WrldCom Inc v. FCC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 9, 2002 Decided October 22, 2002

No. 01-1198

WorldCom, Inc.,
Appellant

v.

Federal Communications Commission,
Appellee

Verizon New England Inc., et al.,
Intervenors

Consolidated with
Nos. 01-1206 and 01-1209

Appeals of an Order of the
Federal Communications Commission

Mark D. Schneider argued the cause for appellants and
intervenor AT&T Corp. With him on the briefs were Thom-

as F. O'Neil III, William Single IV, Karlen J. Reed, Assis-
tant Attorney General, Attorney General's Office of Common-
wealth of Massachusetts, Charles C. Hunter, Catherine M.
Hannan, David W. Carpenter, Mark E. Haddad, and David
L. Lawson. Mark C. Rosenblum and Peter D. Keisler en-
tered appearances.

James M. Carr, Counsel, Federal Communications Com-
mission, argued the cause for appellee. With him on the brief
were John A. Rogovin, Deputy General Counsel, and John E.
Ingle, Deputy Associate General Counsel.

Michael E. Glover argued the cause for intervenors Veri-
zon New England Inc., et al. With him on the brief were
Mark L. Evans, Donna M. Epps, Colin S. Stretch, and Scott
H. Angstreich.

William P. Agee and Albert P. Halprin were on the brief
for amicus curiae Massachusetts Department of Telecommu-
nications and Technology, urging affirmance.

Before: Tatel and Garland, Circuit Judges, and Williams,
Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge
Williams.

Williams, Senior Circuit Judge: On January 16, 2001
Verizon submitted an application to the Federal Communica-
tions Commission under s 271 of the Telecommunications Act
of 1996, 47 U.S.C. s 271, seeking authority to offer long-
distance service to customers in Massachusetts. The Com-
mission approved the application on April 16, 2001, just within
the statutory 90-day time limit. In Re Application of Veri-
zon, et al. for Authorization to Provide In-Region, Inter-
LATA Services in Massachusetts, 16 FCC Rcd 8988 (2001)
("Order"). WorldCom, AT&T and a number of similarly
situated firms acting through a trade association ("appellants"
or "WorldCom") challenge the approval. The parties' main
dispute revolves around the Commission's conclusion that
Verizon's rates for unbundled network elements ("UNEs")

complied with the "TELRIC" standard (total-element long
run incremental cost). Appellants' challenge in essence at-
tacks as unreasonable the Commission's use in combination of
two devices that it had employed separately, one in its s 271
approval for Oklahoma, which we upheld in Sprint Comm. Co.
v. FCC, 274 F.3d 549 (D.C. Cir. 2001), and the other in its
s 271 approval for New York, which we upheld in AT&T
Corp. v FCC, 220 F.3d 607 (D.C. Cir. 2000). We are not
persuaded. As for the two remaining issues, one requires a
remand because the relevant record is not materially distin-
guishable from that in Sprint; we lack jurisdiction over the
other.

* * *

Because our opinions in AT&T and Sprint set out the
statutory background in some detail, our treatment here will
be brief. The decree settling the AT&T antitrust litigation,
the Modification of Final Judgment ("MFJ"), see United
States v. American Telephone and Telegraph Co., 552
F. Supp. 131 (D.D.C. 1982), aff'd sub nom. Maryland v.
United States, 460 U.S. 1001 (1983), split the sale of long-
distance services from the sale of local telephone services, so
that the Bell Operating Companies (spun off from AT&T by
the MFJ) could provide local service but were barred from
offering long-distance service in their local markets. But
s 271 of the 1996 Act allows those firms--now, together with
their successors, commonly known as incumbent local ex-
change carriers or "ILECs"--to secure FCC approval to sell
long-distance service to customers in the region for which
they are the dominant local-service providers. To receive
s 271 approval an ILEC must show (among many other
things) compliance with a list of fourteen conditions, termed
the "competitive checklist," designed to ensure that an ILEC
will be permitted to sell long-distance service in its local
region only when it has opened up the local service market to
competition. 47 U.S.C. s 271(c)(2)(B).

One of the fourteen items on the checklist requires an
ILEC to offer access to "network elements" needed by

competitors to provide telecommunications service. See id.
at s 251(c)(3) (incorporated into the competitive checklist by
s 271(c)(2)(B)(ii)). These elements, the unbundled network
elements or UNEs referred to earlier, must be offered to
competitive local exchange carriers ("CLECs") at rates that
are "establish[ed]" by state regulatory agencies pursuant to a
"pricing methodology" prescribed by the FCC. See AT&T
Corp. v. Iowa Utilities Bd., 525 U.S. 366, 383 (1999). The
methodology chosen by the Commission is called TELRIC,
which requires that rates be based on "the cost of operating a
hypothetical network built with the most efficient technology
available." Id. at 374 n.3. See also Verizon Communica-
tions, Inc. v. FCC, 122 S. Ct. 1646 (2002) (upholding the
TELRIC standard).

Application of the TELRIC standard has proved complex,
involving detailed fact-finding over years of litigation in state
agencies. This complexity has two important consequences
for this case. First, because the FCC has only 90 days to
approve or reject a s 271 application, it cannot independently
determine the TELRIC compliance of an ILEC's UNE rates.
Rather, the FCC defers to the determinations of the state
agencies who "possess[ ] a considerable degree of expertise"
and who typically perform "a significant amount of back-
ground work" during the rate determinations. AT&T, 220
F.3d at 616. Thus, the FCC need only ensure that the state
proceedings "comply with basic TELRIC principles" and are
not infected with clear factual errors so "substantial that the
end result falls outside of the range that the reasonable
application of TELRIC principles would produce." Id. at
615-16. Second, the Commission may base its finding of
TELRIC compliance on a comparison of the disputed rates
with those of a neighboring state which it had already ap-
proved under s 271, provided that the applicant can demon-
strate that local costs were at or above those in the bench-
mark state. See Joint Application by SBC Communications,
Inc. et al. for Provision of In-Region InterLATA Services in
Kansas and Oklahoma, 16 FCC Rcd 6237 (2001) at p p 82-87
(determining that the Oklahoma loop charges were TELRIC-

compliant based on a comparison with previously approved
Texas loop charges), aff'd, Sprint, 274 F.3d at 561.

The Massachusetts s 271 controversy began when Verizon
filed an initial application in September 2000. Possibly be-
cause of various criticisms, including FCC concern over its
UNE pricing, it withdrew the application in December. But
before doing so it filed a tariff lowering its UNE rates to
levels substantially equivalent to the rates offered by Bell
Atlantic (Verizon's name before its merger with GTE) in New
York, which had already secured Commission approval under
s 271. See AT&T, 220 F.3d at 611-16.

These New York rates had themselves been the subject of
challenge. CLECs had offered evidence--both before the
New York Public Service Commission ("NYPSC") and the
FCC (during the s 271 proceeding)--that Bell Atlantic had
understated the size of the discounts it received on certain
switch purchases, with the result that its UNE rates might in
fact not comply with TELRIC. The NYPSC re-opened its
proceedings to inquire into the claims, but the Commission
nonetheless approved the s 271 application. In AT&T we
rejected the CLECs' attack on the approval, finding that such
newly discovered evidence was not in itself enough to upset
an otherwise valid approval. 220 F.3d at 617-18. In a move
loosely paralleling that of the NYPSC, the Massachusetts
Department of Telecommunications and Energy ("DTE") in
January 2002 embarked on its scheduled, quinquennial review
of Verizon's UNE rates. Thus, as in New York, at the times
the relevant s 271 applications were pending before the FCC,
the disputed UNE rates were under challenge and review in
the state agency with immediate authority.

WorldCom's leading claim is even if the New York rates
were acceptable at the time, their age and their errors made
them inadequate as benchmarks, so that the Massachusetts
s 271 approval was arbitrary and capricious. In addition,
they say that it was arbitrary and capricious for the FCC to
dismiss their argument that the Massachusetts UNE rates
created a "price squeeze," i.e., were so high that a CLEC
could not use UNEs for profitable sale of local service.

Finally, WorldCom argues that the s 271 application was
fatally defective because, at the time it was filed, Verizon was
not offering its advanced services at resale discounts, in
contravention of item 14 on the competitive checklist, see
s 271(c)(2)(B)(xiv).

1. Reasonableness of the New York Benchmark

WorldCom does not claim that there is anything inherently
flawed in the Commission's use of benchmarking (which we
upheld in Sprint), even where the previously approved rates
had been seriously called into question, as was true of the
rates approved in the New York s 271 process (which we
upheld in AT&T). Rather, it contends that the Commission's
deference under AT&T is owed to a process, not to a result;
deference by the Commission is therefore inappropriate
where the rates under review were adopted by a state agency
(that of Massachusetts) that did not conduct its own fact-
finding. Second, WorldCom argues that if the FCC chooses
to use a benchmark to evaluate the UNE rates before it in
the s 271 proceeding, it must ensure that the chosen bench-
mark is reasonable, based on all available evidence.

WorldCom's first point completely overlooks the facts of
Sprint. There the ILEC had simply given a certain class of
Oklahoma charges "an arbitrary 25% 'haircut,' " 274 F.3d at
558, which had the effect of bringing them into line with rates
approved by the Commission for Texas, id. at 561. We see
no principled distinction between Oklahoma's "process," ac-
cepting arbitrarily trimmed rates that matched ones approved
in Texas (and blessed by the Commission under s 271) and
Massachusetts's similar adoption of ones matching those ap-
proved in New York (and similarly blessed by the Commis-
sion).

Moreover, many of the elements of the "process" that
merited deference under AT&T are present here, both in
Massachusetts process itself and the Commission's clear rec-
ognition of the link between the ongoing New York proceed-
ings and the Massachusetts rates. WorldCom points to the
critical role of the "active review and modification of Bell
Atlantic's proposed [UNE] prices." In re Application by Bell

Atlantic New York to Provide In-Region, InterLATA Ser-
vice, 15 FCC Rcd 3953 (2000), at p 238. But such active
review is present here as well. The NYPSC is itself continu-
ing to review its own UNE prices, and as the FCC stated in
the Order, New York's rate revisions could "undermine Veri-
zon's reliance on those [old] rates in Massachusetts and its
compliance with the requirements of section 271," if the
revisions were not also adopted in Massachusetts. 16 FCC
Rcd 8988, at p 30. In addition, the Commission noted that
DTE itself was "endeavoring to reset UNE rates" and ob-
served that if "prices are not set in accordance with our rules
and the Act, [the Commission] retain[s] the ability ... to take
appropriate enforcement action." Id. In light of these pre-
cautions, it was perfectly reasonable for the Commission to
review the UNE rates in Massachusetts under the same
deferential standard as it used in evaluating rates for New
York and Oklahoma.

But WorldCom also argues that the Commission's chosen
benchmark was unsuitable, having become radically detached
from TELRIC. The causes of such detachment, according to
WorldCom, range from the age of the rates (rates that passed
muster in the December, 1999 s 271 proceeding for New
York were more than a year older in April 2001), the flaws
that had infected the rates from the beginning, and additional
evidence brought to bear against them not present in the
New York determination.

At some point, WorldCom's argument plainly must become
a winner. In a market with falling costs, ancient UNE rates
cannot serve as a valid benchmark. Nor could ones that had
been convincingly shown, for example, to have been based on
fraudulent ILEC submissions. Moreover, WorldCom is sure-
ly right to suggest that a challenger might tender evidence of
benchmark unreasonableness so strong as to preclude FCC
approval without a hearing.

To the extent, however, that WorldCom argues simply that
the Commission could have chosen a better benchmark, it
poses the wrong issue. The FCC need not choose the
"optimal" benchmark, only a reasonable one. Nor can World-

Com expect the s 271 process to grow into a full-scale rate-
making on the part of the FCC, if for no other reason than
the time constraints imposed by the 90-day limit. The FCC
is thus under no duty to provide a detailed, point-by-point
explanation of why it rejected the claim that use of the
benchmark was improvident. Rather, the record need only
show that the FCC reasonably concluded that it had, in light
of appellants' claims and proffered evidence, reasonable
grounds to be satisfied that the disputed rates were unlikely
to exceed the range of TELRIC compliance. As we held in
AT&T, 220 F.3d at 616, and reiterated in Sprint, 275 F.3d at
555, TELRIC is not a single rate but a ratemaking methodol-
ogy that may yield a rather broad range of rates. We believe
that here the Commission's review of the new evidence was
enough.

WorldCom, for instance, points to comparative studies that
show that other states have lower UNE rates than New York.
But if TELRIC implies a range of rates--a point on which
appellants themselves rely in pressing their price squeeze
argument--then such variation by no means shows a lack of
TELRIC compliance. WorldCom also provides an alternative
cost study in support of their position, but this study was
conducted in 1996, was rejected by DTE when presented to it
in 1996, and does not appear to have ever been accepted by
the FCC. At best, this study proves that the Commission
and appellants have different opinions on the best way to
determine UNE prices; our deference, of course, is owed to
the Commission.

Appellants also make much of the fact that the New York
rates were the oldest UNE rates in the nation, and suggest
that they were therefore outdated. In addition, they point to
evidence of a decline in switch costs over time. While the
New York rate may have exceeded theoretically perfect
TELRIC levels when the Massachusetts Order was issued,
such a lag does not render a rate invalid. Indeed, when
element costs are falling, such temporary deviations, or regu-
latory lags, are both unavoidable and perhaps even desirable.
In AT&T we recognized that a state's TELRIC rates could
not always reflect the most recently available information,

since rate determinations consume substantial periods of time
and cannot be constantly undertaken. 220 F.3d at 617-18.
Indeed, a process of Penelope-like unraveling and reinvention
would, like hers, prove endless. And in upholding TELRIC,
the Supreme Court affirmatively invoked the likelihood of a
regulatory lag, saying that such a lag would prevent TELRIC
prices from dropping so low as to unduly tempt CLECs to
rely on ILEC-supplied UNEs rather than build their own
facilities. Verizon, 122 S. Ct. at 1669-70.

So the mere age of a rate doesn't render the FCC's
reliance on it unreasonable; we can reverse the Commission's
judgment only if it sufficiently disregarded the issue of the
rate's age so as to adopt rates that were unreasonably
outdated. This, we are satisfied, the Commission did not do.
While it is true that the Commission made no explicit findings
that the New York rates were in line with current costs, it
adopted what is likely a far more workable approach to the
problem of timeliness--namely, reliance on the state's own
processes of rate revision and correction. As noted above,
the Commission observed that Verizon's s 271 compliance in
Massachusetts would be undermined if its UNE rates fell out
of line with TELRIC levels, as determined by the active rate
review processes under way in New York and Massachusetts.
16 FCC Rcd 8988, at p p 29, 30, 33, 35. Unless these determi-
nations were themselves unsupported or arbitrary and capri-
cious--and we see no evidence that they are--nothing else is
required of the Commission on this issue.

Apart from suggestions that the New York rates were no
longer current, WorldCom points to additional flaws in the
rates themselves. To a large extent these claims simply
duplicate the assertions of inaccuracy that were at issue in
AT&T. To that extent, obviously, appellants are simply
inviting us to reject the conclusion we reached there--that
the process of administrative correction under way in New
York was enough to assure adequate TELRIC compliance for
purposes of s 271--an invitation we could not accept even if
we thought it wise (which we don't). In fact, it turns out here
that in January 2002, after the Commission granted the
Massachusetts s 271 approval, the NYPSC issued an order in

large measure accepting the CLECs' position on the switch
discounts, resolving several other issues in their favor, and
requiring a reduction of the New York rates by more than
50%. See Proceeding on Motion of the Commission to
Examine New York Telephone Company's Rates for Unbun-
dled Network Elements, Order on Unbundled Network Ele-
ment Rates, Case 98-C-1357 (NYPSC Jan 28. 2002). And
the Massachusetts DTE followed suit with an order broadly
accepting the CLECs' claims and in all likelihood leading to a
comparable reduction. See Investigation by the Department
of Telecommunications and Energy on its Own Motion in
the Appropriate Pricing, D.T.E. 01-20 (released July 11,
2002). These findings, obviously unavailable to the Commis-
sion at the time of its decision, seem more to establish the
effectiveness of the process of agency correction on which it
relied--rough though it may be--rather than a basic flaw in
its approach.

WorldCom tries to distinguish our ruling in AT&T by
noting that when AT&T was decided, the flaws at issue were
thought to be small and difficult to recalculate, whereas they
are now known to be large and easily recalculable. We note,
however, that WorldCom has not even tried to take us
through the math on this calculation; more tellingly, its claim
relies on data collected by the Commission for the purposes
of implementing its duties as to the Universal Service Fund--
information that the FCC insists is unreliable for the determi-
nation of UNE rates. In AT&T, we held that this single
errant cost input value did not justify a finding that basic
TELRIC principles had been violated, and the proffer of
additional evidence that is at best uncertain and highly con-
testable is not enough to justify a different conclusion.

More importantly, though, this attempted distinction miss-
es the central point of our prior holding in AT&T: that it is
reasonable for the FCC to rely on the states' periodic rate
revision process as a means of correcting flaws in adopted
rates. Indeed, if there now exists a database of switch
purchases that provides greater accuracy for use in the
TELRIC cost model, as WorldCom claims, it seems fair to
assume that this new information was incorporated in the new

rates promulgated by NYPSC and DTE, or will be if World-
Com seeks judicial review or invokes the FCC's own monitor-
ing process under 47 U.S.C. s 271(d)(6). WorldCom may
disagree with the wisdom of the strategy the Commission
adopted here, and may be skeptical that the states' rate
revision processes will keep their rates within the range of
TELRIC compliance, but it hasn't demonstrated that the
strategy is unreasonable.

WorldCom also notes that the New York rate revision
procedure, unlike the one recently undertaken in Massachu-
setts, ordered refunds to correct for possibly incorrect cost
inputs. But we didn't rely on the refund procedure in our
decision in AT&T, and for good reason: state rate-setting
procedures are complex systems aimed at balancing the com-
peting interests of customers and investors, and we will not
upset that balance ad hoc by requiring refunds (or requiring
the Commission to do so) unless they are clearly necessary to
render the rates TELRIC-compliant. Such was not the case
in AT&T, and it is not the case here. As for the last attempt
to distinguish AT&T--the claim that retail rates are so low in
Massachusetts that these UNE rates would prove to be a
greater entry barrier to CLECs than they did in New York--
we note that this issue properly relates to WorldCom's price
squeeze argument discussed below.

2. Possible Price Squeeze and the Public Interest

Appellants argue, as did their counterparts in Sprint, 274
F.3d at 554-56, that the FCC failed to consider their claim
that the ILEC's UNE rates would create a "price squeeze,"
i.e., prices for CLECs' inputs so high as to largely disable
them from competing profitably in the local market with the
ILEC, the supplier of those inputs. See, e.g., FPC v. Con-
way Corp., 426 U.S. 271 (1976) (requiring agency to consider
price-squeeze challenges to an electric utility's proposed
wholesale rates). Indeed, the FCC's justifications for not
considering this issue--briefly, that the "price-cost squeeze"
is irrelevant because s 271 directs the Commission only to
examine costs rather than profits; that compliance with the
competitive checklist is enough to prove that the market has

been opened to competitive entry; that any deficiencies in
actual local competition may well be due to individual ILEC
strategies; and that the matter may turn largely on the level
of purely local rates that are entirely under the authority of
state regulators--are virtually identical to the rationales we
found inadequate in Sprint. Compare Order, 16 FCC Rcd
8988, at p p 41, 234-35, with Sprint, 274 F.3d at 554-56. The
rationales are no more convincing here than there.

The only apparent difference between the Order here and
the Kansas/Oklahoma Order remanded in Sprint is that here
the record indicates a higher volume of competitive entry.
See Order, 15 FCC Rcd 8988, at p 41 & n.112. But this
evidence alone, unanalyzed, is not enough to discharge the
Commission's duty to assure that ILEC entry to the long-
distance market is in the public interest. After all, classic
price squeeze cases have never turned on a finding that
competition by the input-purchasing firms was absolutely
precluded. See, e.g., Anaheim v. FERC, 941 F.2d. 1234, 1238
(D.C. Cir. 1991) (describing price squeeze inquiry as deter-
mining whether the challenged conduct "has exerted any
anticompetitive effects" (emphasis added)). Because of the
range of TELRIC-compliant UNE rates, a set of fully compli-
ant rates might--under some analyses and policy judgments,
not addressed by the Commission in this record--impede
local competition enough to render a s 271 approval in con-
travention of the "public interest." Accordingly, we remand
the case for further consideration in the light of Sprint.

3. Provision of Advanced Services at Wholesale Rates

Appellants' final argument is that Verizon failed to satisfy
checklist item No. 14, see s 271(c)(2)(B)(xiv), in that it was
not, on the date of its application on January 16, 2001,
offering CLECs DSL and other advanced services at whole-
sale rates. In so doing Verizon had relied on a justification
that the Commission had formerly embraced, but that this
court rejected in Association of Communications Enterprises
v. FCC, 235 F.3d 662 (D.C. Cir. 2001). That opinion was
issued on January 9, 2001, but the mandate issued only on

March 6, 2001. In reliance on this delay in the mandate, the
Commission held that it would not consider Verizon's failure
to provide the services at wholesale rates, saying that Verizon
should not be faulted for complying "with a Commission order
in effect at the time of the application." Order p 219 & n.707.

It is undisputed that three days before the issuance of the
Order here, Verizon (actually, its affiliate) had filed a tariff
that brought it into full compliance with checklist item 14. At
oral argument counsel for appellants admitted that the issue
currently has no practical significance. Although the issue
was discussed at oral argument in the context of possible
mootness, it appears that nothing has happened between the
initial filing of the suit and oral argument that might affect
the significance of Verizon's delay. Thus we conclude that
any Commission error never inflicted an injury sufficient to
give WorldCom standing to bring the issue. WorldCom's
half-hearted attempt to make out a theory that the issue was
"capable of repetition, yet evading review" is therefore inap-
posite, as that familiar exception to mootness cannot confer
standing on a claim when injury in fact was missing at the
outset. Friends of the Earth, Inc. v. Laidlaw Envtl. Services,
528 U.S. 167, 191 (2000). In any case, the issue here does not
even qualify as "evading review" since the issue is clearly
capable of remedy if Verizon were to retract its resale
discounts in this case, or were to withhold resale discounts in
other states with respect to which it files a s 271 application.
Thus, no matter whether the issue is a matter of standing,
mootness or both, we are sure that the complete want of
effect in the real world deprives us of jurisdiction over the
intriguing question of how the distinction between opinion
and mandate might play out in this context.

* * *

We remand the price squeeze issue to the FCC for further
consideration; we dismiss the checklist item 14 issue for want
of jurisdiction; and in all other respects we affirm the Com-
mission Order.

So ordered.