June 21, 2012
IN THE MATTER OF THE BOARD'S INVESTIGATION AND REVIEW OF LOCAL EXCHANGE CARRIER INTRASTATE EXCHANGE ACCESS RATES.
On appeal from the New Jersey Board of Public Utilities, Docket No. TX08090830.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: May 11, 2011
Before Judges Axelrad, R. B. Coleman, and Lihotz.
This appeal involves the Board of Public Utility's (the BPU) reduction of switched access service rates, which telephone companies pay each other when calls by their customers either originate or terminate, or both, on another company's rented, leased, or owned landline network.
Appellants, various competitive local exchange carriers (CLECs), challenge the BPU's order gradually reducing the rates they can charge incumbent local exchange carriers (ILECs), such as respondents, Verizon and CenturyLink, and interexchange carriers (IXCs), such as respondents Sprint and American Telephone and Telegraph Corp. (AT&T), for intrastate switched access service, that is, connections for toll calls originating and terminating in New Jersey. The BPU historically set intrastate switched access rates much higher than the actual cost of providing switched access service, reflecting the agency's historical goals: (1) to subsidize costs incurred by the ILECs to operate their local landline networks, and (2) to provide the ILECs with the ability to offer artificially cheaper local telephone service to their own customers. However, the telecommunications industry is constantly changing, and the BPU maintains that its elimination of those subsidies and the uniform reduction of intrastate switched access rates for all local exchange carriers (LECs)*fn1 to the lowest level set by the Federal Communications Commission (FCC) for interstate access is reasonable and supported by the record. Appellants challenge the BPU's order as unreasonable and unconstitutionally confiscatory, and argue the BPU made no findings of fact sufficiently explaining its decisions. We affirm.
We provide a brief historical perspective of the telecommunications markets to place this appeal in context. Telecommunications markets in the United States were monopolistically controlled first by AT&T, and then later by its "Baby Bell" offspring. Until 1982, AT&T dominated both the local-exchange and long-distance telephone service markets. AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 413, 119 S. Ct. 721, 746, 142 L. Ed. 2d 834, 870 (1999) (Breyer, J., concurring in part and dissenting in part). Because of that monopoly, there were no access fees or switched access service. In 1982, facing an antitrust suit by the federal government, AT&T agreed to a settlement whereby it retained its long-distance operations in one IXC, and split that IXC from its local-exchange or intrastate services, which it then bestowed to various LECs, the Baby Bells. Verizon Commc'ns Inc. v. Fed. Commc'ns Comm'n, 535 U.S. 467, 475, 122 S. Ct. 1646, 1654, 152 L. Ed. 2d 701, 715 (2002).
States then granted one LEC, called the incumbent LEC or ILEC, an exclusive franchise to provide local telephone service within a designated area in that state. AT&T Corp. v. Iowa Utils. Bd., supra, 525 U.S. at 371, 119 S. Ct. at 726, 142 L. Ed. 2d at 844. These areas were called Local Access and Transport Areas, or "LATAs." In re MCI Telecomms. Corp., 263 N.J. Super. 313, 316 (App. Div. 1993). A LATA was identified by a three-digit number (area code). Ibid. "IntraLATA" referred to connections made within the same LATA, while "interLATA" referred to connections between a carrier in one LATA and a carrier in another LATA, i.e., toll calls. Ibid.
The ILECs typically built and owned "the local loops (wires connecting telephones to switches), the switches (equipment directing calls to their destinations), and the transport trunks (wires carrying calls between switches) that constitute[d] a local exchange network." Iowa Utils. Bd., supra, 525 U.S. at 371, 119 S. Ct. at 726, 142 L. Ed. 2d at 844. IXCs, such as AT&T and Sprint, made no investment in those local loops; they merely used that network for their customers' toll calls.
As explained by Verizon's experts,
An exchange access line is composed of a local loop from the NID [(network interface device)] at the customer's location to a switch termination point at a central office. The primary [physical] components of the local loop are the NID, drop, distribution plant, feeder plant, terminal equipment, and electronic equipment.
In addition to the loop cost, the cost of an exchange access line includes the costs associated with the main distribution frame  or digital cross-connect  bay and the termination, or port, on the central office switch.
Accordingly, each ILEC was considered the carrier of last resort (COLR) in its own LATA. An ILEC is still "required to provide service on demand to all customers throughout its service territory," "to maintain a ubiquitous, fully operational telecommunications network that stands ready to serve any customer that requests service regardless of the costs of serving that customer," and to implement and pay for programs to provide subsidized services, such as, for elderly and lower income residents.
Respondent Verizon NJ is the largest ILEC and COLR in New Jersey, serving up to ninety-five percent of the State. It has an average of 839 loops per square mile in its LATA. CenturyLink is also an ILEC and COLR, serving approximately 154,000 customers in largely rural and suburban sections of northern and western New Jersey. It has an average of 182 loops per square mile in its LATA.
After AT&T's split in 1982, state legislatures and administrative agencies set the rates that ILECs could charge consumers, both at the wholesale and retail levels, in order to prevent monopolies from leading to exorbitant local prices. Verizon Commc'ns Inc., supra, 535 U.S. at 477-78, 122 S. Ct. at 1654-55, 152 L. Ed. 2d at 716-17. Regulation of retail prices focused on balancing the ILEC's interest in a fair return on investment against the public's interest in a fair price for services. Id. at 480-81, 122 S. Ct. at 1656-57, 152 L. Ed. 2d at 718-19. Nevertheless, regulators set toll call rates above the actual service costs so the ILEC's local service rates could be kept artificially low. Those rates were set to ensure that the ILEC in each LATA had the chance to recover its costs plus a reasonable rate of return.
Additionally at that time, because the ILEC networks carried both intrastate and interstate calls, charges for switched access services were created. In theory, switched access rates are not paid directly by telephone company customers, considered "end users"; these rates are charged between the companies and apply when a call either originates or terminates beyond the customer's local calling area, as it then is carried on wires controlled, owned, or leased by different companies. That is, an IXC is required to pay a fee, the switched access charge, to the ILEC serving the calling and called customers of a long distance call for the functionality of handling the call at the originating and terminating ends.
Technically, switched access is "a two point electrical communications path between a [calling] customer's premises and an end [answering] user's premises. It provides for the use of common terminating, switching and transport facilities, and both common subscriber plant and unshared subscriber plant, i.e., entrance facilities, of the Telephone Company." This "switching" accommodates calls to and from end users throughout the country, and occurs over the public telephone network, which consists of multiple carriers' interconnecting networks, as contrasted with special access lines dedicated to a private line circuit. The record contains various examples of switched access routes; each appears to involve: (1) a customer making or receiving a call from another customer, with one of them using a landline or wired network, and (2) an actual electric "switch" in the central or satellite office of the "wired" customer's LEC switching that call to or from the customer's IXC or another LEC.
Interstate switched access service crossed state boundaries, while intrastate switched access service stayed within state boundaries, and the FCC governed switched access charges associated with interstate calls, while the BPU regulated the intrastate access rates. Like the ILECs' other rates, these governmental agencies initially and purposely set switched access charges well above the costs of the actual service, with the primary policy objective of promoting universal low-cost basic service across the region.
At that time, the "three most significant" elements of a switched access rate were: (1) the carrier common line charge, a per minute usage charge applied equally to both originating and terminating minutes, which was used to recover a portion of the costs of non-traffic sensitive network elements used to provide access service, and which had a quarterly and annual revenue cap based on a carrier's proportionate use of originating and terminating minutes (i.e., Verizon NJ's current annual cap is $12.8 million); (2) the local switching charge, which was a per minute charge applied to both originating and terminating minutes, and represented an inherent component of the facilities activating switched access service; and (3) the market share line charge, which was a monthly rate assessed against all access lines and trunks, with revenues being apportioned to each carrier customer connecting to the switched access network, the apportionment based on that carrier customer's market share of the local switching minutes of use.
However, despite all of this governmental regulation, local service became a monopoly held by the ILECs, primarily due to the expense of any new carrier having to duplicate the infrastructure of the existing ILEC, including its lines, telephone poles, and switching terminals, before entering the local market. Verizon Commc'ns Inc., supra, 535 U.S. at 490, 122 S. Ct. at 1662, 152 L. Ed. 2d at 724-25.
Consequently, fourteen years later in 1996, Congress opened up the local markets by enacting the Telecommunications Act of 1996 (TCA), Pub. L. 104-104, 110 Stat. 56 (1996) (codified in scattered sections of 15 U.S.C.A., 18 U.S.C.A., and 47 U.S.C.A.). AT&T Corp. v. Fed. Commc'ns Comm'n, 220 F.3d 607, 611 (D.C. Cir. 2000). The TCA restructured and deregulated local service markets by requiring ILECs to share their facilities and networks with aspiring competitors, the CLECs. 47 U.S.C.A. § 253.
These "sharing" arrangements were effectuated through interconnection agreements establishing, among other things, how much a CLEC had to compensate the ILEC for the use, (rent, lease, or sale) of its equipment and networks. 47 U.S.C.A. §§ 251 and 252. If a voluntary agreement could not be negotiated between a CLEC and the ILEC, the TCA provided the CLEC could petition the governing state commission to compel arbitration to produce an interconnection agreement. 47 U.S.C.A. § 252(b). However, unlike the ILECs, the CLECs had no COLR obligations or related costs. The record shows they were "not burdened with legacy technologies and legacy network architectures, and . . . can choose the specific geographic areas in which to build and serve, can service other areas without building a network . . . , or can choose not to serve some areas at all."
Appellants, Level 3 Communications, L.L.C., CTC Communications Corp., Conversent Communications of New Jersey, L.L.C., PAETEC Communications, Inc., US LEC of Pennsylvania, L.L.C., RNK, Inc., Cavalier Telephone Mid-Atlantic, L.L.C., and XO Communications Services, Inc., who are various CLECs, provide retail telecommunications services over facilities they individually own or lease from the ILEC in their region. They are "billion dollar, multi-state and often multi-national corporations," serving "primarily medium to large businesses, government, wholesale markets, and content markets in metropolitan areas." The record reflects that "none serves any substantial number of residential customers in New Jersey." Appellants' witnesses testified they: (1) have incurred and often continue to incur higher capital and operating costs than an ILEC, and (2) do not have the large and stable customer bases enjoyed by the ILECs.
Despite this new deregulation within the industry, the BPU continued its historic practice of setting intrastate access rates above the cost of providing that service in order to maintain affordable basic exchange service rates and to promote universal service.
In 2000, the FCC reduced the interstate switched access rates that all ILECs could charge IXCs, and in 2001, it capped the interstate switched access rates that all CLECs could charge at the interstate rate of the ILEC with which the CLEC competed. That cap was "intended to prevent CLECs from imposing excessive access charges on [IXCs] and their customers." Simultaneously, the FCC increased the LECs' subscriber line charges and established a universal service fund to help LECs offset revenue losses from the switched access rate reductions.
Since 2000, at least seventeen states have reduced their intrastate switched access rates for all LECs to the interstate levels. Some of those states, however, had express policies to mirror the FCC rates, either established by their legislatures, such as Texas and Maine, or by the administrative agencies regulating telecommunication companies, such as in West Virginia and Ohio.
In New Jersey, the BPU began adopting plans of alternative regulation, including service reclassifications, for the LECs in this state. The BPU has "the authority to approve alternative forms of regulation in order to address changes in technology and the structure of the telecommunications industry; to modify the regulation of competitive services; and to promote economic development." N.J.S.A. 48:2-21.16(a)(5). See N.J.S.A. 48:2-21.17 ("'Competitive service' means . . . any telecommunications service not regulated by the [BPU]."). Thus, while an IXC's services are always competitive, N.J.S.A. 48:2-21.20, the BPU could determine, based on evidence of ease of market entry, the presence of competitors, and the availability of substitute services, whether the services of any LEC were competitive/unregulated or noncompetitive/regulated. N.J.S.A. 48:2-21.19(b).
For example, in 2007, pursuant to N.J.S.A. 48:2-21.19, the BPU granted the ILECs pricing freedom by reclassifying all of their retail services as competitive/unregulated, except for the following four, which remained noncompetitive/regulated:
(1) residential basic exchange service; (2) single line business basic exchange service; (3) installation of residential service; and (4) residential directory assistance. In re Bd. Investigation Regarding the Reclassification of Incumbent Local Exch. Carrier (ILEC) Servs. as Competitive, In re Application of United Tel. Co. of N.J., Inc., BPU TX07110873 and TO08060451 (August 20, 2008) (ILEC Reclassification Proceeding). Expressly excluded from the BPU's order were switched access service and rates, which remained noncompetitive/regulated.
Also in 2007, and more important here, the BPU issued an order deregulating all CLECs' retail services and deeming them competitive/unregulated. In re Bd. Investigation Regarding the Reclassification of Competitive Local Exch. Carrier (CLEC) Servs. as Competitive, BPU TX06120841 (June 29, 2007) (CLEC Reclassification Proceeding). While the BPU's order did not extend to any CLEC's wholesale services, including switched access services, it allowed CLECs to increase their rates for retail services without the BPU's review or permission.
At its agenda meeting on October 6, 2008, the BPU sua sponte "open[ed] an investigation into the appropriate level" of the intrastate access rates charged by LECs. The agency invited and granted intervention and pro hac vice motions.
On December 17, 2008, the BPU issued a "Prehearing Order," declaring that "[t]his investigation [was] designed to set rates which all entities will be required to charge, including default rates where entities have failed to participate in this proceeding." The agency explained there were "two basic positions" at the core of its investigation: (1) "one group believes that access rates should be immediately reduced, ideally to the interstate level set by the [FCC]," with other issues being resolved, "if necessary, after the setting of the appropriate access rates"; and (2) "[t]he other group accepts the [BPU's] ability to review access rates, but calls upon the [BPU] to engage in a deliberate and intensive review prior to any modifications in the access rate, and . . . does not concede that the FCC's interstate rate is necessarily reasonable."
The BPU viewed "this as an investigation as to the entire industry," which "require[d] a comprehensive review of costs as well as other relevant information in order for the [BPU] to make its determination." Thus, it ordered "that cost studies, to the extent requested or otherwise used in this matter, shall be forward-looking." Additionally, the BPU announced that "[t]he question of revenue recovery is not an appropriate area of review in this docket and shall be considered, if necessary, in a separate matter, as appropriate, following the conclusion of this matter. This approach reflects the commitment set forth in the ILEC stipulations."
Thereafter, before the BPU held evidentiary hearings on September 15, and 17, and October 19, and 20, 2009, most of the parties here filed initial and reply testimony from their experts, and appellants filed cost studies and other summary models, with explanations, claiming they would lose millions of dollars in revenue if the BPU reduced those rates by eliminating the historical subsidies in switched access rates. Appellants Level 3 Communications, L.L.C., and XO Communications Services, Inc., requested additional time to file their own cost studies, but never submitted them. The parties then filed initial and reply briefs.
The CLECs presented only two "New Jersey-specific studies and models estimating costs incurred in providing switched usage service" -- one from appellant PAETEC and one from appellant One Communications or ONE COMM. They argued the studies demonstrated it was "clear" that "CLEC access costs are: (1) higher than Verizon's costs required to produce the same services, and (2) substantially higher than both Verizon's and [CenturyLink]'s interstate access rates." However, appellants' witnesses testified that PAETEC's results were "unique for a CLEC" and its "network" was "unique in relation to networks operated by other CLECs." They also pointed to other differences between PAETEC and the other CLECs, such as the size of the switching office.
Nevertheless, based on those studies, appellants argued their rates should not be changed. They claimed that it would be unfair if the BPU capped their intrastate switched access rates at the level of an ILEC's interstate rate because of the considerable economic and market differences between them and the ILECs, such as in their operating costs and lower margins. They pointed out: (1) CLECs were "smaller companies"; (2) "investors and creditors view [CLECs] very differently from AT&T when attributing necessary returns on their capital," and "CLEC investors require greater levels of return on their investment to mitigate this increased level of risk"; (3) "CLECs face greater risk due to their lack of size and scale"; and (4) "CLECs lack any regulatory protection related to their revenue stream should they lose customers and/or usage volumes on their networks." They further claimed CLECs do not have the ability to raise their unregulated retail rates because the market was so competitive and they could not rely on regulated rates as a source of revenue.
Appellants further asserted that while ILECs served more of the local customers in an exchange, CLECs had significantly smaller customer bases and smaller economies of scale and scope. Appellants urged that CLEC switches served more geographic area than an ILEC's switches, requiring CLECs to build or purchase transport capacity between their switches and various ILECs' central offices, and use third parties to connect to some However, appellants' witnesses admitted that although "the CLEC networks are designed somewhat differently," "they predominately provide the same general functionality as an ILEC network." In fact, they answered in their written testimony:
Q. THOUGH DIFFERENTLY CONFIGURED, DO CLEC NETWORKS PROVIDE THE SAME TYPE OF SWITCHED ACCESS SERVICE AS A MORE CLASSICALLY CONFIGURED NETWORK?
A. Yes, in the sense that functionally, there are no differences for either the end user customer, or the IXC with regard to the access service provided by CLECs versus access service provided by a more traditional network.
Sprint's witnesses argued that "CLECs have absolutely no incentive to limit the level of their switched access rates." They explained that "[t]o ensure and promote full competition, carriers cannot be expected to subsidize LEC retail services through inflated intrastate switched access rates." They elaborated:
The higher that CLECs set their switched access rates, the more their cost of service is recovered from the CLECs' competitors instead of the CLECs' own customers. Inflated access rates allow the CLECs to offer lower retail rates that competitors paying those access rates cannot match. Competitors subsidize the CLEC offerings through high switched access rates that other carriers must pay to complete their non-local calls to the CLECs' customers. High switched access rates, regardless of the entity imposing those rates, distort the retail market.
CLECs' switched access should be set at levels that do not distort the retail market. To accomplish that, Sprint believes the [BPU] should prevent the aggregate CLEC access rate from exceeding the aggregate rate of the ILEC the CLEC is competing against. If the CLEC is competing with more than one ILEC in New Jersey, the CLEC should be permitted to charge an aggregate rate equal to incumbent's aggregate rate in each ILEC territory served. As it does with ILEC rates, Sprint advocates an immediate change to the CLEC rates so each CLEC's aggregate rate equals the ILECs' interstate rates-which will also be the new intrastate aggregate levels.
Verizon NJ's witnesses testified that its intrastate rates should be "the benchmark" for all LECs, since those rates "have been subject to the greatest regulatory scrutiny and they are near the median intrastate access rate charged by all carriers in the state." The other parties criticized Verizon NJ's cost study, but Verizon NJ submitted rebuttal testimony, demonstrating that its low basic exchange service rates did not cover its costs for providing local service, and it was already suffering a shortfall for its regulated service.
The other respondents' witnesses testified that "subsidies embedded in access rates harm competition and consumers," because they "inflate the price for all retail voice telecommunications services that require those access services as an essential input." Switched access is a monopoly service, because there can only be one provider of switched access for calls to and from a local service customer, and that is the customer's local service provider. They further testified the only time carriers are not impacted by high intrastate access rates is "[w]hen a competing carrier exchanges traffic with its affiliated LEC," such as the traffic between Verizon Corporation, Verizon Wireless, and Verizon NJ. Moreover, LECs can recover revenue for lower access rates using price schedules of other services. The witnesses concluded, "[i]f the switched access rates are reduced, consumers will benefit" because "service providers will have more resources to expand service coverage, enhance service quality, develop new and innovative service offerings, and provide better pricing in the market."
Various witnesses pointed out that the cost of switching and transporting a call on both Verizon NJ's networks is significantly less than each ILEC's compatible intrastate switched access rate, because "[t]he same ILEC network elements are used to complete a call on the ILEC network regardless of where that call originated. Therefore, the economic cost to terminate a local call should be the same as the cost to terminate interstate or intrastate switched access traffic." In addition, witnesses for the Rate Counsel declared that intrastate access was "functionally the same as interstate access."
These witnesses further claimed that reducing each New Jersey ILECs' intrastate rate to its interstate level was appropriate because: (1) they have already been providing access at the FCC rates for some time; (2) they originally supported those rates at the federal level; and (3) "the services and infrastructure used to provide intrastate switched access services are the same as the services and infrastructure used to provide interstate switched access services." Additionally, the industry has "dramatically changed such that ILECs now offer a full slate of services over their exchange access network from which to recover their network costs (i.e., local, toll, long distance, high speed internet, and other services)." According to the witnesses, ILECs can recover "their full basic network connection costs from their own end user customers," namely, by using their "significant flexibility to increase basic local service rates as well as [their] unlimited flexibility to increase rates for other local services that were reclassified as competitive." Furthermore, both ILECs here provide high-speed internet services over their same customer network connections, allowing them to collect more revenue per user. In fact, according to their own economic information, both Verizon NJ and CenturyLink are increasing their average revenue per consumer.
By order dated February 1, 2010, the BPU adopted a four step, thirty-six month, phase-in of reductions to intrastate access rates applicable to all LECs. It denied all applications for a stay.
After summarizing, in detail, the parties' arguments and their examination of supporting facts in the record, as set forth in their administrative briefs and reply briefs, the BPU reviewed the history of the telecommunications industry and switched access service rates. It then noted that New Jersey's intrastate "rates were established in 1984 and have not been materially changed since that time," and it acknowledged that "significant subsidies" had been "include[d] . . . in these rates [which] were appropriate at a time when there was little or no competition."
The BPU, however, was "convinced that the current level of subsidies [was] no longer necessary today." It noted that "many states and the FCC have reduced access charge rates over the years, some as many as 15 years ago." Thus, the BPU announced, "based upon the record in this proceeding, that it [was] time to reduce these long standing subsidies that are neither necessary nor appropriate in the increasingly competitive marketplace." "[T]he legacy subsidies contained in intrastate switched access rates are no longer appropriate and should therefore be removed."
The BPU essentially listed four reasons, based upon its "careful review of the record in this matter," why the subsidies had to be eliminated, and why the rates had to be reduced, uniform for all LECs in a region, and mirror the FCC's interstate rates.
First, the BPU found "that switched access service is a monopoly because there is no ability for an IXC or its customers to avoid excessive access charges." Thus, it rejected allowing market forces to control access rates, and agreed: (1) with Sprint's claim "that LECs have a monopoly over access to their end users, which has permitted a situation where CLECs have charged access rates well above the rates that ILECs charge for similar services," and (2) with Verizon NJ's claim "that regulation prohibits an originating carrier from blocking calls to a CLEC with a high access rate." "Furthermore, switched access is a monopoly because an originating carrier does not have a choice of terminating carriers."
Second, the BPU found that "any disparities in the Intrastate and Interstate Access Rates should be eliminated." It agreed with AT&T's claim "that there is no material difference in the functionalities used to provide interstate and intrastate switched access." The BPU also noted that the FCC's approach to pricing of interstate rates "has been successful," as there was "no evidence that interstate access rates capped by the FCC eight years ago have caused any CLEC to exit the market."
Third, the BPU found "that a reduction of Intrastate Access Rates will benefit customers because there is a relationship between reduced access charges and toll reductions." According to the BPU, the record showed that "not only will market discipline drive IXC rates lower, but AT&T has committed to eliminate an in-state connectivity fee and reduce the decrement rate on prepaid calling cards."
And fourth, the BPU found appellants' cost models and studies did "not form a foundation for higher access rates," because they "included inappropriate costs, [were] flawed[,] and overstate[d] costs for providing intrastate switched access service." The BPU was disturbed particularly by the inclusion of loop costs, the inappropriate inflation of common overheads, and the excessive depreciation rates and cost of capital. It declared that each and every cost model presented in this proceeding overstates, and in some cases, grossly overstates intrastate switched access costs. The record shows that flaws in the access cost models include, but are not limited to, cost of capital, common overheads and depreciation rates that were inappropriately inflated. Furthermore, loop costs, which should not be included, are in some cases the largest cost elements in the cost model. These costs are inappropriate for inclusion in the access cost models in this proceeding. Moreover, there is evidence that the cost models offered by the parties are not forward looking as required by the [BPU's] December 2008 Order.
Therefore, finding it had the authority to regulate intrastate switched access rates, the BPU ordered "that all local exchange carriers in New Jersey . . . reduce their Intrastate Access Rates to their interstate access rates and rate structures." The BPU specifically ordered: "that 1) the ILECs['] Intrastate Access Rates be modified to mirror their respective interstate access rates and rate structures; and 2) that all CLECs['] Intrastate Access Rates shall be reduced to, and capped at, the corresponding ILEC Intrastate Access Rates."
The BPU was concerned, however, with "the timing of these reductions . . . [i]n light of the current economic conditions throughout the State." While the agency wanted to remove the subsidies that were no longer appropriate, it also wanted to do so "without subjecting LECs to sudden revenue changes or other negative rate continuity issues." Consequently, it established a thirty-six month, four phase-in period, which would "remove non-cost based subsidies first, without causing rate continuity issues with each carrier," but which would "necessarily differ by carrier" because "individual ILEC intrastate tariff and rate structures are currently not the same."
In particular, the BPU ordered "that the subsidy elements, specifically the ILECs' Carrier Common Line Charge (CCLC) and Verizon [NJ]'s Market Share Line Charge (MSLC) shall be eliminated and/or reduced first, followed by other access rate elements." Thus, it ordered the following four phase-in reductions in intrastate switched access rates:
Phase I. Effective 20 days from the date of this Order
(1) Verizon [NJ] and [CenturyLink] shall eliminate the Carrier Common Line Charge.
(2) Verizon [NJ] shall also reduce its Market [S]hare Line Charge (MSLC) by 25% from 98 cents to 73.5 cents per line.
(3) Warwick Valley Telephone Company shall reduce its CCLC by one-third.
(4) CLEC rates shall not exceed the composite, per minute intrastate rate charged by the ILEC in whose territory switched access calls are originated or terminated.
Phase II. Effective 12 months from the date of this Order
(1) [CenturyLink] shall reduce its intrastate switched access rates by one-third of the difference between its Intrastate Access Rates and its Interstate Access Rates.
(2) Verizon [NJ] shall further reduce its MSLC rate (of 73.5 cents) by an amount equivalent to one-third of the then existing remaining difference between total intrastate switched access revenues and the amount that would be generated if Verizon [NJ]'s intrastate switched access rates were set at its interstate rates.
(3) Warwick Valley Telephone shall reduce its CCLC by an additional one-half.
(4) CLEC rates shall not exceed the composite, per minute intrastate rate charged by the ILEC in whose territory switched access calls are originated or terminated.
Phase III. Effective 24 months from the date of this Order
(1) [CenturyLink] shall reduce its intrastate switched access rates by one-half of the difference between its intrastate rates and its interstate rates.
(2) Verizon [NJ] shall eliminate the remaining MSLC rate. In addition, Verizon [NJ] shall reduce other access rate elements that, when combined with the elimination of the MSLC, are equivalent to one-half of the then existing difference between total intrastate switched access revenues and the amount that would be generated if Verizon [NJ]'s intrastate switched access rates were set at its interstate rates.
(3) Warwick Valley Telephone shall eliminate the remainder of its CCLC.
(4) CLEC rates shall not exceed the composite, per minute intrastate rate charged by the ILEC in whose territory switched access calls are originated or terminated.
Phase IV. Effective 36 months from the date of this Order
(1) [CenturyLink], Verizon [NJ] and Warwick Valley Telephone shall reduce their intrastate switched access rates to be equal to their interstate rates and mirror their interstate access rate structure.
(2) CLEC rates shall not exceed the composite, per minute intrastate rate charged by the ILEC in whose territory switched access calls are originated or terminated.
Additionally, the BPU rejected Verizon NJ's and CenturyLink's requests to eliminate their COLR obligations, because those companies had not quantified their New Jersey obligations, and because "COLR obligations of ILECs have not been reduced or eliminated in any state that has also reduced Intrastate Access Rates."
The BPU also rejected CenturyLink's request for a "Universal Service Fund" to protect it from any competitive losses resulting from the lowered rates. The BPU found that such a fund "would merely shift the subsidy from toll customers to all customers," and that CenturyLink was "not a federally-funded high cost carrier in New Jersey" needing protection.
Finally, the BPU refused to discuss "revenue recovery" in its order, pointing to the 2008 stipulations in its earlier ILEC Reclassification Proceeding. It explained:
The ILECs [Verizon NJ and CenturyLink] in this proceeding have argued that if the [BPU] reduces Intrastate Access Rates, the [BPU] should provide the LECs with more pricing flexibility to offset the reduction in Intrastate Access revenues. Despite the arguments from Verizon [NJ] and [Century Link], the question of revenue recovery is not part of this proceeding. Verizon [NJ] and [CenturyLink] agreed in their respective Stipulations in the ILEC Reclassification Proceeding that they would have the ability to seek additional rate relief if the Board issues an order reducing access rates. Moreover, the [BPU's] December 2008 Pre-Hearing Order in this docket provided that revenue recovery would not be determined in this proceeding and that determination was not challenged by any party to this proceeding.
Nevertheless, the record shows that [CenturyLink] and Verizon [NJ] would still have a positive revenue impact after both the rate flexibility granted to them in the ILEC Reclassification Proceeding and the potential access reductions are calculated. Furthermore, CLECs have complete retail pricing flexibility because all of their retail services have been deemed competitive. Accordingly, the [BPU] HEREBY FINDS that the issue of revenue recovery was not intended to be a part of the proceeding, and the issue should be reserved for a separate proceeding, as appropriate for each ILEC.
Verizon NJ appealed (Docket No. A-2767-09T2) and United Telephone Company of New Jersey, Inc., d/b/a CenturyLink appealed (Docket No. A-3002-09T2).*fn2 Appellants also filed a notice of appeal (Docket No. A-2974-09T2). We denied all three appellants' separate motions for a stay, ordered the three appeals be consolidated and all parties be allowed to file "public" and "confidential" versions of their papers, respectively with and without redactions for confidential and proprietary financial information. In this opinion we have referred to information contained in the confidential appendices in very general terms.
On November 30, 2011, the BPU issued a prehearing order declaring its intent to re-evaluate the competitiveness of the ILECs' services "in response" to its ILEC Reclassification Proceeding on August 20, 2008. In re Bd.'s Investigation Regarding the Reclassification of Incumbent Local Exch. Carrier (ILEC) Servs. as Competitive - Phase II, BPU TX11090570 (November 30, 2011).
On November 18, 2011, the FCC adopted FCC 11-161, Universal Service and Intercarrier Compensation Reform Order, which, among other things, adopted a number of new rules that comprehensively impacted rates imposed on switched access services. The order essentially eliminated the states' role in intercarrier compensation, and placed constraints on their rate-setting powers for local telephone service. That is, effective December 29, 2011, certain LECs were required to cap their interstate switched access rates to the rates of the price-cap incumbent carrier in the state with the lowest switched access rates by February 13, 2012, or within forty-five days after the carrier begins to engage in "access stimulation," i.e., when it has an access revenue sharing agreement with another entity and the carrier has a three-to-one ratio of interstate terminating to originating traffic in a given month or has had a 100% or greater increase in originating or terminating switched access minutes in a month as compared to the same month in the previous year.
The FCC order adopts a structure that, by 2013, will bring all intrastate switched access rates down to interstate levels and then all intercarrier compensation rates to zero in six to nine years (six years for price-cap carriers and nine years for rate of return carriers), placing them into a uniform national "bill-and-keep" framework for all telecommunications traffic exchanged with a LEC. The order also creates various funds to help the companies make service and rate changes, and allows carriers to impose a new limited monthly charge on consumers.
On December 14, 2011, the United States Judicial Panel on Multidistrict Litigation ordered consolidated the thirteen challenges to the FCC's order, mostly by LECs and state commissions, to be heard in the United States Court of Appeals for the Tenth Circuit. In re: Fed. Commc'ns Comm'n, Connect Am. Fund, MCP No. 108 (Dec. 14, 2011). On January 11, 2012, the FCC issued a notice, among other things, delaying the effective date of the carrier "bill-and-keep" requirements. Connect Am. Fund, 77 Fed. Reg. No. 7, 1637-40 (Jan. 11, 2012) (to be codified at 47 C.F.R. pts. 20 and 54).
On appeal, appellants contend the BPU's new rate policies and new switched access rates are arbitrary, capricious, or unreasonable, or unconstitutionally confiscatory, and the BPU made insufficient findings of fact to support its rates and policy decisions. They also contend the ONE COMM and PAETEC cost studies were supported by the evidence, which demonstrated:
(1) the common overheads were not inflated; (2) the costs of capital were not inflated; (3) the depreciation rates were not inflated; (4) the cost studies appropriately included loop costs; and (5) the cost studies were forward looking. Based on our review of the record, and consideration of the briefs and oral arguments, applicable law, and limited standard of review, we are not persuaded by any of appellants' arguments.
"It is clear that in this State the courts have no power to fix rates." N.J. Bell Tel. Co. v. State, 162 N.J. Super. 60, 69 (App. Div. 1978). Appellate review of any BPU order is extremely limited, as "ratemaking is a legislative and not a judicial function." In re Elizabethtown Water Co., 107 N.J. 440, 452 (1987). Specifically, N.J.S.A. 48:2-46 states that the Appellate Division may set aside a rate order of the BPU when it clearly appears that there was no evidence before the [BPU] to support the same reasonably or that the same was without the jurisdiction of the [BPU].
No order shall be set aside in whole or in part for any irregularity or informality in the proceedings of the [BPU] unless the irregularity or informality tends to defeat or impair the substantial right or interest of the appellant. [(Emphasis added).]
Moreover, "[i]n rate-setting cases, . . . courts allow the agency the fullest exercise of administrative discretion." In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, 330 N.J. Super. 65, 106 (App. Div. 2000) (internal quotation marks and citation omitted), aff'd, 167 N.J. 377, cert. denied sub nom. Co-Steel Raritan v. N.J. Bd. of Pub. Utils., 534 U.S. 813, 122 S. Ct. 37, 151 L. Ed. 2d 11 (2001). Even the BPU's "policy decision[s] should be given great weight." Id. at 129. When the BPU is exercising its statutory ratemaking powers, a court must recognize its broad discretion, in light of the agency's expertise in that area, and presume the validity of its rulings. In re N.J. Am. Water Co., 169 N.J. 181, 188 (2001); In re Pub. Serv. Elec. & Gas Co., supra, 167 N.J. at 384-85. We have held that an appellate court is not at liberty to titrate the evidence in order to determine whether we would have made the same findings and reached the same conclusions as the [BPU] did on the record before it. Rather, where there is substantial evidence on all sides of the issues addressed, no findings made or conclusions reached that are based on that evidence and are otherwise within the [BPU's] discretionary authority will be seen to be arbitrary, capricious or unreasonable.
We are, furthermore, bound to recognize and respect the [BPU's] substantive expertise, especially on questions that are "primarily of judgmental or predictive nature". . . . [In re N.J. Bell Tel. Co., 291 N.J. Super. 77, 89 (App. Div. 1996) (citations omitted).]
The presumption, therefore, will be overcome only when the decisions lack reasonable support in the evidence, or when they are arbitrary, capricious, unreasonable, or beyond the BPU's delegated authority. In re N.J. Am. Water Co., supra, 169 N.J. at 188. In Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S. Ct. 281, 288, 88 L. Ed. 333, 345 (1944), the Supreme Court explained: "If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry . . . is at an end. The fact that the method employed to reach that result may contain infirmities is not then important."
Nevertheless, "the system of rate regulation and the fixing of rates thereunder are related to constitutional principles which no legislative or judicial body may overlook." In re Proposed Increased Intrastate Indus. Sand Rates, 66 N.J. 12, 23 (1974). We explained:
Thus, on the question of confiscation we may decide only whether the essential findings were either illegally arrived at or not made, and as to whether the rates approved are "just and reasonable," we may weigh the evidence only to ascertain whether the [BPU's] determination finds "reasonable support in the evidence." In connection therewith the burden of proof rests on the public utility. In no way can findings be tested for support in the evidence except through the process of weighing and examining, and it is in this sense only that the duty to weigh the evidence is enjoined upon us. [N.J. Bell Tel. Co., supra, 162 N.J. Super. at 72 (citations omitted).]
As set forth in the statute, since 1992, our State's "policy" has been to:
(1) Maintain universal telecommunications service at affordable rates.
(2) Ensure that customers pay only reasonable charges for local exchange telecommunications services, which shall be available on a non-discriminatory basis.
(3) Ensure that rates for noncompetitive telecommunications services do not subsidize the competitive ventures of providers of telecommunications service.
(4) Provide diversity in the supply of telecommunications services and products in telecommunications markets throughout the State.
(5) Permit the [BPU] the authority to approve alternative forms of regulation in order to address changes in technology and the structure of the telecommunications industry; to modify the regulation of competitive services; and to promote economic development. [N.J.S.A. 48:2-21.16(a).]
The Legislature further found:
(1) In a competitive marketplace, traditional utility regulation is not necessary to protect the public interest and that competition will promote efficiency, reduce regulatory delay, and foster productivity and innovation.
(2) Whether measured by the number of interexchange companies operating in New Jersey, the variety and number of services and/or competitive alternatives, or barriers to entry, the interexchange telecommunications marketplace in New Jersey is sufficiently competitive to relieve interexchange telecommunications carriers from traditional utility regulation.
(3) Permitting the competitive interexchange telecommunications marketplace to operate without traditional utility regulation will produce a wider selection of services at competitive market-based prices.
(4) The [BPU] has found the interexchange telecommunications market place sufficiently competitive to relieve interexchange carriers from traditional utility regulation but found it lacked the authority to eliminate unnecessary regulatory constraints under the existing public utility statute.
(5) It is in the public interest to relieve interexchange telecommunications carriers from traditional utility regulation. [N.J.S.A. 48:2-21.16(b).]
Furthermore, the Legislature no longer allows the BPU to regulate or prescribe rates or costs of services for a telecommunications carrier's competitive services. N.J.S.A. 48:2-21.19(a). However, for all noncompetitive/regulated services, like switched access, the BPU may "[f]ix just and reasonable individual rates [or] joint rates . . . whenever [it] shall determine any existing rate . . . to be unjust, unreasonable, insufficient or unjustly discriminatory or preferential." N.J.S.A. 48:2-21(b)(1). The requirement for "just and reasonable" rates applies whether the BPU is setting rates under a traditional methodology, N.J.S.A. 48:2-21(b), or under a plan of alternative regulation. N.J.S.A. 48:2-21.18(a)(2). See In re Elizabethtown Water Co., supra, 107 N.J. at 450 (noting one of the BPU's most important functions is to fix "just and reasonable" rates).
Historically, the phrase "just and reasonable" meant rates that would enable the utility: (1) to recover its operating and capital costs of providing the service, and (2) to earn a rate of return "sufficient to assure its financial health," State Farm Mut. Auto Ins. Co. v. State, 124 N.J. 32, 48-49 (1991), that is, a reasonable rate of return on its investment in exchange for the provision of proper service to consumers and the general public. In re Valley Rd. Sewerage Co., 285 N.J. Super. 202, 209 (App. Div. 1995). In fact, appellants claim that rates, to be constitutional, must allow a utility to recover all of its costs, along with a return on its investment commensurate with the risks of that business. We reject this contention.
Even though no particular level of profit was ever required above what was adequate to attract and retain invested capital, State Farm Mut. Auto Ins., supra, 124 N.J. at 48, determining the rate base was fundamental in those older cases. See, e.g., N.J. Bell Tel. Co., supra, 162 N.J. Super. at 73 ("Involved in the determination of reasonableness are an examination of the company's rate base, its income and expenses, and the rate of return which is developed by relating its income to its rate base."). In fact, the important detail in those cases was the overall impact of the rates on the utility company. The United States Supreme Court in Hope Natural Gas, supra, 320 U.S. at 602, 64 S. Ct. at 287-88, 88 L. Ed. at 345 (citations omitted), stated: "[I]t is the result reached not the method employed which is controlling. It is not theory but the impact of the rate order which counts. . . . The fact that the method employed to reach that result may contain infirmities is not then important." And in In re Permian Basin Area Rate Cases, 390 U.S. 747, 767, 88 S. Ct. 1344, 1360, 20 L. Ed. 2d 312, 336 (1968) (quoting Fed. Power Comm'n v. Natural Gas Pipeline Co. of Am., 315 U.S. 575, 585, 62 S. Ct. 736, 743, 86 L. Ed. 1037, 1049 (1942)), the Supreme Court declared that a rate within the "'zone of reasonableness'" will not be set aside.
Those courts, nevertheless, acknowledged that the BPU was not legislatively bound to use any particular formula or combination of formulas to set rates, Hope Natural Gas, supra, 320 U.S. at 602, 64 S. Ct. at 287, 88 L. Ed. at 344, and the selection of its ratemaking methodology involved policy decisions particularly within the agency's discretion. Duquesne Light Co. v. Barasch, 488 U.S. 299, 314-15, 109 S. Ct. 609, 619, 102 L. Ed. 2d 646, 661 (1989). See In re Pub. Serv. Coordinated Transp., 5 N.J. 196, 214 (1950) (noting the BPU has "broad discretion" in ratemaking).
It is those latter principles that are still applicable today. See generally Verizon Commc'ns Inc., supra, 535 U.S. at 467, 122 S. Ct. at 1646, 152 L. Ed. 2d at 701 (providing an historical discussion of rate setting). In fact, it is now clear the BPU is not required to calculate a rate base in certain circumstances. N.J.S.A. 48:2-21.2 states:
In arriving at any determination as to the justness or reasonableness of any existing rate, fare or charge or in prescribing a just and reasonable rate, fare or charge, the [BPU] shall not be bound:
1. To find a rate base, if it determines that
(a) the applicable operating expenses plus depreciation and taxes of conducting the business, for which the rate, fare or charge is established, computed on the basis of the 12 months next preceding the month in which the proceeding is initiated, exceeds the revenue from such operation, during said period, under the existing rates, fares or charges and that the revenue under the proposed increased rates, fares or charges will not exceed such operating expenses, depreciation and taxes, or
(b) the gross operating revenue of the public utility, computed on the basis of the 12 months next preceding the month in which the proceeding is initiated, exceeds the depreciated book cost of its property used and useful in its business as a public utility, or
(c) the product or service is a new offering and not covered by an existing rate, fare or charge approved by the board.
When the [BPU] shall prescribe a rate, fare or charge without finding a rate base, it shall, in its determination, make a finding of the facts on the basis of which it prescribed such rate, fare or charge.
Also, the BPU's power in N.J.S.A. 48:2-21.18 to regulate a LEC using an alternative form of regulation means that it can employ "a form of regulation . . . other than [the] traditional rate base, rate of return regulation . . . and may include, but not be limited to, the use of an index, formula, price caps, or zone of rate freedom." N.J.S.A. 48:2-21.17. And the TCA, which requires each ILEC to provide interconnections at "rates, terms, and conditions that are just, reasonable, and nondiscriminatory," 47 U.S.C.A. § 251(c)(2)(D), states its "pricing standards" as:
Determinations by a State commission of the just and reasonable rate for the interconnection of facilities and equipment . . .
(A) shall be-
(i) based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the interconnection or network element (whichever is applicable), and
(ii) nondiscriminatory, and
(B) may include a reasonable profit.
[47 U.S.C.A. § 252(d)(1).]
Thus, recovery of a reasonable profit, or indeed any profit, is no longer required.
"It is, however, plain that the 'power to regulate is not a power to destroy,' and that maximum rates must be calculated for a regulated class in conformity with the pertinent constitutional limitations." In re Permian Basin Area Rate Cases, supra, 390 U.S. at 769, 88 S. Ct. at 1361, 20 L. Ed. 2d at 337 (quoting Stone v. Farmers' Loan & Trust Co., 116 U.S. 307, 331, 6 S. Ct. 334, 345, 29 L. Ed. 636, 644 (1886)) (other citations omitted). That is, if the rate does not afford the utility sufficient revenue, the State can be judged to have taken the use of utility property without paying just compensation. "By long standing usage in the field of rate regulation, the 'lowest reasonable rate' is one which is not confiscatory in the constitutional sense." Fed. Power Comm'n, supra, 315 U.S. at 585, 62 S. Ct. at 742, 86 L. Ed. at 1049. Nevertheless, "neither law nor economics has yet devised generally accepted standards for the evaluation of rate-making orders." In re Permian Basin Area Rate Cases, supra, 390 U.S. at 790, 88 S. Ct. at 1372, 20 L. Ed. 2d at 349.
Our Supreme Court held in In re Public Service Coordinated Transport, supra, 5 N.J. at 225, We can say, however, that the rate which a public utility may reasonably charge should be sufficient to encourage good management and furnish a reward for efficiency, to enable the utility, under efficient and economical operation, to maintain and support its credit; and to enable it to raise money necessary for the proper discharge of its public duties. It can never be more than the reasonable worth of the service supplied; neither can it be fixed so low as to be confiscatory. If within these limits and supported by competent evidence, rates set by the [BPU] would clearly be just and reasonable.
It is clear that when an administrative body renders a decision and fails to make adequate findings of fact and express reasoning which, when applied to the found facts, led to the conclusion below, the decision cannot stand. Lister v. J.B. Eurell Co., 234 N.J. Super. 64, 73 (App. Div. 1989). Those findings must be "'sufficiently specific under the circumstances of the particular case to enable the reviewing court to intelligently review an administrative decision and ascertain if the facts upon which the order is based afford a reasonable basis for such order.'" Ibid. (quoting N.J. Bell Tel. Co. v. Commc'ns Workers of Am., 5 N.J. 354, 377 (1950)).
Indeed, our courts "cannot accept without question an agency's conclusory statements, even when they represent an exercise in agency expertise." Balagun v. N.J. Dep't of Corr., 361 N.J. Super. 199, 202-03 (App. Div. 2003). It is settled that an "administrative agency must set forth basic findings of fact supported by the evidence and supporting the ultimate conclusions and final determination so that the parties and any reviewing tribunal will know the basis on which the final decision was reached." Riverside Gen. Hosp. v. N.J. Hosp. Rate Setting Comm'n, 98 N.J. 458, 468 (1985). Without findings of fact supported by the record and supporting the ultimate determination, the agency decision is an arbitrary, capricious, and unreasonable action. In re Issuance of a Permit by Dep't of Envtl. Prot. to Ciba-Geigy Corp., 120 N.J. 164, 173 (1990).
"The requirement of findings is far from a technicality and is a matter of substance." Commc'ns Workers of Am., supra, 5 N.J. at 375. See In re Denial of Reg'l Contribution Agreement Between Galloway Twp. & City of Bridgeton, 418 N.J. Super. 94, 103 (App. Div. 2011) (stating the lack of fact-finding "is more than a procedural flaw"). Justice requires "a clear and concise demonstration that the litigants have been heard and their arguments considered." Bailey v. Bd. of Review, 339 N.J. Super. 29, 33 (App. Div. 2001).
Although it would have been preferable for the BPU to have more thoroughly articulated specific factual findings and analysis of the record, particularly in a case such as the present one involving a complex technical subject, we are satisfied the challenged order contained findings and conclusions sufficient for judicial review and to demonstrate that the parties were heard and their arguments considered by the agency. Moreover, the BPU did reference the record in order to provide examples for its reasoning. This case is distinguishable from In re Denial of Regional Contribution Agreement, supra, 418 N.J. Super. at 99-100, in which we found an agency insufficiently articulated findings of fact for judicial review where the agency merely quoted the conclusion of its staff rather than providing its own findings with reference to data and information in the record. Nor does the decision suffer from the deficiency identified in Pitts v. Division of New Jersey Racing Commission, 185 N.J. Super. 190, 196 (App. Div. 1982), where an agency's "one sentence decision ('Ruling') . . . [was] entirely lacking in findings and conclusions."
Here, all parties contributed to a large record of extremely complex financial and technical evidence, and the BPU did make findings of fact from that evidence to support its policy decisions to lower switched access rates, to eliminate the historical subsidies included in those rates, and to impose intrastate rates mirroring interstate rates. Indeed, even appellants recognize the BPU's order contains "general subsidiary findings" and provided, albeit cursory, "reasons for those few findings."
Furthermore, the BPU was not required to explain why it rejected or disregarded some evidence, even if there was evidence on all sides of the issues. We disagree with appellants' argument that the BPU was required to discuss what it "thought about" each piece of evidence presented, and why it "rejected" or "disregarded" some evidence and accepted other evidence as support.
Appellants' reliance on Universal Camera Corp. v. National Labor Relations Board, 340 U.S. 474, 71 S. Ct. 456, 95 L. Ed. 456 (1951) is misplaced. In that case, the United States Supreme Court explained that the newly enacted federal Administrative Procedure Act required that a federal agency's substantial review of the evidence "must take into account whatever in the record fairly detracts from its weight." Id. at 487-88, 71 S. Ct. at 464, 95 L. Ed. at 467. Neither New Jersey's case law nor its statutes have the same requirement, and while it might have been helpful to understand why the BPU rejected or disregarded portions of the evidence, N.J.S.A. 48:2- 46 allows reversals only when there is no evidence to support the agency's order.
Appellants claim: (1) the BPU rejected all of the cost models, and then never pointed out what evidence it used to determine the FCC's interstate rates would be just, reasonable and not confiscatory; (2) the BPU rejected all of the cost models without identifying any particular flaws or overstatements, and then ignored the rebuttal evidence in support of those models; (3) the BPU provided no justification for deciding to exclude local loop costs from the fees, even though the record showed that local loops are necessary for the actual completion and termination of intrastate toll calls; and (4) the BPU failed to make any company-specific factual findings regarding the impact of the reduced rates, even in light of the evidence that those fees would cause the parties to suffer massive losses in revenue. We disagree.
Contrary to appellants' arguments, the BPU was not required to make carrier-specific factual findings regarding the impact of the reduced rates. In In re Permian Basin Area Rate Cases, supra, 390 U.S. at 769, 88 S. Ct. at 1361, 20 L. Ed. 2d at 337, the Supreme Court declared that an agency was not constitutionally prohibited from determining and imposing rates on a regulated group without first evaluating the separate financial position of each group member. It was "sufficient if the agency ha[d] before it representative evidence, ample in quantity to measure with appropriate precision the financial and other requirements of the pertinent parties." Ibid. Thus, an agency can impose fees even if some members would be affected financially more than others. Ibid.
Furthermore, it was not unreasonable for the BPU to reject the cost studies submitted by the CLECS. In fact, the BPU rejected every cost study submitted by participants in the action, explaining "[t]he record shows that each and every cost model presented in this proceeding overstates, and in some cases, grossly overstates intrastate switched access costs." Contrary to appellants' arguments, the BPU provided specific reasons for such decisions, noting the flaws in the cost studies included, but were not limited to, inappropriately inflated costs of capital, common overheads, and depreciation. Moreover, the BPU even provided a specific example of how such rates were inflated, explaining that the loop costs, which were some of the largest cost elements in many of these studies, were inappropriately included in the access cost models.
Moreover, the BPU's decision to reject the cost studies is amply supported by the record. For example, the BPU correctly observed that including local loop costs in the studies was inappropriate as it inflated the cost. Appellants' own expert testified that local loop costs are inherently tied to local service; in other words, once a LEC incurs the loop cost for the local service, it incurs no further costs associated with the loop for additional services. Thus, despite the fact that CLECs only offer bundled services, meaning one cannot purchase solely local calling, the loop access costs do not directly affect the switched access associated with long distance services. Nor does the cost of furnishing the loop affect the cost for switching access to justify the loop cost's presence in the cost analysis.
The CLECs submitted only two cost studies, ONE COMM and PAETEC, and one of their experts testified these studies were "based on unrealistic, uneconomic and non-forward looking inputs." Moreover, when the inflated costs were adjusted, the record provides that both ONE COMM's and PAETEC's costs fell below their interstate access rates.
Nor were these studies representative of the CLECs as a whole. Even appellants' witnesses testified that the results of the PAETEC study were somewhat "unique in relation to networks operated by other CLECs," because the structure of its network resulted in substantially larger switching costs, one that is "higher than it might otherwise be for more typical carriers."
The witnesses also admitted that the depreciation values employed in PAETEC's cost study was a shorter economic life than the traditional value, which they felt would be "too long for cost model purposes." Because of such differences between PAETEC and ONE COMM, CLECs' witnesses agreed that comparing certain aspects of each CLEC, such as the shared and common cost percentages, with one another "will almost certainly result in an 'apples to oranges' comparison." Consequently, neither cost study submitted was representative of the CLECs as a group, and thus, it was not unreasonable for the BPU to summarily reject them.
Ultimately, although the BPU should have provided a clearer analysis explaining its rejection of the cost studies, it is not completely deficient of fact-finding, and all specifics that may be missing can be inferred from the order. Moreover, because of the highly confidential material contained in the record, we can infer based on the general examples given in the BPU's order that the specialized agency thoroughly considered all the facts and documentation presented to it in the record to reach the conclusions that the cost studies were overstated. Thus, the BPU's order was not arbitrary and capricious, rather, it was based on sufficient, credible evidence contained in the record.
Appellants urge us to reverse the order, contending the BPU's new rates and policy of uniformly lowering intrastate rates to interstate levels are arbitrary, capricious, unreasonable, and unconstitutionally confiscatory. Specifically, they complain the BPU erred by establishing uniform rates for all carriers while failing to recognize the significant differences in cost structures, customer bases, and revenue recovery opportunities between CLECs and ILECs, and they assert that switched access rates cannot be set above the costs for that service. In this regard, they assert the financial impact of the new rates cannot be analyzed as a whole with unregulated rates; in fact, they claim they cannot raise their unregulated rates to recoup any losses from the new rates because market forces will put them at a significant disadvantage. Finally, they assert the BPU erred by finding it has monopoly power over intrastate switched access rates and by eliminating the disparities between intrastate and interstate rates.
Relying on Federal Power Commission v. Texaco, Inc., 417 U.S. 380, 94 S. Ct. 2315, 41 L. Ed. 2d 141 (1974), appellants claim intrastate rates cannot simply mirror interstate rates. Appellants' reliance is misplaced. There, the Supreme Court explained that requiring every rate of a natural gas company to be just and reasonable did not mean the costs of each individual company had to be ascertained and its rates fixed with respect to its own costs. Id. at 387, 94 S. Ct. at 2321, 41 L. Ed. 2d at 150. The Court also noted that market price was not the "final measure" of determining what was just and reasonable. Id. at 397, 94 S. Ct. at 2326, 41 L. Ed. 2d at 156. However, market price "may certainly be taken into account along with other factors," and the market price could, in an individual case, coincide with just and reasonable rates. Id. at 399, 94 S. Ct. 2327, 41 L. Ed. 2d at 157.
Nevertheless, relying on Brooks-Scanlon Co. v. Railroad Commission of Louisiana, 251 U.S. 396, 40 S. Ct. 183, 64 L. Ed. 323 (1920), appellants argue the BPU erred by counting on the LECs' abilities to recover any losses from the new switched access rates by using revenue generated from their competitive/unregulated services. Brooks-Scanlon involved an agency's inability to compel a railroad to operate at a loss from an unprofitable train line. Id. at 398-99, 40 S. Ct. at 184, 64 L. Ed. at 326-27. The Supreme Court observed that a state-chartered railroad utility "cannot be compelled to carry on even a branch of business at a loss, much less the whole business of carriage." Id. at 399, 40 S. Ct. at 184, 64 L. Ed. at 326. Although it could not be forced to operate, if the railroad continued to exercise the power conferred to it by the State, "the [S]tate may require it to fulfil[l] an obligation imposed by the charter even though fulfil[l]ment in that particular may cause a loss." Ibid. Therefore, if the operation resulted in a loss, the railroad was entitled to withdraw its grant by discontinuing the use. Id. at 399, 40 S. Ct. 184, 64 L. Ed. at 326-27.
Contrary to appellants' assertion, the Brooks-Scanlon case does not prevent the BPU from lowering intrastate access rates. Instead, if certain rates are set at a loss, CLECs cannot be "compelled" or forced to continue operating. Here, although CLECs are not being compelled by the State to maintain their operation at a loss, if they continue their operation, they must abide by the regulations and rates set by the BPU, provided those rates are just and reasonable.
We are satisfied the rates established by the BPU were just and reasonable. There is nothing preventing the BPU from lowering switched access rates and inherently causing all New Jersey LECs to make up any revenue losses by using profits from their competitive/unregulated services or by raising those rates to generate more profit. N.J.S.A. 48:2-21.18(c) states: "No local exchange telecommunications company may use revenues earned or expenses incurred in conjunction with noncompetitive services to subsidize competitive services." The statute, contrary to appellants' arguments, does not imply the reverse is also prohibited ---- that revenues earned from competitive/unregulated services may be used to subsidize noncompetitive/regulated services. Therefore, the BPU is not prevented from lowering the switched access rates so as to cause all LECs to make up revenue losses from their competitive/unregulated services.
Furthermore, the BPU did not have an accurate, reliable depiction of the CLECs' switch access costs to rely upon when setting the rates because the reports were flawed and contained inflated costs. The record demonstrated that once the CLECs' cost studies were adjusted to account for the flaws, the costs were significantly lower than reported and were ultimately lower than interstate rates. Therefore, given the lack of accurate information on the CLECs' costs, it was not unreasonable for the BPU to mirror interstate rates when setting intrastate switched access rates.
Moreover, based on the evidence presented in the confidential record, even though it was clear appellants have smaller customer bases in New Jersey than the ILECs, the interstate rate ultimately adopted by the BPU's order was less than every LEC's costs as reported by them in their cost studies. Despite the fact the BPU rejected the cost studies, every LEC is in the same position, and the CLECs are hampered by less regulation of their retail and wholesale rates than the ILECs. Moreover, in contrast to ILECs, the CLECs, as newer market entrants, have no COLR obligations to serve residential customers in rural or high-cost areas and do not bear the historical legacy of having to maintain low retail prices for residential consumers. Even if such higher costs exist, CLECs have the ability to subsidize any losses from the lower switched access rates by charging higher local service rates on the wholesale level, over which they have market power.
More important, even taking as true appellants' assertions that they have higher capital and operating costs than the ILECs, and generally are in more precarious financial situations, there was sufficient evidence before the BPU to support its rates. That is, the evidence clearly showed from the testimony, and was supported by the testimony of appellants' own witnesses, that CLEC networks and ILEC networks have the "same interconnection functionality" because "any time one of their customers calls a customer of a wireline local telephone company, unless the call is handled end to end by the same company, it must be handed off to the LEC serving the called party so that the latter LEC can deliver the call to the called party." The Rate Counsel's witnesses further declared that intrastate access was "functionally the same as interstate access." Thus, the BPU's mirroring interstate and intrastate rates was not arbitrary. Indeed, there was evidence presented that allowing any disparity between ILEC and CLEC competitors distorts the competitive market and provides CLECs with an unfair competitive advantage by allowing them to collect more for the same service. This, however, would be in direct contravention of the Legislature's policy in N.J.S.A. 48:2-21.16 of promoting competition.
If an individual CLEC can justify a higher intrastate switched access rate, it can always file a petition for cost justification with the BPU seeking approval for a higher rate, since switched access rates are still regulated.