MCI WrldCom Ntwrk v. FCC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 1, 2001 Decided December 28, 2001

No. 00-1406

MCI Worldcom Network Services, Inc. and
MCImetro Access Transmission Services LLC,
Petitioners

v.

Federal Communications Commission and
United States of America,
Respondents

Verizon Communications,
Intervenor

Petition for Review of an Order of the
Federal Communications Commission

Jodie L. Kelley argued the cause for petitioners. With her
on the briefs were Donald B. Verrilli Jr., Lara M. Flint,
Thomas F. O'Neil III and William Single IV.

 Rodger D. Citron, Counsel, Federal Communications Com-
mission, argued the cause for respondent. On the brief were
John Rogovin, Deputy General Counsel, John E. Ingle, Depu-
ty Associate General Counsel, and Laurel R. Bergold, Coun-
sel. Laurence N. Bourne, Counsel, Andrea Limmer and
Catherine G. O'Sullivan, Attorneys, U.S. Department of Jus-
tice, entered appearances.

J.C. Rozendaal argued the cause for intervenor. With him
on the brief were Mark L. Evans and Michael E. Glover.

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

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: MCI Worldcom Network Ser-
vices, Inc., and MCImetro Access Transmissions Services,
LLC (collectively "MCI") petition this Court for review of the
Federal Communications Commission's ("FCC" or "Commis-
sion") order dismissing its complaint against Bell Atlantic
Corporation (now Verizon Communications, Inc.1), in which
MCI alleged that Bell Atlantic violated the pricing require-
ment set forth by the FCC in its order approving the merger
of Bell Atlantic and NYNEX Corporation. See Memorandum
Opinion and Order, AT&T Corp. v. Bell Atlantic Corp., and
MCI Telecommunications Corp., et al. v. Bell Atlantic Corp.,
15 FCC Rcd 17066 (2000) ("Dismissal Order"). In the Dis-
missal Order the FCC reasoned that the proper forum for
MCI's complaint was the state public utility commissions,
pursuant to 47 U.S.C. s 252 (2000), and that the merger
order imposed no cost methodology requirement that is not
independently applicable in such section 252 proceedings.
MCI alleges that the dismissal was arbitrary and capricious,
effectively nullifying the merger order pricing requirement.
Because the FCC did not act unreasonably in declining to
enforce the merger order requirement in what amounts to a
parallel and duplicative proceeding under 47 U.S.C. s 208, we
deny the petition for review.

__________
1 For clarity, we will refer to this company as "Bell Atlantic."

 I. Background

A. Statutory and Regulatory Framework

The Telecommunications Act of 1996, Pub. L. No. 104-104,
110 Stat. 56, codified at 47 U.S.C. ss 151-276 ("the Act"), was
enacted to bring about market competition in the local tele-
phone service market. As part of its comprehensive scheme,
it requires incumbent local telephone service providers to
interconnect with new market entrants, and to allow these
new entrants to lease elements that make up the local net-
work to provide local telecommunications service. See 47
U.S.C. s 251 (2000). The Act mandates that the rates for
interconnection and access to unbundled network elements be
"just and reasonable" and "based ... on cost." Id. at
s 252(d)(1). The Act further expressly provides that a "State
[public utility] commission" must, in arbitration proceedings,
"establish ... rates for interconnection, services, or network
elements." Id. at s 252(c)(2). However, Congress empow-
ered the FCC to prescribe the general methodology to be
used by the state commissions in setting these rates. See id.
at s 252(d)(1); AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366,
385 (1999) (holding "that the Commission has jurisdiction to
design a pricing methodology"). Thus Congress created a
kind of "intergovernmental partnership" with a division of
responsibility between the FCC and the states. Michigan v.
EPA, 268 F.3d 1075, 1078 (D.C. Cir. 2001); cf. Virginia v.
EPA, 108 F.3d 1397, 1408 (D.C. Cir. 1997) (describing a
partnership between the states and the federal government
as an "experiment in federalism").

Pursuant to section 252(d)(1), the FCC issued its Imple-
mentation of the Local Competition Provisions in the Tele-
communications Act of 1996, 11 FCC Rcd 15499, modified on
recon., 11 FCC Rcd 13042 (1996) ("Local Competition Or-
der"), in which it set forth a forward-looking pricing method-
ology based on the so-called Total Element Long-Run Incre-
mental Cost ("TELRIC") of a local network. TELRIC is a
forward-looking cost methodology in which it is assumed that
a carrier uses a hypothetical network with the most advanced
and efficient technology available, at a significant reduction in

cost over the network elements that are actually in use. See
Local Competition Order, 11 FCC Rcd at 15850, p 690.
TELRIC is just one "particular species of forward-looking
cost methodology." Dismissal Order, 15 FCC Rcd at 17071-
72, p 13. The Local Competition Order required the state
public utility commissions to use a forward-looking methodol-
ogy, specifically TELRIC, in setting rates. See Dismissal
Order, 15 FCC Rcd at 17069, p 7.

The Local Competition Order and the division of labor
between the state commission and the FCC have been the
subject of much litigation, with cases being consolidated in
the U.S. Court of Appeals for the Eighth Circuit. See Iowa
Utils. Bd. v. FCC, 109 F.3d 418, 421 (8th Cir. 1996). That
court originally ruled that the FCC lacked authority to issue
pricing methodology regulations binding on the states. Iowa
Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997). The Supreme
Court reversed in AT&T Corp. v. Iowa Utilities Board, 525
U.S. 366 (1999). On remand, the Eighth Circuit agreed with
the FCC that it could prescribe use of a forward-looking cost
methodology under the 1996 Act, but invalidated the FCC's
particular pricing methodology-TELRIC. Iowa Utils Bd. v.
FCC, 219 F.3d 744 (8th Cir. 2000). That decision is currently
before the Supreme Court, Verizon Communications v. FCC,
121 S. Ct. 877 (2001) (granting certiorari), where oral argu-
ment was held on October 10, 2001.

B. The Bell Atlantic/NYNEX Merger

Bell Atlantic (which became Verizon as part of a subse-
quent merger with GTE Corporation) and NYNEX an-
nounced their intent to merge on April 23, 1996, and sought
FCC approval of the transfer of licenses. On August 14,
1997, the FCC approved the merger, but with nine conditions
that would remain in effect for a four-year period. See
Memorandum Opinion and Order, Applications of NYNEX
Corp., Transferor, and Bell Atlantic Corp., Transferee, For
Consent to Transfer Control of NYNEX Corp. and Its Sub-
sidiaries, 12 FCC Rcd 19985, 20069-79 (1997) ("Merger Or-
der"). The Merger Order outlines significant concerns over

the harm to competition that would be caused by the Bell
Atlantic/NYNEX merger. See id. at 20008-63. In response
to the concerns, on "July 19, 1997, Bell Atlantic and NYNEX
submitted an ex parte filing proffering a number of specific
commitments they would undertake as conditions of the ap-
proval of the transfer of [the] licenses." Id. at 20069, p 178.
Based on these commitments, the FCC proceeded to approve
the merger. See id. The FCC concluded that "these com-
mitments are sufficient to outweigh the harm to the public
interest," and approved the merger, subject to the nine
voluntary conditions set forth by the FCC in Appendix C of
the Merger Order. Id. at 20069, p 179. The conditions are:
1) The preparation of Performance Monitoring Reports; 2)
providing uniform interfaces for use by carriers purchasing
interconnection; 3) conducting operational testing of the in-
terfaces; 4) proposing certain options for carriers purchasing
interconnection; 5) providing shared transport based on for-
ward-looking, economic costs; 6) proposing rates based upon
forward-looking, economic cost; 7) engaging in good faith
negotiations to establish performance standards; 8) a 48-
month sunset provision; and 9) a commitment to negotiate
requested supplements to existing agreements based on these
conditions. Merger Order, 12 FCC Rcd at 20107-12, App. C
p p 1-9. At issue in this appeal is Paragraph 6 of the
conditions, which provides:

To the extent Bell Atlantic/NYNEX proposes rates, in-
cluding in interconnection negotiations and arbitrations,
for interconnection, transport and termination, or unbun-
dled network elements, including both recurring and non-
recurring charges, any such proposal shall be based upon
the forward-looking, economic cost to provide those
items.

Id. at 20111, p 6. The Merger Order was issued less than a
month after the Eighth Circuit originally ruled that the FCC
lacked authority to issue pricing methodology regulations
binding on the states and vacated the FCC's pricing rules.
See Dismissal Order, 15 FCC Rcd at 17069, p 9.

 C. Proceedings Below

A few months after the release of the Merger Order, AT&T
Corporation and MCI filed formal complaints with the FCC
pursuant to 47 U.S.C. s 208, alleging Bell Atlantic had com-
mitted various violations of Paragraph 6 of the Merger Order
in seven different jurisdictions. See Dismissal Order, 15
FCC Rcd at 17067, p 4. AT&T and MCI argued that Bell
Atlantic had not used TELRIC or a forward-looking cost
methodology in setting rates. See id. at 17067-68, p 4. The
complainants sought FCC enforcement of the Paragraph 6
pricing condition of the Merger Order against Bell Atlantic.
Bell Atlantic moved for the FCC to dismiss or deny the
complaints and pointed out that the complainants already had
litigated whether Bell Atlantic's proposed rates were based
on forward-looking costs in state arbitration proceedings pur-
suant to 47 U.S.C. ss 251 and 252. See Dismissal Order, 15
FCC Rcd at 17068, p 6. Specifically, Bell Atlantic argued
that the complainants' claims were either moot, as state
commissions had already set rates, or should be dismissed
"on the basis of comity," out of respect for the dominant role
the 1996 Act assigns the states in setting rates. See id. Bell
Atlantic also contended that MCI's complaint was wrong on
the merits in two respects: The Merger Order only required
that rates be based "upon the forward-looking, economic cost"
and not necessarily TELRIC; and Bell Atlantic's rate propos-
als were in fact based on forward-looking costs as well as the
specific requirements of TELRIC. See id. at 17068, p p 5-6.

During 1998, the parties conducted discovery and filed
merits briefs. In early 1999, after the Supreme Court issued
its ruling in AT&T Corp. v. Iowa Utilities Board, the FCC
requested supplemental briefing. In March 2000, AT&T
petitioned this Court for a writ of mandamus, seeking an
order directing the FCC to decide the complaints. In re
AT&T Corp., No. 00-1133 (filed March 23, 2000), dismissed
as moot, (D.C. Cir. Sept. 19, 2000). That petition was ren-

dered moot when the FCC issued its order dismissing AT&T
and MCI's complaints. See id.

In its Dismissal Order, the FCC observed that it had
adopted Paragraph 6 of the Merger Order in light of the
uncertainty created by the Eighth Circuit's vacatur of the
generally applicable forward-looking pricing rules of the Lo-
cal Competition Order in Iowa Utilities Board v. FCC, 120
F.3d 753 (8th Cir. 1997). See Dismissal Order, 15 FCC Rcd
at 17069, p 9. It explained that Paragraph 6 was a gap-filling
measure to replace the Local Competition Order, and that it
was no longer necessary given the Supreme Court's reversal
of the Eighth Circuit. See id. at 17071, p 12.

The FCC stated that the regulatory objective underlying
Paragraph 6 had been satisfied both by the state commis-
sions' adoption of forward-looking pricing standards and the
Supreme Court's reversal. See id. at 17069-70, p 10. It
rejected the argument that Paragraph 6 required the use of
TELRIC. Rather, the Merger Order only required the use of
a forward-looking cost methodology, without specifying any
particular version. See id. at 17071-72, p 13. The FCC
observed that Paragraph 6 imposes "no cost methodology
requirement that is not independently applicable in section
252 proceedings," and therefore "the substance of the pricing
methodology that the state commissions have employed (and
must continue to employ) in section 252 proceedings wholly
subsumes the substance of the merger condition [in Para-
graph 6.]" Id. at 17071, p 12 (emphasis added). The only
question remaining was "whether, as a procedural matter, the
merger condition compels [the FCC] to duplicate the rate
inquiry that Congress entrusted to the state commissions and
the federal courts on review." Id. The Commission conclud-
ed that duplication of the rate inquiry entrusted to the state
commissions by statute "could unnecessarily raise substantial
comity concerns," and rejected the argument that the Merger
Order required it to adjudicate Bell Atlantic's compliance with
Paragraph 6 through a section 208 proceeding. Id. Instead,
it ruled that a section 208 proceeding was inappropriate
because the "merger condition was designed to ensure the
use of a forward-looking cost methodology as a substantive
matter; it was not independently designed to bypass the
statutory procedural framework for ensuring compliance with

that methodology under section 252." Id. (emphasis added).
The Commission dismissed MCI's and AT&T's complaints
with prejudice. Id. at 17072, p 14.

MCI sought review of the Dismissal Order in this Court.
AT&T did not.

II. Analysis

MCI contends that the Dismissal Order "represents a
fundamental departure from prior policy, effectively eliminat-
ing a critical requirement imposed on Bell Atlantic as a
condition of the Commission's approval of the Bell Atlantic-
NYNEX merger." Thus, at the heart of the dispute, MCI
argues that the FCC failed to provide an adequate explana-
tion for this alleged departure, and therefore the Dismissal
Order is arbitrary and capricious.

The Dismissal Order is subject to reversal if the agency's
action was "arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law." 5 U.S.C. s 706(2)(A)
(2000). This is a " 'deferential standard' that 'presume[s] the
validity of agency action.' " Global NAPs, Inc. v. FCC, 247
F.3d 252, 257 (D.C. Cir. 2001) (quoting Southwestern Bell Tel.
Co. v. FCC, 168 F.3d 1344, 1352 (D.C. Cir. 1999)). "[T]he
Court must consider whether the decision was based on a
consideration of the relevant factors and whether there has
been a clear error of judgment.... The Court is not empow-
ered to substitute its judgment for that of the agency."
Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S.
402, 416 (1971); see Motor Vehicle Mfrs. Ass'n v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). In making this
assessment, we review an agency's interpretation of its own
regulations under a highly deferential standard.2 See Omni-
point Corp. v. FCC, 78 F.3d 620, 631 (D.C. Cir. 1996). We
give "an agency's interpretation of its own regulation 'control-
ling weight unless it is plainly erroneous or inconsistent with
the regulation.' " Associated Builders and Contractors, Inc.

__________
2 The Local Competition Order, while styled an "order," is not
the product of adjudication, but rather partakes of the nature of
regulation.

v. Herman, 166 F.3d 1248, 1254 (D.C. Cir. 1999) (quoting
Military Toxics Project v. EPA, 146 F.3d 948, 954 (D.C. Cir.
1998)). Moreover, "it is well established that an agency's
interpretation of the intended effect of its own orders is
controlling unless clearly erroneous." Southwest Gas Corp. v.
FERC, 145 F.3d 365, 370 (D.C. Cir. 1998) (citation and
internal quotation marks omitted).

In this case, the FCC contends that the purpose of its
Merger Order was to ensure, insofar as possible in light of the
uncertainty created by the Eighth Circuit's (now-overruled)
jurisdictional ruling in Iowa Utilities Board v. FCC, 120 F.3d
753 (8th Cir. 1997), that "Bell Atlantic-NYNEX's rates would
be based upon a forward-looking cost methodology." Thus
the purpose was a substantive one, not intended to create a
procedural bypass of the section 252 procedure specified by
Congress. However, the FCC submits that those objectives
were achieved, both by the voluntary actions of all of the
relevant state commissions and by the reinstatement of the
general forward-looking cost requirement of the pricing rules
by the Supreme Court. See Dismissal Order, 15 FCC Rcd at
17069-71, p p 10, 12. To the extent that any uncertainty
remains over the authority of the Commission to mandate
that a carrier calculate its prices according to TELRIC, it is
irrelevant, as the Merger Order only requires the use of a
forward-looking methodology, and not necessarily TELRIC.
See Iowa Utils. Bd. v. FCC, 219 F.3d 744, 750-52 (8th Cir.
2000) (holding "the FCC's use of a forward-looking cost
methodology was reasonable," but rejecting the use of a
"hypothetical" network standard); Dismissal Order, 15 FCC
Rcd at 17071-72, p 13 ("Although the Eighth Circuit invalidat-
ed some aspects of our pricing rules, it affirmed our require-
ment that UNE rates be based on forward-looking rather
than historical costs.").

Therefore, the FCC submits that this case "is not about
whether the Commission should or will continue to require
Bell Atlantic-NYNEX to base it rates upon forward-looking
costs." There has been no change in its policy, as the Local
Competition Order affirmatively obligates all Local Exchange
Carriers ("LECs"), including Bell Atlantic, to base their

interconnection and element rates upon a forward-looking
cost methodology. In short, the FCC reasons that it did not
decide that Bell Atlantic-NYNEX should be free of the
substantive requirement that it base its rates upon forward-
looking costs; instead, it dismissed MCI's complaint because
MCI can obtain (and, in the relevant states, either has
obtained or is in the process of obtaining) redress for any
violations of the forward-looking cost requirement by Bell
Atlantic-NYNEX through the section 252 process.

In the Merger Order, the Commission did suggest that
MCI could seek enforcement of the order through a proceed-
ing other than that specified in s 252. Specifically, the
Commission observed that MCI could object to a violation
through, for example, a complaint pursuant to s 208, opposi-
tion to an application by Bell Atlantic for a radio license
under s 309, or opposition to an application for a certificate of
convenience and necessity under s 214. See Merger Order,
12 FCC Rcd at 20075-76, p 191. The Commission now de-
clares that it will not consider MCI's complaint under section
208 because to do so would "duplicate the rate inquiry that
Congress entrusted to the state commissions." Dismissal
Order, 15 FCC Rcd at 17071, p 12.

We have recognized that the Commission is "entitled to
reconsider and revise its views as to the public interest and
the means to protect that interest," so long as it gives a
reasoned explanation for the revision. DirecTV, Inc. v. FCC,
110 F.3d 816, 826 (D.C. Cir. 1997). With the state commis-
sions having adopted the substance of Paragraph 6, the
Commission determined that the reduced need for hearings
under section 208 as a means of enforcing the Merger Order
no longer could justify the threat to comity that the hearings
would entail. See Dismissal Order, 15 FCC Rcd at 17071,
p 12. To the extent that the Dismissal Order departed from
the policy stated in the Merger Order, the change was
therefore a reasonable exercise of the agency's discretion.

The Commission noted that MCI took the opportunity to
litigate in each of the seven relevant state jurisdictions on
whether Bell Atlantic-NYNEX's rates are based upon for-

ward-looking costs, and presented the same substantive argu-
ments that it now asks the FCC to adjudicate in its section
208 complaint. See Dismissal Order, 15 FCC Rcd at 17071,
p 12. The FCC contends that the real issue is whether MCI,
by challenging Bell Atlantic-NYNEX's compliance with Para-
graph 6 in a section 208 complaint proceeding, can require the
Commission to re-litigate the same substantive issues already
decided (or soon to be decided) by state public utility commis-
sions and federal courts in fulfilling their statutorily defined
duties, and concludes that it cannot.

Given the presumption of validity and the high level of
deference due to an agency in interpreting its own orders and
regulations, see Southwest Gas Corp., 145 F.3d at 370; Asso-
ciated Builders, 166 F.3d at 1254, we cannot say that the
FCC acted unreasonably in declining to enforce the Para-
graph 6 condition of the Merger Order in a parallel and
duplicative section 208 proceeding. MCI seeks no relief from
the FCC that the state public utility commissions cannot
grant in their capacity as arbitrators under section 252.
Regardless of whether the FCC could offer some additional
relief, it would be entirely reasonable for the FCC to defer to
the states as a matter of comity. See Dismissal Order, 15
FCC Rcd at 17071, p 12. At oral argument, we noted the
potential for a procedural nightmare in which the FCC
reached a different conclusion as to whether rates were
"forward-looking," from a federal district court, based on the
same body of evidence. A federal court, reviewing a state
public utility commission's arbitration, might conclude that
forward-looking rates had been applied, and yet, the FCC
conclude that the exact same rates, proposed by Bell Atlantic,
were not forward-looking. By deferring to the statutorily
defined role of the state public utility commissions, the FCC
reasonably avoids this quagmire. Cf. Neal v. United States,
516 U.S. 284, 295 (1996) ("Once we have determined a stat-
ute's meaning, we adhere to our ruling under the doctrine of
stare decisis, and we assess an agency's later interpretation
of the statute against that settled law.").

Moreover, all parties fully recognize Bell Atlantic-
NYNEX's legal obligation to base its rate upon forward-

looking costs. Although some uncertainty lingers as to the
future of TELRIC, all the Merger Order requires is the use
of a forward-looking methodology. See Dismissal Order, 15
FCC Rcd at 17071-72, p 13. Therefore, as noted by the FCC,
the dispute between MCI and Bell Atlantic "centers upon
factual issues," and will center upon those factual issues
whether the case is litigated before the FCC as a section 208
proceeding or state commissions through the section 252
process. At issue are prices for complex network elements
and inputs--and each category would have to be calculated
for each of the seven jurisdictions, taking into account the
unique circumstances in each location. The Commission's
task in adjudicating the merits of MCI's complaint thus would
be larger than the task confronting any individual state
commission. Contrary to MCI's assertion, there is no great
streamlining to be gained should the FCC adjudicate the
issue, as it would have to consider the relevant facts on a
state-by-state basis too. The FCC is reasonable in its conclu-
sion that these disputes are as readily resolved in the section
252 process as in a section 208 complaint. See Dismissal
Order, 15 FCC Rcd at 17071, p 12 (observing Paragraph 6
"imposes no cost methodology requirement that is not inde-
pendently applicable [by enforcement of the FCC's pricing
rules] in section 252 proceedings"). We agree with the FCC
that any alleged shortcomings in the section 252 process do
not undercut the Commission's reliance on the statutory role
of the state commissions and federal district courts in setting
rates--and any complaints about the efficacy of section 252
procedures are better addressed to Congress than to this
Court.

III. Conclusion

The FCC's Dismissal Order does not work a change in the
Commission's substantive policy of requiring incumbent carri-
ers to use a forward-looking methodology in determining
interconnection rates for new market entrants. The FCC's
determination that the conditions imposed in Paragraph 6 of
the Merger Order were "wholly subsume[d]" by the Supreme
Court's reinstatement of the Local Competition Order is not
unreasonable. See Dismissal Order, 15 FCC Rcd at 17071,

p 12. Because it was not unreasonable for the FCC to decline
to engage in an inquiry that duplicates the function given
state public utility commissions and the federal courts by law
in the Telecommunications Act of 1996, 47 U.S.C. s 252, we
deny the petition for review.