Sprint Communications Co. v. Federal Communications Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 17, 2001 Decided December 28, 2001

No. 01-1076

Sprint Communications Company L.P.,
Appellant

v.

Federal Communications Commission,
Appellee

SBC Communications Inc., et al.,
Intervenors

Consolidated with
01-1081, 01-1082, 01-1083, 01-1084

Appeals from an Order of the
Federal Communications Commission

David W. Carpenter argued the cause for appellants. With
him on the briefs were Mark C. Rosenblum, Mark E. Had-

dad, David L. Lawson, Jay T. Jorgensen, Theodore C. White-
house, Randy J. Branitsky, Thomas F. O'Neil III, William
Single IV, Mark D. Schneider, Robert J. Aamoth, Brad E.
Mutschelknaus and Jonathan E. Canis. Peter D. Keisler
entered an appearance.

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

Geoffrey M. Klineberg argued the cause for intervenors
SBC Communications Inc., Southwestern Bell Telephone
Company and Southwestern Bell Communications Services,
Inc. With him on the brief were Michael K. Kellogg, Scott K.
Attaway, Alfred G. Richter, Jr., James D. Ellis, Martin E.
Grambow and Mary W. Marks.

Eva Powers, Elisabeth H. Ross and Douglas S. Burdin
were on the brief for intervenor Kansas Corporation Commis-
sion.

William R. Burkett was on the brief for amicus curiae
Oklahoma Corporation Commission in support of appellee.

Before: Tatel, Circuit Judge, Silberman and Williams*,
Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge
Williams.

Williams, Senior Circuit Judge: The regional Bell operat-
ing companies ("BOCs"), split off from AT&T in the 1982
antitrust settlement, provide most local telephone service.
Section 271 of the Telecommunications Act of 1996 (the
"Act"), 47 U.S.C. s 271, offers the BOCs a deal: such a
company can enter the long distance business in a state
within its service area if it takes specified steps to open the
local-service market to competition. SBC Communications, a

__________
* Senior Circuit Judge Williams was in regular active service at
the time of oral argument.

provider of local service in Kansas and Oklahoma, applied to
the Federal Communications Commission for authorization to
enter the long distance market in those states. Various long
distance providers, including the five appellants before us,
objected. The FCC granted the authorization, see Joint
Application by SBC Communications, Inc. et al. for Provi-
sion of In-Region InterLATA Services in Kansas and Okla-
homa, 16 F.C.C.R. 6237 (2001) (the "Order"), and this appeal
followed. See 47 U.S.C. s 402(b)(6) & (9) (giving this court
exclusive jurisdiction over challenges to the Commission's
s 271 orders).

The full regulatory context of a s 271 application is set
forth comprehensively in our decision affirming the FCC's
approval of Bell Atlantic's s 271 application for New York.
AT&T v. FCC, 220 F.3d 607, 610-15 (D.C. Cir. 2000), affirm-
ing Bell Atlantic New York Order, 15 F.C.C.R. 3953 (1999)
("New York Order"). Here we state only the bare bones.
The Act entitles each of the BOCs to begin offering long
distance service originating outside their local-service areas
immediately. See 47 U.S.C. s 271(b)(2). But for authority to
offer "in region" long distance service (i.e., service originating
in a state where it provided local service), the Act requires a
BOC to apply for Commission approval. Id. s 271(b)(1).
The Commission then has 90 days to decide whether the BOC
has shown that it is in compliance with the statutory prereq-
uisites. Id. s 271(d)(3).

First, the BOC must satisfy either "Track A" or "Track
B"--names derived from subparagraphs of s 271(c)(1). For
Track A it must show that it provides network access to "one
or more unaffiliated competing providers of telephone ex-
change service ... to residential and business subscribers."
Id. s 271(c)(1)(A). If no competing provider has requested
such access, the BOC may invoke Track B, showing that it is
ready and willing to provide its competitors with network
access and interconnectivity under terms "approved ... by
the State commission." Id. s 271(c)(1)(B).

Besides prevailing on Track A or B, the BOC must estab-
lish that its offering of interconnection and access to competi-

tive local exchange companies ("CLECs") meets the fourteen
requirements of a "competitive checklist" contained in
s 271(c)(2)(B). Many of these requirements are simply incor-
porations by reference of obligations independently imposed
on the BOCs by ss 251-52 of the Act, id. s 271(c)(2)(B)(i) &
(ii), and enforced by state regulatory commissions pursuant to
s 252. The required interconnection and access must be
available on non-discriminatory terms and at cost-based rates.
See, e.g., id. ss 251(c)(2) & (3), 252(d)(1). Finally, the BOC
must convince the FCC that "the requested authorization is
consistent with the public interest, convenience, and necessi-
ty." Id. s 271(d)(3)(C).

SBC filed an application for long distance service authoriza-
tion in both Kansas and Oklahoma on October 26, 2000. Its
petition relied on the network element rates that were set by
the Kansas Corporation Commission and the Oklahoma Cor-
poration Commission in s 252 proceedings implementing
SBC's duties under s 251. See Order at p p 12-16, 22-23.
Numerous parties--including the Department of Justice, the
Kansas Commission and the Oklahoma Commission, and the
five appellants--filed comments. The state commissions
weighed in on the side of SBC. DOJ's recommendations
endorsed neither denial nor approval of the applications, but
instead urged the FCC to scrutinize particular aspects of the
petition, including SBC's prices for network elements.

On January 22, 2001--ninety days after the application was
filed, and for the first time in a situation involving predomi-
nantly rural states--the FCC released its order granting
SBC the authorizations. See Order p 1.

The Commission found first that SBC had satisfied Track A
in both Kansas and Oklahoma because the company was
supplying network access to one or more unaffiliated competi-
tors providing residential and business customers with "facili-
ties-based service." Order p p 40-44; see also s 271(c)(1)(A).

Next the Commission concluded that SBC had fully met the
requirements of the competitive checklist in both states.
Evidence in the record was virtually uncontested with respect
to eleven of the fourteen checklist items. Order p p 39, 241-

55. As for the remaining three items, the Commission con-
sidered and rejected commenters' contentions that SBC failed
to provide network elements and interconnection to CLECs
at cost-based rates. See Order p p 45-240.

Appellants raised two rate-related arguments that are nov-
el in s 271 litigation. Pointing to the rather low level of
residential service by CLECs, they argued that the unbun-
dled network element ("UNE") rates could not have genuine-
ly conformed to the cost requirement, or else competition
would have flourished, or at least not proven so modest.
Further, pointing to submissions of evidence that SBC's UNE
rates were too high to provide profitable residential service,
they argued that SBC was engaged in a "price squeeze"
(charging prices for inputs that precluded competition from
firms relying on those inputs), and that accordingly the
Commission could not find that authorization of its entry into
the long distance market was "consistent with the public
interest," as required by s 271(d)(3)(C). The Commission
rather summarily rejected both claims. Order p p 92, 268.

Appellants here pursue three basic arguments. First, they
make the arguments summarized above about the relation
between UNE rates and low volumes of residential service.
Second, they make a series of detailed attacks on the Com-
mission's findings that the UNE rates were cost-based. Fi-
nally, they say that the FCC improperly relied on ex parte
communications in its Kansas Track A determination, which
was, in any event, independently erroneous. We consider the
arguments in that order. We conclude that appellants have
made out a case for a remand to the Commission only on the
"public interest" aspect of the first issue.

1. Low-volume local competition, possible price squeeze and
the public interest.

In contrast to the situation in the other two states where
the FCC has previously granted long distance authority to a
requesting BOC (New York and Texas), Oklahoma and Kan-
sas have local telephone markets characterized by relatively
low volumes of residential competition from non-BOC firms.
Order p p 34, 92, 268. Appellants also point to evidence they

submitted, evidently uncontradicted in the record, that com-
petition in the residential market that was dependent on
UNEs at SBC's prices could not succeed. They argue that
the low volumes and the evidence of the impossibility of
profitable competition both contradict the Commission's find-
ing of cost-based rates and undermine its conclusion that
granting SBC's applications was consistent with the public
interest.

The Commission's standard for cost--"TELRIC" (or total
long-run incremental cost)--is one that might normally be
expected to generate competition. In principle, there is no
reason to think the BOC's real costs could be lower. In an
otherwise undistorted market, firms capable of efficiently
supplying the non-BOC elements should be able to compete.
Appellants' proposal that the Commission consider the vol-
ume of competition as a cross-check for its cost finding is
therefore understandable.

But we can hardly find the Commission's rejection of
appellants' proposal unreasonable. The statute imposes no
volume requirements for satisfaction of Track A, so that it
would be odd for the Commission to use low volume to defeat
a finding of TELRIC-compliant rates. And it would be
reasonable for the Commission to treat any questions raised
by the low volumes, or by the appellants' evidence showing
the difficulty of making a profit under SBC's rates, as sub-
sumed within the issue of TELRIC compliance. See AT&T,
220 F.3d at 619. As the appellants concede, the lack of
competition they allude to is neither a direct nor a conclusive
proof of a checklist violation. Appellants' Br. at 52.1 The
Justice Department argued that the low volumes "compel[led]
a closer look" at whether SBC's rates were "properly cost-
based," Evaluation of the U.S. Department of Justice ("DOJ
Report") at 10, and the FCC did just that, as we shall see.

Appellants repackage the data on volumes and potential
profitability as an attack on the Commission's public interest
finding. Concededly, Congress did not expressly consider

__________
1 All cites to briefs are to pages in the sealed versions.

whether such data could prevent a public interest finding or
even require further inquiries by the Commission. See Chev-
ron U.S.A. v. Natural Resources Defense Council, 467 U.S.
837, 842-43 (1984). But appellants in substance argue that
the only reasonable construction of the requirement calls at
least for such an inquiry. They point to "price squeeze"
decisions, construing public-interest provisions in statutes
that are not explicitly aimed at fostering competition, which
reviewed--and found wanting--agencies' asserted grounds
for failing to follow up similar claims. See, e.g., Mid-Tex
Elec. Coop., Inc. v. FERC, 773 F.2d 327, 351-62 (D.C. Cir.
1985). With a statute that proclaims competition as the
congressional purpose, Pub. L. No. 104-104, purpose state-
ment, 110 Stat. 56, 56 (1996), it follows a fortiori, appellants
say, that the Commission should pursue their price squeeze
claim, or at the very least explain why the public interest does
not require it to do so. After all, "the words 'public interest'
in a regulatory statute ... take meaning from the purposes of
the regulatory legislation." NAACP v. FPC, 425 U.S. 662,
669 (1976).

In fact, the Commission gave appellants' claim rather a
brush-off. First, the Commission said that under its reading
of the Act, the "profitability" considerations raised by appel-
lants were "irrelevant" because the Act directed it to assure
that the rates were cost-based, "not [to determine] whether a
competitor can make a profit by entering the market." Order
p 92; see also id. p 65. This, of course, is unresponsive. The
issue is not guarantees of profitability, but whether the UNE
pricing selected here doomed competitors to failure.

Second, the Commission reasoned that consideration of the
price-squeeze claims would have exceeded the Commission's
authority under the Act, because it would have required the
FCC to invade state commissions' exclusive jurisdiction over
retail rates. Order p 92 ("Were we to focus on profitability,
we would have to consider the level of a state's retail rates,
something which is within the state's jurisdictional authority,
not the Commission's."). But the Supreme Court rejected
precisely this argument in FPC v. Conway Corp., 426 U.S.
271 (1976). There the Federal Power Commission had re-

fused to hear price-squeeze evidence on the theory that it was
powerless to eliminate any such squeeze, as retail rates fell in
the exclusive jurisdiction of state commissions. Id. at 277.
The Supreme Court responded that the remedy, if any, could
take the form of the Commission's fixing the wholesale rates,
which were under its jurisdiction, at a lower level within "the
zone of reasonableness." Id. at 279 (internal quotation marks
omitted).

The Commission makes a related argument in its brief,
saying that any price-squeeze claim is effectively rebutted by
the Commission's finding that UNE rates were cost-based.
That is true to the extent that an agency can pinpoint
TELRIC rates; as we suggested earlier, in an undistorted
market "perfect" TELRIC rates would seem inconsistent
with any price squeeze. But to the extent that an agency can
confidently identify TELRIC rates only within some band,
like those involved under conventional "just and reasonable"
regulation, the possibility exists that the agency has chosen
too high a point within the band. As the Court said in
Conway:

This argument, however, assumes that ratemaking is an
exact science and that there is only one level at which a
wholesale rate can be said to be just and reasonable....
[H]owever, there is no single cost-recovery rate, but a
[wide] zone of reasonableness....

Conway, 426 U.S. at 278.

Finally, the Commission observes, "[f]actors beyond a
BOC's control, such as individual CLEC entry strategies for
instance, might explain a low residential customer base."
Order, p 268. This is, of course, correct in principle, although
it may leave the inquisitive wondering why firms would
forego what superficially appear to be promising opportuni-
ties for profit. But the observation is no basis for rejecting a
proffer of evidence that the ceiling level for UNE rates--
fixed by the state commissions and approved by the FCC
itself--precluded profitable entry.

 At oral argument Commission counsel offered another anal-
ysis, not explicitly mentioned in the Order. He suggested
that state commissions have historically set relatively low
residential rates, especially rural ones, allowing the incum-
bent monopoly to make it up in other aspects of their
business. Compare City of Batavia v. FERC, 672 F.2d 64, 90
n.52 (D.C. Cir. 1982) ("Conway [does not] require the Com-
mission to set a wholesale rate so that wholesale customers
are guaranteed the ability to compete in the retail market. It
may be, for instance, that the state commission is not allowing
an adequate rate of return. If so, the Commission is not
obliged to follow, and indeed may not follow suit, for the rates
it sets must fall within the zone of reasonableness."). This
was in part contested by appellants' counsel, who suggested
that even with state commission regulation it would be possi-
ble to offer certain enhanced services profitably--if only
UNE rates were capped at correct TELRIC levels, or, in the
alternative formulation, at lower levels within the correct
TELRIC range.

In any event Commission counsel's observation is not a
ground for rejecting appellants' claim; we can affirm only on
the Commission's reasoning. See SEC v. Chenery Corp., 318
U.S. 80, 88 (1943). We therefore remand the case to the
Commission for reconsideration of this issue. Of course
Conway itself "merely holds that the Commission must weigh
anticompetitive effects along with other factors in setting
rates." Kansas Cities v. FERC, 723 F.2d 82, 94 (D.C. Cir.
1983) (citing Conway, 426 U.S. at 278-79). Here, as the Act
aims directly at stimulating competition, the public interest
criterion may weigh more heavily towards addressing poten-
tial "price squeeze." But the Commission's reasoning, when
it is proffered, will presumably help establish the reasonable
range for interpretations of the statutory criterion.

In closing we note two points, without evaluation. First,
the potential scale of a serious price squeeze inquiry may
present a problem; we have already recognized that Con-
gress's 90-day limit constrains the scope of the Commission's
inquiries. AT&T, 220 F.3d at 631. Second, if the Commis-
sion is correct in reading Track A to require only a minimal

volume of competition to be present, see Order p 42, and that
reading is not challenged here (though its application is), it
may reflect a recognition that the residential market may not
be attractive to competitors even if UNE costs are at the
lower end of TELRIC (assuming it to have a material range).
See City of Batavia, 672 F.2d at 90. While we remand for
consideration of this issue, we do not vacate the Order. See,
e.g., Allied-Signal, Inc. v. NRC, 88 F.2d 146, 150-51 (D.C.
Cir. 1993) ("The decision whether to vacate depends on 'the
seriousness of the order's deficiencies (and thus the extent of
doubt whether the agency chose correctly) and the disruptive
consequences of an interim change that may itself be
changed.' ").

2. Specific attacks on the Commission's UNE rate findings.

General background. There is no dispute here on the basic
principle governing the rates at which a BOC must offer
unbundled network elements. The 1996 Act gives the Com-
mission general authority to promulgate rules necessary to
implement the statute, while entrusting the individual state
commissions with the application of those principles in the
process of approving interconnection agreements and rates
pursuant to s 252. See AT&T Corp. v. Iowa Utils. Bd., 525
U.S. 366, 385 (1999); AT&T, 220 F.3d at 615. In August 1996
the FCC adopted general rules, including the TELRIC stan-
dard. See First Report and Order, Implementation of Local
Competition Provisions in the Telecommunications Act of
1996, 11 F.C.C.R. 15499, 15844 p 672 (1996).

A forward-looking rather than a historical measure,
TELRIC bases rates on "the cost of operating a hypothetical
network built with the most efficient technology available."
Iowa Utils. Bd., 525 U.S. at 374 n.3. "TELRIC is not a
specific formula," but rather a collection of "methodological
principles." AT&T, 220 F.3d at 615 (internal quotation marks
omitted). As it allows the states wide latitude to account for
"local technological, environmental, regulatory, and economic
conditions," its application "may result in different rates in
different states." Id. (internal quotation marks omitted).

When the Commission adjudicates s 271 applications, it does
not--and cannot--conduct de novo review of state rate-
setting determinations. Instead, it makes a general assess-
ment of compliance with TELRIC principles. Id.

Specifically, the Commission has said that it "will not reject
an application ... [unless] basic TELRIC principles are
violated or the state commission makes clear errors in factual
findings on matters so substantial that the end result falls
outside the range that the reasonable application of TELRIC
principles would produce." Order p 59 (quoting New York
Order, 15 F.C.C.R. at 4084, p 244).

We review the Commission's decision on TELRIC compli-
ance under the arbitrary and capricious standard. 5 U.S.C.
s 706(2)(A). In AT&T we identified three reasons why "spe-
cial deference" was in order for our review of a s 271 finding
by the Commission: that the issues at stake were ones
involving a high level of technical expertise in an area of
rapidly changing technological and competitive circumstances;
that the Commission itself was reviewing a state agency with
considerable expertise; and that "enormous flexibility [was]
built into TELRIC." 220 F.3d at 616. These reasons of
course continue to apply, and so shall the deference.

Thus, a challenger can prevail here by making one of two
showings. First, he may demonstrate that the FCC acted
arbitrarily and capriciously in finding that the state commis-
sion followed basic TELRIC principles. Alternatively, he
may point to specific factual errors made by the state com-
mission, and demonstrate either that the FCC failed to
consider these errors or that it arbitrarily determined that
the rates were nevertheless within the range acceptable
under TELRIC.

Kansas non-recurring charges. A CLEC leasing a net-
work element from the BOC incurs two types of charges.
Recurring charges are assessed for the use of the network
element in question over some time period. Non-recurring
charges are for one-time activity of processing orders for
UNEs and for physically providing them initially. Under the
FCC's rules, TELRIC applies to both. See 47 C.F.R.

s 51.507(e). Our inquiry in this section focuses on SBC's
non-recurring charges in Kansas.

The key dispute revolves around the so-called "fall-out
factor." Even with the best technology available, each stage
in the various automatic processes may fail, requiring more
expensive manual intervention. When this occurs, a service
order is said to "fall out." Kansas Commission Nov. 3, 2000
Non-Recurring Charges Order p 35;2 see also Order p 57
(comparing a $2.35 non-recurring service charge for electroni-
cally-processed orders with a $12.35 charge associated with
manual processing).

At the outset of its s 252 proceeding, the Kansas Commis-
sion found itself faced with what it deemed unrealistic cost
proposals submitted by both parties (SBC and the long
distance providers). Over a four-year period it conducted
"extensive workshops, hearings, and other types of discovery"
aimed at obtaining an accurate estimate of SBC's UNE costs.
Order p 49. Finally, it ordered both sides to rerun their
TELRIC recurring and non-recurring cost studies "using
certain prescribed inputs and cost assumptions" that the
commission thought would better approximate efficient net-
work design and operation. See id.

For non-recurring charges this attempted solution proved
defective. Making an estimate that fall-out probably would
occur about 5% of the time in a well-functioning system, the
commission directed the two sides to re-run their studies on
this aspect yet again, using this figure. Kansas Commission
Sept. 17, 1999 Reconsideration Order p 70; Kansas Commis-
sion Nov. 3, 2000 Non-Recurring Charges Order p 35. Both
sides, however, applied the 5% factor creatively so as to
inflate or understate the net rate of manual processing, as
would suit their respective cases. Kansas Commission Nov.
3, 2000 Non-Recurring Charges Order p p 13(C), 35, 38 (not-
ing that in the case of one particular network element, SBC's
unfounded assumptions ballooned the cumulative fall-out fac-

__________
2 The Kansas Commission set the rates for non-recurring costs
on November 3, 2000, a week after SBC filed for s 271 approval,
and SBC's application was duly supplemented. Order p 50.

tor to 59.3%). Although the exact nature of AT&T's fudging
is obscure, see id. p 13(C), AT&T here makes no claim to have
complied precisely with the commission order.

Concerned with preventing further delay in the already
lengthy proceedings, and frustrated by the carriers' failure to
follow its directions, the commission decided to set non-
recurring rates based on "information previously received in
this matter" and "its best judgment." Kansas Commission
Nov. 3, 2000 Non-Recurring Charges Order p 4. To fix the
majority of non-recurring rates it split the baby, adopting a
weighted average of the AT&T (2/3) and SBC (1/3) proposals.
Kansas Commission Nov. 3, 2000 Non-Recurring Charges
Order p 32; Revised Attachment B at 10 n.2. In weighting
the studies "so that the final price fell toward the low end of
the range of possible prices," id. p 32, the commission aimed
to avoid "reward[ing] an inefficient service provider," id. It
set the remaining rates by adopting either SBC or AT&T cost
proposals, or by relying on similar rates from comparable
jurisdictions.

SBC's initial s 271 application to the FCC relied on the
non-recurring charges calculated as described above. Re-
sponding to comments filed by the Department of Justice and
private commenters, which noted that many of the charges
were a good deal higher than the corresponding rates in
Texas, SBC proposed to lower its non-recurring rates in
Kansas by 25%. SBC December 28, 2000 Ex Parte Letter at
2, Joint Appendix ("J.A.") 1447; see also Order p 56. The
Kansas Commission adopted these cuts on January 5, 2001.
Order p 52. In light of "these additional voluntary reduc-
tions," the Commission reasoned that it "need not reach a
conclusion as to whether the carriers' failure to follow the
Kansas Commission's directions" in running cost studies re-
sulted in non-recurring rates that violate TELRIC. Order
p 60. In its opinion, the cuts eliminated "any remaining
concerns" about the non-recurring rates in Kansas.

Appellants claim the FCC could not properly find these
rates TELRIC-compliant, as they are the product of a crude
"settlement" method, trimmed by an arbitrary 25% "haircut."

Accusing the Kansas Commission of acting out of self-
imposed pressure to support SBC's s 271 application, the
appellants say that the Kansas Commission should have
required SBC to continue re-running its studies until they
reflected "accurate and Commission-approved cost data."
Appellants' Br. at 39 (quoting Kansas Commission Nov. 3,
2000 Non-Recurring Charges Order p 30 (internal quotation
marks omitted)). (Appellants often cite to pages in the
Kansas Commission's rulings where the commission finds
fault with SBC's studies, never mentioning that the same
pages allocate seemingly equal fault to AT&T's.)

Appellants' complaints overlook the procedural context of
the Kansas proceeding. The commission stated that the
burden of producing cost studies "squarely fell upon AT&T
and SWBT," Kansas Commission Nov. 3, 2000 Non-
Recurring Charges Order p 28 (J.A. 800-01); appellants have
not contested this (or mentioned it!). Given that calculation
of forward-looking costs for a hypothetical network requires
far more pervasive use of predictive judgments than does
standard cost-of-service ratemaking, some such allocation was
likely essential. Especially in the rural states, the burden on
regulatory resources might otherwise have proven over-
whelming. Cf. Order p 2. Perhaps AT&T might have legiti-
mately protested the assignment of any burden to the protest-
ers, but it appears not to have done so.

In fact the Kansas Commission diligently labored for sever-
al years scrutinizing AT&T's and SBC's submissions; to the
extent that it believed those studies contained errors, it made
adjustments. As the appellants concede, the Kansas Com-
mission "identified the many cost-inflating flaws in SBC's cost
studies." Appellants' Repl. Br. at 17. In such instances it
would then use "inputs, in some instances those proposed by
AT&T, that it found more reasonable," accordingly reducing
SBC's non-recurring charges for service orders and several
kinds of loops. Order p 63.

As we have seen, however, sound application of a fall-out
rate proved comparatively intractable. Appellants argue that
the weighted (2/3)/(1/3) formula, even when coupled with the

25% cut, was "mathematically incapable" of bringing SBC's
exaggerated fall-out ratios down to the correct 5% level. But
in fact appellants waited until their reply brief before deign-
ing to offer any detailed numbers in support of their com-
plaint. See id. at 20-21 n.5. Further, we note that if the
calculations were so simple, surely AT&T itself could have
offered the Kansas Commission some easy way of bringing
SBC's submissions--or its own--into line with the 5% criteri-
on. In AT&T, rejecting AT&T's insistence that switching
costs should have been adjusted to reflect newly discovered
information, we endorsed the New York agency's observation
that its computations were "the result of a complex analysis
that does not lend itself to simple arithmetic correction
through the adjustment of a single input." 220 F.3d at 617
(internal quotes omitted). Here, too, we cannot fault the
FCC for approving the Kansas Commission's compromise
resolution of an issue that the parties' behavior had left a
muddle.

Nor are we persuaded by appellants' suggestion that be-
cause some of SBC's non-recurring charges (even after its
25% discount) remain significantly higher in Kansas than in
Texas, such charges are not TELRIC-compliant. First, even
if the appellants' calculations were properly done, only two of
the five non-recurring UNE rates on which appellants rely in
this appeal--loop and cross-connect charges--are higher in
Kansas; the other three--service order charge, analog line
switch port, and central office access--are identical in both
states. AT&T Clarke Supp. Decl. Ex. 1, Cols. F & J (J.A.
1526-27). Second, SBC submitted evidence indicating that if
the relevant non-recurring charges (pre-discount) were amor-
tized over a reasonable period of time, the total monthly
UNE costs for CLECs serving comparable exchanges would
be lower in Kansas than in Texas. Order p 61 n.171. Al-
though appellants dispute the latter conclusion, saying that it
was generated by selectively comparing charges in urban
areas of Kansas to those in more costly suburban Texas,
Appellants' Reply Br. 21, their own citations (see J.A. 1519-
20, 1563-64) do not clearly establish a fallacy in SBC's
contention.

 Even if the two states' rates in fact differ, the FCC
identified a likely cause. Whereas the Texas Commission had
explicitly rejected SBC's claimed entitlement to a "trip
charge" for various installation and maintenance activities, a
comparable charge was evidently allowed in Kansas. Order
p 61. Because the "trip charge" is not a directly observable
quantity, but like many other inputs to the TELRIC model is
a prediction about future costs faced by a not-yet existent
efficient provider, a state-to-state difference in prediction
scarcely proves that either resulting rate is non-TELRIC.

Appellants argue that the Kansas Commission never explic-
itly approved a trip charge. But in fact the Kansas Commis-
sion cited a statement by AT&T that "20 percent of [new]
service orders will require sending a truck (and technician) to
work the order." Kansas Commission Nov. 3, 2000 Non-
Recurring Charges Order p 24; see also id. p 48-49. (Pre-
sumably this 20% is applied to a set different from and
smaller than the set for which the 5% fall-out rate was
considered appropriate.) While there may be no explicit
Kansas finding of a trip charge, the Kansas Commission's
express recognition of AT&T's own suggestion makes its
exclusion by Kansas seem implausible.

Accordingly, we reject appellants' claim that the Commis-
sion was arbitrary or capricious in finding no violation by the
Kansas Commission of basic TELRIC principles and no
"clear errors in factual findings on matters so substantial that
the end result falls outside the range that the reasonable
application of TELRIC would produce." Order p 59.

Oklahoma rates. Oklahoma's recurring and non-recurring
UNE rates were set by the Oklahoma Commission's adminis-
trative law judge on June 30, 1998, and approved by the
Oklahoma Commission without modification on July 17, 1998.
Although SBC's initial recurring and non-recurring cost pro-
posals were founded on cost studies similar to those it had
used in Kansas, the Oklahoma ALJ did not--unlike its Kan-
sas counterpart--order a re-run of estimates. Declaration of
Baranowski & Flappan, November 15, 2000, at 7. Instead, he
recommended adoption of rates that SBC and Cox Oklahoma,

a cable competitor, had agreed to in a s 252 arbitration,
convinced that they appropriately reflected forward-looking
costs. Order p 69.

Oklahoma non-recurring charges. Appellants now chal-
lenge the FCC's conclusion that Oklahoma's non-recurring
rates, after a 25% discount paralleling that in Kansas, satis-
fied the s 271 checklist. Pointing out that Cox uses its own
network to provide telephone service, has no need for most
UNEs that other CLECs must rely on, and thus would
benefit--or, at least, be indifferent--if SBC overcharges oth-
er local competitors for these elements, AT&T insists that the
Oklahoma non-recurring rates are not supported by any cost
evidence. Thus, it reasons, the FCC should have indepen-
dently determined compliance with TELRIC.

We are unconvinced. First, the fact that the non-recurring
charges recommended by the ALJ (before the 25% haircut)
were 33% below those originally proposed by SBC, Order
p 100, tends to rebut the claim that Cox didn't really object to
high rates for SBC's UNEs. Second, that the ALJ's ultimate
selection was of stipulated rates did not in itself show that
they were not backed by any cost studies. The ALJ had
SBC's and AT&T's cost data before him, and found that the
stipulated rates fell within the range of cost-based rates
proposed by the parties. Order p p 69, 90; see also Okla-
homa ALJ Report at 159. The FCC ultimately concluded
that the Oklahoma ALJ had "carefully analyzed the various
cost studies submitted for nonrecurring charges, and was
committed to TELRIC principles in making his evaluations."
Order p 98. While appellants point to passages in the ALJ's
report that may be ambiguous on the articulation of TEL-
RIC, Appellants' Repl. Br. at 24 (citing Oklahoma ALJ
Report at 165-66), even these snippets are not clearly incon-
sistent with a sound understanding of TELRIC.

Appellants correctly note that the ALJ mistakenly assumed
manual processing for all service order charges. But the FCC
saw that error too, and concluded that it was neutralized by
SBC's subsequent implementation of a reduced charge for
electronic orders, so that the higher charge originally adopted

by the ALJ was in fact applied only to manually processed
orders. Order p 99. Appellants question that conclusion,
and, again challenging the ALJ's grasp of TELRIC, point to
a section of the record where the ALJ rejected the conten-
tion--just as the Kansas Commission had--of an AT&T
witness who claimed that almost all of the actual provisioning
of UNEs could be done electronically. Order p 100 & n.286;
see also Oklahoma ALJ Report at 166. The passage in fact
doesn't show the ALJ to be the hopeless rube appellants
paint him as.

Oklahoma recurring charges. Following the same line of
reasoning it had applied when considering Oklahoma non-
recurring charges, the FCC also determined that SBC's
Oklahoma recurring rates, with one exception, complied with
TELRIC. Order p p 75, 90, 91. To the extent that appel-
lants' challenge to the recurring rates in Oklahoma tracks
their arguments raised against the non-recurring charges, we
reject it for the reasons just stated.

The FCC's only serious doubt concerned the ALJ's choice
of what the Commission viewed as an unreasonably low loop
"fill factor" for the computation of recurring loop rates. "A
fill factor is the estimate of the proportion of a facility that
will be used. In other words, the per-unit cost associated
with a particular element ... [is] the total cost associated
with the element divided by a reasonable projection of the
actual total usage of the element." Order p 78. Thus, the
lower the fill factor, the higher the rate ceiling. The ALJ had
erred, the Commission thought, by basing the fill factor on its
current value (30%) instead of "consider[ing] the forward-
looking fill or assum[ing] that the fill factor would increase
over time." Order p 80. AT&T was urging 50%. Id.

The FCC resolved this issue by (1) taking into account
SBC's proposal of a 25% reduction in its rates and (2)
comparing the resulting loop charge with that approved by
the Commission for Texas. Order p p 82-87. To do so, it
took into account estimates from its "USF" (universal service
fund) cost model, which it regards as generally valid for
comparisons between states, indicating that loop costs were

23% higher in Oklahoma than in Texas. Id. p 84. As the
weighted average of the various Oklahoma discounted loop
rates was only 11% higher than the equivalent for Texas, the
FCC concluded that the Oklahoma rates, though not calculat-
ed by TELRIC means, nonetheless fell "within the range that
TELRIC would produce." Order p 86. To create a distinc-
tion between properly derived cost-based rates and rates that
were equal to them, the Commission said, "would promote
form over substance, which, given the necessarily imprecise
nature of setting TELRIC-based pricing, is wholly unneces-
sary." Order p 87.

AT&T's main complaint here is that the Commission was
wrong to accept the Texas rates as a standard, as "the
reasonableness of Texas network element rates was not liti-
gated" in the Texas s 271 proceedings. But all of the
appellants in this case participated in the Texas administra-
tive proceedings and were free to litigate the matter if they
thought litigation promising. As the stakes for appellants
must have been high, and as they have not generally been shy
about pressing claims in this area, we see no abuse of
discretion in the Commission's reliance on the Texas rates,
with suitable adjustments, to verify TELRIC compatibility
for the Oklahoma recurring loop rates.

Against the Texas comparison AT&T also urges that new
evidence, coming to light after the Texas rates had been set,
shows that CLECs have abandoned their efforts to provide
residential service in the state. But nothing that AT&T cites
ties the alleged decline to excessive UNE rates.

Finally, AT&T says that as the FCC used some Texas
recurring rates for comparison, it should have also compared
all the Oklahoma recurring rates to Texas's. This issue was
not raised before the FCC and is therefore waived. See 47
U.S.C. s 405; Coalition for Noncommercial Media v. FCC,
249 F.3d 1005, 1008-09 (D.C. Cir. 2001).

3. Track A. Under the FCC's interpretation of s 271, a
BOC cannot qualify under Track A unless it shows that at
least one competing provider, with which it has entered into
an interconnection agreement, serves "more than a de min-

imis" number of residential and business customers using
either exclusively or predominantly that CLEC's own tele-
phone exchange facilities (including therein UNEs leased
from the BOC, Ameritech Michigan Order, 12 F.C.C.R.
20543, 20588 p 101 (1997)) and thus constitutes "an actual
commercial alternative to the BOC." SBC Oklahoma Order,
12 F.C.C.R. 8685, 8695 p 14 (1997); see also Order p 42.
Appellants contend that SBC had failed to make that showing
with respect to Kansas residential subscribers.

The weakness of appellants' position is most easily viewed
in relation to the evidence for residential service offered by a
CLEC named Ionex. SBC was not privy to Ionex's own
figures on the subject. But because Ionex was offering
service via UNEs leased from SBC, SBC was in a position to
estimate the sum of Ionex's aggregate service volumes, and,
by further extrapolation, to estimate the residential service.
In its Reply Comments before the Commission, it produced
an analysis suggesting that Ionex's residential service via
UNE was sufficient to meet the Commission's standard--
"more than a de minimis number." See SBC Reply Com-
ments at 73, J.A. 1240; Affidavit of J. Gary Smith dated
December 11, 2000 at 6, J.A. 1269.

Later SBC submitted an "ex parte" letter dated December
20, 2000, with actual numbers for Ionex and an explanation of
its methodology. J.A. 1370-71, 1373. SBC made the filing of
the letter public by an open filing on January 12, 2001, and
appellants secured a copy from SBC on January 17, just two
days before the Commission decided SBC's application. Ap-
pellants cry foul.

But Ionex was itself a party to the proceeding, sturdily
resisting SBC's application and presumably fully aware of its
residential services. The public SBC Reply put it on notice
that SBC was using Ionex's service to satisfy Track A. Ionex
uttered not a peep in protest, correction or qualification. So
the FCC's observation that it used the ex parte letter only as
"additional support" for the Track A finding, Order p 43, was
entirely legitimate.

 Appellants also say the Commission contradicted its own
prior decision when it counted Birch as a competitive alterna-
tive, even though Birch was "not actively marketing" residen-
tial service in Oklahoma. They point to the Commission's
1997 decision on SBC's first Oklahoma s 271 application,
where it found Brooks Fiber's residential service inadequate:
the only "customers" were four Brooks employees receiving
free service as a test, and Brooks was refusing to accept any
new business. See SBC Oklahoma Order, 12 F.C.C.R. 8685,
8698 p 20 (1997). The Commission's finding no commercial
alternative there hardly contradicts a positive finding here,
where the Commission found that more than a de minimis
number of real customers were actually being served. Order
p 42.

* * *

Because the Commission has offered an inadequate justifi-
cation for why it thought that evidence of a "price squeeze"
precluding profitable CLEC competition was irrelevant to its
public interest analysis, we remand the case for reconsidera-
tion of that issue. We reject all other claims.

So ordered.