United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 16, 1998 Decided February 6, 1998
No. 93-1110
James L. Melcher, et al.,
Petitioners
v.
Federal Communications Commission and
United States of America,
Respondents
CellularVision USA, Inc., et al.,
Intervenors
---------
Consolidated with
Nos. 93-1111, 93-1112, 93-1113, 93-1114, 93-1115, 93-1116,
93-1117, 93-1118, 93-1119, 93-1120, 93-1122, 93-1123,
93-1124, 93-1125, 93-1126, 93-1127, 93-1128, 93-1130,
93-1131, 93-1132, 93-1133, 93-1134, 93-1135, 93-1136,
93-1137, 93-1139, 93-1140, 93-1142, 93-1143, 93-1144,
93-1145, 93-1146, 93-1147, 93-1148, 93-1149, 93-1150,
93-1152, 93-1154, 97-1368, 97-1371, 97-1380, 97-1386,
97-1393, 97-1415, 97-1431, 97-1483, 97-1484
On Petitions for Review of Orders of the
Federal Communications Commission
Frederick M. Joyce argued the cause for petitioners James
L. Melcher, et al., with whom John Haven Chapman and
Christine McLaughlin were on the briefs. James H. Barker,
III, Michael R. Gardner, Tom W. Davidson, Daniel E. Troy
and Robert L. Pettit entered appearances.
Richard P. Bress argued the cause for petitioners United
States Telephone Association, et al., with whom Maureen E.
Mahoney, Gary M. Epstein, Michael E. Glover, James G.
Pachulski, Mary M. McDermott, Linda Kent, M. Robert
Sutherland, Gail L. Polivy and John F. Raposa were on the
briefs. Frank W. Krogh and Andre J. Lachance entered
appearances.
Paul J. Sinderbrand argued the cause for petitioner U S
West, Inc., with whom L. Andrew Tollin, Robert G. Kirk,
Craig E. Gilmore, Georgina M. Lopez-Ona and Robert B.
McKenna were on the briefs.
L. Marie Guillory argued the cause for petitioner National
Telephone Cooperative Association, with whom David Cosson
was on the briefs.
Joel Marcus, Counsel, Federal Communications Commis-
sion, argued the cause for respondents, with whom Joel I.
Klein, Acting Assistant Attorney General, United States De-
partment of Justice, Robert B. Nicholson and Andrea Lim-
mer, Attorneys, William E. Kennard, General Counsel at the
time the brief was filed, Federal Communications Commis-
sion, Christopher J. Wright, General Counsel, John E. Ingle,
Deputy General Counsel, Carl D. Lawson and Roberta L.
Cook, Counsel, were on the brief. Catherine G. O'Sullivan,
Attorney, United States Department of Justice, Daniel M.
Armstrong, Associate General Counsel, Federal Communica-
tions Commission, and David Silberman, Counsel, entered
appearances.
Glenn B. Manishin argued the cause for intervenors Web-
Cel Communications, Inc., et al., with whom Matthew B.
Pachman and John D. Windhausen, Jr., were on the joint
briefs. Frank W. Krogh entered an appearance.
Caressa D. Bennet, Michael R. Bennet, Gregory W.
Whiteaker and Stephen G. Kraskin were on the joint briefs
for intervenors Rural Telecommunications Group, et al.
Before: Edwards, Chief Judge, Wald and Rogers, Circuit
Judges.
Opinion for the Court filed by Circuit Judge Wald.
Wald, Circuit Judge: This case involves the Local Multi-
point Distribution Service ("LMDS"), a new wireless mode of
communication that supports video, voice, and data services.
The crux of the dispute concerns the Federal Communication
Commission's ("FCC") decision to bar incumbent local tele-
phone companies (known as local exchange carriers, or
"LECs"), including rural local telephone companies, from
holding LMDS licenses in the same geographic areas in which
they provide telephone service, for three years from the date
of the upcoming LMDS auction.1 The FCC explains that its
Order is designed to prevent LECs from acquiring LMDS
licenses in order to preempt competition in the local tele-
__________
1 The FCC's challenged eligibility restriction applies to both local
exchange carriers and cable operators. One of the petitioners
before us, U S West, Inc., provides both local exchange service and
is the nation's third largest cable operator. However, U S West
substantially replicates the arguments that the LEC petitioners
advance, and relies on no critical distinctions between the situation
of LEC and cable service providers.
phone market. The LEC and rural LEC petitioners, consist-
ing of various trade associations as well as individual LEC
companies, challenge the FCC's eligibility restriction on mul-
tiple grounds. In addition, a number of waiver applicants
challenge the FCC's previous decision, promulgated while the
FCC was devising the current regime, that denied them
waivers of the rules that formerly governed use of the
spectrum now designated for LMDS. We reject the claims
put forth by the LECs, the rural LECs, and the waiver
applicants, and accordingly deny their petitions for review.
I. Background
A. The Regulatory Regime Before 1996
In 1970, the FCC adopted a cross-ownership rule prohibit-
ing telephone companies from providing video programming
directly to subscribers in their telephone service areas, be-
cause of concerns that telephone companies might monopolize
the emerging cable industry. See General Tel. Co. v. United
States, 449 F.2d 846, 851-52 (5th Cir. 1971). Congress even-
tually codified that rule in 1984. See 47 U.S.C. s 533(b),
repealed by Telecommunications Act of 1996, Pub. L. No.
104-104, s 302(b)(1), 110 Stat. 56, 124 ("1996 Act"). Over the
next two decades, however, it became apparent that this
cross-ownership prohibition granted cable providers too much
protection. By 1992, "most cable television subscribers ha[d]
no opportunity to select between competing cable systems,"
resulting in "undue market power for the cable operator as
compared to that of consumers and video programmers."
Cable Television Consumer Protection and Competition Act
of 1992, Pub. L. No. 102-385, s 2(a)(2), 106 Stat. 1460, 1460.
B. The Telecommunications Act of 1996
Congress enacted the Telecommunications Act of 1996 "to
provide for a pro-competitive, de-regulatory national policy
framework designed to accelerate rapidly private sector de-
ployment of advanced telecommunications and information
technologies and services to all Americans by opening all
telecommunications markets to competition." H.R. Conf.
Rep. No. 104-458, at 1 (1996) ("Conference Report").2
The 1996 Act eliminates the ban on telephone-cable cross-
ownership, see 1996 Act s 302(b)(1), and authorizes a variety
of ways for telephone companies to deliver video services,
including: (1) via Title III radio-based systems (the Title that
includes LMDS); (2) as a common carrier under Title II; (3)
via a Title IV cable system; and (4) through an Open Video
System ("OVS"), see id. s 651.
The only specific reference in the legislative history of the
1996 Act to LMDS involves section 301(b)(3)(C) of the Act.
This section amends 47 U.S.C. s 543(l)(1), which provides
alternative definitions of "effective competition," by expand-
ing the definition of that term to include: "a local exchange
carrier or its affiliate (or any multichannel video program-
ming distributor using the facilities of such carrier or its
affiliate) [that] offers video programming services directly to
subscribers by any means (other than direct-to-home satellite
services) in the franchise area of an unaffiliated cable opera-
tor which is providing cable service in that franchise area, but
only if the video programming services so offered in that area
are comparable to the video programming services provided
by the unaffiliated cable operator in that area." 1996 Act
s 301(b)(3)(C) (emphasis added). The Conference Report on
the 1996 Act states that " '[b]y any means,' includes any
medium (other than direct-to-home satellite service) for the
delivery of comparable programming, including MMDS [Mul-
__________
2 The House Report similarly stated that:
The original rationale for adopting the prohibition of tele-
phone company entry into video services has been satisfied,
and given the changes in technology and the evolution of the
cable industry, the prohibition is no longer valid. In fact, three
governmental bodies, the [FCC], the Commerce Department's
National Telecommunications and Information Administration
(NTIA) and the Department of Justice's Antitrust Division
have expressly found that the statute impedes competition in
the cable industry.
H.R. Rep. No. 104-204, pt. 1, at 52-53 (1995).
tichannel Multipoint Distribution Service], LMDS, an open
video system, or a cable system." Conference Report, at 170.
The 1996 Act seeks additionally to stimulate competition in
the local telephone market, requiring, for instance, incumbent
local telephone companies to interconnect with the facilities
and equipment of their competitors. See 1996 Act
s 251(c)(2); see also id. s 251(c)(3) (duty to provide "unbun-
dled access"); id. s 251(c)(4)(A) (duty "to offer for resale at
wholesale rates any telecommunications service that the carri-
er provides at retail to subscribers who are not telecommuni-
cations carriers"). Along the same lines, section 271 of the
1996 Act provides that a Regional Bell Operating Company
("RBOC") may provide long-distance service, but only after
that RBOC has demonstrated that it has met all the require-
ments for opening its local telephone market to competition
and the FCC has found that "the requested authorization is
consistent with the public interest, convenience, and necessi-
ty." Id. s 271(d)(3)(C).
C.The FCC's Rulemaking on LMDS
On January 8, 1993, three years before the passage of the
1996 Telecommunications Act, the FCC released a Notice of
Proposed Rulemaking that proposed redesignating the 28
GHz spectrum for LMDS. See In the Matters of Rulemaking
to Amend Part 1 and 21 of the Commission's Rules to
Redesignate the 27.5-29.5 GHz Frequency Band, 8 F.C.C.R.
557 (released Jan. 8, 1993) ("first NPRM"). This first NPRM
stated that the FCC did not propose to adopt cross-ownership
restrictions on acquiring LMDS licenses, explaining that:
The evidence before us suggests that the most likely first
use of the 28 GHz band will be video entertainment
programming.... There is no assurance this will be the
case, or that even if it is the predominant use, that it will
be the most viable use in all geographic areas. In view
of this uncertainty, we are inclined not to exclude any
existing video distribution or telecommunications firm
from constructing and operating 28 GHz facilities. We
seek comment on our tentative policy conclusion that
cross-ownership restrictions should not be imposed.
Id. p 33. The FCC then denied the 971 outstanding requests
for waivers of the rules that formerly governed use of the
spectrum now tentatively designated for LMDS. See id.
pp 51-53. (These rejected waiver applicants had sought to
provide point-to-multipoint service on the 28 GHz band, at a
time when only point-to-point service was authorized. See
id.) Many of the applicants, including all of the petitioners in
this case who challenge the waiver denials, petitioned the
FCC for reconsideration of the first NPRM. See In the
Matter of Rulemaking to Amend Parts 1, 2, 21, and 25 of the
Commission's Rules to Redesignate the 27.5-29.5 GHz Fre-
quency Band, at p 385 n.595 (released Mar. 13, 1997) ("Or-
der"). In addition, these waiver applicants concurrently
sought review of the FCC's denial of their waiver requests in
this court. This court held the latter petitions in abeyance
pending the completion of the FCC's reconsideration process.
The FCC's Third Notice of Proposed Rulemaking, released
in July 1995, solicited "further comment on competitive is-
sues" associated with LEC acquisition of in-region LMDS
licenses. In the Matter of Rulemaking to Amend Parts 1, 2,
21, and 25 of the Commission's Rules to Redesignate the
27.5-29.5 GHz Frequency Band, 11 F.C.C.R. 53, at p 101
(released July 28, 1995) ("third NPRM"). Specifically, the
third NPRM asked a number of questions, including:
To what extent can this [28 GHz band] spectrum be used
to provide service that is competitive with local telephone
service, particularly the provision of access services to
residential and business subscribers? Would allowing a
LEC to acquire LMDS licenses in its service area elimi-
nate a potential and important new source of competition
in the local exchange market? Given the LECs' current
monopoly status with regard to the provision of local
exchange service, would LECs be likely to acquire
LMDS spectrum as a means of forestalling competitive
entry into the local exchange market, for example, by
warehousing spectrum or diverting it to less optimal
uses?
Id.
Congress passed the Telecommunications Act of 1996 sev-
eral months after the release of this third NPRM. The FCC
accordingly sought "specific comment on how our policies
towards LMDS eligibility would best promote the competitive
objectives of the 1996 Act." In the Matter of Rulemaking to
Amend Parts 1, 2, 21, and 25 of the Commission's Rules to
Redesignate the 27.5-29.5 GHz Frequency Band, 11 F.C.C.R.
19005, at p 105 (released July 22, 1996) ("fourth NPRM").
The Commission explained its current reasoning this way:
In considering eligibility for LECs and cable operators
within their geographic service areas one must weigh the
potential for competition presented by open entry against
the possibility that this spectrum may be used to fore-
stall rather than promote competition. Open eligibility
may delay or eliminate an opportunity to increase the
number of competitors in the local exchange telephony
and multichannel video programming markets. On the
other hand, a bar on eligibility could prevent LECs and
cable operators from using LMDS to compete against
each other more effectively and rapidly or to provide new
services not now offered by any firm.
Id. p 125.
The FCC released its Final Order on March 13, 1997. This
Order placed a three-year ban on LECs acquiring LMDS
licenses within their service areas, see Order WW 157-99, and
denied reconsideration of the Commission's earlier denial of
the waiver applications, see id. WW 383-406. In explaining its
decision to impose this three-year eligibility restriction, the
Commission stated that,
Based on the record here, standard economic theory,
our experience, an analogous situation in the cable TV
industry, and our assessment of competitive and regula-
tory developments in the local telephony and MVPD
[Multichannel Video Programming Distributor] markets,
we find on balance that a policy favoring restricted
eligibility for a limited time would result in the greatest
likelihood of increased competition in the local telephony
and MVPD markets. By restricting in-region LEC and
cable companies, we ensure the entry of a new LMDS
operator that could provide competition in the LEC
market, the MVPD market, or both. An incumbent, on
the other hand, would have a strong incentive to obtain
an LMDS license in order to prevent a new entrant from
obtaining the license and competing directly in the in-
cumbent's current market. In so doing, such an incum-
bent will have forestalled market entry by an entity that
could provide both telephony and MVPD and will have
deprived consumers of an opportunity to choose between
a possible two providers in each market and the lower
prices for such services that consumer choice necessarily
implies. Furthermore, either incumbent would have no
incentive to use the LMDS spectrum to provide the
service in which it has market power because this could
result in lower prices for the service, and lower profits.
By temporarily restricting incumbents' eligibility to ac-
quire in-region LMDS licenses, this policy maximizes the
likelihood of increasing competition in both the LEC and
MVPD markets.
Id. p 162.
Although rural LECs had asked the FCC to exempt them
from this eligibility restriction, the Commission decided
against granting such an exception. The rural LECs argued
that rural residents would likely be deprived of access to
LMDS services unless the incumbent rural LECs were per-
mitted to acquire LMDS licenses in their existing service
areas. See id. p 179. The FCC disagreed. It noted, inter
alia, that even incumbent rural LECs would only provide
LMDS service where it was profitable to do so, and that
outsiders should be equally willing to acquire and operate
licenses in such situations. See id. p 180. The FCC further
found it unlikely that many rural LECs would be subject to
the eligibility bar, see id., because the restriction only applies
to a LEC if ten percent or more of the population in the basic
trading area ("BTA") that the desired LMDS license covers is
also within the LEC's authorized telephone service area, see
id. p 188, and BTAs typically encompass geographic areas
that are significantly larger than a rural LEC's service area,
see id. p 180.
II. Analysis
A.The LEC Petitioners
The LEC petitioners challenge the FCC's imposition of the
eligibility restriction under section 706(2)(A) of the Adminis-
trative Procedure Act ("APA"), which requires this court to
"hold unlawful and set aside" the FCC's Order to the extent
that it is "arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law." 5 U.S.C. s 706(2)(A).
1.Whether the FCC has Changed its Policy Without
Explanation
The LECs argue, first, that the FCC's Order constitutes
arbitrary decision making in violation of APA s 706(2)(A)
because it is an unexplained departure from prior rules that
authorize and encourage LECs to offer new wireless commu-
nication services. Along these lines, the LECs note that in
1981 the FCC set aside one cellular service license per
market exclusively for the use of the incumbent LEC. See
Final Brief of Petitioners United States Telephone Associa-
tion, et al., at 14-15, citing In the Matter of an Inquiry into
the Use of Bands 825-845 MHz and 870-890 MHz for Cellu-
lar Communications Systems, 86 F.C.C.2d 469, 483, 488, 491-
92 (1981). Similarly, although the FCC was initially con-
cerned that LECs might use the Personal Communications
Service ("PCS"), another wireless communications technolo-
gy, for anticompetitive ends, it decided in 1993 to include
LECs in the bidding on the ground that LEC participation
would promote the rapid development of the technology and
yield a broader range of services at a lower price. See id. at
15, citing In the Matter of Amendment of the Commission's
Rules to Establish New Personal Communications Services, 7
F.C.C.R. 5676, 5705 (1992); 8 F.C.C.R. 7700, 7751-52 (1993).
The LECs contend that the FCC's reasons for permitting
LECs to acquire and use these other wireless services apply
as strongly in the LMDS context and that the FCC has failed
to differentiate its prior decisions from the instant eligibility
restriction.
Although the portion of the FCC's Order devoted to this
issue is relatively brief, we find that it adequately explains
why the FCC reached a different conclusion about LEC
eligibility in the case of LMDS than in the earlier technolo-
gies. In balancing the advantages and disadvantages--in
terms of competition and technological development--of
granting incumbent LECs unrestricted access to a new wire-
less technology, the FCC's Order indicates that there are at
least three important factors that differentiate the LMDS
situation.
The first factor is the number of licenses available per area.
In the earlier cases, there were several licenses available in
each market. With LMDS, in contrast, the Commission
found "that the temptation for preemptive acquisition is par-
ticularly compelling ... because of the unusually large size of
the LMDS spectrum allocation. A single, large spectrum
block of relatively unused spectrum will be auctioned in each
service area." Order p 173.
The second factor, which is related to the first, is the
unprecedented capacity of an 1,150 megahertz LMDS license,
which is the single biggest license that the FCC has ever
issued. As the FCC's Order explains:
LMDS licenses may be used to provide service in the
local MVPD [Multichannel Video Programming Distribu-
tor] market, the local telephone market, a broadband
data market, or a combination of these possibilities....
LMDS offers a significant amount of capacity, larger
than currently available wireless services. For instance,
according to TI [Texas Instruments, Inc.], the LMDS
system they have manufactured for use in other coun-
tries can be used to serve 16,000 telephone subscribers,
in each LMDS cell with a three-mile radius, concurrently
with about 200 video-on-demand channels....
....
... [T]he capacity of an LMDS license is unprecedent-
ed.
Id. pp 170, 173. In other words, a single LMDS license can
simultaneously support 16,000 telephone calls and 200 video
channels on demand, a capacity that makes the FCC extreme-
ly wary about the possibility that incumbent LECs would
devote their in-region LMDS licenses only to communications
services that do not compete with the LECs' existing tele-
phone services.
The third differential factor is that the FCC's earlier
decisions, none of which purported to announce any general
policy against eligibility restrictions on LECs, were made at a
time when the prospects for generating competition in the
local telephone market, and for developing new technologies
without maximum participation from incumbent LECs, were
significantly less. The FCC's Order observes:
We recognize that as a result of ongoing technological
changes and passage of the 1996 Act, there are other
sources of potential and actual competition to the incum-
bent LEC and cable firms in the local telephony and local
MVPD [Multichannel Video Programming Distributor]
markets. For multichannel video distribution, likely
sources of competition include open video systems (OVS),
MMDS [Multichannel Multipoint Distribution Service],
DBS [Direct Broadcast Satellite], FSS [Fixed Satellite
Service] program distributors, and satellite master an-
tenna television systems. For fixed voice and broadband
data services, the competitive alternatives include new
facilities-based, wireline entrants, such as interexchange
carriers (IXCs), competitive access providers (CAPs),
and cable firms, non-facilities-based entrants utilizing the
new local competition provisions of the 1996 Act, and a
variety of wireless possibilities, including PCS [Personal
Communications Service] and cellular service providers.
In many of the foregoing cases, LECs may enter MVPD
markets and cable television firms may enter local ex-
change markets.
Id. p 163.
In light of the discussion in the FCC's Order that reviews
these three differential factors, we find that the Commission
has adequately explained why it came to a different conclu-
sion about LEC eligibility in the case of LMDS than it
reached in earlier cases involving different technologies.
2.The LECs' Claim That the FCC Order is Not Sup-
ported by Substantial Record Evidence or Market
Analysis
a.The LECs' Challenge to the FCC's Conclusion That
LECs Might Acquire Exclusive LMDS Licenses in
Order to Preempt Competition in Their Local Tele-
phone Markets
The LECs' second argument challenges the three proposi-
tions that they contend underlie the FCC's "preemptive ac-
quisition" rationale: (1) that the LECs exercise monopoly
power; (2) that a LEC could prevent in-region competition
from eroding this monopoly power by acquiring the LMDS
license for its service area; and (3) that an unaffiliated entity
would likely use a LMDS license to compete both in the local
telephony market and in the local subscriber video market.
The LECs contend that the first premise, that of monopoly
power, is factually inaccurate. Here, they cite to the existing
regulatory scheme that is designed to counteract the LECs'
monopoly position. They further observe that in one recent
proceeding the FCC itself found that "applicable statutory
and regulatory safeguards [were] likely to be sufficient to
prevent the BOCs [Bell Operating Companies] from improp-
erly allocating costs between their monopoly local exchange
and exchange access services and their affiliates' competitive
interLATA services to such an extent that their interLATA
affiliates would be able to eliminate other interLATA service
providers and subsequently earn supra-competitive profits by
charging monopoly prices." In the Matter of Regulatory
Treatment of LEC Provision of Interexchange Services Origi-
nating in the LEC's Local Exchange Area, at p 104 (released
Apr. 18, 1997). All that statement demonstrates, however, is
the FCC's belief that, in the particular context of interLATA
affiliate services, regulatory controls would be able to offset
the risk of LECs abusing their monopoly. The LECs have
not shown that the FCC's conclusion in the present case, that
the LECs would likely resist competing against themselves in
the telephony market, is unreasonable or that it lacks sub-
stantial evidence in the record. As the FCC's Order elabo-
rates, the Commission's judgment about the precise situation
at issue in this case rests not only on economic theory and
analysis, but on predictive comments from the Department of
Justice, the Federal Trade Commission, and several state
attorneys general, three outside economists' conclusions that
LECs have substantial market power and are likely to behave
preemptorily, as well as the agency's own expertise. See
Order pp 157-78. Moreover, the FCC has found in recent
proceedings other than the one petitioners cite that LECs do
currently exercise monopoly power over the provision of local
telephone service and that eroding that power is in the public
interest. See id. p 163 & n.251.
The LECs challenge the FCC's second and third premises
for the eligibility restriction--that a LEC could prevent com-
petition from eroding its monopoly power by acquiring the
LMDS license for its service area and that an unaffiliated
entity would likely use a LMDS license to compete both in
the local telephony and local subscriber video markets--as
unduly speculative. With regard to the second premise, the
LECs contest the relevance of an analogy that the FCC's
Order draws to anticompetitive behavior that occurred in the
cable industry in the early 1990s when satellite broadcast
service providers emerged as potential competitors to local
cable companies. See id. pp 166-69. In that situation, incum-
bent, monopolist local cable companies "were alleged to have
stifled competition from their non-cable competitors, such as
DBS [Direct Broadcast Satellite] operators, and to have
attempted to suppress the development of DBS technology as
a competitor to cable television service." Id. p 166. The
LECs point to what they regard as controlling distinctions
between that case and the present one, noting particularly
that the earlier case involved different market conditions and
that the anticompetitive concern in the cable situation
stemmed from the vertical integration between certain cable
operators and programmers, whereas vertical integration is
not a factor in the present case. With regard to the third
premise, the LECs observe that the FCC has not established
that LMDS will be used by non-LEC licensees to compete
with the existing local telephone network, pointing to portions
of the Order that instead state that "[i]t is expected that
many [of the telecommunications services that may be provid-
ed in LMDS] may be offered in the local telephony market-
place as an alternative to the wired telephone network." Id.
p 210 (emphasis added); see also id. p 176 ("[W]e do not know
at this time whether the LMDS spectrum is best used for
local telephone, video, or something else."). The LECs also
point to other means by which competitors can enter the local
exchange market, although the FCC is substantially less
confident that these other technologies will actually create
significant competition in the local telephone market. See id.
pp 164-65.
In considering these claims, we must keep in mind our
standard of review. As both the Supreme Court and this
circuit have made clear, our review of the FCC's exercise of
its predictive judgment is particularly deferential. In FCC v.
National Citizens Committee for Broadcasting ("NCCB"),
436 U.S. 775 (1978), another case in which FCC rulemaking
that established eligibility criteria for communications licens-
es was challenged as arbitrary, the Supreme Court held that
the FCC was not required to "conclusively establish" the
factual validity of the agency's premises. Id. at 796. As the
Supreme Court explained,
to the extent that factual determinations were involved in
the Commission's decision ..., they were primarily of a
judgmental or predictive nature.... In such circum-
stances complete factual support in the record for the
Commission's judgment or prediction is not possible or
required; "a forecast of the direction in which future
public interest lies necessarily involves deductions based
on the expert knowledge of the agency."
Id. at 813-14 (quoting FPC v. Transcontinental Gas Pipe
Line Corp., 365 U.S. 1, 29 (1961)). This circuit has similarly
noted that our arbitrary or capricious review of the FCC
is a narrow one; we must affirm the decision if we find
that it is not contrary to law, that it is supported by
substantial evidence and based upon a consideration of
the relevant factors, and if we determine that the conclu-
sions reached have a rational connection to the facts
found. FCC v. National Citizens Comm. for Broadcast-
ing, 436 U.S. 775, 803, 814-15 (1978); NAACP v. FCC,
682 F.2d 993, 997-98 (D.C. Cir. 1982). When, as in this
case, "an agency is obliged to make policy judgments
where no factual certainties exist or where facts alone do
not provide the answer," our role is more limited; we
require only that the agency "so state and go on to
identify the considerations it found persuasive." Nation-
al Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d
1095, 1140 (D.C. Cir. 1984) ("NARUC") (internal quota-
tions omitted), cert. denied, 469 U.S. 1227 (1985).
AT&T v. FCC, 832 F.2d 1285, 1291 (D.C. Cir. 1987).
These precedents indicate why the LECs' arguments can-
not prevail. Where, as here, the FCC must make judgments
about future market behavior with respect to a brand-new
technology, certainty is impossible. The Commission must
rely (within the limits of reason and rationality) on its exper-
tise and its evaluation of the existing evidence in deciding
whether the risk of harm is large and/or important enough to
merit regulatory action. Our review for arbitrariness does
not demand total assurance on the part of the agency; such a
standard would substantially hobble agencies working in new
and rapidly developing fields. In this light, it is not unrea-
sonable for the FCC to have drawn guidance from another
recent situation in which a local communications monopoly
actively set about suppressing the development of a new
technology that could foster competition in its market. Simi-
larly, the FCC's prediction that an unaffiliated entity will be
more likely than a LEC to use a LMDS license to compete
both in the local telephony and local subscriber video markets
is plausibly rooted in the unprecedented size and capacity of a
LMDS license and in the unprecedented opportunity to foster
competition in the local telephone market that the current
window of opportunity may represent.
b.The LECs' Argument That the FCC Order Cannot be
Justified as a Way to Afford Opportunities to Small
Providers
In paragraph 159 of their Order, the FCC Commissioners
note that: "Our primary goal in the present proceeding is to
encourage efficient competition in the telephony and MVPD
markets. We have also expressed a corresponding concern
with providing opportunities for smaller operators. These
objectives are drawn from the direction given us by Con-
gress." The rest of the Order continues to place the smaller
operator rationale in a distinctly secondary status, and the
FCC does not highlight it before this court.
In challenging this latter rationale, the LECs rely on the
reasoning in Cincinnati Bell Telephone Co. v. FCC, 69 F.3d
752 (6th Cir. 1995), a Sixth Circuit case holding that eligibility
rules that restricted cellular communications providers from
participating in Personal Communications Service ("PCS")
auctions were arbitrary because inadequately explained, see
id. at 756. The Cincinnati Bell opinion noted that the
eligibility restriction at issue there, like the one in the instant
case, permitted incumbent monopolists to acquire new licens-
es as long as they did so outside of their current geographic
service areas, and reasoned that the restriction would there-
fore do little if anything to stem the accretion of communica-
tions giants, while disproportionately hurting smaller provid-
ers who would most likely only be financially able to offer new
communications services within their existing service area.
Id. at 764.
Considering the FCC's downplaying of the smaller-
provider-based rationale before this court and in its Order,
we need not tarry on the argument long. We note, however,
that the Sixth Circuit's case involved a different technology
and a different market. The Sixth Circuit had before it only
the question of cellular communications provider access to
PCS. Moreover, the Cincinnati Bell court addressed this
question in 1995, a year before Congress passed the 1996
Telecommunications Act, which was intended, inter alia, to
make the development of competition in the telephony market
a more realistic possibility. As indicated above (see II.A.1.),
the FCC's Order adequately differentiates LMDS from earli-
er technologies like PCS, and present market conditions from
those prevailing before the passage of the 1996 Act. In this
light, the Sixth Circuit's opinion gives us no reason to ques-
tion the reasonableness of the FCC Commissioners' judgment
that restricting the power of incumbent local telephone com-
pany monopolists to acquire the LMDS license for their
existing service area will promote competition. Certainly, it
is reasonable to believe that many smaller providers who do
not currently hold LEC monopolies will benefit if the FCC's
Order prevents the incumbent LECs monopolists from domi-
nating the LMDS market to the exclusion of smaller potential
competitors.
We accordingly find that the LECs' challenges to the
FCC's Order all fail.
B.The Rural LEC Petitioners
The FCC's eligibility restriction applies to rural LECs as
well. The rural telephone companies argue that including
them in this restriction violates 47 U.S.C. s 309(j)(3)-(4).
Section 309(j)(3)(A)-(B) states that, in designing systems of
competitive bidding, the FCC "shall seek to promote" a series
of objectives, including, inter alia, "(A) the development and
rapid deployment of new technologies, products, and services
for the benefit of the public, including those residing in rural
areas, without administrative or judicial delays" (emphasis
added) and "(B) promoting economic opportunity and compe-
tition and ensuring that new and innovative technologies are
readily accessible to the American people by avoiding exces-
sive concentration of licenses and by disseminating licenses
among a wide variety of applicants, including small busi-
nesses, rural telephone companies, and businesses owned by
members of minority groups and women" (emphasis added).
Section 309(j)(4)(D) provides that "[i]n prescribing regulations
pursuant to paragraph (3), the Commission shall ... (D)
ensure that small businesses, rural telephone companies, and
businesses owned by members of minority groups and women
are given the opportunity to participate in the provision of
spectrum-based services, and, for such purposes, consider the
use of tax certificates, bidding preferences, and other proce-
dures" (emphasis added). We agree that these statutory
provisions evidence a particular congressional concern for
rural consumers and rural LECs, but find that the FCC's
decision to include rural LECs in its three-year eligibility
restriction on acquisition of an in-region LMDS license ulti-
mately does not violate section 309(j)(3)-(4).
1.The Rural LECs' Argument Under Chevron's First
Step
The rural LECs argue, first, that the FCC's inclusion of
rural telephone companies in its eligibility restriction contra-
venes the plain language of section 309(j)(3)-(4) and therefore
fails under the first prong of Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984). This
prong of the two-part Chevron test asks only "whether Con-
gress has directly spoken to the precise question at issue. If
the intent of Congress is clear," of course, "the court, as well
as the agency, must give effect to the unambiguously ex-
pressed intent of Congress." Id. at 842-43. According to the
rural LECs, section 309(j)(4)(D) requires the FCC to "en-
sure" through its auction rules that LMDS licenses are
actually disseminated to rural telephone companies, and sec-
tion 309(j)(3)(B) mandates that rural telephone companies be
"given the opportunity to participate in the provision of"
LMDS. Joint Brief of Intervenors Rural Telecommunica-
tions Group and Independent Alliance in Support of Petition-
er National Telephone Cooperative Association, at 8-10 ("Ru-
ral LEC Brief"). We cannot see how the plain language or
clear meaning of section 309(j) bars the FCC from imposing
the eligibility restriction on rural LECs at issue here.
a.Section 309(j)(3)
First, keep in mind that section 309(j)(3) grants the FCC
the authority to establish eligibility restrictions on communi-
cations licenses. See 47 U.S.C. s 309(j)(3) ("In identifying
classes of licenses and permits to be issued by competitive
bidding, in specifying eligibility and other characteristics of
such licenses and permits, and in designing the methodolo-
gies for use under this subsection, the Commission shall
include safeguards to protect the public interest in the use of
the spectrum and shall seek to promote the purposes speci-
fied in section 151 of this title and the following objectives
....") (emphasis added); see also Cincinnati Bell, 69 F.3d at
762 ("A plain reading of Section 309(j)(3)(B), which directs the
FCC to promote 'economic opportunity and competition ...
by avoiding excessive concentration of licenses and dissemi-
nating licenses among a wide variety of applicants,' indicates
that Congress clearly conferred authority on the FCC to
place restrictions and limitations on the bidding process.").
Second, section 309(j)(3)(B) does not state that rural tele-
phone companies must be "given the opportunity to partici-
pate in the provision of" LMDS. Instead, it requires the
FCC to "seek to promote" a number of objectives, including
"promoting economic opportunity and competition and ensur-
ing that new and innovative technologies are readily accessi-
ble to the American people by avoiding excessive concentra-
tion of licenses and by disseminating licenses among a wide
variety of applicants, including small businesses, rural tele-
phone companies, and businesses owned by members of mi-
nority groups and women." This provision is subject to a
variety of reasonable interpretations. Most importantly, it
articulates a number of potentially conflicting objectives, in-
cluding both the promotion of competition and the dissemina-
tion of licenses to rural telephone companies. "[O]nly the
Commission may decide how much precedence particular
policies will be granted when several are implicated in a
single decision." Mobiletel, Inc. v. FCC, 107 F.3d 888, 895
(D.C. Cir. 1997). In this case, the Commission determined
that allowing incumbent LECs, including incumbent rural
LECs, to participate without restriction in bidding for in-
region LMDS licenses would ultimately inhibit the develop-
ment and use of the LMDS spectrum, whereas the FCC's
eligibility restriction on rural LECs would "promote economic
opportunity and competition, and ... avoid excessive concen-
tration of licenses by disseminating licenses among a wide
variety of applicants." Order p 181. In addition, while sec-
tion 309(j)(3)(B) calls for the wide dissemination of licenses, it
lists a number of indications of diversity, rather than confin-
ing its concern to rural telephone companies. Moreover,
section 309(j)(3)(B) refers to "new and innovative technolo-
gies" as a group, indicating that diversity within this group
might be enough to meet the statute's requirements even if
the licensees for one technology within this group are less
diverse. Finally, as we discuss below, the FCC concluded
that many rural LECs would actually to able to acquire in-
region LMDS licenses under its Order.
b.Section 309(j)(4)
Section 309(j)(4)(D) does not state that the FCC must
"ensure" through its auction rules that licenses for LMDS,
which is a spectrum-based service, are actually disseminated
to rural telephone companies. Instead, it insists only that
rural telephone companies have "the opportunity to partici-
pate in the provision of spectrum-based services" and accord-
ingly instructs the FCC to "consider the use of tax certifi-
cates, bidding preferences, and other procedures" (emphasis
added). The meaning of "opportunity" in the context of
section 309(j)(4)(D) is necessarily ambiguous. At the ex-
tremes, the term is capable of supporting a range of interpre-
tations extending from the licensee guarantees that the rural
LECs advocate to a regime in which there are no guarantees
(and perhaps little realistic chance) that rural LECs will
actually end the day with access to LMDS. Under the three-
year eligibility restriction in issue, a rural LEC does have an
"opportunity" to: (a) acquire LMDS licenses immediately in
all areas but its existing service area; (b) acquire a LMDS
license in its existing service area once three years have
passed; (c) bid immediately for a smaller LMDS license (150
megahertz instead of 1,150 megahertz) in its service area; (d)
acquire the LMDS license for its service area as long as the
LEC does not provide telephone service to more than ten
percent of the population within the basic trading area
("BTA") assigned to each LMDS license; (e) acquire an in-
region LMDS license immediately on the condition that the
LEC divest its overlapping telephone interests; and (f) seek a
waiver of the eligibility restriction, subsequent to the initial
award of LMDS licenses, upon a showing of good cause. See
Order WW 178-80, 188, 160. Moreover, section 309(j)(4)(D),
like section 309(j)(3)(B), speaks of "spectrum-based services"
as a unit, rather than stating that rural telephone companies
must have access to each spectrum-based service. Finally,
section 309(j)(4)(D) does not mandate that the rural LECs
receive preferential treatment in the form of "tax certificates,
bidding preferences, and other procedures"; it just instructs
the FCC to "consider" that possibility.
In short, we do not believe that the present eligibility
restriction violates the text or intent of section 309(j)(3)(B) or
section 309(j)(4)(D) so as to violate the first prong of the
Chevron test.
One of the rural LEC petitioners, the National Telephone
Cooperative Association ("NTCA"), also makes a brief argu-
ment under Chevron's second prong. NTCA contends that
the FCC abused its discretion by ignoring section 309(j)'s
concern for rural residents and rural LECs, and the 1996
Telecommunications Act's overarching desire to foster compe-
tition. This argument is baseless for the reasons elaborated
elsewhere in this opinion. The FCC's imposition of the three-
year eligibility restriction on rural LECs is fully consistent
with a reasonable interpretation of section 309(j), (see II.B.1.),
and the Commission has clearly explained its basis for believ-
ing that this eligibility restriction will foster competition, see,
e.g., Order p 162.
2.The Rural LECs' Argument That Including Them in
the Eligibility Restriction Was Arbitrary and Capri-
cious
The rural telephone companies also argue that the FCC
has failed to supply a reasoned basis in the record for its
decision to include the rural LECs in the LMDS eligibility
restriction. They accordingly contend that the application of
the in-region eligibility restriction to rural telephone compa-
nies is arbitrary and capricious, an abuse of discretion, and
otherwise contrary to law.
a.The Claim That the FCC Lacks Support for its
Predictions and That the Commission's Actions Fail
to Satisfy the FCC's Stated Objectives
The rural telephone companies engage in the same error
that the LECs committed: They assert that the FCC was
required to establish "that limiting rural telephone company
participation is necessary to ensure that rural America re-
ceives LMDS at reasonable charges." Rural LEC Brief, at
13-14 (emphasis added). The rural LECs do not locate this
requirement in any statute, but instead point to a statement
in the FCC's Order that appears in the introduction to the
Commission's explanation of its decision to impose an eligibili-
ty restriction:
Our overall goal in assessing the need to restrict the
opportunity of any class of service providers to obtain
and use spectrum to provide communications services has
been to determine whether the restriction is a necessary
step in ensuring that consumers will receive efficient
communications services at reasonable charges. Since
we are of the view that competitive markets are the most
direct and reliable means for ensuring that consumers
receive the benefits described in the Communications
Act, we have evaluated the need for spectrum licensing
restrictions in terms of whether the restrictions are
necessary to promote competition in the telecommunica-
tions marketplace and whether these restrictions are
otherwise consistent with our obligation to promote the
public interest.
Order p 157 (emphasis added). We believe that the rural
LECs have over-read this introductory passage, which speaks
in general terms about "any class of service providers," any
"communications service," and eligibility restrictions as a
category. Id. As the FCC's Order makes clear when it
begins its detailed discussion of the Commissioners' decision
to impose a three-year eligibility restriction on LEC acquisi-
tion of in-region LMDS licenses, the Commission did not
conclude--or believe that it needed to conclude--that impos-
ing the eligibility restriction on rural LECs was a necessary,
unavoidable step if the Commission was "to ensure that rural
America receives LMDS at reasonable charges." Rather, the
FCC determined that: "[t]he [last] element of our inquiry is
whether eligibility restrictions are the best means of achieving
our goal of increasing competition in the LEC and MVPD
markets. We find that they are" Id. p 176 (emphasis added);
see also id. p 162 ("[W]e find on balance that a policy favoring
restricted eligibility for a limited time would result in the
greatest likelihood of increased competition in the local tele-
phony and MVPD markets.") (emphasis added).
The rural LECs also argue that, even if the FCC's Order
defends its eligibility restriction as the "best" approach rather
than the "necessary" one, the FCC cannot rely on economic
theory, its evidence indicating that LECs exercise monopoly
power, and its predictive judgment as to the future behavior
of markets in deciding to include the incumbent rural LECs
in its eligibility restriction. Instead, the rural LECs contend,
the FCC had to provide what the rural telephone companies
characterize as "supporting data," which would presumably
contain more specific and exact factual information. Rural
LEC Brief, at 15. NCCB and AT&T defeat this claim. Both
cases recognize that where, as here, the FCC has to establish
eligibility criteria based on how it predicts the market and
regulated entities will react, "complete factual support in the
record for the Commission's judgment or prediction is not
possible or required; 'a forecast of the direction in which
future public interest lies necessarily involves deductions
based on the expert knowledge of the agency.' " NCCB, 436
U.S. at 814 (quoting FPC v. Transcontinental Gas Pipe Line
Corp., 365 U.S. 1, 29 (1961)). "When, as in this case, 'an
agency is obliged to make policy judgments where no factual
certainties exist or where facts alone do not provide the
answer,' our role is more limited; we require only that the
agency 'so state and go on to identify the considerations it
found persuasive.' " AT&T, 832 F.2d at 1291 (quoting Na-
tional Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d
1095, 1140 (D.C. Cir. 1984)).
Here, the FCC acknowledged that absolute certainty was
impossible, but presented its reasoning clearly, cogently, and
based on the agency's best understanding of the available
information. This explanation is too lengthy to present com-
pletely here, but the following passage from the Order sum-
marizes many of its essential points:
Based on the record here, standard economic theory,
our experience, an analogous situation in the cable TV
industry, and our assessment of competitive and regula-
tory developments in the local telephony and MVPD
[Multichannel Video Programming Distributor] markets,
we find on balance that a policy favoring restricted
eligibility for a limited time would result in the greatest
likelihood of increased competition in the local telephony
and MVPD markets. By restricting in-region LEC and
cable companies, we ensure the entry of a new LMDS
operator that could provide competition in the LEC
market, the MVPD market, or both. An incumbent, on
the other hand, would have a strong incentive to obtain
an LMDS license in order to prevent a new entrant from
obtaining the license and competing directly in the in-
cumbent's current market. In so doing, such an incum-
bent will have forestalled market entry by an entity that
could provide both telephony and MVPD and will have
deprived consumers of an opportunity to choose between
a possible two providers in each market and the lower
prices for such services that consumer choice necessarily
implies. Furthermore, either incumbent would have no
incentive to use the LMDS spectrum to provide the
service in which it has market power because this could
result in lower prices for the service, and lower profits.
By temporarily restricting incumbents' eligibility to ac-
quire in-region LMDS licenses, this policy maximizes the
likelihood of increasing competition in both the LEC and
MVPD markets.
As we have unanimously observed in recent proceed-
ings, both incumbent LECs and cable television firms
currently possess substantial market power. An in-
region LMDS license would be valuable to these firms
not only because they could use it as other firms would,
but also because, by obtaining the license, they could
preserve excess profits that an independent LMDS com-
petitor would erode....
....
Our concern regarding LEC and cable eligibility is
educated by the substantial record collected in this pro-
ceeding on the capabilities of LMDS.... LMDS offers
a significant amount of capacity, larger than currently
available wireless services.... [W]e believe that the
likelihood that LMDS can increase competition in either
the local multichannel video or local telephone exchange
markets (or both simultaneously) is high and warrants
analysis in order to determine whether in-region LEC
and cable TV incumbents should be permitted to acquire
and hold initial licenses.
While all bidders in an auction for LMDS licenses can
be expected to base their bids on their individual assess-
ment of the most efficient use of the spectrum, LECs
and cable companies assessing the value of in-region
LMDS licenses would have the additional incentive to
protect their market power and preserve a stream of
future profits.
Order pp 162-63, 170-71. We find that this explanation is
both reasonable and adequate support for the FCC's pre-
dictive judgment.
b.The Claim That the FCC Failed to Consider Record
Evidence
The rural LECs next argue that the FCC's Order failed to
address comments in the record from the rural telephone
community that contended that an in-region eligibility restric-
tion on rural LECs "would harm the ability of rural telephone
companies to provide LMDS in their service areas." Rural
LEC Brief, at 17. This argument is somewhat odd. One
would naturally expect that an eligibility restriction on rural
LEC acquisition of in-region LMDS licenses would, by its
very nature, "harm"--to some degree--"the ability of rural
telephone companies to provide LMDS in their service ar-
eas"; that, in fact, is the restriction's purpose. Indeed, no
one, including the FCC, disputes this point, although the FCC
has determined for the reasons elaborated below that ulti-
mately the in-region restriction will have a relatively small
impact on the rural LECs' ability to participate in the LMDS
auction. See Order pp 179-80. We believe the real question
presented here is whether the FCC can exercise its judgment
that a restriction on the incumbent rural LECs is merited in
order to counteract the rural LECs' present monopoly power.
Moreover, while the rural LECs assert that the FCC failed to
consider "record evidence," they point to no evidence in the
record. Instead, the portions of the record that the rural
LECs cite simply assert that the eligibility restriction will
harm rural LECs. See Rural LEC Brief, at 17, citing Joint
Appendix, at 665-67, 672-74, 765-66, 774-76.
The rural LECs go on to cite the Order at paragraph 179
for the proposition that the FCC has established a standard
whereby "in order for a rural telephone company to be
entitled to an opportunity to participate in a new service, the
rural telephone company must first demonstrate that it is the
only entity that can provide the service [in rural areas]." Id.
Instead, however, paragraph 179 only rejects the rural LECs'
contention "that they are the only entities that can provide
service in their service territories." It reads:
Commenters from the rural telephone community ....
reason that unless rural telephone companies are able to
participate in the LMDS market, consumers in rural
areas are likely to be deprived of the benefits of this new
service. We agree that it would be undesirable to impair
the provision of LMDS service to rural consumers. Al-
though we have decided to impose some short-term
restrictions in LECs, including rural telephone compa-
nies, we do not believe that these restrictions, as crafted,
will hinder the introduction of LMDS in rural areas.
Rural LECs have not made the case that they are the
only entities that can provide LMDS in their service
territories.
Order p 179.
The rural LECs have mischaracterized the FCC's rationale
for its Order and pointed to no record evidence that the
Commission failed to consider.
c.The Claim That the FCC's Conclusion That the
Eligibility Restriction Will Not Compromise Rural
Telephone Company Participation in LMDS is Arbi-
trary and Capricious
As we indicated above (see II.B.2.b.), we have not been able
to find (and, for the reasons discussed above, would not
expect to find) any statement within the FCC's Order assert-
ing that the eligibility restriction will have no negative effect
on rural LEC participation in LMDS. Instead, the FCC's
Order "conclude[s] that the interests of rural telephone com-
panies are adequately addressed by the LMDS rules we
adopt herein," Order p 362, and explains the various opportu-
nities that remain open to rural LECs. We evaluate the
specific claims that the rural LECs make about that FCC
conclusion in this light.
1.The Claim That the FCC's Conclusion That Rural
Telephone Companies Will Not Trigger the Eligi-
bility Restriction is Arbitrary and Capricious
The rural LECs take issue with the FCC's determination
that "because rural LECs are generally small, they are
unlikely to have the degree of overlap with BTAs [basic
trading areas] necessary ... to trigger our eligibility restric-
tion." Id. p 180. This statement refers to the fact that the
FCC's eligibility restriction only applies to a LEC if ten
percent or more of the population in the BTA that the desired
LMDS license covers is also within the LEC's authorized
telephone service area. See id. p 188. This determination
appears in the FCC's Order as one of several reasons why the
FCC concluded that its restriction on rural LECs will not
"hinder the introduction of LMDS in rural areas." Id. p 179.
The rural LECs argue that the FCC's prediction of relatively
modest effects on rural LEC eligibility is arbitrary and
capricious because the application of the restriction turns on
the overlap between a LMDS license's BTA and a LEC's
telephone service area, rather than on the size of a rural
LEC. However, it is not difficult to see a logical connection
between the FCC's overlap criteria and a rural LEC's size:
The smaller a LEC, the less likely it is to be servicing a
customer base that constitutes ten percent or more of the
population within a BTA, particularly because the BTAs for
LMDS licenses, which are quite large, have no necessary
correlation to the boundaries of rural telephone companies'
service areas. See id.pp 135, 138, 180.
The rural LECs also claim that the FCC's determination is
arbitrary and capricious because the FCC did not "conduct an
analysis of the actual degree of overlap between LMDS
license areas and rural telephone company service areas."
Rural LEC Brief, at 19. The rural telephone companies do
not claim to have the detailed information that such an
analysis covering hundreds of rural LECs would require, or
to have offered to collect it for the FCC; they argue, instead,
that the FCC should have secured this information during its
rulemaking. Given that all the data needed for an overlap
analysis presumably exists--the boundaries of the BTAs for
LMDS licenses and the current authorized service areas for
rural LECs are both established--the FCC might profitably
have undertaken such a factual investigation. However, we
do not believe that the comprehensive factual analysis that
the rural LECs would have liked was actually required of the
FCC in this case. The FCC was entitled to conduct, and did
conduct, a general analysis based on informed conjecture.
Specifically, a BTA is typically constructed around an "urban
commercial center," where the population of the BTA will be
most concentrated; BTAs are not designed to follow the same
lines as rural LEC service areas. Order p 138. BTAs also
tend to be quite large: The FCC divided the fifty states into
only 487 BTAs. See id. p 135. The FCC accordingly drew a
reasonable inference from its general knowledge that "rural
LECs are generally small," and concluded that rural LECs
were "unlikely" to have the necessary overlap, although some
number of rural LECs will presumably meet the overlap
requirement's threshold. Id. p 180.
In the final analysis, the number of rural LECs that will or
will not fall within the ten percent overlap rule was not the
determinative issue. The FCC was operating on the premise
that if a LEC services a customer base that constitutes more
than a small percentage of a BTA, then the risk of impeded
competition in the telephony market is great enough to
warrant an in-region eligibility bar. The exact percentage of
rural LECs covered under a ten percent overlap rule was not
the primary question, and the precise identification of that
percentage through a detailed and expensive study would not
likely have led the FCC to a different conclusion about
whether to impose a ten percent overlap rule.
2.The Claim That the Divestiture Provision Does
Not Reduce the Adverse Impact on Rural Tele-
phone Companies
Under the FCC's Order, a LEC can buy a LMDS license
as long as it divests itself of any overlapping service areas or
interests within ninety days. See id. p 194; see also id. p 180.
The FCC observed in a footnote that:
Such flexibility should be particularly useful for those
rural LECs that may have overlapping ownership inter-
ests in a BTA. Although we anticipate that most rural
LECs would not have sufficient overlap of their autho-
rized service area with the LMDS service area to be
affected by the eligibility restrictions we are adopting,
the additional flexibility to divest such overlapping own-
ership interests should further ameliorate any potential
negative impact on these entities.
Id. p 194 n.302. The rural LECs argue that, in fact, this
divestiture provision will be "singularly unhelpful" to them
"because the areas rural telephone companies have a desire
and ability to serve are those within and adjacent to their
service area." Rural LEC Brief, at 20.
We do not believe that this claim renders the FCC's
decision to include rural LECs in its eligibility restriction
arbitrary or capricious. Some--perhaps even a large--per-
centage of rural LECs will not find the divestiture provision
in the FCC's Order an attractive solution to all their "prob-
lems." But that does not mean that the availability of this
option does not increase a rural LEC's flexibility, nor does it
mean that the divestiture provision will not help some rural
LECs. And we see no evidence that the FCC is claiming
more for its divestiture provision than that.
3.The Claim That the FCC's Conclusion That Geo-
graphic Partitioning Will Ensure the Dissemina-
tion of Licenses to Rural Telephone Companies is
Arbitrary and Capricious
One of the reasons that the FCC cited in support of its
conclusion that its eligibility restriction will not impede the
introduction of LMDS in rural areas was that
to the extent any LEC is unsuccessful in the LMDS
auction, it will still have the opportunity to participate--
subject to the eligibility rules--by either acquiring spec-
trum from an LMDS licensee through the partitioning
and disaggregation rules we are adopting, or by contract-
ing (in a way that does not circumvent any applicable
ownership and control requirements and does not raise
competitive concerns) with the LMDS licensee to provide
service in its telephone market area.
Order p 180. The rural LECs argue that the FCC's parti-
tioning rules are "effectively ... useless" for rural LECs
because if the customer base of a rural LEC constitutes more
than ten percent of the population in a BTA, partitioning the
BTA will not enable the LEC to avoid the FCC's ten percent
overlap rule. Rural LEC Brief, at 21. We agree that the
partitioning rules would be more useful to rural LECs seek-
ing to offer in-region LMDS service if they provided a means
to circumvent the ten percent overlap rule. However, that is
not the purpose of the partitioning rules. Rather, the FCC
intended for its partitioning rules to help rural LECs by
making ownership of a LMDS service more affordable. With
the assistance of these rules, a rural LEC seeking to provide
LMDS service does not have to garner sufficient capital to
purchase and then effectively utilize an entire LMDS license;
instead, a rural LEC can buy or lease part of a LMDS license
from its original owner. See Order p 141 ("We determined
that the issue of geographic partitioning should be considered
to enable LMDS licensees to recoup some of their initial
licensing and construction costs, while providing a method for
entities with specific local concerns or insufficient capital to
purchase rights for the entire service area, to acquire a
portion of the geographic area originally licensed."); id.
p 145 ("[T]he nature of the LMDS cell structure makes
disaggregation and partitioning powerful tools for licensees to
concentrate on core areas or to deliver services to isolated
complexes, such as rural towns or university campuses, that
do not lie within major market areas. We further believe
that disaggregation and partitioning will provide opportuni-
ties for small businesses seeking to enter the MVPD and local
telephony marketplaces."); id. p 362 ("[T]he degree of flexi-
bility we will afford in the use of this spectrum, including
provisions for partitioning or disaggregating spectrum, should
assist in satisfying the spectrum needs of rural telephone
companies at low cost."). We find the FCC's conclusion, that
its partitioning rules will help rural LECs acquire LMDS
licenses by making smaller, more affordable licenses poten-
tially available, reasonable.
The rural LECs go on to assert that only six partitioning
deals have thus far been consummated in auction-licensed
services and argue, citing a trade periodical, that licensees
are reluctant to enter into partitioning agreements with small
and/or rural entities due to transaction costs and the difficulty
of earning a profit. We reject this argument on two grounds.
First, the FCC's partitioning rules at issue here govern the
implementation of a new technology in a brand-new market.
These are the precise sorts of circumstances in which the
Commission's predictive judgment demands great deference,
see NCCB, 436 U.S. at 813-14; AT&T, 832 F.2d at 1291, and
in this case the FCC's Order explains the technologically-
based reasons for the Commission's conclusion that partition-
ing will be an attractive option for LMDS licensees. The
Order, for instance, "observ[es] that continued technological
improvements may reduce the amount of spectrum required
to provide a full range of services." Order p 140. The Order
also cites with approval comments in the record "contend[ing]
that the relatively high cost of LMDS construction and the
shorter transmission paths it provides, in addition to the
limitation of service to consumers within reach of cell trans-
mitters, lend support for the Commission's proposals with
regard to geographic partitioning." Id. p 143. Second, even
if rural LECs will encounter difficulties in finding parties
willing to contract with them for part of a LMDS license, we
do not believe that this would make it arbitrary or capricious
for the FCC to list its partitioning rules as one of the actions
it is taking to promote LMDS service in rural areas.
3.The Argument That the Application of the In-Region
Eligibility Restriction to Rural Telephone Companies
Hinders the Rapid Deployment of LMDS to Rural
America and is Arbitrary and Capricious
a.The Claim That There is No Evidence to Support the
FCC's Conclusion That Competitive Forces Will En-
sure the Provision of LMDS to Rural America
The rural LECs challenge the FCC's statement that "we
do not believe that these [eligibility] restrictions, as crafted,
will hinder the introduction of LMDS in rural areas.... [I]f
it is profitable to provide service in rural areas, a licensee
should be willing to do so, either directly or by partitioning
the license and allowing another firm to provide service." Id.
pp 179-80. The rural LECs argue that such reliance on the
market is "outrageous" in this context because, historically,
rural areas have not attracted many potential competitors.
Rural LEC Brief, at 25. Although the rural LECs do not
assert that they will be able to provide LMDS service in rural
areas at less expense than other possible providers, they
claim that they have a natural interest in providing additional
communications services in rural areas where they are al-
ready operating.
We do not find this argument persuasive. First, in making
a predictive judgment about the future operation of the
brand-new market in LMDS, the FCC is entitled to a very
substantial measure of deference and is clearly not required
to rely on the history of other markets in other technologies.
See NCCB, 436 U.S. at 813-14; AT&T, 832 F.2d at 1291.
Second, the rural LECs have not indicated why they would be
able to provide LMDS in rural markets if provision of that
service would in fact be unprofitable. They have presented
no evidence and made no argument, for instance, that they
would be able to provide LMDS in rural areas at less expense
than potential competitors would incur. In this light, it
seems perfectly sound--indeed commonsensical--for the
FCC to conclude that the rural LECs can only want in-
creased access to the rural LMDS market precisely because
they think that this market will be profitable (or possibly
because they want to protect their telephone monopolies).
b.The Claim That the FCC Gave No Consideration to
the Universal Service Principles Set Forth in Sec-
tions 309(j)(3)(A) and 254(b)(3) When It Imposed the
Eligibility Restriction on Rural Telephone Compa-
nies
47 U.S.C. s 309(j)(3)(A) provides that the FCC "shall seek
to promote," inter alia, "the development and rapid deploy-
ment of new technologies, products, and services for the
benefit of the public, including those residing in rural areas,
without administrative or judicial delays" (emphasis added).
47 U.S.C. s 254(b)(3) provides that:
Consumers in all regions of the Nation, including low-
income consumers and those in rural, insular, and high
cost areas, should have access to telecommunications and
information services, including interexchange services
and advanced telecommunications and information ser-
vices, that are reasonably comparable to those services
provided in urban areas and that are available at rates
that are reasonably comparable to rates charged for
similar services in urban areas.
(emphasis added).
We believe that the rural LECs err in their claim that the
FCC's Order does not adequately consider the universal
service principles set forth in these sections. To be sure, the
FCC's Order does not address this issue by name; its explicit
reference to the universal service goals in the context of
providing LMDS to rural areas is limited to a paragraph.
See Order p 271 & n.403. But the Order does make clear that
the FCC did consider the substance of the universal service
issue. As a key passage of the Order on rural LECs ex-
plains, the FCC Commissioners "agree[d] that it would be
undesirable to impair the provision of LMDS service to rural
customers." Id. p 179. The Commissioners concluded, how-
ever, that the Order's eligibility restriction would not in fact
"hinder the introduction of LMDS in rural areas" for the
series of reasons discussed throughout this section. Id. In
this light, the rural LECs' argument devolves into a rehash-
ing of the contention, rejected above, that the FCC was
arbitrary or capricious in disagreeing with the rural LECs'
claim that the eligibility restriction will leave rural areas
without LMDS service.
c.The Claim That the FCC's Performance Require-
ments When Coupled With the Eligibility Restriction
Mean That Rural America Will Not Receive LMDS
in Direct Violation of Section 309(j)(4)(B)
47 U.S.C. s 309(j)(4)(B) states that "the Commission shall"
include performance requirements, such as appropriate
deadlines and penalties for performance failures, to en-
sure prompt delivery of service to rural areas, to prevent
stockpiling or warehousing of spectrum by licensees or
permittees, and to promote investment in and rapid
deployment of new technologies and services.
(emphasis added). In its Order, the FCC decided to
adopt very flexible build-out requirements for LMDS.
Specifically, we will require licensees to provide "sub-
stantial service" to their service area within 10 years.
Although LMDS licensees will have incentives to con-
struct facilities to meet the service demands in their
licensed service area, we believe that minimum construc-
tion requirements can promote efficient use of the spec-
trum, encourage the provision of service to rural, remote,
and insular areas, and prevent the warehousing of spec-
trum.
....
... [F]or an LMDS licensee that chooses to offer
point-to-multipoint services, a demonstration of coverage
to 20 percent of the population of its licensed service area
at the 10-year mark would constitute substantial service.
Order pp 266, 270. The Order went on to state that:
We believe that these build-out provisions fulfill our
obligations under Section 309(j)(4)(B). We also believe
that the auction and service rules which we are adopting
for LMDS, together with our overall competition and
universal service policies, constitute effective safeguards
and performance requirements for LMDS licensing. Be-
cause a license will be assigned in the first instance
through competitive bidding, it will be assigned efficient-
ly to a firm that has shown by its willingness to pay
market value its willingness to put the license to its best
use. We also believe that service to rural areas will be
promoted by our proposal to allow partitioning and
disaggregation of LMDS spectrum.
Id. p 271.
The rural LECs argue that these relatively undemanding
performance requirements, together with the eligibility re-
striction on rural LECs, will hinder the delivery of LMDS to
rural areas. In their view, LMDS licensees offering point-to-
multipoint services will meet the requirement that they cover
twenty percent of the population in their licensed service
areas within ten years by serving urban areas and avoiding
rural ones; once the licensees' build-out benchmarks are met,
the rural LECs continue, the licensees will lack any incentive
(given the high transaction and other costs associated with
serving sparsely populated regions) to negotiate partitioning
agreements with businesses seeking to serve rural areas.
This is not an implausible scenario. However, it does not
render the Commission's alternate predictive judgment un-
reasonable.
The FCC concluded, based on its prior analogous experi-
ence with Wireless Communications Services ("WCS"), that
strict build-out requirements might discourage the acquisition
of LMDS licenses, given the wide variety of services that
LMDS can potentially support and the substantial uncertain-
ties that presently exist as to the best uses for LMDS. See
id. p 267. In light of this danger, the Commission decided to
adopt liberal build-out requirements.
We agree that this decision is a reasonable interpretation of
section 309(j)(4)(B), a provision that endorses three different,
and potentially competing, goals. First, the FCC's reasoning
was clearly in accord with section 309(j)(4)(B)'s concern that
the agency "promote investment in and rapid deployment of
new technologies and services." 47 U.S.C. s 309(j)(4)(B).
Moreover, if strict build-out requirements pose a threat to the
rapid development of the LMDS spectrum, that danger will
also threaten section 309(j)(4)(B)'s goal of "ensur[ing] prompt
delivery of service to rural areas." Id. As for section
309(j)(4)(B)'s third goal, "prevent[ing] stockpiling or ware-
housing of spectrum by licensees or permittees," id., the FCC
Commissioners decided, in their expert judgment, that this
danger did not loom large enough to mandate stricter build-
out requirements. They also expressly "reserve[d] the right
to review our liberal construction requirements in the future
if we receive complaints related to Section 309(j)(4)(B), or if
our own monitoring initiatives or investigations indicate that a
reassessment is warranted." Order p 272.
C.The Waiver Applicant Petitioners
The waiver applicant petitioners seek review of the FCC's
decision, released on January 8, 1993, while the Commission
was devising its current LMDS regime, that denied them
waivers of the rules that formerly governed use of the
spectrum now designated for LMDS. See first NPRM pp 51-
53. The rejected waiver applicants filed petitions with the
FCC for reconsideration on February 8, 1993. Concurrently,
the rejected applicants filed petitions for review with this
court. See Brief of Petitioners James L. Melcher, et al., at 3;
Order p 385 n.595. On April 15, 1993, this court ordered
those latter petitions held in abeyance pending completion of
the FCC proceeding. On March 13, 1997, the FCC denied
the rejected applicants' petitions for reconsideration. See
Order pp 383-406. Many of the rejected applicants did not
then file timely new appeals with this court. However, at
least two rejected applicants, Celltel Communications Corpo-
ration ("Celltel") and CT Communications Corporation
("CT"), who had dismissed their petitions for reconsideration
that were before the FCC, filed timely new petitions for
review with this court on August 11, 1997. This court consoli-
dated these two petitions into the present case on September
8, 1997.
The FCC argues that TeleSTAR, Inc. v. FCC, 888 F.2d 132
(D.C. Cir. 1989) (per curiam), and Wade v. FCC, 986 F.2d
1433 (D.C. Cir. 1993) (per curiam), establish that the filing of
a petition for reconsideration before the FCC makes the
challenged FCC order nonfinal, and therefore nonreviewable
by this court, as to the petitioning party.3 The Commission
asserts that the rejected waiver applicants' petitions for re-
view before this court should accordingly be dismissed as
incurably premature. We agree that the petitions before this
court from large numbers of the rejected waiver applicants
raise serious prematurity problems. TeleSTAR, Inc. consid-
ered the precise question of "whether a petition for review,
unripe because of the pendency of a request for agency
reconsideration, ripens so as to vest this court with jurisdic-
tion once the agency issues its final decision on reconsidera-
tion." TeleSTAR, Inc., 888 F.2d at 133. It held "that this
court does not have jurisdiction to consider the prematurely-
filed petition for review, even after the agency rules on the
rehearing request. In order to obtain review of a now-final
agency order, a new petition for review must be filed." Id.
As the court explained:
__________
3 In addition, the rejected waiver applicants themselves concede
that nearly every issue raised in this appeal was not raised before
the agency.
While final agency action can ripen an issue for appel-
late review, the filing of a challenge to agency action
before the agency has issued its decision on reconsidera-
tion is incurably premature. We hold therefore that
when a petition for review is filed before the challenged
action is final and thus ripe for review, subsequent action
by the agency on a motion for reconsideration does not
ripen the petition for review or secure appellate jurisdic-
tion. To cure the defect, the challenging party must file
a new notice of appeal or petition for review from the
now-final agency order. We develop this bright line test
to discourage the filing of petitions for review until after
the agency completes the reconsideration process. If a
party determines to seek reconsideration of an agency
ruling, it is a pointless waste of judicial energy for the
court to process any petition for review before the agen-
cy has acted on the request for reconsideration.
Id. at 134 (citation omitted); see also Wade, 986 F.2d at 1434
("The danger of wasted judicial effort that attends the simul-
taneous exercise of judicial and agency jurisdiction arises
whether a party seeks agency reconsideration before, simulta-
neous with, or after filing an appeal or petition for judicial
review.") (citation omitted).
However, we do reach the merits of the petitions before
this court from Celltel and CT, who have presented petitions
that were not premature.
This court held in Turro v. FCC, 859 F.2d 1498 (D.C. Cir.
1988), that:
Our standard for reviewing the FCC's denial of a
request for waiver of an agency rule is very deferential.
As we stated in WAIT Radio v. FCC, 459 F.2d 1203, 1207
(D.C. Cir.), "An applicant for waiver faces a high hurdle
even at the starting gate. On its appeal to this court, the
burden on [the petitioner] is even heavier. It must show
that the Commission's reasons for declining to grant the
waiver were so insubstantial as to render that denial an
abuse of discretion."
Id. at 1499 (citations omitted); see also Orange Park Florida
T.V., Inc. v. FCC, 811 F.2d 664, 669 (D.C. Cir. 1987) ("[I]t is
elementary that the judiciary may disturb a Commission
refusal to waive its rules only in the event of an abuse of
discretion."). In Turro, the FCC had "concluded that it was
preferable to address the policy concerns raised by Turro in a
rulemaking proceeding and not in the context of an ad hoc
waiver proceeding." Turro, 859 F.2d at 1500. The court
found that "[t]his decision to proceed by rulemaking is enti-
tled to considerable deference." Id.
In this case, the FCC had received hundreds of waiver
requests--971 in total--seeking authority to provide point-to-
multipoint services on the 28 GHz band, rather than the
point-to-point services then-authorized. See first NPRM
pp 51-53. The FCC also had pending before it three petitions
for rulemaking, two supporting the designation of the 28 GHz
band for point-to-multipoint services, and one opposing such a
designation. See id. pp 1-13. The Commission denied the
waiver requests as a group and proceeded instead with notice
and comment rulemaking on the use of the spectrum at issue.
As the FCC explained, it had concluded, based on the number
of waiver applications and the size of their requests for
spectrum space, that granting the waivers would result in a
de facto reassignment of the 28 GHz band--a band that other
parties wanted to use for different, incompatible purposes.
See id. WW 51-53; Order p 388. Moreover, the Commission
found that the waivers raised common policy questions, in-
volving both the best use of the 28 GHz band and the
additional rules that would be needed to govern new uses of
that band, questions that would best be addressed in a
rulemaking proceeding. See Order pp 389, 402-04, 406.
The FCC's reasoning in this regard was not only rational,
but highly sound. The 971 waiver applicants were essentially
seeking to use the waiver process as a means of getting the
28 GHz band reassigned. Their petitions raised systemic
issues most appropriately considered in a rulemaking pro-
ceeding that offered all interested parties the opportunity to
comment and gave the agency the opportunity to proceed in a
more thorough and fair manner. See National Small Ship-
ments Traffic Conference, Inc. v. ICC, 725 F.2d 1442, 1447-48
(D.C. Cir. 1984) ("Notice-and-comment procedures ... are
especially suited to determining legislative facts and policy of
general, prospective applicability.").
Moreover, the FCC has adequately distinguished its earlier
decision, in January 1991, to grant a waiver permitting Hye
Crest Management, Inc. to provide point-to-multipoint service
on the 28 GHz band. When Hye Crest applied for a waiver,
it was the only such applicant. Its proposal was unique and
untried. The FCC determined that, "under the circum-
stances of this proceeding," a formal rulemaking to consider
changing the designation of the 28 GHz band was "prema-
ture" and that a waiver should be granted as the most
efficient way to introduce point-to-multipoint service into New
York City (the area in which Hye Crest sought to operate).
In re Application of Hye Crest Management, Inc., 6 F.C.C.R.
332, at p 18 (released Jan. 18, 1991). The Commission con-
cluded that "grant of the waiver request does not establish a
precedent that will ultimately lead to the de facto reallocation
of the 28 GHz band" and stated that it "[did] not anticipate
that our action today will result in an onslaught of waiver
requests." Id. p 19. The FCC also observed that "[s]hould
the proposal prove to be a success and the public benefits
anticipated become a reality, a general investigation into
alternate uses of the 28 GHz band would then be appropriate
for consideration." Id. p 18. In contrast, by the time that
the FCC acted on the instant waiver applications, a number
of manufacturers had begun developing equipment to offer
point-to-multipoint services on the 28 GHz band and the
agency had received almost a thousand requests for waivers
to use the band for that purpose--so many that granting
them all would have amounted "to a de facto reallocation of
the 28 GHz band." First NPRM pp 51-53. To be sure, some
of those rejected waiver applicants had filed their applications
for waiver as early as 1991, in the early days of what was to
become a deluge of requests. But this court has held that the
filing of a waiver application does not create a legal interest
that restricts the discretion vested in the FCC or compels the
agency to review the request as if no time had passed or
circumstances changed since the moment the request was
filed. See Chadmoore Communications, Inc. v. FCC, 113
F.3d 235, 241 (D.C. Cir. 1997) (citing Hispanic Info. &
Telecomms. Network v. FCC, 865 F.2d 1289, 1294-95 (D.C.
Cir. 1989); Schraier v. Hickel, 419 F.2d 663, 667 (D.C. Cir.
1969)). By the time the FCC acted in this case, the circum-
stances that the FCC had expressly believed would not
develop when it granted Hye Crest's waiver had in fact come
to pass, so that the agency's reasons for granting the earlier
waiver no longer applied.
Conclusion
We accordingly deny the petitions for review from all of the
petitioners in this case.
Melcher v. Federal Communications Commission
Court: Court of Appeals for the D.C. Circuit
Date filed: 1998-02-06
Citations: 134 F.3d 1143, 328 U.S. App. D.C. 319
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