MCI WrldCom Inc v. FCC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 30, 2000 Decided February 2, 2001

No. 99-1395

WorldCom, Inc., et al.,
Petitioners

v.

Federal Communications Commission and
United States of America,
Respondents

United States Telephone Association, et al.,
Intervenors

Consolidated with
99-1404, 99-1472

On Petitions for Review of an Order of the
Federal Communications Commission

Carl S. Nadler argued the cause for petitioners and sup-
porting intervenors. With him on the briefs were Ian Heath

Gershengorn, Thomas F. O'Neil, III, William Single, IV,
Jeffrey A. Rackow, Mark C. Rosenblum, Peter H. Jacoby,
Judy Sello, Gene C. Schaerr, James P. Young, Brian Conboy,
Thomas Jones, Albert H. Kramer, Robert J. Aamoth, Charles
C. Hunter and Catherine M. Hannan. Maria L. Woodbridge
entered an appearance.

Lisa S. Gelb, Counsel, Federal Communications Commis-
sion, argued the cause for respondent. With her on the brief
were Christopher J. Wright, General Counsel, and John E.
Ingle, Deputy Associate General Counsel. Robert B. Nichol-
son and Robert J. Wiggers, Attorneys, U.S. Department of
Justice, Daniel M. Armstrong, Associate General Counsel,
Federal Communications Commission, and Laurence N.
Bourne, Counsel, entered appearances.

Before: Edwards, Chief Judge, and Sentelle and
Randolph, Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: Petitioners, WorldCom, AT&T,
Time Warner Telecom, and other long distance telephone
service providers, seek review of the FCC's Fifth Report and
Order and Further Notice of Proposed Rulemaking in In Re
Access Charge Reform, 14 F.C.C.R. 14,221 (1999) (hereinafter
"Order" or "Pricing Flexibility Order"). That order grants
local exchange carriers ("LECs") immediate pricing flexibility
for some interstate access services and establishes procedures
through which LECs may seek substantial additional relief
from existing price cap regulation. Petitioners maintain that
the Order is arbitrary, capricious, and contrary to law in that
it violates the FCC's statutory mandate to ensure "just and
reasonable" prices for telecommunication services and pro-
mote the public interest. Several LECs--BellSouth, Qwest,
SBC Communications, and Verizon--intervene in support of
the FCC.

We hold that the FCC's decision to grant additional pricing
flexibility to incumbent LECs through a series of collocation

based triggers, deregulation of new services, and deaveraging
of rates was neither arbitrary and capricious nor contrary to
law. The FCC made a reasonable policy determination that
collocation was a sufficient proxy for market power in deter-
mining whether to grant pricing flexibility to LECs and
sufficiently explained the basis for its decision to grant imme-
diate pricing flexibility for some services. For these reasons,
we uphold the FCC's order and deny the petitions for review.

I. Background

A. Legal and Regulatory Context

In recent years, the FCC has sought to facilitate greater
competition in the provision of both long-distance and local
telephone service. See, e.g., AT&T v. FCC, 220 F.3d 607
(D.C. Cir. 2000); Bell Atl. Tel. Cos. v. FCC, 79 F.3d 1195
(D.C. Cir. 1996); Nat'l Rural Telecom Ass'n v. FCC, 988 F.2d
174 (D.C. Cir. 1993). Competition for telephone services,
where it exists, serves the FCC's statutory goal of ensuring
fair and reasonable prices for telecommunications services.
Therefore, as telephone markets become more competitive,
the FCC has lessened regulatory control over those markets,
including the market for interstate access services. It is
within this evolving regulatory context that this case arises.

1. Interstate Access Services

Local telephone service is provided by local exchange carri-
ers. 47 U.S.C. s 153(26). Typically, one LEC is the domi-
nant, or "incumbent," service provider in each local area.
Until relatively recently, the incumbent LECs had virtual
monopolies over the provision of local phone service in their
territories.

Long distance service--that is, service between local access
and transport areas ("LATAs") or "InterLATA" service--is,
for the most part, provided by interexchange carriers
("IXCs"), such as petitioners WorldCom and AT&T. Long
distance providers are reliant upon LECs to reach their
customers. When a customer makes a long distance call, the
IXC must have "access" to the local networks at both the

originating and receiving end of the call in order to complete
the connection. Generally, the LEC connects the call from
the caller to a switch or "end office," which is in turn
connected to a "serving wire center" (SWC), which is itself
connected to an interconnection point, or "point of presence"
(POP), with the long distance carrier. This same series of
connections will also be made at the receiving end of the
phone call--from POP to SWC to switch to call recipient.
LECs charge the IXCs for providing this "access service" in
accordance with 47 C.F.R. Part 69. IXCs then bill customers
directly for long distance calls.

There are two types of access service: "switched access"
and "special access." Switched access service requires the
creation of a connection between the caller and the long
distance company on a "call-by-call" basis. This entails (1) a
connection between the caller and a local LEC switch, (2) a
connection from the LEC switch to the SWC ("interoffice
transport"), and (3) an entrance facility which connects the
SWC and the long distance company's POP. Switched access
can either be dedicated to a particular IXC ("dedicated
transport" or "direct trunked transport") or shared among
IXCs. "Special access" service, on the other hand, uses
dedicated lines between the customer and the IXC's local
POP. Switched access is used by most residential customers.
Most users of special access services are companies with high
call volumes.

For quite some time incumbent LECs dominated access
service markets. In recent years, however, other companies
have begun to enter these markets. Market entrants typical-
ly provide a portion of full access service, such as from the
IXC POP to the SWC, in any given market. This develop-
ment was facilitated by changes in FCC regulations. Begin-
ning in 1992, the FCC required incumbent LECs to permit
competitors to "collocate" their equipment at LEC wire cen-
ters and connect directly to the LEC networks as a means of
spurring additional competition in access service. See Ex-
panded Interconnection with Local Tel. Co. Facilities, 7
F.C.C.R. 7369, p P1-3, 39, reconsidered 8 F.C.C.R. 127 (1992),
vacated in part and remanded in part, Bell Atl. Tel. Cos. v.

FCC, 24 F.3d 1441 (D.C. Cir. 1994). Now, the FCC believes,
there may be sufficient competition for access services to
justify deregulatory measures.

2. Regulatory Framework

For years the FCC imposed traditional rate of return
regulation on the LECs. Beginning in 1990, however, the
FCC substituted "price cap" regulation for the largest LECs.
See Nat'l Rural Telecom Ass'n, 988 F.2d at 178-79. Price
cap regulation imposes a "cap" on aggregate prices charged
by LECs for certain services in a given area. See 47 C.F.R.
ss 61.41-.49. For the purposes of setting the caps, services
are grouped in various "baskets." See 47 C.F.R. s 61.42(d).
These are the common line basket, traffic-sensitive basket,
trunking basket, and special access basket, the latter two of
which are at issue in this case. LECs are also required to
charge averaged (i.e., uniform) rates in given service areas,
absent substantial cost differentials. See 47 C.F.R.
s 69.3(e)(7). This averaging requirement is designed to pre-
vent price discrimination by LECs.

Price cap regulation offers more pricing flexibility than rate
of return regulation, as companies are relatively free to set
their own prices so long as they remain below the cap. A
company can raise the price for one service so long as that
increase is offset by a price decrease in another. Prices that
are below upper price "bands" for a given service are also
presumed lawful and given streamlined review by the FCC.
See Bell Atl. Tel. Cos., 79 F.3d at 1198. The FCC implement-
ed price cap regulation for LECs as "a transitional regulatory
scheme until actual competition makes price cap regulation
unnecessary." Order p 11.

Price cap regulation is supplemented by tariff requirements
for "dominant carriers" (including all regional Bell Operating
Companies in their local service areas), under which compa-
nies are required to publish rate changes before they are
implemented. 47 U.S.C. s 203(a), s 204(a). Tariffs must be
filed fifteen days in advance of price increases and seven days
in advance of price decreases. 47 U.S.C. s 204(a)(3). This
allows both the FCC and affected customers to review and

challenge price changes by LECs. The tariff requirement is
waived for those carriers that are deemed non-dominant
because they face substantial competition from other firms.

3. The 1996 Act

In 1996, Congress enacted the Telecommunications Act of
1996 to "promote competition and reduce regulation in order
to secure lower prices and higher quality services for Ameri-
can telecommunications consumers and encourage the rapid
deployment of new telecommunications technologies." Pub.
L. No. 104-104, 110 Stat. 56, 56 (Introductory Statement).
The 1996 Act requires incumbent LECs to grant competitors
(such as the IXCs) greater access to their local networks
through collocation of facilities, the purchase and resale of
"unbundled network elements" and services, and mandated
interconnection. 47 U.S.C. s 251(c)(2)-(4). In response to
the 1996 Act, the FCC has sought to move toward greater
competition for, and less regulation of, telecommunications
services.

B. The FCC's Pricing Flexibility Order

On August 5 1999, the FCC adopted the Fifth Report and
Order and Further Notice of Proposed Rulemaking in In Re
Access Charge Reform, 14 F.C.C.R. 14,221 (1999). In accor-
dance with the stated goals of the 1996 Act, the Order
granted immediate pricing flexibility for some services and
set competition thresholds to trigger additional relaxation of
regulatory controls. According to the FCC, the Order was the
"logical next step in the Commission's ongoing effort to
coordinate reduced regulation with competitive develop-
ments." Brief for Federal Communications Commission at 9.

1. Immediate Pricing Flexibility

The Order provides immediate pricing flexibility for LECs
in three important respects: (1) LECs may introduce "new
services" subject to a streamlined approval process; (2)
LECs may offer deaveraged rates for services in the trunking
basket; and (3) interstate interLATA and intraLATA toll
services are removed from price cap regulation. Order

p p 34-66. Petitioners challenge the first and second changes
as unlawful.

New services are those services that, by definition, "ex-
pand[ ] the range of service options available to consumers."
Id. p 37. Previously, an LEC needed a waiver to offer a new
switched access service that did not fit into the preexisting
rate structure. The LEC was required to demonstrate that
such a waiver was in the "public interest." Finding that
existing "new service rules impede the introduction of new
services," id. p 37, the FCC Order eliminates the required
"public interest" showing and allows LECs to file tariffs for
new services with only one-day's notice. LECs are still
prohibited from offering "new services outside of price cap
regulation." Id. p 43.

Under the FCC's regulations, price cap LECs are general-
ly required to geographically average charges for access
elements across a given "study area" (typically a state or
region). 47 C.F.R. s 69.3(e)(7). Deaveraging--the disaggre-
gation of charges for specific service access elements--was
only allowed in up to three zones per LEC and only subject to
certain conditions, such as intensity of use. Under the new
rules, LECs may define up to seven zones subject to the
requirements that (1) each zone other than the highest price
zone accounts for at least fifteen percent of the LEC's
trunking basket revenues in the study area, and (2) annual
price increases in a zone cannot exceed fifteen percent.
Order p 62. According to the FCC, this new flexibility "en-
hances the efficiency of the market for those services by
allowing prices to be tailored more easily and accurately to
reflect costs and, therefore, promotes competition." Id. p 59.

The Pricing Flexibility Order also removes interLATA and
intraLATA toll services from price cap regulation upon an
LEC's implementation of toll dialing parity. See id. p 45.
Toll service is "telephone service between stations in different
exchange areas for which there is made a separate charge not
included in contracts with subscribers for exchange service."
47 U.S.C. s 153(48). When an LEC provides toll dialing
parity, it permits its local service customers within a given

calling area "to make a local telephone call notwithstanding
the identity of the customer's or the called party's telecommu-
nications service provider." 47 C.F.R. s 51.207. LECs are
required to implement toll dialing parity throughout their
service areas. See 47 C.F.R. ss 51.205, .209, .211, .213.
Upon meeting this requirement for all interLATA and intra-
LATA toll services, an LEC's provision of these services is
removed from price cap regulation. This portion of the
Pricing Flexibility Order is not challenged in this case.

2. Future Pricing Flexibility

The FCC order also provides for additional pricing flexibili-
ty once an LEC shows that certain competitive thresholds
("triggers") have been met in a given metropolitan statistical
area (MSA). According to the FCC, this step is merely the
latest effort to "allow incumbent LECs progressively greater
pricing flexibility as they face increasing competition." Order
p 67. The triggers measure market competition based upon
investments in infrastructure by potential competitors. The
FCC's stated aim is to balance the benefit of further deregu-
lation with the potential risk of exclusionary behavior or
increased prices for consumers. See id. p 69 (noting that the
relief "if granted prematurely, might enable price cap LECs
to (1) exclude new entrants from their markets, or (2) in-
crease rates to unreasonable levels"). Therefore, the more
relief sought, the higher the trigger is set--that is, a greater
level of investment by competitors is required.

The relief comes in two phases. In Phase I, LECs may
offer contract tariffs and volume and term discounts, while
remaining subject to some price cap rules and tariff require-
ments. In addition, for LECs subject to Phase I relief, new
tariffs only require one day advance notice as opposed to
seven or fourteen days notice under current rules. Phase I
relief is available upon a showing "that competitors have
made irreversible investments in the facilities needed to
provide the services at issue, thus discouraging incumbent
LECs from successfully pursuing exclusionary strategies."
Id. p 69. Phase I relief is potentially available for dedicated
transport (entrance facilities, direct-trunked transport), chan-

nel terminations, and common line and traffic-sensitive ser-
vices.

In order to obtain Phase I relief for dedicated transport
services an incumbent LEC must show collocation in fifteen
percent of wire centers within the MSA in which relief is
sought, or in wire centers accounting for at least thirty
percent of revenues for services in question. Id. p 93. In
addition, at least one competitor must rely on transport
facilities provided by a non-incumbent LEC in each wire
center relied on in the applicant LEC's petition. Phase I
relief is available for channel terminations upon a showing of
collocation in fifty percent of wire centers within the MSA in
which relief is sought or in wire centers accounting for at
least sixty-five percent of revenues for services in question.
Id. p p 105-06. The trigger for common line and traffic-
sensitive services is that a competitor must offer service to
fifteen percent of incumbent LEC's customer locations using
its own transport and switching facilities. Id. p 120.

In each case Phase I relief is subject to several conditions
to prevent price discrimination or other potentially predatory
behavior. Under Phase I, contract tariff rates must be
available to all similarly situated customers, and volume
discounts must be available to all similarly situated customers
willing to make equivalent term commitments. Id. p p 124,
130. Incumbent LECs must continue to offer services pursu-
ant to price caps as well. Id. p 24. Finally, LECs remain
subject to FCC enforcement actions for anticompetitive be-
havior. See, e.g., id. p p 127, 131; 47 U.S.C. s 208.

In Phase II, LECs are given greater freedom to raise and
lower rates outside of price cap regulation. Phase II relief is
available for the same services and may be sought once
"competitors have established a significant market presence
in the provision of the services at issue." Order p 69. Phase
II relief allows LECs to offer services outside of price cap
regulation, though LECs must still file generally available
tariffs and remain subject to FCC enforcement actions for
anticompetitive behavior.

 In order to obtain Phase II relief for dedicated transport
services an incumbent LEC must show collocation in fifty
percent of wire centers within the MSA in which relief is
sought or in wire centers accounting for at least sixty-five
percent of revenues for services in question. Id. p p 148-49.
In addition, as with Phase I relief, at least one competitor
must rely on transport facilities provided by non-incumbent
LECs in each wire center relied on in the applicant LEC's
petition. Id. p 82. Phase II relief is available for channel
terminations upon a showing of collocation in sixty-five per-
cent of wire centers within the MSA in which relief is sought
or in wire centers accounting for at least eighty-five percent
of revenues for services in question. Id. p 150. The FCC has
not yet set a collocation trigger for common line and traffic-
sensitive services Phase II relief.

As with Phase I relief, LECs must file tariffs and remain
subject to FCC enforcement actions for anticompetitive be-
havior under the relevant statutory provisions. Id. p 151.
The FCC acknowledged that its rule may allow Phase II
relief before the manifestation of actual competitive alterna-
tives for interstate access service customers but that "the
costs of delaying regulatory relief outweigh the potential
costs of granting it before IXCs have a competitive alterna-
tive for each and every end user." Id. p 144.

Both Phase I and Phase II relief are available on an MSA-
wide basis. This is because, according to the FCC, "MSAs
best reflect the scope of competitive entry, and therefore are
a logical basis for measuring the extent of competition." Id.
p 72. Relief is not available on a rural service area basis.
Rather relief is available for the "non-MSA parts of a study
area"--typically one or more rural service areas--if the trig-
gers are satisfied for the entire area. Id. p 76. The FCC
acknowledges the "theoretical possibility" that granting relief
on an MSA-wide basis could enable LECs to engage in
predatory behavior. Id. p 83. However, the Commission
concluded "the costs, particularly the administrative costs, of
granting pricing flexibility on a wire center-by-wire center
basis outweigh the benefits of protecting against such theo-
retical harms." Id. The Commission declined to provide

relief on a LATA basis, as in some states the relevant LATA
encompasses the entire states. Id. p 73.

The triggers relied upon by the FCC are largely based
upon collocation by competitors at LEC facilities. The FCC
adopted this trigger for two reasons. First, the FCC con-
cluded that collocation is a reasonable proxy for competitive
conditions in a given MSA. Id. p 78. Specifically, the FCC
found that "collocation by competitors in incumbent LEC
wire centers is a reliable indication of sunk investment by
competitors." Id. p 81. Sufficient sunk investment of this
sort, in the FCC's view, will discourage "exclusionary pricing
behavior." Id. p 78. In addition, the FCC determined that
the collocation level is "an easily verifiable, bright-line test"
that serves "to avoid excessive administrative burdens." Id.
In this sense, the trigger balances the FCC's desire for an
accurate measure of actual competitive conditions in a given
MSA, while also establishing a clear administrative standard.

The FCC acknowledged that adopting specific thresholds,
like utility ratemaking, "is not an exact science." Id. p 96;
accord United States v. FCC, 707 F.2d 610, 618 (D.C. Cir.
1983). "Rather, the thresholds are policy determinations
based on our agency expertise, our interpretation of the
record before us in this proceeding, and our desire to provide
a bright-line rule to guide the industry." Id. p 96 (footnote
omitted). Moreover, the FCC claimed its "effort to select
triggers that precisely measure competition for particular
services also is hampered by the lack of verifiable data
concerning competitors' revenues and facilities." Id.

To set the proper trigger thresholds the FCC examined a
few local markets to assess the extent of market penetration
that correlates with a given level of collocation investment,
and scaled the various triggers to correlate with the level of
relief sought. Thus, the Phase II triggers are higher than
those for Phase I, and different services have different trig-
ger levels depending upon the FCC's estimation of the threat
of predatory or anticompetitive conduct. Thus, the amount of
collocation required to obtain Phase I relief for channel
terminations is higher than for dedicated transport services.

 II. Analysis

A. Collocation Thresholds for Pricing Flexibility

Petitioners challenge the FCC's decision to offer LECs
relief from price cap regulation based upon a showing that
one or more competitors have made substantial local invest-
ments in collocation. Petitioners contend that this decision
was arbitrary and capricious and contrary to law because the
FCC failed to condition this relief upon a finding of competi-
tion sufficient to protect consumers from anticompetitive con-
duct. Collocation, petitioners contend, is a poor proxy for
actual competition in the provision of interstate access ser-
vices. As a result, petitioners claim that the Order violates
the Commission's statutory duty to ensure that prices are
"nondiscriminatory, 'just,' and 'reasonable.' "

Petitioners specifically challenge three aspects of the
FCC's new pricing flexibility framework: (1) basing the trig-
gers for pricing flexibility on collocation rather than an
analysis of actual competitive conditions; (2) granting pricing
flexibility on an MSA-wide basis based on collocation in only a
portion of the MSA; and (3) selecting specific triggers in an
arbitrary fashion and without sufficient explanation. In as-
sessing these claims, we consider whether the FCC's actions
are "arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law." 5 U.S.C. s 706(2)(A). This is a
"deferential standard" that "presume[s] the validity of agency
action." Southwestern Bell Tel. Co. v. FCC, 168 F.3d 1344,
1352 (D.C. Cir. 1999); accord Jersey Shore Broad. Corp. v.
FCC, 37 F.3d 1531, 1537 (D.C. Cir. 1994). Like agency
ratemaking, price cap regulation of local carriers "involves
policy determinations in which the agency is acknowledged to
have expertise." Time Warner Entm't Co. v. FCC, 56 F.3d
151, 163 (D.C. Cir. 1995) (per curiam) (internal quotation
omitted). Therefore, it is not our role to second guess the
FCC's policy judgment, so long as it comports with estab-
lished standards of administrative practice. "The FCC's
judgment about the best regulatory tools to employ in a
particular situation is ... entitled to considerable deference

from the generalist judiciary." Western Union Int'l, Inc. v.
FCC, 804 F.2d 1280, 1292 (D.C. Cir. 1986).

1. Collocation

Under the Pricing Flexibility Order, LECs are eligible for
regulatory relief upon a showing that there is sufficient
collocation by one or more competitors. In this fashion, the
FCC uses investment in collocation as a proxy for competition
in access service. Petitioners contend that this is arbitrary
and capricious because collocation is not a sufficient measure
of actual market competition. Therefore, petitioners argue,
the FCC can offer no assurance that LECs will continue to
offer "just" and "reasonable" rates once they are granted
pricing flexibility. To petitioners, the regulatory relief pro-
vided for by the FCC's Order is tantamount to foregoing
dominant carrier regulation altogether, and can only be justi-
fied upon a finding of actual competition.

It may well be that collocation is a poor measure of market
share, as petitioners attest. That competing firms have
invested in collocation does not mean that they have captured
a significant portion of the market for access services. Yet
the FCC did not conclude that a loss of market share was
necessary to prevent an incumbent LEC from raising prices.
The FCC has long held that market share is not the be-all,
end-all of competition. See AT&T Corp. v. FCC, No. 99-1535,
slip op. at 13 (D.C. Cir. Jan. 23, 2001) ("the FCC has never
viewed market share as an essential factor" in evaluating
market competition) (emphasis in original). It is merely one
of several relevant factors considered when making a market
power determination. For example, in Motion of AT&T
Corp. to Be Declared Non-Dominant for International Ser-
vice, 11 F.C.C.R. 17,963, 17,976 p 34 (1996), the FCC wrote
that

market shares, by themselves, are not the sole determin-
ing factor of whether a firm possesses market power.
Other factors, such as demand and supply elasticities,
conditions of entry and other market conditions must be
examined to define a relevant market, and determine
whether a particular firm can exercise market power in
the relevant market.

The FCC is free to change this policy so long as it provides
an adequate explanation for the shift, AT&T, slip op. at 13-
14, but it has not done so.

As the FCC noted in its Order, the presence of substantial
sunk investment, and the resulting potential for entry into the
market, can limit anticompetitive behavior by LECs. Specifi-
cally, the FCC found that:

Once multiple rivals have entered the market and cannot
be driven out, rules to prevent exclusionary pricing be-
havior are no longer necessary. Investment in facilities,
particularly those that cannot be used for another pur-
pose, is an important indicator of such irreversible entry.
If a competitive LEC has made a substantial sunk invest-
ment in equipment, that equipment remains available and
capable of providing service in competition with the
incumbent, even if the incumbent succeeds in driving that
competitor from the market.

Order p 80. Even if a rival LEC is unsuccessful at challeng-
ing an incumbent, "the presence of facilities-based competi-
tion with significant sunk investment makes exclusionary
pricing behavior costly and highly unlikely to succeed." Id.
Collocation, in the FCC's expert view, "is a reliable indication
of sunk investment by competitors." Id. p 81. Therefore,
collocation can reasonably serve as a measure of competition
in a given market and predictor of competitive constraints
upon future LEC behavior.

Whatever its faults as a measure of competition, the FCC
found collocation to be superior to the various alternatives
proposed by petitioners during the notice and comment peri-
od. See id. p p 84, 104. Petitioners, for their part, offer no
alternative save a painstaking analysis of market conditions
such as that which is required when an LEC seeks classifica-
tion as a non-dominant carrier or the forbearance of dominant
carrier regulation under Section 10 of the Communications
Act. See, e.g., AT&T Corp. v. FCC, No. 99-1535 (D.C. Cir.
Jan. 23, 2001). The FCC determined that this would be
burdensome and time-consuming--a point which petitioners
do not contest--and thus not appropriate in all cases. It

therefore sought an alternative for the purpose of providing
pricing flexibility, in addition to the statutory procedure
under Section 10, 47 U.S.C. s 160, which remains a "viable
and independent means" for carriers to seek regulatory relief.
AT&T, slip op. at 16.

That the FCC chose to rely upon an admittedly imperfect
measure of competition does not render its use arbitrary and
capricious. Nat'l Ass'n of Regulatory Util. Comm'rs v. FCC,
737 F.2d 1095, 1116 (D.C. Cir. 1984) ("NARUC"). Nor is the
FCC's decision to make ease of administration and enforce-
ability a consideration in setting its standard for regulatory
relief. So long as the FCC's proxy is reasonable, as it is
here, we have no basis upon which to require the FCC to
engage in a more searching analysis of competition before
granting pricing flexibility. Cf. United States v. FCC, 652
F.2d 72, 90-91 (D.C. Cir. 1980) (en banc) ("Someone must
decide when enough data is enough. In the first instance
that decision must be made by the Commission.... To allow
others to force the Commission to conduct further evidentiary
inquiry would be to arm interested parties with a potent
instrument for delay.").

Petitioners emphasize the FCC's concession that the pric-
ing flexibility contained in the Order could "if granted prema-
turely ... enable price cap LECs to (1) exclude new entrants
from their markets, or (2) increase rates to unreasonable
levels." Order p 68. Petitioners contend it is reversible error
for the FCC to fail to show that its new regulations will result
in "just and reasonable" rates for consumers. See Farmers
Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1510 (D.C.
Cir. 1984).

The FCC readily admits that its decision to adopt the
thresholds contained in the Pricing Flexibility Order was
dependent, at least in part, on the agency's predictive fore-
casts. Despite their inherent uncertainty, there is little ques-
tion that agency prognostications of this sort may be used in
the formulation of policy; "it is within the scope of the
agency's expertise to make such a prediction about the mar-
ket it regulates, and a reasonable prediction deserves our

deference notwithstanding that there might also be another
reasonable view." Envtl Action, Inc. v. FERC, 939 F.2d
1057, 1064 (D.C. Cir. 1991). There is no statutory require-
ment that the FCC be confident to a metaphysical certainty
of its predictions about the future of competition in a given
market before it may modify its regulatory scheme.

Petitioners also contend that the FCC's reliance upon a
proxy for competition is arbitrary and capricious because it is
contrary to Commission precedent. Petitioners argue that
since the Pricing Flexibility Order would grant incumbent
LECs much of the relief afforded to carriers that are de-
clared non-dominant, the FCC should be precluded from
granting such relief without engaging in the sort of competi-
tion analysis it conducted when considering whether to de-
clare a carrier non-dominant. We do not agree.

The Commission readily admits it made different findings
when declaring AT&T to be non-dominant, as petitioners
claim. See Motion of AT&T Corp. to Be Reclassified as a
Non-Dominant Carrier, 11 F.C.C.R. 3271 (1995). However,
the Pricing Flexibility Order expressly does "not grant in-
cumbent LECs all the regulatory relief ... afford[ed] to non-
dominant carriers." Order p 151. Even those LECs which
receive Phase II relief must still file tariffs. This is not
insignificant; tariff filing is the "centerpiece of ... common
carrier regulation." Southwestern Bell Tel. Co. v. FCC, 19
F.3d 1475, 1479 (D.C. Cir. 1994). Therefore, the fact that the
FCC did not engage in the thorough competition analysis
common in non-dominance proceedings does not render the
FCC's action arbitrary and capricious.

Petitioners' appeal to other FCC precedent is equally una-
vailing. For instance, petitioners note that in the UNE
Remand Order, the FCC preferred actual measures of com-
petition to a "bright-line test" in determining when to relieve
LECs of specific regulatory burdens. In re Implementation
of the Local Competition Provisions of the Telecomms. Act of
1996, 15 F.C.C.R. 3696 (1999). However, this proceeding
concerned the conditions upon which local service providers
are given access to unbundled transport in the first place, not
whether deregulatory measures are warranted once competi-

tive providers have used such access to gain a foothold in a
given market.

There is no rule against agencies adopting new policy
positions. "Everyone agrees that an agency's change of mind
does not itself render the agency's action arbitrary." Bell
Atl., 79 F.3d at 1202. Rather "[w]hat matters is the Commis-
sion's explanation." Id. Agencies are "not bound to the
service of any single regulatory formula; they are permitted,
unless their statutory authority otherwise plainly indicates, to
make pragmatic adjustments which may be called for by
particular circumstances." Permian Basin Area Rate Cases,
390 U.S. 747, 776-77 (1968) (internal quotation omitted).
Here, the Commission determined that there was reason to
modify the regulatory requirements imposed upon LEC pro-
vision of access services and, unlike in its consideration of US
West's forbearance petition, thoroughly explained why the
Commission found it appropriate to grant incumbent LECs
relief from existing regulations upon certain competitive
showings. See AT&T Corp. v. FCC, No. 99-1535 (D.C. Cir.
Jan. 23, 2001) (remanding FCC denial of forebearance peti-
tion for failure to adequately explain departure from FCC
precedent).

More broadly, the FCC contends that the Order should not
be viewed in isolation, but rather as an additional step along
the road of greater deregulation and pricing flexibility in the
interstate access market. See, e.g, Order p 67. Beginning in
1990, the FCC has taken several steps to encourage innova-
tion, cost-reduction, and greater efficiency by reducing regu-
latory strictures in favor of market discipline. See, e.g., id.
p p 11-18 (summarizing replacement of rate-of-return regula-
tion with price-cap regulation and subsequent developments).
Much as the FCC decided that replacing rate-of-return regu-
lation with price cap regulation furthered the public interest,
it has now determined that relaxing price cap regulation,
when certain levels of collocation have been achieved, furthers
its statutory mandate and promotes the public interest. Peti-
tioners fail to show how this conclusion is arbitrary and
capricious or otherwise contrary to law.

2. MSA-Wide Deregulation

Petitioners contend that the FCC was arbitrary and capri-
cious and abdicated its statutory obligations by authorizing

MSA-wide relief upon a showing of collocation in only a
portion of the MSA. According to petitioners, due to this
provision of the Pricing Flexibility Order the FCC cannot
ensure that interstate access service prices will be just and
reasonable, and therefore the collocation triggers are unlaw-
ful. According to petitioners, the FCC's previous orders
establish that in analyzing competitive issues, the proper
"geographic market aggregates those consumers with similar
choices regarding a particular good or service in the same
geographical area." NYNEX Corp., 12 F.C.C.R. 19,985 p 54
(1997). With the Pricing Flexibility Order, however, the
FCC lumped together customers that do not have similar
competitive alternatives into larger geographic markets--
MSAs--for the purpose of regulatory relief. As a result,
petitioners contend, LECs will gain regulatory relief while
maintaining substantial bottlenecks and market power.

The FCC considered this objection in devising its Order
and nonetheless concluded that pricing flexibility should be
granted on an MSA-wide basis. The FCC defined "the geo-
graphic area that it should use for purposes of reviewing
requests for pricing flexibility ... narrowly enough so that
the competitive conditions within each area are reasonably
similar, yet broadly enough to be administratively workable."
Order p 71. Commenters proposed both larger and smaller
relief areas. The FCC settled upon MSAs because, in the
FCC's expert view, they "best reflect the scope of competitive
entry." Id. p 72. Upon review, the FCC decided that
smaller geographic areas would require incumbent LECs to
file too many pricing flexibility petitions to achieve meaning-
ful relief--a conclusion petitioners do not dislodge with any
evidence to the contrary.

At bottom, petitioners' objection to the FCC's decision to
offer pricing flexibility on an MSA-wide basis amounts to a
difference in policy preferences. This is not a sufficient basis
upon which to upset the FCC's determination. See Time
Warner Entm't, 56 F.3d at 163. The FCC considered alter-
natives to MSA-wide relief and determined that, on balance,
these alternatives would be less beneficial to consumers and
regulated entities. As the FCC provided an adequate expla-

nation for this conclusion, we uphold the Commission's conclu-
sion.

3. Trigger Level Selection

Petitioners' objections to the specific collocation thresholds
established by the FCC are no more than policy differences
with the Commission. Like any agency, the FCC must
provide a rational basis when setting a number for a stan-
dard, but it is not held to a standard of perfection. The
standard for reviewing such determinations was outlined in
WJG Telephone Co. v. FCC:

It is true that an agency may not pluck a number out of
thin air when it promulgates rules in which percentage
terms play a critical role. When a line has to be drawn,
however, the Commission is authorized to make a "ra-
tional legislative-type judgment." If the figure selected
by the agency reflects its informed discretion, and is
neither patently unreasonable nor "a dictate of unbridled
whim," then the agency's decision adequately satisfies
the standard of review.

675 F.2d 386, 388-89 (D.C. Cir. 1982) (citations omitted);
accord NARUC, 737 F.2d at 1141.

Petitioners are correct that the Commission may not evade
review of its decision-making merely by asserting that the
thresholds were "policy determinations." See San Antonio v.
United States, 631 F.2d 831, 852 (D.C. Cir. 1980) (That a
decision involves a policy judgment "does not excuse the
[agency] from articulating fully and carefully the methods by
which, and the purposes for which, it has chosen to act.")
(internal quotes omitted). Yet the FCC is not required to
identify the optimal threshold with pinpoint precision. It is
only required to identify the standard and explain its relation-
ship to the underlying regulatory concerns. The FCC notes
that this court is "generally unwilling to review line-drawing
performed by the Commission unless a petitioner can demon-
strate that lines drawn ... are patently unreasonable, having
no relationship to the underlying regulatory problem." Cas-
sell v. FCC, 154 F.3d 478, 485 (D.C. Cir. 1998) (internal

quotations omitted). The relevant question is "whether the
agency's numbers are within a 'zone of reasonableness,' not
whether its numbers are precisely right." Hercules Inc. v.
EPA, 598 F.2d 91, 107-08 (D.C. Cir. 1978). Indeed, just last
term we held that "the Commission has wide discretion to
determine where to draw administrative lines, and appellants
point to nothing suggesting that the agency abused its discre-
tion in drawing the line[s]" where it did. AT&T Corp., 220
F.3d at 627.

The FCC made a predictive judgment that the amount of
collocation required for each trigger will be sufficient to
constrain anticompetitive practices by incumbent LECs. The
FCC also looked at areas where there was substantial colloca-
tion to determine whether that correlated with substantial
involvement in competitive transport facilities. See, e.g., Or-
der p p 81, 95. For example, the FCC reviewed evidence that
collocation in approximately eighteen percent of wire centers
corresponded to over 2,000 miles of competitive fiber facili-
ties. See id. p 95. The FCC also notes that there are
reasons to believe that, if anything, collocation underesti-
mates competition in relevant markets as "it fails to account
for the presence of competitors that ... have wholly by-
passed incumbent LEC facilities." Id. Weighing these fac-
tors, the FCC concluded that its collocation triggers were
sufficiently protective of the public interest. This is precisely
the sort of "rational legislative-type judgment" the FCC is
empowered to exercise and we are required to respect.

B. Immediate Pricing Flexibility for New Services

Petitioners also challenge the FCC's decision to grant
LECs immediate pricing flexibility for new services. Prior to
the new rule LECs were required to tariff new services
fifteen days in advance and to demonstrate that prices were
reasonable given the carrier's direct costs of providing the
service. As a result of the FCC's Pricing Flexibility Order,
LECs may tariff with only one day's notice and (with the
exception of loop-based services) need not show that the
prices for new services bear any relation to costs. As noted
above, the FCC granted pricing flexibility for new services

because it found that existing regulatory requirements de-
layed the development and introduction of new services to the
detriment of consumers. See id. p 37.

Petitioners contend that the FCC's decision to grant imme-
diate pricing flexibility for new services is unlawful because it
compromises the Commission's "fundamental obligation" to
ensure that rates are just and reasonable. Section 201(b) of
the Communications Act provides that "[a]ll charges ... shall
be just and reasonable, and any such charge ... that is
unjust or unreasonable is declared to be unlawful." 47 U.S.C.
s 201(b). Citing the Second Circuit, petitioners argue that
there is "no authority for the proposition that the FCC may
abdicate its responsibility" under section 201(b) to regulate
dominant carriers so as to ensure "just" and "reasonable"
rates. AT&T v. FCC, 572 F.2d 17, 25 (2d Cir. 1978).

Contrary to petitioners' claims, there is nothing inherently
unreasonable in the Commission's shift to streamlined review
of new services. Cf. Nat'l Rural Telecom Ass'n v. FCC, 988
F.2d 174, 185 (D.C. Cir. 1993) ("In light of the FCC's objec-
tive of eliminating the filing burdens of both itself and the
carriers, and its reasonable finding that caps and bands
render the prospect of unreasonable filings sufficiently im-
probable, we find streamlined review to be reasonable.").
The Commission is free to reduce regulatory requirements
where, as here, it finds that less regulation will better serve
its statutory goals. As we noted above, "[t]he FCC's judg-
ment about the best regulatory tools to employ in a particular
situation is ... entitled to considerable deference from the
generalist judiciary." Western Union Int'l, 804 F.2d at 1292.
Here, the Commission determined that consumers are better
served by loosening the government's grip on new service
offerings and prices.

Petitioners further argue that insofar as new services
represent significant technological advances over existing ser-
vices, failure to offer that service to consumers or competitors
at a reasonable price can produce competitive harm. Al-
though the FCC did not remove new services from price cap
regulation altogether, petitioners contend incumbent LECs

may nonetheless incorporate a new service into the price caps
at an inflated monopolistic price, thereby inflating the overall
price cap and enabling LECs to raise the prices of other
services. The FCC also rejected this contention, noting that
price caps are determined on a revenue-weighted basis.
Therefore, should an LEC offer a new service at an inflated
price, it would have little revenue weight so it would not
enable the LEC to inflate the rates for other services.

C. Rate Deaveraging for Transport Basket Services

As part of the Pricing Flexibility Order, the FCC gave
LECs additional flexibility to deaverage rates for transport
basket services, subject to certain limitations, because aver-
aged rates have the potential to "create a pricing umbrella for
competitors that would deprive customers of the benefits of
more vigorous competition." Order p 60. The FCC believes
that deaveraged rates promote efficiency, and existing regula-
tions discouraged carriers from pursuing deaveraged rates.
Petitioners challenge this decision on the grounds that allow-
ing rate deaveraging will result in "predatory pricing and
cross-subsidization." In particular, petitioners contend that
LECs will use this new pricing flexibility to lower their
transport rates in competitive markets and increase their
rates where competition is minimal.

Merely because WorldCom disagrees with the FCC's con-
clusion that deaveraging rates will produce more consumer
benefits than maintaining the existing regulatory structure is
no reason for this court to strike down the FCC's decision.
As noted above, the FCC's policy judgments are entitled to
due deference from this court so long as the agency's conclu-
sions are reasonable and supported by substantial evidence,
and the agency complies with the applicable procedural re-
quirements. As above, the FCC's decision with regard to
deaveraging rates meets this minimal test.

Petitioners' concerns were raised by both AT&T and
WorldCom during the notice and comment period, were con-
sidered by the FCC, and rejected. The FCC concluded that
petitioners' fears are exaggerated, and there is no basis upon
which this court could conclude that this determination was

arbitrary, capricious or otherwise contrary to law. Indeed,
"there is a consensus among commentators that predatory
pricing schemes are rarely tried, and even more rarely suc-
cessful." Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 589 (1986). Moreover, the FCC took specific
steps to guard against the possibility of anticompetitive con-
duct. In particular, the Order limits annual price increases
within pricing zones to fifteen percent, and the annual in-
creases in the study area are limited to five percent. See
Order p 63; 47 C.F.R. s 61.47(e). According to the Commis-
sion, this safeguard ensures "that incumbent LECs cannot
define zones that are, for all practical purposes, specific to
particular customers." Order p 62. Finally, LECs can still
be subject to prosecution should they engage in predatory
behavior. After thorough review, the FCC considered these
safeguards to be sufficient in this instance, and we can find no
reason to upset that result.

III. Conclusion

For the foregoing reasons, we affirm the FCC, and the
petitions for review are denied.