Qwest Corp. v. Leroy KoppendrayerQwest Corp. v. Leroy Koppendrayer
Case Information
*2 Before WOLLMAN, LAY, and RILEY, Circuit Judges.
___________
LAY, Circuit Judge.
Qwеst Corporation (“Qwest”) appeals two district court decisions upholding orders of the Minnesota Public Utilities Commission (“MPUC” or “Commission”) which set and applied retroactively the rates that telecommunication companies are required to pay when leasing Qwest’s network infrastructure. We affirm the district court.
I.
The 1996 Telecommunications Act (“1996 Act”) was intended to create
competition between carriers in local telecommunication service markets that had
been traditionally dominated by a single monopoly carrier. Incumbent local exсhange
carriers (“ILECs”), such as Qwest, own the network infrastructure necessary to
provide local telephone service. The 1996 Act requires ILECs to lease their networks
to competitive local exchange carriers (“CLECs”) and outlines procedures for
determining lease rates.
FCC rules require state public utilities commissions to establish rates based on a cost methodology called Total Element Long Run Incremental Cost (“TELRIC”). See Implementation of the Local Competition Provisions in the Telecommunications Act of 1996 , First Report and Order, 11 F.C.C.R. 15,499 ¶¶ 674-90 (FCC rel. Aug. 8, 1996) (“ Local Competition Order ”). Under TELRIC, unbundled network element (“UNE”) rates are not set based on an ILEC’s actual costs in building and maintaining its network. Rather, UNE rates are calculated according to what it would cost today to build and operate an efficient network that can provide the same services as the ILEC’s existing network. In this way, UNE rates can providе accurate market signals to inform CLECs’ decisions about whether to invest in their own facilities or lease the ILEC’s facilities.
In the spring of 2002, MPUC reviewed UNE rates, some of which the Commission had previously set in a generic cost proceeding and were based on TELRIC. A group of CLECs contended that some of these rates no longer complied *4 with TELRIC due to changes in market conditions and technology. MPUC concluded that UNE rates would likely change, and therefore issued an order on April 4, 2002, declaring that all Qwest UNE rates under review would be deemed interim and subject to true-up payments after MPUC set permanent rates (“April 4 Order”). MPUC adopted an Administrative Law Judge’s (“ALJ”) recommendation on October 2, 2002, and filed an order establishing permanent rates on March 24, 2003. As a result, Qwest owed the CLECs almost $13 million in true-up payments, which began accruing on April 4, 2002.
Qwest brought suit in district court, challenging both the establishment of interim rates in the April 4 Order and the permanent UNE rates set by MPUC. In two separate opinions, the district court denied both of Qwest’s challenges and upheld the orders. Qwest now appeals.
Title
A. Retroactive Ratemaking
Qwest first argues that the April 4 Order violates the rule against retroactive
ratemaking. The rule against retroactive ratemaking prohibits a commission from
prescribing rates to recoup a utility’s past losses for transactions that have already
taken place.
See, e.g.
,
BP West Coast Prod., LLC v. FERC
,
The April 4 Order expressly put Qwest and all other interested parties on notice
that the existing UNE ratеs were under review and subject to true-up payments when
MPUC adopted permanent rates. Rates collected prior to April 4, 2002, are not
subject to true-up payments. With these considerations in mind, the April 4 Order
“change[d] what would be purely retroactive ratemaking into a functionally
prospective process by placing the relevant audience on notice at the outset that the
rates being promulgated [were] provisional only and subject to later revision.”
Natural
*6
Gas Clearinghouse
,
B. The Language and Policy of the 1996 Act and FCC Orders
The remainder of Qwest’s arguments about the validity of the April 4 Order
center around the language and policy of the 1996 Act. Qwest argues that Congress
intended “parties to know the rates for network elements prior to the transactions to
which they would apply” because under the 1996 Act, rates for network elements
must be included in ICAs.
See
Qwеst further argues that interim rates and true-up payments are inconsistent
with the 1996 Act and FCC pricing rules, which were designed to facilitate a market-
driven telecommunications industry with a preference for voluntarily negotiated ICAs
and UNE rates that send the correct economic signals to CLECs.
See Pac. Bell v. Pac-
W. Telecomm, Inc.
,
Moreover, interim rates and true-up paymеnts will not discourage voluntary
negotiations by CLECs. Parties may not seek arbitration until after negotiations have
failed.
*8
The FCC approved the use of interim rates subject to true-up when state public
utilities commissions were initially attempting to arbitrate TELRIC-compliant rates
after the passage of the 1996 Act.
Local Competition Order
¶ 693. The FCC has also
authorized the use of interim rates subject to true-up in proceedings under
Interim rates are also used in orders by the FCC’s Wireline Competition
Bureau. If states refuse to arbitrate UNE rates, the FCC will preempt the state
commission’s jurisdiсtion and assume responsibility for the matter.
See
Qwest contends that these FCC orders do not support the interim rates set by MPUC in this case. First, Qwest argues that the FCC’s approval of interim rates is limited to cases where permanent TELRIC-compliant rates were not already established, or where there was misconduct by the ILEC. Second, Qwest attempts to distinguish the Virginia Arbitration Order by arguing that arbitration by the Wireline Competition Bureau is a unique circumstance because the Bureau’s orders are always subject to review by the FCC at a party’s request.
We find Qwest’s arguments unpersuasive. First, merely because the FCC has
allowed (or in the case of the Wireline Competition Bureau, required) interim rates
subject to true-up in instances different than the one presented here does not mean the
use of interim rates is limited to those circumstances. Rather, it suggests the FCC
recognizes that limited use of interim rates can be valuable when it is uncertain
whether the current rates are TELRIC-compliant.
See California 271 Order
¶¶ 33, 37
;
Texas 271 Order
¶¶ 85-90
; New York 271 Order
¶¶ 258-60;
see alsо In re Application
of Verizon New England Inc. for Authorization to Provide In-Region InterLATA
Services in Massachusetts
, 16 F.C.C.R. 8988 ¶ 34 (FCC rel. Apr. 16, 2001) (stating
that interim rates subject to true-up are appropriate “in certain circumstances”).
Second, the FCC approved TELRIC-based interim rates in the
Texas 271 Order
,
suggesting that the retroactive adjustment of TELRIC-compliant rates is not
disfavored by the FCC.
Texas 271 Order
¶ 89. Third, while ILEC misconduct was
a contributing factor in the use of interim rates in the
California 271 Order
,
California
271 Order
¶¶ 23, 37 n.85, ILEC misconduct is certainly not the sole instance where
*10
interim rates have been approved by the FCC. Rather, the FCC has approved interim
rates in
Qwest argues that the interim rates established by MPUC create too much
uncertainty. However, whether rates are interim as arbitrated by the Wireline
Competition Bureau or set by a state public utilities commission for the purposes of
Finally, Qwest argues that the April 4 Order violates the 1996 Act by
retroactively changing the terms of binding ICAs.
See
Unlike CPUC in
Pacific Bell
, there is no question in the present case that
MPUC has authority to arbitrate UNE rates under the 1996 Act.
III.
We must next consider whether MPUC was arbitrary and capricious in setting select permanent UNE rates. Qwest challenges four MPUC actions: (1) the reduction of switching costs; (2) the rates set for high capacity loops; (3) the plant mix estimates; and (4) the adoption of the HAI Model to determine general support assets. After considering the record, we hold that MPUC was not arbitrary and capricious.
A. Reduction of Switching Costs
Switches route telephone calls to their destinations. Switches cаn either be modern, computerized digital loop carrier (“DLC”) systems, or older and more *12 expensive analog switches. To comply with TELRIC, MPUC had to establish switch rates that included the percentage of digital switches that a hypothetical efficient network in Minnesota would utilize. MPUC adopted the HAI Model, proposed by AT&T/MCI, which uses the switching investment calculated by the FCC Synthesis Model. See In re Forward-Looking Mechanism for High Cost Support , Tenth Report and Order, 14 F.C.C.R. 20,156 (FCC rel. Nov. 2, 1999) (“ Inputs Order ”). The HAI Model makes a reduction to the calculated switching investment to reflect the savings that would result from an increased use of DLC systems. The HAI Model assumes that thе FCC Synthesis Model accounts for only 18.3% DLC and that in Minnesota DLC penetration in a hypothetical efficient network would actually be 57.5%. Therefore, the MPUC adopted a DLC adjustment to account for the higher DLC penetration and resulting savings.
Qwest argues that the DLC adjustment is arbitrary and capricious because there is no evidence that the FCC Synthesis Model assumed only 18.3% DLC, or that the FCC Synthesis Model did not already reflect the savings associated with digital switches. The FCC refused to adopt a DLC adjustment for this very reason in the Inputs Order . See id. ¶ 327. However, the FCC cost model was developed to determinе federal universal support and the FCC explicitly cautioned parties against using the federal input values to make claims regarding UNE rate determinations in other proceedings. Id. ¶ 32. Therefore, MPUC was not arbitrary and capricious merely because it reached a different conclusion than the FCC.
AT&T’s expert testified that the FCC inputs assumed approximately 18.3% of
the switches were digital. Moreover, AT&T’s expert and an expert for the Minnesota
*13
Department of Commerce (“Department of Commerce” or “Department”) testified
that the FCC inputs from 1999 did not adequately reflect the savings that a forward-
looking network would achieve with DLC switches. Qwest provided no evidence to
the contrary. Therefore, the ALJ rejected Qwest’s argument that the DLC adjustment
should be set to zero, as in the FCC Synthesis Model, because this would overstate the
switching investment for a forward-looking network. The 1996 Act requires state
public utilities commissions to make their decisions based upon the best evidence
available, and does not mandate that they independently acquire data to build an
evidentiary record.
See
B. Rates for High Capacity Loops
Qwest next argues that MPUC improperly adopted the HAI Adjunct Model proposed by AT&T and MCI to calculate the rates for high capacity loops. High capacity loops are larger wires that connect high-volume customers to a telephone company wire center. The FCC requires TELRIC studies to “explain with specificity” how “the associated costs are developed.” Local Competition Order ¶ 691. When offered in a spreadsheet, a model should reveal the underlying formulae and should include data or inputs that are easily verifiable. TELRIC NPRM ¶ 41. Qwest objects to the Adjunct Model because it provided only “aggregate per line investment figures,” rather than specifying the individual cost of the particular components that made up that input.
While the ALJ acknowledged the model would have been stronger with more price documentation, the Adjunct Model uses per-line costs based on proprietary information from Qwest’s competitors and the vendors that supply the relevant *14 equipment. As a result, the data concerning costs for each particular company was not disclosed. The data collected from the individual competitors and vendors was used to compute an average per line investment for the relevant equipment and operations. The inputs were verified by expert witnesses who sponsored the model, and were independently verified by the Department of Commerce’s technical expert.
Qwest asserts that there was insufficient documentation to support the
conclusion of the experts; however Qwest failed to provide the ALJ with any evidenсe
that the prices used in the Adjunct Model were inadequate. Moreover, the ALJ and
MPUC rejected Qwest’s proposed model and proffered alternative per-line costs
because they relied on the structure of Qwest’s existing network,
see
C. Plant Mix Determination
Qwest also challenges MPUC’s plant mix determinations. “Plant mix” refers to the ratios of different categories of telephone lines. Aerial lines are strung between telephone poles, while buried and underground lines are located below ground. Buried lines are placed in a trench and covered with earth. Underground lines are placed in a buried conduit that is accessible by manholes. The ALJ and MPUC adopted plant mix ratios recommended by the Department of Commerce, rejecting ratios suggested by Qwest and the CLECs in competing models. The ALJ concluded that the CLEC model included too high a percentage of aerial plant, given that *15 communities were moving away from aerial plant due to aesthetic concerns, while the Qwest model overstated the amount of underground plant. Therefore, the ALJ adopted the Department’s recommendation that increased buried plant and reduced investment in underground and aerial plant. Qwest is challenging the reduction in underground lines, arguing that MPUC improperly relied upon the unsupрorted testimony of the Department’s expert.
In a prior proceeding, MPUC had adopted the Department’s conclusion that 14.5% of plant was underground. Based upon the testimony of the Department’s expert, the ALJ concluded that this percentage was no longer accurate and established a new weighted average of 5.8% underground plant. The Department’s expert reached this conclusion in part by relying upon a survey conducted for a Department of Commerce study for a different proceeding which reflected that telecommunications companies were installing very little aerial or underground plant. Qwest argues that MPUC improperly relied upon the unsupported testimony of the Department’s expert because this survey was not included in the record and the expert failed to explain his methodology.
However, the survey was only part of the expert’s rationale. The Department’s expert explained to the ALJ that the most accurate forward-looking estimates of plant mix have changed since he made his initial calculation of 14.5% underground plant. He explained that this prior estimate improperly relied upon carriers’ actual use of plant in embedded networks and that there would be a significant difference between these numbers and what a telecommunications company would chose when “starting from scratch.” As a result, he used his prior estimates as a benchmark, which he adjusted to account for what an efficient carrier deploying a forward-looking network would do today. With that in mind, the Department’s expert explained that buried plant would be the preferred placement method in a forward-looking netwоrk because *16 it is less expensive to place than underground plant and easier to maintain and more accepted by communities than aerial plant.
Qwest again objects to the ALJ’s rejection of its proposal, which was based
upon Qwest’s embedded numbers. Qwest’s embedded numbers are not dispositive.
See
D. Determining General Support Assets
Finally, Qwest objects to MPUC’s adoption of the HAI model to calculate
general support asset (“GSA”) expenses. GSA expenses are the costs for the
necessary items that keep a network running and make telephone service possible,
without actually being part of the network. These include the costs of computers,
desks, buildings, vehicles, tools, and other non-network assets. Under FCC rules,
these costs are treated as common and are recovered through a percentage markup on
UNEs.
See Local Competition Order
¶¶ 676, 682;
see also
MPUC based GSA costs on the HAI Model proposed by AT&T/MCI. Under the HAI Model, GSA expenses are adjusted through two allocation factors that remove retail-only costs. Qwest argues that the HAI Model’s calculation of GSA expenses already allocates to Qwest’s retail operations an appropriate share of costs, and therefore the further adjustment under the allocators was unnecessary. Qwest alsо claims there is a lack of evidence explaining the methodology used to remove retail costs under the allocation factors.
While Qwest objects to the evidentiary support given to the HAI Model and the
allocation factors, at its heart, Qwest’s argument focuses on its disagreement with the
methodology chosen to remove retail costs. Qwest argues that the preadjusted GSA
costs allocated an appropriate share of such costs to Qwest’s retail operations, and that
further reduction under the allocators would result in Qwest’s retаil operations bearing
a disproportionate share of GSA costs. Given that Qwest’s retail operations should
*18
not merely be bearing a share of the retail GSA costs, but rather
all
of Qwest’s retail
costs,
see
Qwest argues that there was insufficient explanation of the allocator methodology. However, Qwest’s expert challenged the allocators in a sophisticated manner, suggesting that Qwest understood the HAI Model’s methodology, and merely disagrеed with it. While the ALJ and MPUC could have provided more detail in explaining their decision to adopt the HAI Model, they were not arbitrary and capricious merely because they chose the explanation and methodology of one expert over another.
Qwest argues that the Wireline Competition Bureau rejected a similar secondary adjustment in the Virginia arbitration. See Virginia Arbitration Order ¶ 151. However, the Virginia arbitration adopted a different cost model than the HAI Model adopted by MPUC. The Bureau rejected the inclusion of a secondary adjustment that removed cоsts associated with special access and toll in the universal service support context because there was nothing to indicate that this adjustment correlated to a reduction in retail expenses in the GSA context. Id. Relevant to the HAI Model, however, the ALJ noted that the model was previously adopted by MPUC in another proceeding and that Qwest presented its same objections to two other state public utilities commissions, both of which accepted the HAI Model as properly excluding retail GSA expenses.
Therefore, we concludе that MPUC was not arbitrary and capricious in its adoption of the cost models relevant to the present case.
IV.
For the foregoing reasons, we affirm the decision of the district court.
______________________________
Notes
[1] The Honorable Ann D. Montgomery, United States District Judge for the District of Minnesota.
[2] A collection of interested CLECs are intervenors in this case.
[3] MPUC adopted the findings and conclusions of a recommendation by Administrative Law Judges Kathleen A. Sheehy and Steve M. Mihalchick.
[4] Qwest argues that the notice requirement is wholly illusory because nothing
would prevent a state public utility commission from simply dеclaring current rates
to be interim whenever it sees fit. However, the purpose of the rule against retroactive
ratemaking is to ensure fairness and predictability. Courts have held in a variety of
factual situations that as long as the affected parties have notice, these concerns are
satisfied.
See, e.g.
,
GTE South, Inc. v. Morrison
,
[5] Contrary to Qwest’s concerns, regulatory lag will not disappear after the use of interim rates. Rates in a regulated industry will always lag behind prices in a truly competitive market because the true-ups do not date back to when the existing rates ceаsed to be accurate.
[6] Lines served by DLC do not utilize the main distribution frame and utilize a switch port termination that is cheaper than the corresponding analog interface. Therefore, more use of DLC in a hypothetical network results in lower switching investment.
[7] Qwest challenges the Department’s expert’s testimony as lacking a proper
evidentiary foundation. However, “administrative agencies are not restricted to rigid
rules of evidence,”
Whaley v. Gardner
,
[8] In addition, Qwest asserts that the adoption of low GSA expenses for
computers, which would compensate Qwest for only 23% of its actual computer costs,
is inconsistent with an earlier determination that Qwest’s operations would become
increasingly automated. However, as stated above, it is not necessarily relevant that
Qwest’s actual embedded costs are different than those an efficient forward-looking
network would acquire.
See