Puerto Rico Telephone Co. v. Telecommunications Regulatory Board

United States Court of Appeals
For the First Circuit

No. 10-1983

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.

No. 10-2028

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.
 APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO

[Hon. Bruce J. McGiverin, U.S. Magistrate Judge]

Before

Torruella, Lipez, and Howard,
Circuit Judges.

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 Leclair
Ryan, 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.

December 9, 2011

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 TORRUELLA, Circuit Judge. This appeal arises out of

negotiations for interconnection1 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

1
"The term interconnection is used by regulators and carriers to
refer to the physical linking and use of networks owned by
different carriers, to permit customers of one carrier to call
customers of another carrier . . . ." Rural Iowa Indep. Tel. Ass'n
v. Iowa Utils. Bd., 385 F. Supp. 2d 797, 800 n.11 (S.D. Iowa 2005).

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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

(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.

In 1982, facing an antitrust suit by the Government, AT&T agreed to

2
"Baby Bell" is a colloquial term used to refer to one of the
Regional Bell Operating Companies that AT&T spun off as part of the
1982 settlement of the United States' antitrust suit against it.
See Verizon New England, Inc. v. Maine Pub. Utils. Corp., 509 F.3d
1, 3 (1st Cir. 2007).

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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. 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. Among other

things, the Act sought to encourage competition in local

telecommunications markets3 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. 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

3
Congress intended the Act "to promote competition and reduce
regulation in order to secure lower prices and higher quality
services for American telecommunications consumers and encourage
the rapid deployment of new telecommunications technologies." Pub.
L. No. 104-104, 110 Stat. 56, pmbl. (1996).

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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. 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. Regulation of retail prices focused on setting "just and

reasonable rates," balancing the utility provider's interest in a

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fair return on investment against the public's interest in a fair

price for services. See id. at 480-81. 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 (citing Fed. Power

Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 603 (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. 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. 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.

The Telecommunications Act of 1996, however, "appears to

be an explicit disavowal" of this rate-of-return model. Verizon,

535 U.S. at 489. Under the Act, "Congress called for rate making

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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. 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 (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 cost,"

based on the "total element long-run incremental cost" ("TELRIC")

of each element and a reasonable allocation of forward-looking

common costs (for those costs that "cannot be attributed directly

to individual elements"). Verizon, 535 U.S. at 495 (quoting 47

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C.F.R. § 51.505). The FCC further specified that TELRIC itself

"should be measured based on the use of the most efficient

telecommunications technology currently available and the lowest

cost network configuration, given the existing location of the

[ILEC's] wire centers." 47 C.F.R. § 51.505(b)(1).

Therefore, the Act still requires state commissions to

determine "just and reasonable" rates for interconnection

agreements. 47 U.S.C. § 252(d)(1). However, the Act does not stop

there. It further specifies how state commissions must determine

such "just and reasonable" rates. Such rates shall be "based on

the cost" of providing the individual network elements, and this

"cost" shall in turn be "determined without reference to"

traditional rate-of-return or rate-based methods. Id. § 252(d)

(1)(A)(I). Exercising its remaining discretion within these

constraints, see Verizon, 535 U.S. at 495, the FCC further defined

this "cost" as "forward-looking," and provided that the cost shall

be determined through the TELRIC methodology, which assumes a

"forward-looking cost over the long run" as well as a "lowest cost

network configuration" that uses "the most efficient

telecommunications technology currently available." 47 C.F.R.

§ 51.505. The Supreme Court has upheld this TELRIC methodology as

a reasonable exercise of the FCC's discretion. See Verizon, 535

U.S. at 523 ("TELRIC appears to be a reasonable policy for now, and

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that is all that counts.") (citing Chevron, U.S.A., Inc. v. Natural

Res. Def. Council, Inc., 467 U.S. 837, 866 (1984)).

Accordingly, under the 1996 Act, the FCC has adopted

TELRIC as the new standard for determining "just and reasonable"

rates. U.S. Telecom Ass'n v. FCC, 359 F.3d 554, 561 (D.C. Cir.

2004). The Supreme Court has noted that the FCC's treatment of

"cost" as "forward looking" is "something distinct from the kind of

historically based cost generally relied upon in valuing a rate

base after Hope Natural Gas." Verizon, 535 U.S. at 495. Thus, the

FCC's TELRIC methodology -- which presumes a "forward-looking,"

"most efficient," and "lowest cost" hypothetical network in the

local market, 47 C.F.R. § 51.505(b) -- represents a significant

break from traditional rate-setting models. See Verizon, 535 U.S.

at 495. Furthermore, in Verizon, the Supreme Court upheld the

FCC's TELRIC methodology, id. at 523, 539, noting that "it was the

very point of Hope Natural Gas that regulatory bodies required to

set rates expressed in [terms of 'just and reasonable' rates] have

ample discretion to choose methodology." Id. at 500.

C. Facts and Procedural History

In October 2006, WorldNet formally requested to negotiate

an ICA with PRTC. As negotiations faltered, WorldNet filed a

Petition for Arbitration with the Board to resolve 374 issues then

outstanding regarding the agreement. The Board opened an

arbitration proceeding; meanwhile, WorldNet and PRTC resolved many

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of the disputed issues, ultimately submitting approximately 200

issues to the arbitrator. The arbitrator considered over 1,000

pages of written direct and rebuttal testimony from twenty fact

witnesses and eight expert witnesses. The arbitrator also held a

hearing from May 22 through May 25, 2007, that included opening

statements, cross-examination of witnesses, and closing arguments.

The arbitrator resolved the outstanding issues in a ruling issued

on July 2, 2007.

After the arbitrated ICA was approved by the Board on

November 2, 2007, both parties sought reconsideration by the Board

of several aspects of that agreement. Following the resolution of

these various motions for reconsideration, PRTC and WorldNet then

each sought judicial review of the ICA and the Board's

determinations, appealing twenty-five issues to the district court.

On August 25, 2009, the district court issued an Amended Opinion

and Order on these issues -- the court affirmed the Board's

decision on seventeen issues,4 vacated the Board's decision and

4
The seventeen issues on which the district court affirmed the
Board's decision are: liquidated damages, performance standards,
mixed bundles, OSS access (download, upload, and batches OSS
access), OSS access (access to OSS systems interfaces), transit
traffic rates, depreciation inputs, cost of capital, maintenance
and operations factors, buried drop costs, direct fed buildings,
cable sizes, fiber structure costs (trenching versus excavation),
fiber structure costs (paving), non-recurring rates (fall-out
rates), non-recurring rates (dispatch occurrence frequency), and
rates for local loops.

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reinstated the arbitrator's decision on four issues,5 and vacated

and remanded another four issues6 to the Board for further

consideration. WorldNet Telecomms., Inc. v. Telecomms. Regulatory

Bd. of P.R. (WorldNet III), 707 F. Supp. 2d 163, 216 (D.P.R. 2009).

Following the remand, the Board issued an order on

November 9, 2009 that included the Board's determinations on the

four remanded provisions of the ICA. Before the district court for

a second time, PRTC appealed the Board's determinations on two of

the remanded provisions. All the parties then moved for summary

judgment; WorldNet concurred with the Board, adopting the Board's

statement of facts and all of its positions and arguments. The

district court granted the Board's motion for summary judgment and

dismissed PRTC's supplemental complaint with prejudice. See

WorldNet Telecomms. v. Telecomms. Regulatory Bd. of P.R. (WorldNet

IV), Civil Nos. 08-1360 (BJM), 08-1359 (BJM), slip op. at 12

(D.P.R. July 20, 2010).

PRTC now appeals various aspects of the district court's

two decisions. First, PRTC challenges the Board's authority to

include a liquidated damages provision in the ICA. PRTC then

5
The four issues as to which the district court vacated the
Board's decision and reinstated the arbitrator's decision are:
collocation construction schedule, NID and block terminal costs,
circuit demand, and value of land.
6
The four issues as to which the district court vacated the
Board's decision and remanded to the Board for further proceedings
are: transit traffic, collocation construction, collocation price
quotation response, and structure sharing.

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challenges the determinations of various cost measures and pricing

inputs, including nine determinations on which it lost at the

district court and one determination on which it prevailed. These

cost measures and pricing inputs are used to determine the ultimate

rates that WorldNet must pay PRTC for the use of PRTC's equipment

and facilities. Accordingly, PRTC generally argues that these

costs will be higher than determined by the district court, and

thus that WorldNet should pay PRTC higher rates. WorldNet, in

contrast, argues that the lower costs, and resulting lower rates,

determined by the arbitrator and the Board and upheld by the

district court are correct.

II. Standard of Review

Because judicial review here is based on the agency

record, we apply the "ordinary review standards" to agency

determinations, "accepting the district court decision merely as it

may be persuasive." Centennial P.R. License Corp. v. Telecomms.

Regulatory Bd. of P.R., 634 F.3d 17, 26 (1st Cir. 2011) (quoting

WorldNet I, 497 F.3d at 5), reh'g denied, No. 10-1091 (1st Cir.

Mar. 21, 2011), cert. denied, No. 10-1531, 565 U.S. __ (Oct. 3,

2011).

A. Questions of Law

We "review the Board's interpretations of federal and

state law de novo." Centennial, 634 F.3d at 26. Though "it is

customary where any doubt exists to give some deference to the

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agency charged with administering the statue," id. (quoting

WorldNet I, 497 F.3d at 11) (internal quotation marks omitted),

this deference is only extended to the Board's interpretations of

the Puerto Rico Telecommunications Act,7 not the Board's

interpretations of the Federal Act. See WorldNet I, 497 F.3d at

11; Global NAPs, Inc. v. Verizon New Eng., Inc. (Global NAPs III),

444 F.3d 59, 70 (1st Cir. 2006). Determinations by the Board that

rest principally on an interpretation of the Federal Act are

subject to de novo review. Global NAPs III, 444 F.3d at 70.

B. Questions of Fact and Policy

"[W]here no error of law exists, the state agency's other

determinations are reviewed under the arbitrary and capricious

standard." Centennial, 634 F.3d at 27 (internal quotation marks

omitted) (quoting Global NAPs, Inc. v. Verizon New Eng., Inc.

(Global NAPs I), 396 F.3d 16, 24 n.8 (1st Cir. 2005)).

Accordingly, the Board's determinations as to facts, policy, and

the application of general standards are subject to the deferential

arbitrary and capricious standard. See Centennial, 634 F.3d at 26;

WorldNet I, 497 F.3d at 5. Under this standard, "an agency's

decision will be upheld unless 'the agency lacks a rational basis

for making the determination or if the decision was not based on

consideration of the relevant factors.'" Centennial, 634 F.3d at

7
Puerto Rico Telecommunications Act of 1996, 27 L.P.R.A. § 265 et
seq., commonly referred to as Law 213.

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37 (quoting River St. Donuts, LLC v. Napolitano, 558 F.3d 111, 114

(1st Cir. 2009)). "Review under the arbitrary and capricious

standard is narrow and this Court may not substitute its judgment

for that of the agency, even if it disagrees with the agency's

conclusions." River St. Donuts, 558 F.3d at 114. The agency's

actions are presumed to be valid; if the agency's decision is

supported by a rational basis,8 we will affirm. Id.

C. When the Board Reviews an Arbitrated ICA

When the Board reviews an ICA arrived at through

compulsory arbitration,9 the Federal Act limits the Board's options

on review: the Board may only reject the ICA (or individual

8
An agency lacks a rational basis for a decision if, for example,
"the agency relied on improper factors, failed to consider
pertinent aspects of the problem, offered a rationale contradicting
the evidence before it, or reached a conclusion so implausible that
it cannot be attributed to a difference of opinion or the
application of agency expertise." Associated Fisheries of Maine,
Inc. v. Daley, 127 F.3d 104, 109 (1st Cir. 1997) (citing Motor
Vehicle Mfrs. Ass'n v. State Farm Mut. Ins. Co., 463 U.S. 29, 43
(1983)).
9
The compulsory arbitration provided for under the
Telecommunications Act is more akin to administrative adjudication
than to the sort of voluntary commercial arbitration to which
courts generally grant significant deference under the Federal
Arbitration Act ("FAA"), 9 U.S.C. § 1. The FAA, and the
jurisprudence applying the FAA, applies to a "written provision in
. . . a contract . . . to settle by arbitration a controversy
thereafter arising out of such contract or transaction." Id. § 2.
Such arbitration is therefore a creature of contract. By contrast,
"interconnection agreements are not ordinary commercial contracts:
the Act dictates their creation; they are imposed by involuntary
arbitration and agency review if the parties cannot agree; and
their aim is to secure the public benefit of competition."
WorldNet I, 497 F.3d at 7.

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provisions therein) on specified grounds. See WorldNet Telecomms.,

Inc. v. Puerto Rico Tel. Co. (WorldNet II), 497 F.3d 13, 14 (1st

Cir. 2007) (citing 47 U.S.C. § 252(e)(2)). The Board must accept

ICA provisions that are consistent with Sections 251 and 252(d) of

the Act, unless the Board reasonably finds that the ICA conflicts

with Puerto Rico statutes, the Board's rules, or the Board's policy

determinations. WorldNet I, 497 F.3d at 7. For the Board to

reject an ICA provision based on Board policy, there must be a

conflict with general policies "that the Board would follow in

other situations," and not simply with the Board's "ad hoc

preferences." Id. at 7–8. These determinations by the Board --

including its findings of fact and applications of the law in

resolving disputes over the terms of an ICA -- are reviewed under

the arbitrary and capricious standard. Centennial, 634 F.3d at

26–27. Accordingly, when the Board reviews an arbitrated ICA for

consistency with law and policy, this court reviews questions of

law addressed in the Board's review de novo, see Global NAPs III,

444 F.3d at 70, and all of the Board's other determinations under

an arbitrary and capricious standard, see Centennial, 634 F.3d at

26-27; however, the focus of our review is always on the Board's

exercise of its limited authority to affirm or reject the

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arbitrated ICA, and not on the arbitrator's particular cost

determinations, see WorldNet I, 497 F.3d at 7.10

III. Discussion

A. Liquidated Damages

In its brief, PRTC argues that under Puerto Rico law, the

Board lacks the authority to impose liquidated damages provisions

in an arbitrated ICA between two telecommunications carriers. At

oral argument, however, PRTC acknowledged that we previously

decided this exact issue in the Centennial case. See Centennial,

634 F.3d at 31.11

Indeed, Centennial examined in depth PRTC's argument that

the Board lacks the power to impose liquidated damages provisions.

See id. at 27. Dismissing PRTC's argument as being contrary to

"binding precedent," the Centennial Court noted that "the

fundamental holding of [WorldNet I] is that an arbitrated

interconnection agreement may contain liquidated damages provisions

10
PRTC raises the concern that this framework prevents any review
of arbitrary and capricious decision-making by an arbitrator,
whether by the Board or by federal courts. This is not the case.
Cost determinations that are completely unmoored from the evidence
before the arbitrator are inconsistent with law insofar as the Act
requires that rates set by an ICA be based on the actual costs of
providing the service and/or the retail rates charged to
subscribers. See 47 U.S.C. § 252(d). Additionally, arbitrary and
capricious determinations would presumably also violate Board
policy and may be rejected on this alternate ground. See WorldNet
I, 497 F.3d at 7-8.
11
The Centennial case was decided after the conclusion of briefing
in this case, but before oral argument.

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that are designed to create incentives or to approximate costs and

are inserted over the objection of one of the parties." Id. at 28.

Accordingly, PRTC's argument is "foreclosed by [WorldNet I]:

Puerto Rico law does not prohibit liquidated damages provisions in

arbitrated interconnection agreements." Id. at 29. Summarizing

its holding on this issue, the Centennial Court concluded as

follows:

As [WorldNet I] makes clear, incentive-based
or cost-based liquidated damages -- at least
as far as interconnection agreements go -- are
permissible under Puerto Rico law.
Accordingly, we reaffirm our holding in
WorldNet that Puerto Rico law does not prevent
the inclusion -- whether voluntarily
negotiated, imposed by an arbitrator, or
imposed by the Board -- of incentive- or
cost-based liquidated damages in
interconnection agreements between
telecommunications carriers.

Id. at 31. Because PRTC's arguments on this issue are foreclosed

by explicit, binding precedent in WorldNet I and Centennial, we

affirm the determination of the Board as to liquidated damages in

the ICA.

B. Just and Reasonable Rates

Under the Telecommunications Act, PRTC is entitled to be

paid "just and reasonable" rates for its services. 47 U.S.C. § 252

(d)(1). PRTC argues that the Board made unjust and unreasonable

determinations with respect to two figures: Total Cable and the

Local Loop Rate. The "Total Cable" or "Cable Size" figure is the

total quantity of cable in the hypothetical, forward-looking, most

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efficient, least cost network. The "Local Loop rate" or "rate for

local loops" refers to the rate that PRTC can charge WorldNet for

the wires and cable used to connect the network to a customer's

home or business.12 In both cases, PRTC argues that the end result

of the Board's methodology was an unjust and unreasonable rate.13

Further, PRTC argues that the district court deprived it of

meaningful judicial review by failing to evaluate the

reasonableness of the end results of the Board's determinations,

and instead focusing on the Board's methodology. We disagree.

Citing a line of cases following Fed. Power Comm'n v.

Hope Natural Gas Co., 320 U.S. 591 (1944), PRTC asserts that when

assessing whether rates are "just and reasonable," the focus must

be on the reasonableness of the impact of the result, and not the

reasonableness of the theory or methodology employed.14 PRTC

12
The Appendix of this opinion contains a table of key technical
terms.
13
Specifically, PRTC argues that for Total Cable, "the result of
the Board's methodology was unjust and unreasonable because it
produced an amount of cable for the hypothetical network that was
simply insufficient to serve the entire island of Puerto Rico."
For Local Loop Rate, PRTC maintains that the result "was unjust and
unreasonable when compared with average loop rates across the
United States and other benchmarks."
14
See, e.g., Hope Natural Gas Co., 320 U.S. at 602 ("Under the
statutory standard of 'just and reasonable' it is the result
reached not the method employed which is controlling. It is not
theory but the impact of the rate order which counts. If the total
effect of the rate order cannot be said to be unjust and
unreasonable, judicial inquiry under the Act is at an end. The
fact that the method employed to reach that result may contain
infirmities is not then important.").

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maintains that the Board and the district court must not only ask

whether each individual element or cost input was determined

appropriately, but must also undertake another inquiry: whether the

final interconnection compensation rates -- the aggregate or "end

results" of all the intermediary components of the equation -- are

"just and reasonable." WorldNet and the Board argue that the first

inquiry determines the latter -- that is, whether a rate is "just

and reasonable" is determined solely by asking whether each

individual component was determined appropriately under the

governing law.

As a preliminary matter, we note that Total Cable is not

a "rate" at all, but rather an individual network element used in

calculating rates -- it refers to the total quantity of cables in

the hypothetical network. Thus, as a pricing input and

intermediary determination, Total Cable is not properly subject to

challenge as violating PRTC's asserted statutory right to a "just

and reasonable rate." 47 U.S.C. § 252(d)(1) (emphasis added). Nor

is the Total Cable figure properly subject to constitutional

challenge as an unconstitutional taking: a taking analysis focuses

on the result of a rate calculation, rather than on the inputs to

the calculation. Cf. Verizon, 535 U.S. at 525 ("[T]he general rule

is that any question about the constitutionality of rate setting is

raised by rates, not methods . . . ."). Thus, only the Local Loop

Rate remains relevant for PRTC's "just and reasonable" arguments;

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we will review the Board's determination as to Total Cable with the

Board's other network element determinations. See § D(6), infra.

Additionally, we note that although PRTC collapses the

two inquiries into one analysis in its brief, its argument on the

"just and reasonable" issue actually encompasses two related but

analytically distinct claims: (1) a statutory claim to "just and

reasonable" rates, and (2) a constitutional claim grounded in the

Takings Clause of the Fifth Amendment.15 We begin with the

statutory claim.

As noted in Section I.B, supra, the 1996 Act created a

new framework for determining the rates that an ILEC could charge

a competitor for interconnection. The 1996 Act still requires

"just and reasonable" rates, but the phrase now carries a different

meaning -- and requires a different standard -- than it did under

the old regulatory regime. PRTC's choice of cases to cite in

support of its argument makes this distinction clear. Tellingly,

only two of the cases cited by PRTC in support of its argument on

15
Historically, in the utility rate-setting context, courts
applied the same standards when evaluating both statutory and
constitutional claims to "just and reasonable" rates. See, e.g.,
Jersey Cent. Power & Light Co. v. FERC, 810 F.2d 1168, 1175 (D.C.
Cir. 1987) (noting that both the Federal Power Act and the Natural
Gas Act of 1938 require that rates be "just and reasonable"; that
"courts rely interchangeably on cases construing each of these Acts
when interpreting the other"; and that the "just and reasonable"
standard prescribed by the statutes coincides with the
constitutional standard). However, as described infra, the
Telecommunications Act of 1996 changed the standard for "just and
reasonable" rates in the telecommunications industry. Thus, here
it is necessary to analyze the two inquiries separately.

-21-
this issue were decided after the passage of the 1996 Act;

moreover, those two citations only relate to the takings issue, not

the statutory interpretation question. See Verizon, 535 U.S. at

523-28 (rejecting the incumbent carriers' claim that TELRIC

methodology will lead to an unconstitutional taking); Rural Iowa

Indep. Tel. Ass'n, 385 F. Supp. 2d at 826-28 (dismissing the

incumbent carrier's takings claim as "fatally premature" because

the Iowa Utilities Board had not set applicable rates in any of its

decisions, and the ILEC and CLEC had not yet obtained a reciprocal

compensation agreement). The other "just and reasonable" cases

cited by PRTC16 predate the 1996 Act and apply precisely the type

of "rate-of-return" or "rate-based" standards that the 1996 Act

expressly prohibits.17 See Verizon, 535 U.S. at 489 (noting that

the 1996 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'") (quoting 47 U.S.C. § 252(d)

(1)(A)(I)); see also Verizon New England, Inc., 509 F.3d at 9

16
The other cases cited by PRTC as support for its position
include: Duquesne Light Co. v. Barasch, 488 U.S. 299, 310 (1989);
Hope Natural Gas Co., 320 U.S. at 602; Tenoco Oil Co. v. Dep't of
Consumer Affairs, 876 F.2d 1013, 1020 (1st Cir. 1989); and Jersey
Cent. Power & Light Co., 810 F.2d at 1175-78.
17
Accordingly, our prior statement in Tenoco Oil -- that "[t]o be
just and reasonable, rates must provide not only for a company's
costs, but also for a fair return on investment," 876 F.2d at 1021
-- is no longer an accurate statement of the law in the context of
rates between telecommunications carriers in an arbitrated ICA
under the Telecommunications Act of 1996.

-22-
(contrasting the potentially higher, traditional "just and

reasonable" rates with the lower TELRIC rates "which are highly

favorable to the competitors").

PRTC does have a statutory right to "just and reasonable"

rates under the 1996 Act; however, the Act and the FCC's rules

further specify how such "just and reasonable" rates are to be

determined -- by determining the cost of the individual network

elements using TELRIC. Here, by applying the TELRIC methodology to

determine the cost of interconnection and individual network

elements, the arbitrator and the Board followed the procedures

required by the 1996 Act and the FCC rules in order to arrive at

"just and reasonable" rates under the Act. Accordingly, PRTC's

statutory claim on this issue fails.

Having addressed PRTC's statutory claim, we must still

address its constitutional claim. Yet the very cases PRTC relies

upon undermine its constitutional claim, articulating standards

that PRTC fails to meet.

In Hope Natural Gas, the Supreme Court noted that an

agency's rate order is "the product of expert judgment which

carries a presumption of validity," and "he who would upset the

rate order under the Act carries the heavy burden of making a

convincing showing that it is invalid because it is unjust and

unreasonable in its consequences." 320 U.S. at 602. In Duquesne

Light, the Supreme Court reviewed the "guiding principle" that the

-23-
Takings Clause of the Fifth Amendment18 protects utilities from

being restricted to rates that are "so 'unjust' as to be

confiscatory." 488 U.S. at 307; see also Fed. Power Comm'n v.

Texaco Inc., 417 U.S. 380, 391-92 (1974) ("All that is protected

against, in a constitutional sense, is that the rates fixed by the

Commission be higher than a confiscatory level."); Federal Power

Comm'n v. Natural Gas Pipeline Co. of Am., 315 U.S. 575, 585 (1942)

("By long standing usage in the field of rate regulation, the

'lowest reasonable rate' is one which is not confiscatory in the

constitutional sense."). As the Eleventh Circuit has noted,

"[c]ases like Duquesne Light stand for the proposition that rates

can be regulated so long as they are not so 'unjust' as to be

confiscatory, and within this range the regulatory agency has broad

discretion." Ala. Power Co. v. FCC, 311 F.3d 1357, 1367 (11th Cir.

2002). The Supreme Court has also defined the phrase "so unjust as

to be confiscatory" as a rate that "threaten[s] an incumbent's

'financial integrity.'" Verizon, 535 U.S. at 524 (quoting Duquesne

Light, 488 U.S. at 307).

Therefore, we examine PRTC's constitutional claim to

determine whether PRTC has demonstrated that the Local Loop Rate is

so unjust as to be confiscatory -- that is, whether the Local Loop

18
"The Takings Clause of the Fifth Amendment applies to the states
and to Puerto Rico through the Fourteenth Amendment." Fideicomiso
de la Tierra del Caño Martín Peña v. Fortuño, 604 F.3d 7, 12 (1st
Cir. 2010).

-24-
Rate threatens PRTC's financial integrity. See Verizon, 535 U.S.

at 524. Here, PRTC makes no such showing. In its brief, PRTC

makes only the most cursory of arguments on this point, asserting

merely that the Local Loop Rate "was unjust and unreasonable when

compared with average loop rates across the United States and other

benchmarks." Relying entirely on this one-sentence, naked

assertion on appeal,19 PRTC falls far short of meeting its "heavy

burden" of showing that the Local Loop Rate threatens its financial

integrity. See Hope Natural Gas Co., 320 U.S. at 602; Ill. Bell

Tel. Co. v. FCC, 988 F.2d 1254, 1263 (D.C. Cir. 1993). Thus, PRTC

has failed to demonstrate an unconstitutional taking.

C. Mixed Bundles

A "mixed bundle" is a packaged resale product containing

both telecommunications and non-telecommunications services. At

issue are the appropriate wholesale rates that PRTC will charge

WorldNet for products that PRTC currently retails to its own

customers in mixed bundles. As a hypothetical illustration, PRTC

might charge its retail customers $30 for a home phone line, $10

19
PRTC's argument before the district court on this issue was
similarly underdeveloped. The district court noted that the
section of PRTC's brief challenging the Local Loop Rate "does not
include a single citation to the decisions of the Board or
arbitrator that would allow the court to locate and review the
decisions that PRTC seeks to overturn." WorldNet III, 707 F. Supp.
2d at 215. As a result, the district court was "unable to locate
the Board's discussion of this issue among any of the myriad Board
orders included in the Joint Appendix." Id. "Moreover," the court
noted, "the issue is not mentioned or cited directly in PRTC's
complaint." Id. at 215 n.19.

-25-
for cable television, and a "mixed bundle" consisting of both phone

and cable services for a discounted retail price of $30 (a 25

percent discount). Here, the arbitrator determined that PRTC must

offer each service individually to WorldNet at a price reflecting

the 25 percent discount, but then also apply the parties' standard

wholesale discount on top of the already-discounted "mixed bundle"

price. PRTC challenged this "double-discounting," and the Board

agreed, overruling the arbitrator on this issue. The Board found

that PRTC need offer only two options to WorldNet: either the

wholesale discount for each individual service, or the 25 percent

mixed bundle discount for the services together.

In overruling the arbitrator, the Board noted that the

arbitrator's mixed bundles pricing provision had "established a

principle of law that had not yet been considered by the Board or

the FCC." The Board noted that "[a]s a general matter, we continue

to believe, as we did in the 2002 PRTC–Newcomm arbitration, that

the Arbitrator should not break new ground, but should apply

principles of law that have already been established."

On review, the district court examined whether the

Board's reversal of the arbitrator's decision was proper. The

district court opined that "[i]t is not clear" that the pricing

provision imposed by the arbitrator was "inconsistent" with the

Act: "it may not be required by the Act, but it also may not

violate the Act." WorldNet III, 707 F. Supp. 2d at 184.

-26-
Nonetheless, the court found that it did not need to decide whether

the provision was inconsistent with the Act, because the Board may

also overturn an arbitrated provision that conflicts with Board

policy. See id. (citing WorldNet II, 497 F.3d at 7). The court

reasoned that "[i]t seems eminently reasonable for the Board to

enforce a policy that the Arbitrator should not break new ground,

but should apply principles of law that have already been

established." Id. (internal quotation mark omitted). Because the

arbitrated solution broke new ground, the district court affirmed

the Board's decision. Id.

Although PRTC prevailed on the mixed bundles issue, it

argues that the district court was wrong to even suggest that

WorldNet's "mixed bundles" proposal might be consistent with the

Communications Act. In PRTC's view, WorldNet's proposal was

clearly inconsistent with the Communications Act. WorldNet

responds that since PRTC prevailed below, it is seeking an improper

advisory opinion from this court.20 On the merits, WorldNet argues

that its mixed bundles proposal was not inconsistent with the Act.

As a general rule, "[a] party may not appeal from a

judgment or decree in his favor." Elec. Fittings Corp. v. Thomas

& Betts Co., 307 U.S. 241, 242 (1939). However, under some

20
Federal courts have "neither the power 'to render advisory
opinions nor to decide questions that cannot affect the rights of
litigants in the case before them.'" Preiser v. Newkirk, 422 U.S.
395, 401 (1975) (quoting North Carolina v. Rice, 404 U.S. 244, 246
(1971)).

-27-
circumstances, a prevailing party may appeal a court's

determination on a legal question if that determination could

affect the party's rights in the future. See, e.g., id. (allowing

victorious defendants in patent infringement suit to appeal to

eliminate from the decree the finding that the patent, though not

infringed, was valid). Here, PRTC claims that the district court's

statement is affecting its rights, pointing to a recent decision by

the Board in a separate ICA proceeding between PRTC and WorldNet in

which the Board adopted WorldNet's mixed bundle proposal.21

We will not address the merits of this question because

there was no legal determination below at all, much less a

determination that could affect PRTC's rights. The district

court's language clearly expressed that it was not deciding whether

WorldNet's proposal was inconsistent with the Act. Thus, the

district court's statement that WorldNet's proposal may or may not

be consistent with the Federal Telecommunications Act was mere

dicta that could not have any binding effect for future

proceedings. To rule on that question now would be a paradigmatic

example of an advisory opinion. This we may not do.22

21
See Report and Order, Appx. B, Issue 152, In re WorldNet
Telecommn's., Inc., No. JRT-2010-AR-0001 (TRB Sept. 2, 2010).
22
If in fact the Board has relied on the district court's dicta
in a separate ICA proceeding, the proper place to challenge that
reliance is in that proceeding.

-28-
D. The Arbitrator's Determinations that the Board Affirmed

The Supreme Court noted that the Verizon record "suggests

that TELRIC rate proceedings are surprisingly smooth-running

affairs, with incumbents and competitors typically presenting two

conflicting economic models supported by expert testimony, and

state commissioners customarily assigning rates based on some

predictions from one model and others from its counterpart."

Verizon, 535 U.S. at 522. The record before us suggests the same.

Nonetheless, PRTC now complains of four cost determinations by the

arbitrator that were affirmed by both the Board and the district

court, and two cost determinations by the Board that were affirmed

by the district court.

In the absence of errors of law, we review these

determinations under the deferential arbitrary and capricious

standard. See Centennial, 634 F.3d at 26-27. In reviewing cost

determinations by the arbitrator that were upheld by the Board, we

focus on whether the Board properly exercised its authority to

affirm the arbitrator's decision. See WorldNet I, 497 F.3d at 7.

In reviewing the Board's own pricing determinations, we may not

substitute our judgment for that of the Board, whose determinations

are presumed to be valid. See River St. Donuts, 558 F.3d at 114.

Unless the Board lacked a rational basis for a determination, we

will affirm. See id. We examine each determination in turn.

-29-
 1. Buried Drops / Buried Conduit

Buried Conduit refers to an input to the cost model based

on the cost of placing the buried wire that connects customers to

the PRTC network. Here, PRTC proposed a figure assuming it would

place such buried wires into conduits 100 percent of the time.

WorldNet's proposal assumed the use of conduits 10 percent of the

time. The arbitrator determined that the correct assumption should

be 25 percent, referencing Board policy requiring conduit drops

only for new urban subdivisions and developments and not for rural

areas. PRTC argues that this determination is arbitrary and

capricious, because there is no support for the Board's conclusion

that the arbitrator's determination was "consistent with the

Board's policy to require conduit for urban sub-divisions and

development projects but not to require conduit in rural areas of

Puerto Rico."

PRTC's argument on this buried conduit issue is confined

to a single paragraph in its brief. PRTC has fallen far short of

meeting its burden of demonstrating that "the agency relied on

improper factors, failed to consider pertinent aspects of the

problem, offered a rationale contradicting the evidence before it,

or reached a conclusion so implausible that it cannot be attributed

to a difference of opinion or the application of agency expertise."

Associated Fisheries, 127 F.3d at 109.

-30-
 This case is different from the cases relied on by PRTC

on this issue, Laclede Gas Co. v. Federal Energy Regulatory

Commission, 873 F.2d 1494 (D.C. Cir. 1989), and South Dakota

Public Utilities Commission v. Federal Energy Regulatory

Commission, 668 F.2d 333 (8th Cir. 1981). In Laclede, FERC's

initial order simply made an assertion that the company's customers

were protected by a refund obligation. 873 F.2d at 1499. "After

a number of commenters challenged that conclusion on rehearing,

FERC merely repeated its assertion, again without analysis." Id.

In contrast, here the arbitrator sought a compromise between the

parties' positions, and cited Board policy that rural areas do not

require conduit.

In South Dakota Public Utilities Commission, the Eighth

Circuit held that FERC had ignored estimates and data presented

before it, and had instead chosen a formula for estimating gas

reserves that was significantly inferior to another formula at

FERC's disposal, which the agency ignored. 668 F.2d 344–45. The

court found that the alternative predictions that were not chosen

were made by "one of the most respected analysts in the natural gas

industry and its projections are well in line with those of other

groups." Id. at 344. But "without any apparent rational basis,

[FERC's chosen] model totally eliminates the [respected model's]

speculative category and then reduces the remainder by 300

percent." Id. Moreover, the court held that the FERC's chosen

-31-
model "ignore[d] current governmental policies expressed in the

Natural Gas Policy Act." Id. at 341. Thus, in the South Dakota

Public Utilities Commission case it was clear that FERC had ignored

one available and reliable model in favor of a dramatically

different model that was "without support in the record and [was]

not within the zone of reasonableness." Id. at 344.

In contrast, here the arbitrator was choosing between two

presumably self-serving estimates presented by the parties: 100

percent by PRTC, and 10 percent by WorldNet. Unlike in South

Dakota Public Utilities Commission, the estimate that was not

chosen here had not been made by "one of the most respected

analysts" in the industry, and the projections were not "well in

line with those of other groups." See id. Moreover, the

arbitrator's decision conforms with the Board's general policy that

conduit is not required in rural areas. Therefore, the Board's

decision to affirm the arbitrator's determination as consistent

with law and policy was not arbitrary and capricious.

2. Cost of Capital

The Weighted Average Cost of Capital ("WACC") determines

the level of return to investment contained within prices that an

ILEC is expected to earn. It is often referred to as the company's

"rate of return." A WACC calculation includes a determination of

the "beta" factor, which estimates the risk of investing in a

particular company by measuring the volatility of its stock as

-32-
compared to the market as a whole. PRTC argued for a beta value of

1.12, representing the average beta value of all ILECs nationwide.

WorldNet proposed a lower figure, based on PRTC-specific data.

Instead of choosing either PRTC's or WorldNet's proposals, the

arbitrator adopted a beta value of 1.0, representing the average

beta value of S&P 500 companies. This was the same beta value the

FCC had used in 2003 in deciding an ICA dispute between two

carriers in Virginia. See In re WorldCom, Inc. (Verizon Virginia),

18 FCC Rcd. 17722 (WCB 2003).

The arbitrator explained that her decision to reject

PRTC's proposed beta figure was based in part on the fact that the

peer group on which PRTC based its figure included national

carriers that were providing video service, whereas PRTC was not.

Because the national carriers were not the appropriate peer group,

the arbitrator chose the overall S&P 500 beta of 1.0. On review,

the Board agreed with PRTC that the video deployment point was

unsupported in the record. Nonetheless, the Board affirmed the

arbitrator's determination, because she did not rely solely on the

video service point. Rather, the arbitrator had also noted that

the overall beta of 1.0 for S&P 500 companies provides a "useful

benchmark" of "the risk faced on average by competitive companies."

This was also the rationale the FCC used in Verizon Virginia. See

18 F.C.C. Rcd. at 17762.

-33-
 We cannot say that choosing a larger sample size of

companies in many industries over a smaller sample size of

companies in the same industry amounts to "a conclusion so

implausible that it cannot be attributed to a difference of opinion

or the application of agency expertise." See Associated Fisheries,

127 F.3d at 109. Thus, we agree with the district court's

conclusion that the Board's decision to affirm the arbitrator's

beta value of 1.0 as consistent with law and policy was neither

arbitrary nor capricious.

3. Depreciation

Depreciation is the mechanism by which the investment in

an asset is recovered over the life of that asset. The

depreciation calculation involves two factors: (1) the useful life

of the asset, and (2) the rate at which the asset is depreciated

over the useful life. The dispute here concerns the figures used

for the range of asset lives. The FCC has identified a range of

forward-looking asset lives and has deemed them "safe-harbor"

lives. See Verizon Virginia, 18 F.C.C. Rcd. at 17771 n.325. The

arbitrator adopted asset lives that were towards the lower end of

this "safe-harbor" range.

PRTC argues that the Board's determination should be

vacated as erroneous as a matter of law for two reasons. First,

PRTC maintains that the Board mistakenly assumed that the FCC's

Verizon Virginia decision compelled the adoption of the lower end

-34-
of the safe harbor ranges for all cases, whereas it actually

applied only to that particular case and did not establish a

general rule that the lower end of the safe harbor ranges is

appropriate in all circumstances. Second, PRTC argues that the

Arbitrator erred as a matter of law in concluding that PRTC's

proposed asset lives were inconsistent with FCC requirements merely

because they do not fall within the safe harbor ranges established

in Verizon Virginia.

The arbitrator did not accept the depreciation rates

proposed either by PRTC or by WorldNet. Rather, the arbitrator

found as follows: "The FCC's more recent activity in Verizon

Virginia and the generally wholesale acceptance of the Verizon

Virginia order -- by both parties in certain situations --

motivates me to adopt the Verizon Virginia economic lives and

depreciation rates for this arbitration. These lives have been

determined to be forward-looking and are at the lower end of the

safe harbor range -- in some instances these lives are shorter than

those proposed by PRTC." The Board affirmed the arbitrator's

decision: "It is clear her review of the record was comprehensive:

her judgment to use the Verizon Virginia economic lives and

depreciation rates was based on the entirety of the record. We

agree with the Arbitrator who found unpersuasive PRTC's claim .

. . ."

-35-
 Contrary to PRTC's argument, nothing in the arbitrator's

decision or the Board's affirmance of that decision suggests that

the determination was compelled by Verizon Virginia. Nor does PRTC

argue that the decision to use the Verizon Virginia economic lives

and depreciation rates was precluded by law. Thus, there was no

error of law. The arbitrator made a reasoned finding of fact and

policy determination on this issue, so this Court reviews the

Board's affirmance of the arbitrator under the arbitrary and

capricious standard. See Centennial, 634 F.3d at 26. The Board

found that the arbitrator's determination was based on a

"comprehensive" review of the entirety of the record, and the Board

agreed with the arbitrator that PRTC's claim was unpersuasive.

Importantly, the arbitrator's finding that both parties had relied

on the Verizon Virginia order in certain situations constitutes a

rational basis for adopting asset lives approved by the FCC from

that case. Thus, the Board's determination that the arbitrator's

decision was consistent with law and policy was neither arbitrary

nor capricious.

4. Direct Fed Buildings

Direct fed buildings are buildings where PRTC's

proprietary telephone network cables need to be installed (instead

of using another company's equipment that is already installed at

the site). PRTC's figures assumed that it would place its own

equipment in 100 percent of the buildings, as it had done in the

-36-
past. However, WorldNet showed that 15 percent of buildings in San

Juan did not have PRTC-owned equipment, and further argued that a

forward-looking model should not assume that PRTC's past practice

was the least-cost, most-efficient method. The arbitrator here

adopted WorldNet's proposed 15 percent reduction to the figure

proposed by PRTC.

PRTC argues that the arbitrator's decision to reduce

PRTC's proposed cost input for PRTC direct fed buildings by 15

percent was arbitrary and capricious because there was no support

for the arbitrator's findings (1) that PRTC's proposal was

inconsistent with TELRIC or (2) that a 15 percent reduction in

PRTC's proposal was consistent with TELRIC. PRTC notes that

neither the arbitrator nor the Board pointed to a single citation

in the record or to any legal authority to support the finding that

the 15 percent reduction was consistent with forward-looking cost

principles, and argues that this failure is sufficient to render

the Board's determination arbitrary and capricious.

PRTC's proposed cost model assumed it would place its own

equipment in 100 percent of the buildings. The arbitrator reduced

PRTC's proposal by 15 percent, reasoning that such a reduction was

a "reasonable estimate" of the actual direct fed buildings in a

"least cost, most efficient network." The Board affirmed this

decision, reasoning that it was consistent with forward-looking

cost principles.

-37-
 As the arbitrator noted, "PRTC suggests that it always

terminates on its own equipment without claiming this is a least

cost, most efficient design practice." Nor does PRTC advance such

an argument on appeal. Rather, PRTC merely complains that the

Board gave an insufficient explanation of its decision. However,

the burden is on Appellant, not the Board. "An agency's action is

entitled to a presumption of validity, and the burden is upon the

petitioner to establish the action is arbitrary or capricious."

Sorenson Commc'ns, Inc. v. FCC, 567 F.3d 1215, 1221 (10th Cir.

2009). And PRTC has failed to show that "the agency relied on

improper factors, failed to consider pertinent aspects of the

problem, offered a rationale contradicting the evidence before it,

or reached a conclusion so implausible that it cannot be attributed

to a difference of opinion or the application of agency expertise."

Associated Fisheries, 127 F.3d at 109. In affirming the

arbitrator's decision as "reasonable and consistent with both law

and policy," the Board noted that the arbitrator had concluded that

"there was insufficient support showing why [PRTC's] existing

policy is consistent with forward-looking cost principles."

Therefore, PRTC has not met its burden of showing that the Board

lacked a rational basis for its decision.

5. Fiber Structure Costs: Excavation vs. Trenching

The input for Fiber Structure Costs relates to the costs

necessary for the placement of fiber optic cables. There are

-38-
generally two standard methods for laying cables: excavation and

trenching. Excavation is more costly than trenching; accordingly,

PRTC prefers excavation and WorldNet prefers trenching (though the

Board noted that there are also valid engineering and economic

reasons why PRTC would prefer excavation unrelated to the effect on

the rates PRTC could charge to WorldNet). The Board decided the

Fiber Structure Cost figure in the first instance, and thus we

examine whether the Board's determination was arbitrary and

capricious.

PRTC's proposal assumed that PRTC would rely on the more

costly excavation 100 percent of the time. WorldNet's proposal

assumed that PRTC would never rely on excavation, instead assuming

that PRTC would use trenching 100 percent of the time. The Board

opted to split the difference by assuming that 50 percent of the

time excavation would be used, following PRTC's accounting

measures, and 50 percent of the time trenching would be used,

following WorldNet's accounting measures.

PRTC argues that such a "Solomonic judgment" is arbitrary

and capricious, particularly where there is no support in the

record for the proposition that PRTC uses trenching 50 percent of

the time. PRTC further argues that the Board failed to explain why

"it is likely that some mix of trenching and excavation would be

used," and that under the arbitrary and capricious standard,

agencies must adequately explain their reasoning.

-39-
 We agree with the district court that the Board's

decision "was reasonable and supported by record evidence, and thus

was neither arbitrary nor capricious." WorldNet III, 707 F. Supp.

2d at 211. The Board examined the evidence presented and found

that it does "not believe that any proposal that relies on 100% of

either excavation or trenching is reasonable." The Board observed

that the evidence at the hearing "convinced us that each method has

upsides and downsides." Furthermore, the Board noted "that

trenching and excavation are used by other providers as they design

and execute their networks, including providers in Puerto Rico such

as Centennial and cable TV companies." Thus, the Board concluded

"that in a forward-looking, least cost/most efficient network it is

likely that the mix of trenching and excavation would be used."

There was no support for either party's absolute position, but

there was also no evidence demonstrating the proper exact ratio in

a forward-looking network. Under these circumstances, it was

perfectly reasonable for the Board to assume a 50/50 split.

6. Total Cable / Cable Size

The "Total Cable" or "Cable Size" figure determines the

total quantity of cables in a forward-looking, efficient,

least-cost network. The cost of the cable is dependent on the size

of the cable used; larger-sized cables, which carry more data, are

less expensive to deploy than smaller cables. The higher the cost

of cable, the higher the cost that PRTC can charge WorldNet under

-40-
the ICA. Both PRTC and WorldNet asked the Board to consider the

arbitrator's initial decision on this figure. The Board requested

additional submissions from both sides and then issued its own

figure, which PRTC challenges. Because the Board issued its own

figure, we examine whether the Board's determination was arbitrary

and capricious.

PRTC argues that under FCC rules, forward-looking cost

models "must estimate the cost of providing service for all

businesses and households within a geographic region." See In re

Federal-State Joint Bd. on Universal Serv. (Universal Service First

Report and Order), 12 F.C.C. Rcd. 8776, 8912-16 (1997). PRTC

contends that the Board's methodology failed to meet this

requirement because it resulted in a total cable figure that is not

sufficient to serve all of Puerto Rico. However, WorldNet and the

Board counter that PRTC's position regarding the amount of cable

required to cover Puerto Rico was based on flawed assumptions.

WorldNet notes that many parts of Puerto Rico are mountainous or

sparsely populated and thus require little or no cable. PRTC's

proposal to the Board did not account for this, and was thus

unrealistically high. PRTC had also contended that the amount of

cable it currently uses should have been a "sanity check" for

determining if the Board's calculation was correct, and it noted

that the total length of cable under the Board's calculation was

only roughly one third of the present amount. However, the Board

-41-
argues that because the Act requires a forward-looking estimate

based on the most efficient network, it would not have been

appropriate to rely on the current cable length figure as a

benchmark. Thus, there was nothing arbitrary or capricious about

the Board's rejection of PRTC's proposal.23

Furthermore, there was nothing arbitrary or capricious in

the approach the Board adopted. PRTC's proposal included a

"simplifying assumption" that the width of the cable would decrease

at a steady rate along the path between PRTC's central offices and

the customers. The Board held that this assumption was not

necessary and instructed PRTC to "provide a cost study module for

cable sizes and investment that does not include the unnecessary

simplifying assumptions in this matter," to which WorldNet would be

allowed to respond. However, PRTC did not provide any new data to

the Board. The Board ultimately settled on "a modified WorldNet

approach" that eliminated both sides' simplifying assumptions.

Given that the Board requested additional studies and briefing, and

23
WorldNet contends that TELRIC methodology does not require an
estimate of the cost of providing coverage to all of Puerto Rico.
We disagree. In Verizon Virginia, the FCC noted that it had
previously "delineated ten criteria that should be used in making
forward-looking economic cost determinations" in a TELRIC
proceeding; these criteria were criteria that the FCC had
identified in its Universal Service Order decision. See Verizon
Virginia, 18 F.C.C. Rcd. 17742 (citing Universal Service First
Report and Order, 12 F.C.C. Rcd. at 8912-16, ¶ 250). The ten
criteria identified in Universal Service First Report and Order
include the requirement that the model "must estimate the cost of
providing service for all businesses and households within a
geographic region." 12 F.C.C. Rcd. at 8915, ¶ 250(6).

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carefully considered both parties' models before adopting a hybrid

approach, the Board's reasoned determination did not lack a

rational basis and was thus not arbitrary and capricious.

E. The Arbitrator's Determinations that the Board Reversed

PRTC argues that the district court erred in reversing

the Board's determinations as to the input for Circuit Demand and

the inputs for NIDs and Block Terminals. PRTC maintains that these

determinations were arbitrary and capricious rulings by the

arbitrator, which the Board had a duty to correct. PRTC maintains

that the district court's decision on this issue would "give rise

to the irrational situation in which State Commissions are helpless

to correct arbitrator determinations that are arbitrary and

capricious either because the arbitrator failed to consider

evidence that is relevant under the TELRIC methodology or because

they are not supported by the record."

As the district court opinion is not entitled to

deference, but is only accepted to the extent it is persuasive,

this Court is concerned only with the appropriate standard of

review for the Board's determination. See Centennial, 634 F.3d at

26; WorldNet I 497 F.3d at 5. The Board's determinations to

overrule the arbitrator can only be upheld: (1) if the arbitrator's

determinations were inconsistent with Sections 251 and 252(d) of

the federal Act; or (2) if the Board reasonably determined that the

ICA provisions at issue conflicted with Puerto Rico statutes, the

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Board's rules, or the Board's policy determinations. WorldNet I,

497 F.3d at 7. If the Board based its determination on the former

prong (for inconsistency with the Federal Act), this Court reviews

de novo that determination by the Board. See Global NAPs III, 444

F.3d at 70 (holding that the Board's determinations resting

principally on an interpretation of the federal Act are subject to

de novo review by this Court).

1. Circuit Demand

This issue concerns the pricing for unbundled "transport"

network elements, which are connections between PRTC switching

centers that WorldNet leases for its use. To determine the rate

for these elements, the Board considers (1) the cost of equipment

needed to establish transport circuits and (2) total demand for

such circuits. PRTC proposed a cost model based on 2005 and 2007

prices for the equipment, divided by the 2001 circuit demand in

order to get the forward-looking rate. WorldNet disputed the use

of the 2001 circuit demand level, and offered expert testimony to

establish a more current figure. The arbitrator determined that

the future demand projection provided by WorldNet's expert --

unrefuted by PRTC -— was "reasonable" and applied that figure to

the model.

The Board reversed the arbitrator, finding that the

arbitrator had failed to "account for the match between investment

and demand" and that therefore the arbitrator's order was

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"inconsistent with Section 252(d) in not considering all of the

data and the effect of the decision in determining forward-looking

rates." Accordingly, the Board imposed PRTC's model with the 2001

circuit demand figure.

The district court reversed the Board's decision,

reinstating the arbitrator's determination. See WorldNet III, 707

F. Supp. 2d at 196. The court noted that the Board did not discuss

how the arbitrator's decision conflicted with TELRIC or the Act,

and "there is simply no indication that the arbitrator did not

consider 'all of the costs.'" Id. The court then held that the

Board's use of the words "'inconsistent with Section 252(d)' is not

sufficient to give it carte blanche to overturn the arbitrator."

Id. Rather, here the Board merely had a difference of opinion with

the arbitrator as to the weight given to evidence in the record.

To the district court, "it appeared that the arbitrator did

consider all of the data and the TELRIC requirements." Id. In

such a situation, the district court found that the Board cannot

overturn the arbitrator merely because it would have reached a

different conclusion "if framing the agreement itself." Id.

(quoting WorldNet I, 497 F.3d at 8).

With respect to Circuit Demand, the entirety of the

Board's resolution and explanation is the following:

We agree with PRTC that in making her
determination, the Arbitrator did not account
for the match between investment and demand.
In this matter, the Order was inconsistent

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 with Section 252(d) in not considering all of
the data and the effect of the decision in
determining forward-looking rates.
Consequently, upon reconsideration, we reject
the Arbitrator's requirement to increase
demand by 35.15 percent over a five year
period (approximately 7 percent per year). We
conclude that PRTC has provided a reasonable
projection of demand.

For Circuit Demand, then, the Board did not appeal to Puerto Rico

law, Board rules, or Board policy. In this case, the Board

explicitly reasoned that the arbitrator's Circuit Demand

determination was inconsistent with Section 252(d) of the federal

Act. Therefore, the Board's decision rests principally on its

interpretation of the federal Act, and is thus subject to de novo

review. See Global NAPs III, 444 F.3d at 70.

On a de novo review, the only part of Section 252(d) that

appears to be relevant is Section 252(d)(1)(A)(I), which mandates

that the Board's rate determinations must be based on the cost of

providing the network element. This requirement does not establish

much. Neither PRTC nor the Board has shown how the arbitrator's

determination was inconsistent with Section 252(d). As the

district court rightly observed, merely invoking the words

"inconsistent with Section 252(d)" does not give the Board the

authority to overrule an arbitrated provision. WorldNet III, 707

F. Supp. 2d at 196. Contrary to the Board's assertion, there is no

indication that the arbitrator did not consider all of the costs.

Rather, it seems that the Board merely disagreed with the

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arbitrator's determination based on a difference of opinion as to

the weight of the evidence. Under the Federal Act and First

Circuit precedent in WorldNet I, such a difference of opinion is

not a valid basis for the Board to overrule an arbitrated provision

in an ICA. See 497 F.3d at 8; 47 U.S.C. § 252(e)(2)(B).

Therefore, the district court properly reversed the Board's

determination and reinstated the determination of the arbitrator.

2. NIDs and Block Terminals

A network interface device (NID) is a small boxed device

connecting the telephone network to the inside wires of a house or

other premises. Similar to an NID, a block terminal connects the

telephone network plant to the inside wires of a large building.

Ground rods are metal shafts driven into the ground that carry

current away from the telephone network in the case of an

electrical surge. Ground rods are typically connected to NIDs and

block terminals, and are thus factored into the costs of those two

network elements. The underlying dispute between PRTC and WorldNet

on this issue concerned whether the model should assume either (a)

that PRTC will install its own new ground rods with all its NIDs

and block terminals, or (b) that PRTC should use existing ground

rods when they have already been installed by power companies or

cable providers.

PRTC presented evidence to the arbitrator that its

practice was to install its own ground rods with all NIDs and block

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terminals, instead of relying on non-company equipment that may be

moved. WorldNet presented evidence that ground rods needed to be

installed just 66% of the time for NIDs and 10% of the time for

block terminals. The arbitrator adopted WorldNet's proposal,

finding that in a least cost/most efficient network, PRTC should

share existing ground rods and that its policy of installing new

ground rods in all cases was unreasonable.

The Board overturned the arbitrator's decision, holding

that "the record does not provide sufficient support for WorldNet's

proposals" and therefore the arbitrator erred in adopting them

"without sufficient evidence." The Board found that "without

contradictory persuasive evidence, PRTC's safety concerns must

prevail."

The district court reversed the Board's decision,

reinstating the arbitrator's determination. WorldNet III, 707 F.

Supp. 2d at 195. The district court reasoned that the Board's

decision was merely "a reconsideration of the evidence." Id. at

194. The court noted that the Board did not suggest that the

arbitrated solution conflicted with the statute, Puerto Rico laws,

Board rules, or Board policy, "but rather stated that the

arbitrator incorrectly weighed the evidence." Id. at 195. Thus,

the Board exceeded its authority under WorldNet I. WorldNet III,

707 F. Supp. 2d at 195 (citing WorldNet I, 497 F.3d at 7). The

court noted that "when a state board delegates its duties to an

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arbitrator, it cannot overturn the arbitrator's solution simply

because 'if framing the agreement itself' it would follow different

policies based on 'ad hoc preferences.'" Id. (quoting WorldNet I,

497 F.3d at 8).

With respect to NIDs and Block Terminals, the entirety of

the Board's resolution and explanation is as follows:

The record does not provide sufficient
support for WorldNet's proposals for use of
ground rods and we conclude that the
Arbitrator erred in adopting those proposals
without sufficient evidence. We find that,
without contradictory persuasive evidence,
PRTC's safety concerns must prevail. The
Arbitrator is overruled and PRTC's proposal is
accepted.

This explanation does not mention either (1) any inconsistency with

the federal Act, or (2) any conflict with Puerto Rico statutes, the

Board's rules, or the Board's general policy determinations. There

is no apparent conflict with Sections 251 or 252(d) of the Act.

Nor does either PRTC or the Board articulate how the arbitrator's

decision conflicted with Puerto Rico statutes, the Board's rules,

or the Board's general policy. Therefore, as persuasively found by

the district court, the Board overruled the arbitrator simply on

the basis of a reconsideration of the evidence and because it would

have followed a different policy based on "ad hoc preferences" --

which is an invalid basis for the Board to overrule the arbitrator,

as WorldNet I established. See 497 F.3d at 8; 47 U.S.C. § 252(e)

(2)(B). Because the Board's determination with respect to NIDs and

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Block Terminals exceeded its authority in reviewing an arbitrated

ICA, the district court's reversal of the Board was proper.

IV. Conclusion

For the foregoing reasons, we find no reversible error.

Accordingly, the judgment of the district court is affirmed.

Affirmed.

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 Appendix

To aid the reader's understanding of the technical issues

in this case, we provide the following table of key terms:

Term Description
"ICA" or An "interconnection agreement" or "ICA" is a
"the contract between phone companies to share
Agreement" equipment and connect each other's customers.
The contract can be either by mutual agreement
or imposed by a state regulatory board.
"ILEC" or An "incumbent local exchange carrier" is a phone
"incumbent company formerly with monopolistic status or
LEC" dominant market share and facilities in a given
market. Here, PRTC is the incumbent LEC.
"CLEC" or A "competitive local exchange carrier" is an
"competitive insurgent phone company that wishes to compete
LEC" with the incumbent LEC in a given market. Here,
the CLEC at issue is WorldNet.
"the Act" or The Telecommunications Act of 1996, 47 U.S.C. §
"the federal 251 et seq., is a federal act intended to open
Act" U.S. telecommunications markets to competition.
Among other things, the Act requires ILECs to
allow CLECs to use the incumbent carriers'
networks and equipment in order to connect
customers and to compete.
TELRIC TELRIC ("total element long-run incremental
cost") is a forward-looking methodology that the
FCC requires carriers and state boards to use in
setting rates for ICAs between ILECs and CLECs.
Buried An input to the cost model based on the cost of
Conduit or placing the buried wire that connects customers
Buried Drops to the PRTC network.
Cable Size or The "Cable Size" or "Total Cable" figure
Total Cable determines the total quantity of cables in the
hypothetical, forward-looking, most efficient,
least cost network.

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Circuit This input is related to pricing for unbundled
Demand (or "transport" network elements, which are
Current connections between PRTC switching centers that
Demand) WorldNet leases for its own use. To determine
the rate for these elements, the Board considers
(1) the cost of equipment needed to establish
transport circuits and (2) total demand for such
circuits.
Weighted The Weighted Average Cost of Capital ("WACC")
Average Cost determines the level of return to investment
of Capital contained within prices that an ILEC is expected
to earn. Often referred to as the company's
"rate of return." A WACC calculation includes a
determination of the "beta" factor, which
estimates the risk of investing in a particular
company by measuring the volatility of its stock
as compared to the market as a whole.
Depreciation Depreciation is the mechanism by which the
investment in an asset is recovered over the
life of that asset. The depreciation
calculation involves two factors: (1) the useful
life of the asset, and (2) the rate at which the
asset is depreciated over the useful life.
Direct Fed Direct fed buildings are buildings where PRTC's
Buildings proprietary telephone network cables will be
installed (instead of using another company's
equipment that is already present).
Fiber Fiber structure costs are those costs necessary
Structure for the placement of fiber optic cables,
including trenching and excavation to lay
cables. The cost of paving is another fiber
structure cost.
Local Loop Also called "rates for local loops." This term
Rate refers to the rates that PRTC can charge
WorldNet for the wires and cable used to connect
the network to a customer's home or business.
Mixed Bundles A "mixed bundle" is a packaged resale product
containing both telecommunications and
non-telecommunications services. For example, a
carrier might offer phone service for $30 and
cable television for $30, but could combine both
in a discounted "mixed bundle" of phone and
cable services for $50.

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NIDs, A network interface device (NID) is a small
boxed device connecting the telephone network to
Block the inside wires of a house or other premises.
Terminals (or
Terminal Similar to an NID, a block terminal connects the
Blocks), and telephone network plant to the inside wires of a
large building.

Ground Rods Ground rods are metal shafts driven into the
ground that carry current away from the
telephone network in the case of an electrical
surge.
Structure Structure sharing refers to how much of the cost
Sharing of installing poles, digging trenches, and
placing conduit is to be shared on a
forward-looking basis by the incumbent carrier
with other entities (such as power companies,
cable operators, and CLECs). The more sharing
that is assumed, the lower the cost to the ILEC,
and thus the lower the cost that is reflected in
ICAs with CLECs.
Transit Transit traffic refers to an arrangement in
Traffic Rates which CLEC "A" and CLEC "B" do not have
sufficient network traffic between them to
justify dedicated facilities connecting their
networks, so instead they negotiate with the
ILEC to "transit" traffic between their two
networks -- that is, to connect each other's
customers.
UNEs UNEs are "unbundled network elements." Under
the federal Act, incumbent carriers are required
to provide access to UNEs to competitive
carriers at nondiscriminatory rates.

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