United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 12, 2006 Decided December 1, 2006
No. 05-1032
BELLSOUTH TELECOMMUNICATIONS, INC.,
PETITIONER
v.
FEDERAL COMMUNICATIONS COMMISSION AND
UNITED STATES OF AMERICA,
RESPONDENTS
On Petition for Review of an Order of the
Federal Communications Commission
Jonathan E. Nuechterlein argued the cause for petitioner.
With him on the briefs were Bradford M. Berry and David S.
Mendel.
Robert B. McKenna, Jr., Edward H. Shakin, Michael E.
Glover, and Scott H. Angstreich were on the brief for amici
curiae Verizon Telephone Companies, et al. in support of
petitioner.
Richard K. Welch, Associate General Counsel, Federal
Communications Commission, argued the cause for respondent.
With him on the brief were Thomas O. Barnett, Assistant
Attorney General, U.S. Department of Justice, Robert B.
2
Nicholson and James J. Fredricks, Attorneys, Samuel L. Feder,
General Counsel, Federal Communications Commission, and
Eric D. Miller, Acting Deputy General Counsel. Daniel M.
Armstrong, Associate General Counsel, entered an appearance.
Before: TATEL and KAVANAUGH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
TATEL, Circuit Judge: The Telecommunications Act of 1996
prohibits Bell Operating Companies, known as “Baby Bells,”
from discriminating in favor of their affiliates in the provision
of services. Responding to a complaint filed by AT&T, the
Federal Communications Commission found that one of the
Baby Bells, BellSouth Telecommunications, violated the act
by creating a volume discount plan that, though facially
neutral, favored small and growing companies such as its own
affiliate. Because we find the Commission’s explanation for
its action wanting, we vacate and remand.
I.
This case concerns the market for what are known as
“special access services.” Providers of special access, such as
Petitioner BellSouth Telecommunications, offer their
customers a dedicated connection between two points. See
WorldCom v. FCC, 238 F.3d 449, 453 (D.C. Cir. 2001)
(describing special access services). Purchasers of special
access are typically retailers: long-distance and internet
service providers, as well as other companies that connect
local customers to broader networks.
In 1999, BellSouth created the Transport Savings Plan
(TSP), which gave its customers the option of earning price
discounts in exchange for committing to purchase certain
volumes of services for no less than five years. The TSP
3
offered discounts on a tiered schedule, increasing with the
number of years the customer had spent in the plan and with
the customer’s “committed volume level.” Five years into the
TSP, purchasers committing to at least $3 million of annual
services received a 3% discount, those committing to $10
million received 5%, those committing to $100 million
received 9%, those committing to $300 million received 10%,
and those committing to $500 million received 12%.
According to BellSouth, it chose this discount structure in
order to “provide meaningful discounts to its entire eligible
customer base,” including small customers, which comprised
“a growing segment of [its] market.” J.A. 86 ¶ 46.
As a condition of receiving these discounts, BellSouth
required customers to commit for five years to purchase each
year no less than 90% of what they purchased on an
annualized basis in the six months preceding their
subscription to the plan. The TSP left customers seeking
greater discounts free to increase their volume commitments,
but at the time the Commission ruled on it–the decision at
issue here–the TSP prohibited them from lowering their
committed volume levels without permanently leaving the
plan. Customers withdrawing early were liable for
termination charges and those failing to meet their
commitments were liable for shortfall charges. At the end of
five years, BellSouth’s customers retained the option of
extending their discounts year by year at the same committed
volume level and at the same discount. BellSouth explains
that it adopted the 90% commitment requirement to maintain
lasting and stable rates of utilization on its facilities–an
objective that, according to BellSouth, is critical for
companies like it that have high fixed costs and low marginal
costs.
4
By 2004, the TSP had attracted thirteen subscribers:
three at the lowest committed volume level, six at the next
lowest level, two at the $100 million level, one at the $300
million level, and one at the $500 million level. Entering the
TSP the day it debuted, AT&T committed to the minimum of
90% of past purchases. In the third year of the plan, AT&T,
seeking greater discounts, voluntarily increased its committed
volume level to next highest TSP revenue band. In so doing,
AT&T committed itself to just under 100% of its purchases at
that time, or 141% of its annualized purchases in the six
months before entering the TSP. AT&T presumably made
this choice expecting continued growth in demand, but after
another year of solid growth in 2002, the company began
feeling the effects of a market downturn. By 2004, AT&T’s
“headroom”–the margin between its committed volume level
and its actual volume level–had shrunk to single digits in
percentage terms, limiting AT&T’s flexibility to move its
traffic between carriers and increasing the risk of shortfall
penalties.
In that year, AT&T filed a complaint with the Federal
Communications Commission seeking to invalidate the TSP
on the ground that the plan unlawfully discriminated in favor
of BellSouth’s affiliate, BellSouth Long Distance. BellSouth
created BellSouth Long Distance in 1996 and over the next
two years applied unsuccessfully to the Commission to secure
operational authority for it. See 47 U.S.C. § 271(d) (requiring
that Bell Operating Companies apply to the FCC for affiliate
operational authority). Not until 2002, three years into the
TSP, did BellSouth finally obtain operational authority for
BellSouth Long Distance. Although the affiliate grew rapidly,
it remained a relatively small purchaser of special access
services, occupying the second lowest band of the discount
structure (ranging from $10 million to $100 million) and
5
capturing less than 1% of the total discounts over the life of
the TSP.
In its complaint, AT&T alleged, among other things,
that BellSouth had violated 47 U.S.C. §§ 272(c)(1) and
272(e)(3). Section 272(c)(1) provides that Bell Operating
Companies “may not discriminate between [its] affiliate and
any other entity in the provision or procurement of goods,
services, facilities, and information, or in the establishment of
standards.” Section 272(e)(3) has a narrower scope, providing
that a “Bell operating company. . . .shall charge [its] affiliate. .
. an amount for access to its telephone exchange service and
exchange access that is no less than the amount charged to any
unaffiliated interexchange carriers for such service.” Under
the statute’s sunset provision, section 272(c)(1) ceases to
apply to a Bell Operating Company three years after its
affiliate has been authorized to provide services; section
272(e)(3), however, remains in force. 47 U.S.C. § 272(f)(1).
Treating sections 272(c)(1) and (e)(3) as
interchangeable, the Commission split its inquiry in two,
ruling that the TSP’s discount structure and the 90%
commitment requirement each independently violate section
272. BellSouth now petitions for review, finding fault with
both rulings. In the meantime, BellSouth and AT&T have
agreed to merge and now await regulatory approval.
Approval of the merger would not moot this case because the
Commission has ordered BellSouth to terminate the TSP with
respect to all customers, not just AT&T. In the Matter of
AT&T Corp. v. BellSouth Telecomm., 19 FCC Rcd 23898,
23920 ¶ 61 (2004) (hereinafter FCC Order). We review the
Commission’s decision under the arbitrary and capricious
standard, affirming if the Commission “considered the
relevant factors and ‘articulate[d] a rational connection
6
between the facts found and the choice made.’ ” Earthlink,
Inc. v. FCC, 462 F.3d 1, 9 (D.C. Cir. 2006) (citation omitted).
II.
Underlying its approach to both the discount structure
and the 90% commitment requirement is the Commission’s
construction of section 272–a construction that has two key
elements. First, drawing on its own precedent, the
Commission decided that a facially neutral plan offered by a
Bell Operating Company may violate section 272’s bar on
discrimination when such a plan is “in fact tailored to its
affiliate’s specific size, expansion plans, or other needs.”
FCC Order at 23904-05 ¶ 19 (2004) (quoting Non-Accounting
Safeguards Order, 11 FCC Rcd 21905, 22028-29, ¶ 257
(1996)). Second, the Commission concluded that a Bell
Operating Company may violate section 272 even absent a
showing of discriminatory intent so long as its action
discriminates in effect. FCC Order at 23913, ¶ 39. Based on
this reading, the Commission declared itself free to disregard
evidence tending to show that BellSouth lacked
discriminatory intent when it created the TSP. Such evidence
included the fact that BellSouth initiated the TSP three years
before its affiliate obtained operational authority and that
when BellSouth Long Distance entered the TSP it received a
minuscule portion of the plan’s overall discounts.
BellSouth hinted both in its brief and at oral argument
that the Commission’s interpretation of the statute may be
unreasonable. Indeed, to defend its reading against a more
frontal challenge than the one presented here, the Commission
would have had to explain why the benefits of reading section
272 as broadly as it has done justify the inefficiencies that
may result from frustrating Bell Operating Companies’
attempts to maintain stable utilization rates on their networks
7
or to lower their prices. Nevertheless, we need not consider
that issue because, even assuming the Commission correctly
interpreted the statute, neither of its conclusions applying that
interpretation withstand arbitrary and capricious review.
Structure of TSP Volume Discounts
The Commission’s analysis centered on a comparison
between the TSP’s discount structure, which increases less
quickly at higher volumes, to a hypothetical volume discount
plan in which the percentage discount offered to customers
varies in a linear–i.e., directly proportional–relationship to
their committed volume levels. The Commission explained
that it looks favorably on “typical” linear discount plans
because they reflect “the ever-diminishing per-unit costs of
providing service in increasingly higher volumes.” FCC
Order at 23905-06 ¶ 22. Measured against a linear plan, the
TSP’s discount structure favors small customers. To illustrate
the point, the Commission produced the following table
showing (in the right hand column) the percentage discounts
in the hypothetical “proportional” discount plan rising in a
linear relationship with the lower limit of the revenue bands
(in the left-hand column):
Comparison of Discount Levels
Customer Size (in under TSP under proportional
eligible revenues) (year 5) volume discount plan
$3 - $10 million 3% 0.07%
$10 - $100 million 5% 0.24%
$100 - $300 million 9% 2.40%
$300 - $500 million 10% 7.20%
$500 - $600 million 12% 12.00%
over $600 million 12.5% 14.40%
8
FCC Order at 23907.
Given the “dramatic[]” differences between the discounts in
the TSP and the hypothetical linear plan, the Commission
determined its precedent obligated BellSouth, using its own
cost data, to justify the discount structure. FCC Order at
23909-10 ¶ 32 & n.86 (citing Non-Accounting Safeguards
Order, supra). In other words, BellSouth had to show that its
economies of scale resembled the TSP’s diminishing, non-
linear structure rather than the hypothetical linear model.
Because BellSouth failed to do so, the Commission concluded
the discount structure violated section 272.
As BellSouth points out, however, in comparing the
TSP to a linear volume discount plan, the Commission
neglected a critical fact, namely that the company had no
obligation to offer a volume discount plan at all, much less a
linear plan. Indeed, before 1999, BellSouth offered no
volume discounts, nor was it obligated to do so after the
Commission terminated the TSP. Therefore, in determining
whether the TSP’s discount structure is discriminatory it
seems far more logical to compare it to the pre-TSP world of
no volume discounts rather than to a hypothetical linear
volume discount plan. Otherwise, section 272 would produce
a headscratching outcome: non-volume based discounts (not
to mention a discountless price structure), which would be
vastly more favorable to BellSouth’s affiliate, would not
violate the statute, whereas marginally diminishing volume
discounts, which are less favorable to its affiliate, would
violate the statute.
Had the Commission taken this more natural approach,
it would have had no basis for finding that the TSP
advantaged BellSouth Long Distance. Indeed, compared to a
world of no volume discounts, the TSP substantially
9
disadvantaged BellSouth Long Distance by giving it far
smaller percentage discounts than its larger competitors. For
instance, five years into the plan, a company at the $500
million level would have received a 12% discount, whereas a
customer the size of BellSouth Long Distance would have
received a 5% discount.
In its order, the Commission suggested that linear
plans represent the appropriate basis of comparison because
they are “typical.” FCC Order at 23905-06, ¶ 22. Yet the
Commission provided no evidence that any company offers a
linear discount plan, much less evidence that such plans so
pervade the industry as to form the appropriate basis for
comparison. Of course, the Commission might have justified
its approach by producing evidence that costs actually bear a
linear relationship to volume such that one could conclude a
non-linear plan like the TSP advantages small customers by
allowing them to purchase at a price closer to cost than their
larger competitors. Again, however, the Commission
produced no evidence that marginal costs bear a linear
relationship to volume either industry-wide or in BellSouth’s
case.
The Commission also claims that its own precedent
required it to place the burden of cost justification on
BellSouth and, therefore, to invalidate the TSP. The decision
on which the Commission places greatest emphasis, however,
The Non-Accounting Safeguards Order, supra, says nothing
about measuring discrimination against a baseline of linear
discounts. Rather, the pertinent part of that order states:
Finally, we conclude that a complainant will be
found to have established a prima facie case of
unlawful discrimination under section 272(c)(1)
if it can demonstrate that a [Bell Operating
10
Company] has not provided unaffiliated entities
the same goods, services, facilities, and
information that it provides to its section 272
affiliate at the same rates, terms, and conditions.
To rebut the complainant's case, the [Bell
Operating Company] may demonstrate, among
other things, that rate differentials between the
section 272 affiliate and unaffiliated entity
reflect differences in cost . . . .
11 FCC Rcd at 22004-05 ¶ 212 (emphasis in original).
Nothing in this passage, or for that matter anything else in the
order, suggests the counterintuitive notion that no prima facie
case arises when the company offers the same rates to
affiliates and non-affiliates, but that one does arise when the
Bell Operating Company offers rates that disadvantage its
affiliate. Nor does anything else in the order suggest that non-
linear volume-based prices advantage Bell affiliates. See id.
at 22002, 22004-05, 22028-29 ¶ 206, 212, 257.
The 90% Commitment Requirement
The Commission found the 90% commitment
requirement violated section 272 for two separate reasons.
First, seizing on BellSouth’s statement that but for the 90%
commitment requirement it never would have offered the
volume discounts, the Commission concluded the requirement
was unlawful as an “inextricable component of the
discriminatory effect” of the unlawful discount structure.
FCC Order at 23911 ¶ 35. This reasoning is difficult to
follow. It would be one thing for the Commission, given its
decision to invalidate the discount structure, to have decided
that the appropriate remedy also requires voiding the 90%
commitment requirement, lest BellSouth’s customers be
forced into a one-sided bargain. It is quite another thing to
11
have ruled that the 90% commitment requirement violates
section 272 because of its association with the unlawful
discount structure. In any event, given our decision to vacate
the Commission’s ruling that the discount structure violates
section 272, the Commission’s guilt-by-association rationale
no longer applies.
The Commission’s second reason for invalidating the
90% commitment requirement deserves more careful
attention. The Commission found that the 90% requirement
independently violated section 272 by giving an advantage to
smaller, faster growing customers–like its affiliate, BellSouth
Long Distance. The Commission reasoned that the 90%
requirement functions like a “growth discount,” a device that
links prices to the rate of growth in committed volume or
actual volume on the local exchange carrier’s network. In an
earlier decision, the Commission had found growth discounts
to discriminate in favor of Bell affiliates because Bell
affiliates–which begin their operations with no customers, but
because of their affiliation have abundant business contacts
and name recognition from which to build–are inherently
likely to grow rapidly and thus to obtain greater discounts. In
the Matter of Access Charge Reform Price Cap Performance
Review for Local Exchange Carriers, 11 FCC Rcd 21354,
21437-38 ¶ 192 (1996).
According to the Commission, the 90% commitment
requirement functioned in the same way because it imposed a
lesser burden on rapidly growing companies, such as its own
affiliate. Given that all customers, regardless of their size,
must commit to no less than 90% of past purchases, it follows
that more rapidly growing customers will build up more
“headroom”–again, the margin between a company’s
committed volume level and its actual purchases–lessening
the risk of shortfall charges and allowing them greater
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flexibility in managing their traffic. By contrast, the
Commission predicted that established companies “will likely
experience diminishing headroom and, thus, diminishing
flexibility in how they manage that traffic.” FCC Order at
23912 ¶ 38.
In response, BellSouth argues that nothing in the
Commission order demonstrates that the 90% commitment
requirement in fact harmed any of its putative victims–the
large, established companies. Put differently, according to
BellSouth, the TSP could not have imposed a discriminatory
burden on its large subscribers if, in fact, it had imposed no
burden on them at all.
BellSouth’s argument is well taken. The
Commission’s discussion of how the four largest, most
established companies fared under the 90% commitment
requirement identifies not one company that was injured by
the rule, as opposed to other factors. Contained in a single
footnote, that discussion states that the “headroom of the four
largest TSP subscribers has been stagnant or shrinking.” FCC
Order at 23912 n.106. True enough, but that hardly
demonstrates that these companies have actually been harmed
or will be harmed by the 90% commitment requirement itself,
a point that becomes clearer when the four companies are
considered individually. Two of the companies, AT&T and
Qwest, voluntarily increased their commitment levels above
the 90% requirement by large margins–leading BellSouth to
accuse AT&T of invoking the administrative process in an
attempt to free itself from the “once-promising bargain it
struck years before.” Pet’r’s Br. 32. Regardless of AT&T’s
motivation, however, it remains true that whatever problems
AT&T and Qwest might have experienced due to their lack of
headroom are more appropriately attributed to their free
choice than to the 90% commitment requirement. Had they
13
not voluntarily increased their commitments, each would have
had vastly more headroom: 62% for AT&T and 283% for
Qwest. To be sure, BellSouth Long Distance’s headroom of
608% was higher still. But the Commission has given us no
basis for believing that differences at these levels are material.
A third large company, Sprint, saw its headroom grow
substantially over its five years in the TSP, ending at a level
more than double the plan’s average. Again, without more
explanation, we cannot discern what harm, if any, Sprint
suffered due to the 90% requirement. MCI/Worldcom, the
fourth company in this class, appears to have been the only
one constrained by the 90% commitment requirement rather
than by its own voluntary choice. But given that company’s
unique experience–financial scandal and bankruptcy during
the period of the TSP–its example provides scant support for
the Commission’s assertion that the 90% commitment
requirement imposed substantial burdens on large, established
companies.
We cannot overlook the absence of record evidence
showing that the 90% commitment requirement harmed its
putative victims simply because the Commission cast its
analysis as a prediction of future trends–a prediction the
Commission insists merits special deference. Resp’t’s Br. 22.
It is certainly true that “‘an agency’s predictive judgments
about areas that are within the agency’s field of discretion and
expertise’ are entitled to ‘particularly deferential’ review, as
long as they are reasonable.” In re Core Commc’ns, 455 F.3d
267, 282 (D.C. Cir. 2006) (citation omitted). That said, the
deference owed agencies’ predictive judgments gives them no
license to ignore the past when the past relates directly to the
question at issue. In this case, the Commission had nearly
five years of data against which to test the proposition that the
90% requirement burdened large and established companies.
Moreover, those five years included a market downturn,
14
precisely the type of event one might expect to make the 90%
commitment requirement burdensome and which the
Commission now describes as having “exacerbated the
discriminatory effect of the tariff.” Resp’t’s Br. 40. Given
this ample record, the Commission should either have shown
how the large companies had nonetheless been harmed in the
past five years or offered some reason for believing that the
future is likely to differ from the past. It did neither.
Finally, viewing the TSP as a whole eliminates any
doubt that the Commission’s failure to show that the 90%
commitment requirement harmed its putative victims requires
vacating the order. The TSP is most naturally viewed as a
bargain containing terms that both benefit and burden its
subscribers. Thus, the Commission may be correct that
because the 90% requirement is more likely to constrain the
volume of services the larger, more established companies
purchase, those companies give up more in the TSP than do
their smaller, more quickly growing rivals. But it is also true
that the larger companies get more from the TSP in the form
of substantially higher discounts. Therefore, the TSP cannot
have discriminated against the large companies unless the
additional burden imposed upon them by the 90%
commitment requirement exceeded the additional benefits
they received from the higher percentage discounts. As we
have explained, however, the Commission has failed to show
that the large, established companies were at all harmed by
the 90% commitment requirement, much less that the relative
harm to them exceeded the relative benefits. Thus, without
further explanation, the Commission’s order finding the 90%
commitment requirement unlawful cannot stand.
IV.
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Finding the Commission’s explanation inadequate
with respect to both the discount structure and the 90%
commitment requirement, we vacate and remand for further
proceedings consistent with this opinion. On remand, the
Commission must take account of the fact that, due to the
statute’s sunset provision, section 272(c)(1) no longer applies
to BellSouth. 47 U.S.C. §§272(f)(1). Therefore, the only
applicable provision is section 272(e)(3), which does not use
the term “discriminates,” but provides that a Bell Operating
Company shall charge its affiliate “an amount for access to its
telephone exchange service and exchange access that is no
less than the amount charged to any unaffiliated
interexchange carriers for such service.”
So ordered.