink have a separate "narrow appeal" challenging an FCC 2 percent annual productivity-based "X-factor" rate cut on ILEC offerings remaining under price caps, said the two ILECs' counsel Russell Hanser of Wilkinson Barker. He said the FCC agreed there's a problem with the methodology but failed to address it despite expert studies and testimony the companies cited for a fix. Asked by Judge Steven Grasz if company data had been included in the data, Hanser said it was, yet wasn't "too specific" to preserve an efficiency incentive under price caps.

The FCC found the BDS market is "increasingly competitive," particularly for transport and high-bandwidth channel terminations but also for "many" low-bandwidth channel terminations, said commission counsel Matthew Dunne. He said the agency was "keenly aware" heavy ex-ante price regulation could discourage deployment. Even without price caps, he agreed ILEC rates must be just and reasonable under the Communications Act and said BDS customers could file Section 208 complaints challenging them. Melloy questioned the effectiveness of that backstop. Dunne said many BDS customers are large, "sophisticated" and "motivated" enterprises capable of filing a "test case."

In rebuttal, Wright said, "Judge Melloy, Section 208 is indeed a mirage." The FCC will "laugh us out" of the building if competitors allege ILECs have an excessive rate of return, he said. Noting FCC Chairman Ajit Pai's description of complaints as a "safety valve," Wright cited former D.C. Circuit Judge Robert Bork as once saying a safety valve "can't save irrational rules."

Dunne defended agency reliance on forms of cable competition. He said best-efforts offerings aren't right for all customers but are for many and provide competitive pressure. Ethernet over hybrid fiber-coaxial cable offers better speeds and quality, and also a "leg up" to providing full-fledged BDS offerings with service-quality guarantees, he said, noting AT&T and Verizon reported "substantial losses" to cable. He defended the agency's half-mile potential competition test. Noting FCC reliance on its predictive judgment, Shepherd asked if it considered predictions from experts. Dunne pointed to a "battery of experts," including those who see increasingly robust competition.

Grasz and Shepherd questioned whether notice was adequate for the eventual national price deregulation of transport. Dunne cited 2016 NPRM questions about possible changes and extensive comments by parties opposing transport deregulation, and said under 8th Circuit precedent, an agency asking open-ended questions can satisfy notice duties. Shepherd asked several questions about the public availability of the draft order, with Dunne explaining details of the commission's 2017 initiative to release drafts three weeks before monthly meetings.

The FCC made clear all aspects of BDS were under review, and its actions came after years of proceedings that ILECs found "slow," said Sidley Austin's Jonathan Nuechterlein, representing intervenors AT&T and USTelecom backing the order. He said there was much debate about transport's treatment. In such a complex proceeding, he said, the FCC's job was to reasonably balance the interests under the law, not seek perfection. Cable's support for ILEC deregulation was "Exhibit A" in favor of the FCC approach to spurring facilities-based competition, he said.

On the Citizens/CenturyLink challenge, Dunne said the commission agreed an upward bias in productivity calculations was likely but didn't have enough data to be certain about the extent; so its 2 percent X-factor was at least "reasonable" and "deserves deference." In rebuttal, Hanser cited FCC language that he said showed it clearly understood its X-factor overstated productivity.