The United States Court of Appeals-Tenth Circuit yesterday issued a ruling in Qwest v. FCC, where Qwest appealed a ruling by the FCC denying a the carriers request from certain wireline and local service regulations. Qwest wanted the FCC to find that there was effective competition for certain wire centers in the Phoenix Metropolitan Statistical Area. Qwest argued that the FCC’s ruling denying forbearance from regulatory treatment was arbitrary, capricious, or an abuse of agency discretion. The primary reasoning for the FCC’s denial was that Qwest did not provide econometric data showing that wireless services provided a sufficient constraint on harmful increases in the price for wireline services.
The court also highlighted a decision by the FCC to change the analytical framework under which it would assess the level of competition in a service area when addressing the issue of forbearance. In prior proceedings, the FCC used a two-prong test for determining if forbearance was appropriate. The first prong was a market share test where the petitioning carrier makes a compelling argument that its share has fallen below some specified percentage. The second prong, a coverage test, would evidence that a competitor could reach a significant percentage of a service areas end users.
The FCC decided to abandon the two-prong test, deciding to apply a framework based on the Federal Trade Commission-Department of Justice Horizontal Merger Guidelines. This test would require the petitioner delineate the relevant product and geographic markets; identify market participants; and examine market share data.
Applying this new test, the FCC found that wireless and wireline services were not substitutes for each other (at least in Phoenix), and that Qwest produced no econometric analysis that estimated the cross-elasticity of demand between mobile wireless and wireline access services. (Insert a “WHAT?” using your best Chris Berman voice.)
In general, the court upheld the FCC’s ruling, but issued a clear warning about its policy shift. Describing the FCC’s decision to change its analytical framework as “goalpost-moving”, the court said:
“This kind of goalpost-moving does not reflect an optimal mode of administrative decision-making. And we do not foreclose the possibility that under some circumstances an agency’s shifting of the policy goalpost (e.g. evidentiary requirements for satisfying a particular statutory or regulatory standard) may lead us to conclude that the agency has acted arbitrarily or capriciously.”
My initial response to this was “regulatory uncertainty”. While I personally dislike the phrase, if ever there were an example, put in concrete by a court ruling, this would be it. While this case addressed forbearance from rules for wireline services, the same behavior could have repercussions for carriers delivering broadband services in the new world of net neutrality rules. Less than optimal regulatory decision making can, in my opinion, create volatility in the broadband access markets, especially where new net neutrality rules will be put to the test.
Volatility means unnecessary price increases that, on the one hand, will be put in place to cover increased compliance costs, while possibly impairing broadband adoption. The FCC needs to be mindful that its validity as a regulator, certainty in the investor community, and consumer welfare are dependent on a stable policymaking framework and that policy shifts should be properly telegraphed and explained.