Court of Appeals Affirms FCC’s Denial of Qwest’s Phoenix Forbearance Petition

August 06, 2012

On August 6, 2012 the United States Court of Appeals for the Tenth Circuit released its opinion in Qwest Corporation v. Federal Communications Commission, in which Qwest sought review of an FCC order denying Qwest’s March 2009 petition for regulatory forbearance pursuant to 47 U.S.C. § 160(a), seeking deregulation of certain telecommunications services provided in the Phoenix, Arizona metropolitan statistical area (MSA). The FCC denied the petition, citing insufficient evidence of sufficient competition that would preclude Qwest from raising prices, unreasonably discriminating, and harming consumers. The Court of Appeals affirmed the FCC’s order.

47 U.S.C. § 160(a) provides that the FCC shall forbear from applying 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. In its petition, Qwest sought forbearance from unbundling obligations and dominant-carrier regulations for its mass-market services and facilities in the Phoenix MSA. 

Three prior FCC orders provided the framework for the court’s analysis. In 2005, the FCC granted Qwest forbearance from unbundling requirements and dominant-carrier regulations in the MSA of Omaha, Nebraska, applying a two pronged test: (1) assessing the level of retail competition (the “market-share test”) and (2) considering the geographic reach of potential competitors to determine whether competitors were capable of successfully competing with the petitioner (the “coverage test”). In 2006, Verizon sought forbearance in six MSAs, which the FCC denied citing insufficient evidence of facilities-based competition. Here, the FCC denied relief, based solely on a market share test. In 2007, Qwest sought regulatory forbearance in four MSAs, including Phoenix. The FCC again found that Qwest did not meet the market-share test, finding fault with the geographic scope and reliability of Qwest’s market-share data.

In March 2009, Qwest filed a new petition for forbearance specific to the Phoenix MSA, presenting data that indicated its market share was substantially less than the 50% market share figured relied on by the FCC in the past. However, in August 2009, the FCC sought comments on the analytical approach it should employ in resolving the forbearance issues in the remanded orders, and requested further comments specific to Qwest’s request for forbearance in Phoenix in April 2010. In the June 2010 Phoenix Order, the FCC repudiated the test it had articulated in the Omaha Order, noting that the market-share test was unduly narrow and that the coverage test inappropriately assumed that a duopoly always constitutes effective competition, and the FCC returned to a “traditional market power framework.” Applying its new framework to the Qwest petition, the FCC began by defining the relevant product market for Qwest’s mass-market retail services to include traditional wireline service, as well as facilities-based (but not over-the-top) VoIP services. The FCC ultimately determined that, for the purposes of the forbearance request, wireless voice services do not have a material price-constraining effect with respect to wireline voice services because other reasons could explain the growth in wireless-only customers besides “an increasing cross-elasticity of demand between mobile wireless and wireline services.” Thus, the FCC found, having excluded mobile wireless services, that the market participants in the Phoenix area relied predominantly on Qwest facilities and that competition in the area was insufficient to place downward pressure on Qwest’s prices and denied the requested forbearance.

Qwest challenged the FCC’s Phoenix Order in the Tenth Circuit on two grounds: (1) that 47 U.S.C. § 160(a) requires the FCC to make affirmative findings on the substantive prerequisites for granting forbearance, and because the FCC made no such findings, the request should be deemed granted by operation of law; and (2) that the FCC’s decision was irrational.

In response to Qwest’s first allegation, the FCC argued that Qwest was improperly attempting to reverse the burden of proof in forbearance proceedings, contending that the burden was on Qwest to show that a regulatory obligation was not needed and that forbearance was in the public interest. It concluded in the Phoenix Order that Qwest had failed to meet its burden. The Court of Appeals agreed with the FCC, finding that the burden of proof is on the petitioner. The Court found that the FCC made the requisite statutory findings in its determination that maintaining Qwest’s unbundling obligations was necessary for continued assurance of just, reasonable, and nondiscriminatory terms of service and that forbearance would not be in the public interest, and adequately justified those conclusions in light of the policy shift being made concerning how the merits of forbearance petitions are assessed.

Qwest’s second allegation contended that the FCC’s decision was irrational because it ignored its own precedent concerning the treatment of the “cut-the-cord” data presented. The FCC previously included such data in its assessment in the Verizon Order but refused to do so here because Qwest failed to present evidence that consumers consider wireline services and wireless voice services to be substitutes, thus constraining the pricing of wireline services. The Court of Appeals acknowledged that the FCC “moved the goalpost” but determined that, under these particular circumstances, the agency did not act arbitrarily or capriciously, largely because the FCC was responding to the D.C. Circuit’s remand of earlier orders rather than simply changing the standard of its own volition. It also found that the FCC did not ignore the cut-the-cord phenomenon, but offered a reasonable explanation why, under these circumstances, wireless voice services were excluded from the product market. It found that that the FCC was “conscious of the change it was making, believed it to be better, explained why it was necessary, and offered a sound basis for repudiating its prior decisions.”

Qwest also argued that the FCC’s assessment of competitive conditions in the retail mass market in Phoenix was unreasonable, as it declined to assess competition from wireless companies and unreasonably viewed the Phoenix market as an anti-competitive duopoly. The Court of Appeals found that because the FCC determined that the product market excluded mobile wireless services, and because that exclusion was not arbitrary or capricious, it was appropriate to exclude wireless carriers from its definition of the relevant product market. Qwest further contended that given the market dominance of Qwest and Cox in wireline services, it was proper to for the FCC to consider the Phoenix MSA an effective duopoly. However, while the FCC had predicted that a duopoly could yield a competitive outcome in its Omaha Order, it noted that post-forbearance developments in that case indicated otherwise, thus prompting a shift in the test applied. As such, the Court of Appeals held that taking together the anti-competitive risks of duopoly, the subsequent developments in Omaha and the lack of effective competition in the Phoenix market, the FCC could rationally perceive the need for a different approach and therefore did not act unreasonably in deciding the Phoenix Order.

Accordingly, Qwest’s petition for review was denied.

If you desire more information about this decision or other aspects of the FCC’s forbearance policy, please contact us.

Andrew D. Lipman +1.202.373.6033

Russell M. Blau +1.202.373.6035


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This article was originally published by Bingham McCutchen LLP.