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Qwest Corporation v. Federal Communications Commission; United States of America

August 6, 2012

QWEST CORPORATION, PETITIONER,
v.
FEDERAL COMMUNICATIONS COMMISSION; UNITED STATES OF AMERICA, RESPONDENTS. COMPTEL; XO COMMUNICATIONS, LLC; CBEYOND, INC; INTEGRA TELCOM, INC.; TW TELECOM INC; CAVALIER TELEPHONE LLC; VERIZON; COVAD
COMMUNICATIONS COMPANY; PAETEC HOLDING CORP.; TDS METROCOM, LLC; U.S. TELEPACIFIC CORP., D/B/A TELEPACIFIC COMMUNICATIONS; MPOWER COMMUNICATIONS CORP., D/B/A TELEPACIFIC COMMUNICATIONS; NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES; PUBLIC KNOWLEDGE; AT&T, INC.; ARIZONA CORPORATION COMMISSION; AD HOC TELECOMMUNICATIONS USERS COMMITTEE; SPRINT NEXTEL CORPORATION, INTERVENORS.



Petition for Review of Order Of The Federal Communications Commission (FCC Docket No. 09-135)

The opinion of the court was delivered by: Holmes, Circuit Judge.

United States Court of Appeals Tenth Circuit

PUBLISH

Elisabeth A. Shumaker Clerk of Court

Before BRISCOE, Chief Judge, BALDOCK and HOLMES, Circuit Judges.

Petitioner Qwest Corporation ("Qwest") seeks our review of an order of the Federal Communications Commission ("Commission") denying Qwest's petition for regulatory forbearance pursuant to 47 U.S.C. § 160(a). Qwest filed a petition with the Commission in March 2009 seeking relief from certain regulations pertaining to telecommunications services that it provides in the Phoenix, Arizona, metropolitan statistical area ("MSA"). The Commission denied the petition, citing insufficient evidence of sufficiently robust competition that would preclude Qwest from raising prices, unreasonably discriminating, and harming consumers. Qwest challenges the Commission's decision only as it pertains to Qwest's mass-market retail services in the Phoenix MSA. For the reasons set forth below, we deny Qwest's petition.

I In the Telecommunications Act of 1996 ("1996 Act"), Congress upended the existing telecommunications regulatory regime and imposed on the monopolistic local phone companies (called "local exchange carriers" or "LECs") several new requirements designed to enhance competition in the market for local telephone service. See Qwest Corp. v. Colo. Pub. Utils. Comm'n, 656 F.3d 1093, 1096 (10th Cir. 2011). Foremost among these is the requirement that incumbent carriers share their networks with competitors. Because new market entrants would find it prohibitively costly to replicate the infrastructure necessary to provide local service, the 1996 Act requires incumbent carriers to provide competitors with access to existing network elements on an unbundled basis at "just" and "reasonable" rates. See 47 U.S.C. § 251(c)(3). The Commission is responsible for determining which unbundled network elements ("UNEs") an incumbent LEC must make available to competitors. See id. § 251(d)(2)(B). A second critical feature of the 1996 Act is section 10, codified at 47 U.S.C. § 160. Because newly competitive conditions could make the heavy-handed regulation of incumbent carriers obsolete, section 10 provides that the Commission "shall forbear" from applying certain statutory or regulatory requirements to an incumbent carrier if it determines that those requirements are (1) not necessary to ensure just, reasonable, and nondiscriminatory terms of service, (2) not necessary to protect consumers, and (3) consistent with the public interest. See 47 U.S.C. § 160(a). A carrier can petition the Commission for forbearance. Id. § 160(c). The petition "shall be deemed granted if the Commission does not deny the petition for failure to meet the requirements for forbearance under subsection (a) . . . within one year." Id. (emphasis added). The Commission may extend that one-year deadline by an additional ninety days.

See id.

The dispute here arises out of a June 2010 order of the Commission denying Qwest's petition for forbearance from unbundling obligations and dominant-carrier regulations pertaining to Qwest's provision of mass-market services in the Phoenix MSA. See In the Matter of Petition of Qwest Corporation for Forbearance Pursuant to 47 U.S.C. § 160(c) in the Phoenix, Arizona Metropolitan Statistical Area, 25 FCC Rcd. 8622, 8677, ¶ 109 (2010) [hereinafter Phoenix Order]. Before reviewing that order, however, some additional background is necessary. In particular, we summarize three prior orders of the Commission that provide a central backdrop to the issues in this appeal. After providing key background information, we describe the Phoenix Order and the Commission's reasons for denying forbearance to Qwest.

A

In 2004, Qwest filed a petition for forbearance from unbundling requirements and dominant-carrier regulations in the MSA of Omaha, Nebraska, where it competes extensively with Cox Communications, a cable provider. In response to the petition, the Commission found that "sufficient facilities-based competition . . . exists in certain of Qwest's Omaha MSA wire center service areas to justify forbearance." In the Matter of Petition of Qwest Corporation for Forbearance Pursuant to 47 U.S.C. § 160(c) in the Omaha Metropolitan Statistical Area, 20 FCC Rcd. 19,415, 19,447, ¶ 64 (2005) [hereinafter Omaha Order]. To reach this conclusion, the Commission essentially applied a two- prong test. Under the first prong (the "market-share test"), the Commission assessed the level of retail competition in the Omaha market and found it "compelling" that Qwest's market share for retail mass-market customers was "less than" a specified percentage.*fn1 Id. at 19,430, ¶ 28; see also id. at 19,448, ¶ 66. Under the second prong (the "coverage test"), the Commission considered the geographic reach of Cox's cable network and found that, in certain locations called "wire centers," Cox had deployed facilities capable of reaching a very significant percentage of end-users. See id. at 19,446, ¶ 62. Concluding that CoX could successfully compete with Qwest, the Commission granted forbearance to Qwest with respect to those wire centers. See id. at 19,447, ¶ 64. Then, in 2006, Verizon Telephone Companies ("Verizon") sought regulatory forbearance in six MSAs where it provided services as an incumbent carrier. The Commission denied Verizon's petition, finding insufficient evidence of facilities-based competition. See In the Matter of Petitions of the Verizon Telephone Companies for Forbearance Pursuant to 47 U.S.C. § 160(c) in the Boston, New York, Philadelphia, Pittsburgh, Providence and Virginia Beach Metropolitan Statistical Areas, 22 FCC Rcd. 21,293, 21,313, ¶ 37 (2007)

[hereinafter Verizon Six-MSA Order]. Specifically, the Commission stated, "Overall, in all of the 6 MSAs, it appears that cable operators are presently making some competitive gains against Verizon by providing voice service to consumers in the residential markets, however competition from cable operators does not yet present a sufficient basis for relief." Id. at 21,314 n.116. In assessing Verizon's market share in a given MSA, the Commission looked to the number of Verizon customers as a percentage of both the total number of customers who subscribed to landline ("wireline") service in the MSA and the total number of customers who subscribed exclusively to mobile wireless service--viz., customers who had "cut the cord." See id. at 21,323, App. B; see also id. at 21,308 n.89, ¶ 27 ("[B]ased on the record here, and consistent with recent precedent, we include [in market-share computations] cut-the-cord wireless substitution."). Estimates for the latter group of customers were not available on an MSA-specific basis, so the Commission utilized a national estimate and "assume[d]" that 12.8% of households in a given MSA had cut the cord. Id. at 21,323, App. B.

In 2007, Qwest sought regulatory forbearance in four MSAs, including

Phoenix. The Commission acknowledged that the coverage test articulated in the Omaha Order was met because Cox, Qwest's primary competitor in Phoenix, was capable of reaching at least seventy-five percent of end-users with its own facilities. See In the Matter of Petitions of Qwest Corporation for Forbearance

Pursuant to 47 U.S.C. § 160(c) in the Denver, Minneapolis-St. Paul, Phoenix, and Seattle Metropolitan Statistical Areas, 23 FCC Rcd. 11,729, 11,754, ¶ 35 & n.127 (2008) [hereinafter Qwest Four-MSA Order]. Focusing on the market-share test, the Commission opined:

In calculating market shares, we believe it is appropriate to include wireless-only households (i.e., residential telephone customers who have "cut the cord"). In particular, we find that mobile wireless service should be included in the local services product market to the extent that it is used as a complete substitute for all of a consumer's voice communications needs. Over the past several years, as wireless substitution rates have continued to rise, the Commission has begun including such intermodal substitution in its competitive analyses of the local services market.

Id. at 11,742, ¶ 19 (footnote omitted).

The Commission nevertheless found that Qwest did not meet the market- share test. The Commission noted that it had previously sought to determine whether carriers have "a retail market share of less than 50 percent." Id. at 11750, ¶ 28. In particular, the Commission found fault with the geographic scope and the reliability of Qwest's market-share data. In this regard, the Commission declined to rely on "national wireless-only household data published by the Center for Disease Control (CDC) or the more localized information," id. at 11,743, ¶ 21, which the Commission considered to be uninformative and unreliable, see id. at 11,744-45, ¶ 21. In sum, the Commission stated, "Qwest seeks regulatory relief for particular MSAs based on the specific competitive conditions in those markets, but the CDC estimates and the record generally do not contain reliable data of this type." Id. at 11,744, ¶ 21. More specifically, the Commission concluded:

Qwest has not sufficiently supported its case for forbearance on the basis of reliable, geographically-specific data regarding the measure of wireless substitution in the four MSAs. . . We emphasize that petitioners relying on mobile wireless substitution to support forbearance relief should submit complete and reliable data that is geographically specific to the areas for which forbearance is sought.

Id. at 11,745, ¶ 22. Because reliable Phoenix-specific data was not available in the record, the Commission calculated Qwest's market share without accounting for cut-the-cord customers and denied the request for forbearance. See id.

Verizon, and then Qwest, appealed the Commission's orders to the D.C.

Circuit. That court stayed Qwest's appeal and heard Verizon's challenge first.

Verizon argued that the Commission's exclusive reliance on existing market share to deny forbearance was arbitrary and capricious, and the D.C. Circuit agreed. See Verizon Tel. Cos. v. FCC, 570 F.3d 294, 302 (D.C. Cir. 2009). The court noted that the Commission had "zeroed in on Verizon's market share as the dispositive factor in its . . . analysis." Id. at 301. However, in previous orders, including the Omaha Order, the Commission had considered both actual competition (as represented by existing market share) and the potential for competition from other carriers. See id. at 303-04. The court concluded that the "per se market share test" applied in the Verizon Six-MSA Order marked an "unexplained departure from [the Commission's] precedent." Id. at 296. The court remanded the order, directing the Commission either to consider factors other than a market-share benchmark or to "justify its departure from precedent." Id. at 305. Because the Qwest Four-MSA Order employed a similar analytical approach, the Commission sought and was granted a voluntary remand of that order. Order, Qwest Corp. v. FCC, No. 08-1257 (D.C. Cir. Aug. 5, 2009).

B

Following remand of the two orders, in March 2009, Qwest filed a petition for forbearance specific to the Phoenix MSA. In particular, it sought to explain its low and dwindling retail market share in the Phoenix MSA by providing the Commission with Phoenix-specific cut-the-cord data. See Joint App. at 261-65 (Petition of Qwest Corp. for Forbearance Pursuant to 47 U.S.C. § 160(c), dated Mar. 24, 2009). Qwest acknowledged that, in the Qwest Four-MSA Order, the Commission had rejected its forbearance request in part because of its "lack of Phoenix-specific wireless substitution data that the Commission deemed reliable." Id. at 245. "To address concerns raised by the Commission as to the reliability and generality of its wireless substitution study," Qwest retained a consulting firm "to determine the penetration of wireless-only households in the Phoenix MSA." Id. at 261.

Qwest said that its data indicated that Qwest's market share, taking cord- cutting into account, was "substantially less than the 50% market share figure the Commission has previously relied upon." Id. at 246; see id. at 262 (noting that "25 percent of surveyed Phoenix households reported that they are relying upon wireless services for all of their communication needs"). Highlighting that it previously had demonstrated in the Qwest Four-MSA Order proceeding that Cox's facilities-based coverage in certain areas of Phoenix surpassed seventy-five percent, Qwest noted "publicly available information" indicated that "CoX currently appears to offer voice services even more widely in Phoenix" than Qwest had shown earlier. Id. at 246-47. Thus, Qwest believed it qualified for forbearance. Significantly, Qwest expressly noted that "[t]he analysis of competition in [its] Petition is designed to be consistent with the analytical framework applied by the Commission in Qwest's earlier request for forbearance in the Omaha MSA, as well as the analysis applied in the subsequent Verizon SiX MSA and Qwest 4 MSA proceedings." Id. at 245-46 (footnotes omitted).

However, at that time, the Commission was reconsidering its analytical framework for forbearance petitions. In August 2009, it sought comments on the analytical approach that it should employ in resolving the forbearance issues presented in the remanded orders. In particular, it sought input regarding whether it should "depart from its recent precedent regarding marketplace analysis in forbearance petitions," and concerning the kinds of evidence beyond "market share for a particular product market" that are relevant in determining "whether forbearance from unbundling regulations is warranted." Wireline Competition Bureau Seeks ...


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