Appellate Court Upholds 2011 Pole Attachment Order Lowering the Telecom Pole Attachment Rate and Paving the Way for ILEC Complaints against Electric Utility Pole Owners

The suspense did not last long. Less than five weeks after a spirited oral argument before a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit (the Court”) on January 23, 2013, the Court today affirmed key aspects of the Federal Communications Commission’s April 2011 Report and Order and Order on Reconsideration (“Report and Order”). The Report and Order had modified major portions of the Commission’s pole attachment rules implementing the Pole Attachment Act, codified as Section 224 of the Communications Act of 1934 (the Act”).

The American Electricity Power Services Corporation and other electric utility companies (“Petitioners”) challenged three aspects of the FCC’s Report and Order. (1) The Report and Order interpreted Section 224(b)(1) of the Act, which authorizes the Commission to regulate the rates, terms and conditions of pole attachments” and assure that they are just and reasonable,” to apply to incumbent local exchange carriers (“ILECs”) as providers of telecommunications services.” Building on this interpretation, the Report and Order enabled ILECs to bring complaints before the FCC against investor-owned utility pole owners on whose poles they are attached, even though the statute excludes ILECs from the definition of telecommunications carrier” for purposes of Section 224. (2) The Commission adopted a new pole attachment rate formula applicable to telecommunications carriers (the telecom rate formula”) specifically designed to bring the telecom rate down to the same level as that paid by cable operators when the FCC’s presumed number of attachers is used in the telecom rate formula. (3) The Report and Order modified the FCC’s rules, which had limited to compensatory damages to be awarded only from the date of a complaint to the FCC going forward, to allow damages to be awarded for a period prior to the date of the complaint consistent with the applicable statute of limitations.

The Court denied all three challenges in their entirety, applying Chevron deference to the Commission’s interpretations. The Court’s opinion, quoting FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009), underscored that where the FCC modifies its regulations, as it did in the Report and Order, the hurdle the Commission must clear is a modest” one. Specifically, the Commission need not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better.”

First, the Court upheld the extension to ILECs by the 2011 Report and Order of complaint rights regarding the justness and reasonableness of rates, terms, and conditions applicable to ILEC pole attachments. The decision turned on the proper interpretation of the term provider of telecommunications services” as used in Section 224. The Court agreed with Petitioners that in Section 153 of the Act, the term telecommunications carrier” generally equates to the term provider of telecommunications services,” and both terms include ILECs. But the Court disagreed with petitioners that the exclusion by Section 224 of ILECs from the definition of telecommunications carrier” for purposes of that section commensurately narrowed the term provider of telecommunications services” as used in that section as well. The Court found that where Section 224 uses the term provider of telecommunications services” rather than the term telecommunications carrier,” specifically in Section 224(b)(1), the FCC’s interpretation that Congress meant to include ILECs in the firmer term was entitled to deference. The Court went so far as to say it very much doubt[ed] if the prior interpretation [of Section 224(b)(1) by the Commission to exclude ILECs from that subsection’s benefits] was reasonable.” But, even assuming that that earlier reading was reasonable, the Court found that, as required by the Fox case, the Commission offered sufficient reasons for the change in its interpretation of the statute and, thus, in the content of the FCC’s rules.

Second, the Court affirmed the Commission’s decision to adopt telecom rates under Sections 224(d) and (e) that the agency designed to be substantially equivalent to cable operator rates when the FCC’s presumed numbers of attachers was used. The Report and Order set the telecom rate as the higher of the pre-Report-and-Order telecom formula rate times a newly adopted cost factor” – 66% for urban poles, and 44% for rural poles – or a rate aimed at covering all costs caused by an attachment. (Typically, the first result would be higher.) Petitioners contended unsuccessfully that, the use of the term cost” in Section 224(e), must be interpreted such that the telecom rate formula will allow for recovery of fully allocated cost. Although the Court noted that the provisions of Section 224 limit Commission authority when adopting regulations to ensure that pole attachment rates are just and reasonable,” in the case of the permissible telecom rate formula, the Court concluded that the operative term cost” was undefined and ambiguous. For these reasons, the Court recognized the Commission’s discretion to interpret cost” and establish a telecom rate formula resulting in rates substantially equal to the rates paid by cable operators in order to pursue the policy objective of removing non-cost-based distortions between telecom carrier and cable operator pole attachment rates. The Court, applying Fox, stated that the FCC’s decision must stand “[i]n the absence of some feature of the law or facts that contradicts the Commission’s effort to eliminate that distortion.”

Third, the Court affirmed the Commission’s decision to revise its earlier determination that attachers, when they have been overcharged by pole owners under Section 224, are entitled to refunds only starting at the date of the initial complaint. The Court made short shrift of the Petitioners’ challenge to the decision in the Report and Order to now determine refund periods consistent with the applicable statute[s] of limitations.” The Court found the Petitioners’ challenge had no serious statutory basis” and that the Commission adequately explained its reasons for the change in its rules to satisfy Fox, namely to remove the disincentives of parties to negotiate prior to filing a pole attachment complaint.

Now that the Court has decided the appeal, the stage is set for lobbying and for the Commission to rule on the two pending petitions for reconsideration filed following the adoption of the Report and Order. One, filed by the National Cable & Telecommunications Association and others seeks to modify even further the telecom rate formula to better align the telecom rate with the cable rate when the average number of attachers on poles differs from the traditional rebuttable presumptions of three in non-urban areas and five in urban areas. The other pending petition, filed by the Coalition of Concerned Utilities, seeks a number of minor but substantive rule changes in electric utilities’ that would be in favor when faced with attachment requests. Activity surrounding these petitions had been minimal pending the appeals following the initial comment period.

In addition, it remains to be seen whether the Court’s decision upholding the complaint rights of ILECs will lead to a wave of ILEC complaints at the Commission. To date, only one such complaint has been filed, by Frontier West Virginia v. Appalachian Power Co. in June 2012, and it remains pending. Some ILECs may have been waiting to see how the appeal would be decided before deciding whether to pull the trigger and file. But before that happens, it is reasonable to expect that electric utilities will seek resolutions without adjudication rather than face unwelcome FCC precedent regarding rates, terms and, conditions in cases of joint use and ownership.