Court of Appeals Affirms FCC’s Pole Attachment Decision

Court of Appeals Affirms FCC’s Pole Attachment Decision

Yesterday, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit unanimously upheld the key prongs of the FCC’s dramatic shift in its interpretation of the Federal Pole Attachment Act.  The Commission’s new interpretations for the first time gave ILECs access to the FCC to resolve their disputes with electric utility pole owners.  The FCC also revised its interpretation of the Act to materially reduce the maximum rate that cable operators and competitive local exchange companies can be required to pay for attachments used to provide telecommunications services.  The court upheld both of these new interpretations. 

Oh what a difference the years – and clever reanalysis of statutory language – make.

In the years following passage of the 1996 Telecom Act’s amendment to the pole attachment statute’s guarantee of “just and reasonable” pole attachment rates, terms and conditions for cable operators and telecommunications providers, it was pretty much accepted that nothing in the Act was changed to give the ILECs access to the FCC’s jurisdiction over their disputes with the electric utilities about their pole “joint use” agreements.  And in expanding the coverage of the FCC’s pole attachment jurisdiction to cover telecommunications providers, the Act’s different rate formula for Telecom attachments resulted in pole rates two to three times higher than those calculated under the traditional Cable Rate formula.  But after more than a decade of consistent interpretations along these lines, in April 2011 the FCC reversed course – deciding that the Act gave the FCC jurisdiction over the pole rates and terms imposed by electric utilities on ILECs.  And the FCC also determined that the Act could be interpreted to bring the rate for telecom attachments down to the level of the Cable Rate.

A host of pole owning utilities appealed the FCC’s determinations, and yesterday the Court, applying what it described as “latitudinarian standards” for reviewing agency policy shifts, agreed that the Commission had discretion to make its about-face.  While we previously predicted this outcome, it came more swiftly and resoundingly than expected.

Both of the central issues on which petitioners sought review are important ones for the FCC’s policies of expanding broadband services.  The ILECs had lost leverage in dealing with electric companies in “joint pole use” agreements because the ILECs now own a much smaller percentage of jointly used poles than they did years ago.  As their pole rates rose to levels that in many cases were higher than even the rates for Telecom attachments, the ILECs looked for an interpretation of the statute that would give the FCC jurisdiction to ensure their rates were “just and reasonable.”  They found such an interpretation in the statutory language.  The essence of the view they articulated was that ILECs are covered as “providers of telecommunications services,” despite the statute’s exclusion of coverage for ILECs as “telecommunications carriers” under the Act.  The FCC accepted this interpretation in its April 2011 decision.  And so did the Court of Appeals.

Senior Circuit Judge Williams, writing for the panel, turned the petitioners’ argument that the statutory text forbade the agency’s construction on its head by reducing the text to an algebraic formula to show that on the petitioners’ “own rather mathematized reading of the statute” the term “provider of telecommunications services embraces ILECs rather than excludes them.”  With that understanding, the Court even expressed “doubt” that the FCC’s prior interpretation of no jurisdiction over such disputes was a reasonable construction of the statute.  And not only was the Commission free to change course under the statutory text, the Court concluded that the Commission had a good reason for doing so: the recognized imbalance in pole ownership left “power companies with a far higher proportion of poles and a lesser incentive to share.”

Importantly, the FCC did not apply its rate formula(s) to ILEC attachments, choosing to address such issues only on a case-by-case basis.  The ILECs, therefore, have no automatic right to pole-rate maximums determined according to the FCC’s rate methodology.  Nevertheless, one would expect that, when it addresses that issue, the FCC will rely heavily on its existing rate formula.  The existence of Commission oversight will likely aid ILECs in negotiating more reasonable attachment terms and conditions and reduce the number of disputes the Commission must resolve.

As for the rate issues, the Court again determined that the FCC was vested with discretion to change its prior statutory interpretation.  The FCC’s effort to reduce the Telecom Rate in most cases to the level of the Cable Rate was thus upheld. The Court recognized that the statute establishes a zone of “just and reasonable” rates, with “fully allocated” costs at the upper bound and “incremental” costs at the lower bound of the zone.  And it concluded that the Commission’s re-interpretation of the statutory term “cost” – a term Judge Williams called “necessarily ambiguous” – would produce rates that exceeded pole owners’ incremental costs.

Again, the Court found that the FCC’s policy justification for eliminating artificial distinctions in pole attachment rates “amply” supported the FCC’s exercise of discretion.  Judge Williams observed that, while the utilities attacked the Commission’s policy choice as “nothing more than a algebraic sleight of hand,” they had “offer[ed] neither theory nor fact to contradict the Commission’s fundamental proposition that artificial, non-cost-based differences in the process of inputs among competitors are bound to distort competition, handicapping the disfavored competitors and at the margin causing market share and capital to flow to less efficient firms.”

In addition to significantly reducing the Telecom Rate for providers of telecommunications services, and thereby reducing, if not eliminating, the market-distorting effects of the prior Telecom Rate formula, judicial approval of the FCC’s reformulation of the Telecom Rate should significantly reduce future litigation by utilities over the kinds of services being provided over attachments by cable operators.  We do expect, however, that utilities will continue to focus on efforts to stretch the new Telecom Rate above the Cable Rate, as they may do by documenting that the number of parties attached to an average pole is less than the FCC typically presumes.  This remaining idiosyncratic element of the prior Telecom Rate formula will continue to generate disputes, but the largest discrepancies between the pole rates for Cable and Telecom attachments have been removed.

While it has received less attention, the Court also affirmed the FCC’s reversal of its prior policy that refunds for rate overcharges go back no farther than the date a complaint is filed with the agency.  The Court concluded that the petitioners’ challenge to the FCC’s shift to allow refunds going back as far as the applicable statutes of limitation lacked any “serious statutory basis” given that “broad authorization” the statute gives the Commission to resolve pole attachment complaints.  The Court again found that the Commission’s reasoning – that its prior rule disincentivized pre-complaint negotiations – was sufficient to support its change in direction and that the petitioners’ “identif[ied] neither a material flaw in that reasoning nor any powerful countervailing considerations.”

We expect that the Court’s upholding of the Commission’s change to its refund rule will lead to the filing of fewer pole attachment complaints.  The rule change not only permits the parties greater opportunity informally to resolve their disputes, but it also substantially increases the possible exposure for utilities that refuse to settle.

As several commentators rushed to point out, the Court’s upholding of the FCC’s changes in its statutory interpretation will help reduce significant cost inputs for cable operators and telephone companies.  The lesson for the lawyers is that the courts are giving the FCC, and other administrative agencies, increasing deference to their interpretations – and changes in interpretations – of their enabling statutes.  One possible reason is that the over-burdened courts are looking for ways to reduce their dockets by giving broad discretion in statutory interpretation to agencies.  Where the agency can be convinced to support your policy, scour the statute for any possible ambiguity in its language that can conceivably be used to justify your position. Think outside the box, and you may be able to turn decades of recognized interpretation on its head.

We represented several parties in this matter before the FCC and in the Court of Appeals. Let us know if you have any questions.

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