DC Circuit Questions Data Behind 8YY Order

Inteliquent attorney Kevin King asked the court to set aside the rate cap because the FCC “failed to comply" with the Administrative Procedure Act’s "requirement of recent decision-making” through its “arbitrary and inconsistent treatment” of rate data submitted by Inteliquent and “near-total deference to a deal struck by USTelecom’s large, well-connected members.” Judge Cornelia Pillard asked whether it's true that "neither set of data was really complete or representative." King conceded "neither of them gives a direct, clear picture of current costs for tandem services,” and said the FCC treated the studies “inconsistently.” The agency didn’t comment afterwards.

Pillard asked how Inteliquent's data showed a nationwide-weighted average if it’s “only a subset of the market.” Competitive providers are required to peg their rates to local incumbents when they provide tandem service under the FCC’s benchmarking requirements, King countered, and Inteliquent's data accounted for large and small providers, unlike USTelecom’s. Judge Douglas Ginsburg noted USTelecom “has both large and small members,” and asked how King knew only large providers were surveyed when the association said it received unanimous approval from its membership. "Apparently, the smaller members are happy enough to live with” data USTelecom submitted, Ginsburg said.

Judge Neomi Rao asked King what Inteliquent expected the FCC to do with its proposed rate compared with USTelecom’s since there's “no reliable cost data on either side.” King said there’s a “historical linkage” on cost that the commission should have considered. Rao asked whether Inteliquent gave the FCC specific data on its costs. King said it didn't. "I thought the scheme was to benefit consumers," Ginsburg said, noting the FCC is "not obliged to set a rate to cover every regulated firm."

The FCC’s explanation in its order and waiver process sound “like a perfectly reasonable way” to “get ultimately to their goal” of reducing arbitrage on an interim basis, Ginsburg said. The FCC “knows that it does work for the vast majority of the industry,” he said. King said it doesn't and "all we’re asking for" is the agency to “analyze our data in the rate-making analysis … on equal terms with USTelecom’s.”

The FCC divided its 15 minutes with USTelecom, with each speaking for a few minutes about the reasonableness of the rates and whether the rates are effective in reducing arbitrage. King was allotted several minutes after for rebuttal. Rao asked whether the FCC is relying on its waiver process to justify the rate's reasonableness. Commission attorney Sarah Citrin said the waiver is a "backstop mechanism" and the rate is reasonable regardless of the availability of a waiver.

“You’re advocating the commission shouldn’t base a national rate on any one provider’s data, but you’re basically saying, ‘Well they should’ve relied on ours,’ which would’ve been subject, under your theory, to the exact same challenge from USTelecom,” Rao said. King countered that the FCC “brushed ours aside on cost grounds” and adopted USTelecom’s proposal “wholesale.”

Ginsburg asked whether the FCC's rate will "eliminate all arbitrage" if arbitrage is "more reduced to the extent the rate is reduced." It would "have a significant effect," said USTelecom attorney Kevin Horvitz. "I thought the assumption was that the different providers in the chain would just have to contract with one other rather than do a rate-based business model," Rao said. Horvitz said there could be commercial arrangements, but intermediaries could be skipped altogether with the transition to IP networks and route directly to a long-distance carrier. A USTelecom spokesperson referred us to its oral argument when asked to comment.