In Qwest Corp. v. FCC, No. 10-9543 (10th Cir. Aug. 6, 2012), the US Court of Appeals for the Tenth Circuit upheld the Federal Communication Commission’s decision to adopt a flexible market-power framework for analyzing forbearance petitions. The market-power framework, which is similar to the analysis used in other FCC proceedings as well as by antitrust regulators, replaces the Commission’s prior framework, which had focused on a more limited set of market metrics. This new framework affords the Commission substantially more discretion and creates considerably more uncertainty than the prior approach, presenting challenges for telecommunications providers seeking regulatory forbearance. This decision could also lead the Commission to adopt a similar market power analysis in other regulatory contexts.
Section 10 of the Telecommunications Act of 1996 provides that the FCC shall forbear from applying any regulation or statutory provision if it finds that enforcement is no longer necessary to ensure fair rates, protect consumers, and advance the public interest. If a carrier petitions the Commission for forbearance, the Commission must either grant the petition or explain within approximately one year why the requirements for forbearance are not met.
In 2004, Qwest sought forbearance from dominant carrier regulation and unbundling requirements in the Metropolitan Statistical Area (MSA) of Omaha, Nebraska. In granting that petition, the Commission adopted a two-prong test.1 Under the first prong, the Commission looked to retail market share to determine whether the incumbent carrier had a market share below a specified threshold. Under the second prong, the Commission examined whether a competing carrier offered sufficient geographic coverage in the market to reach a significant percentage of end-users.
In 2007 and 2008, the Commission denied two similar petitions filed by Verizon and Qwest seeking similar relief in various MSAs, including for the Phoenix, Arizona MSA.2 Verizon and Qwest appealed the Commission’s orders to the DC Circuit. Hearing Verizon’s appeal first, the court reversed and remanded the Verizon order and, upon the FCC’s request, voluntarily remanded the Qwest order as well.3
Following remand of the two orders, Qwest petitioned the Commission in March 2009 for regulatory forbearance in the Phoenix MSA. The petition demonstrated that Qwest’s market share was less than 50 percent of the combined wireline and wireless telephone service market in the Phoenix MSA and that one of Qwest’s competitors had sufficient coverage to reach more than 75 percent of households in the MSA.
While Qwest’s petition was pending, the Commission, in August 2009, sought public comment on how it should modify its analytic framework in light of the DC Circuit’s decision.4 The Commission sought additional comments in April 2012 on whether it should adopt a market-power analysis in evaluating Qwest’s petition and on how it should define the relevant product market.5
In June 2010, the Commission adopted the market-power framework and denied Qwest’s forbearance petition.6 The Commission explained that the prior two-prong test was too narrowly focused and that it improperly assumed that a duopoly always ensures effective competition. It reasoned that the market-power approach was better suited for analyzing competitive conditions in a given market and was more consistent with the approaches used by other regulators.
Applying the market-power framework, the Commission determined that competition from mobile wireless providers should not be considered in the Phoenix MSA because Qwest had failed to provide evidence demonstrating that wireless service “materially constrains” the price of wireline telephone service, although the Commission acknowledged that the issue is “complicated” and “one that is evolving over time.” After excluding mobile wireless providers from its analysis, the Commission found that the Phoenix market was an effective duopoly and that regulatory forbearance would create an unacceptable risk of tacit collusion.
Qwest appealed to the Tenth Circuit, which affirmed the Commission’s denial of forbearance. As an initial matter, the court held that the Commission’s decision to place the burden of proof on the petitioner is a reasonable interpretation of the Telecommunications Act. The court then held that the Commission’s decision to exclude mobile wireless providers from the relevant product market was not arbitrary and capricious.
Although Qwest presented nationwide data showing that many households are relying on mobile wireless as a complete substitute for wireline telephone service (sometimes known as “cutting the cord”)—data that would have been sufficient under the Commission’s previous approach—the court refused to overturn the Commission’s conclusion that the data were not sufficiently reliable or specific to the Phoenix market. The Tenth Circuit also upheld the Commission’s determination that, contrary to the position it had taken under its prior framework, a duopoly market is not necessarily sufficient to ensure effective competition and fair pricing.
The Qwest case demonstrates the complexities involved in the Commission’s new market-power framework and the uncertainties it creates for carriers seeking regulatory forbearance. No longer is there a simple bright-line rule. Now, carriers filing forbearance petitions bear the burden of defining the relevant product and geographic markets and providing market-specific data demonstrating that they lack market power in those markets. Moreover, the Commission’s success in court may lead it to adopt a market power approach in other regulatory contexts, such as its current proceeding evaluating the effectiveness of its special access regulations.