IN RE: FCC 11-161 ( 2014 )

FILED
United States Court of Appeals
Tenth Circuit
May 23, 2014
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
IN RE: FCC 11-161 No. 11-9900
DIRECT COMMUNICATIONS CEDAR Consolidated Case Nos.:
VALLEY, LLC, a Utah limited liability 11-9581, 11-9585, 11-9586, 11-9587,
company; TOTAH COMMUNICATIONS, 11-9588, 11-9589, 11-9590, 11-9591, 11-
INC., an Oklahoma corporation; H & B 9592, 11-9594, 11-9595, 11-9596, 11-
COMMUNICATIONS, INC., a Kansas 9597, 12-9500, 12-9510, 12-9511, 12-
Corporation; MOUNDRIDGE 9513, 12-9514, 12-9517, 12-9520, 12-
TELEPHONE COMPANY, a Kansas 9521, 12-9522, 12-9523, 12-9524, 12-
corporation; PIONEER TELEPHONE 9528, 12-9530, 12-9531, 12-9532, 12-
ASSOCIATION, INC., a Kansas 9533, 12-9534, 12-9575
corporation; TWIN VALLEY
TELEPHONE, INC., a Kansas corporation;
PINE TELEPHONE COMPANY, INC., an
Oklahoma corporation; PENNSYLVANIA
PUBLIC UTILITY COMMISSION;
CHOCTAW TELEPHONE COMPANY;
CORE COMMUNICATIONS, INC.;
NATIONAL ASSOCIATION OF STATE
UTILITY CONSUMER ADVOCATES;
NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION d/b/a
NTCA-THE RURAL BROADBAND
ASSOCIATION; CELLULAR SOUTH,
INC.; AT&T INC.; HALO WIRELESS,
INC.; THE VOICE ON THE NET
COALITION, INC.; PUBLIC UTILITIES
COMMISSION OF OHIO; TW
TELECOM INC.; VERMONT PUBLIC
SERVICE BOARD; TRANSCOM
ENHANCED SERVICES, INC.; THE
STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS;
CENTURYLINK, INC.; GILA RIVER
INDIAN COMMUNITY; GILA RIVER
TELECOMMUNICATIONS, INC.;
ALLBAND COMMUNICATIONS
COOPERATIVE; NORTH COUNTY
COMMUNICATIONS CORPORATION;
UNITED STATES CELLULAR
CORPORATION; PR WIRELESS, INC.;
DOCOMO PACIFIC, INC.; NEX-TECH
WIRELESS, LLC; CELLULAR
NETWORK PARTNERSHIP, A LIMITED
PARTNERSHIP; U.S. TELEPACIFIC
CORP.; CONSOLIDATED
COMMUNICATIONS HOLDINGS, INC.;
NATIONAL ASSOCIATION OF
REGULATORY UTILITY
COMMISSIONERS; RURAL
TELEPHONE SERVICE COMPANY,
INC.; ADAK EAGLE ENTERPRISES
LLC; ADAMS TELEPHONE
COOPERATIVE; ALENCO
COMMUNICATIONS, INC.;
ARLINGTON TELEPHONE COMPANY;
BAY SPRINGS TELEPHONE
COMPANY, INC.; BIG BEND
TELEPHONE COMPANY, INC.; THE
BLAIR TELEPHONE COMPANY;
BLOUNTSVILLE TELEPHONE LLC;
BLUE VALLEY TELE-
COMMUNICATIONS, INC.; BLUFFTON
TELEPHONE COMPANY, INC.; BPM,
INC., d/b/a Noxapater Telephone
Company; BRANTLEY TELEPHONE
COMPANY, INC.; BRAZORIA
TELEPHONE COMPANY; BRINDLEE
MOUNTAIN TELEPHONE LLC; BRUCE
TELEPHONE COMPANY, INC.; BUGGS
ISLAND TELEPHONE COOPERATIVE;
CAMERON TELEPHONE COMPANY,
LLC; CHARITON VALLEY
TELEPHONE CORPORATION;
CHEQUAMEGON COMMUNICATIONS
2
COOPERATIVE, INC.; CHICKAMAUGA
TELEPHONE CORPORATION;
CHICKASAW TELEPHONE
COMPANY; CHIPPEWA COUNTY
TELEPHONE COMPANY; CITIZENS
TELEPHONE COMPANY; CLEAR
LAKE INDEPENDENT TELEPHONE
COMPANY; COMSOUTH
TELECOMMUNICATIONS, INC.;
COPPER VALLEY TELEPHONE
COOPERATIVE; CORDOVA
TELEPHONE COOPERATIVE;
CROCKETT TELEPHONE COMPANY,
INC.; DARIEN TELEPHONE
COMPANY; DEERFIELD FARMERS'
TELEPHONE COMPANY; DELTA
TELEPHONE COMPANY, INC.; EAST
ASCENSION TELEPHONE COMPANY,
LLC; EASTERN NEBRASKA
TELEPHONE COMPANY; EASTEX
TELEPHONE COOP., INC.; EGYPTIAN
TELEPHONE COOPERATIVE
ASSOCIATION; ELIZABETH
TELEPHONE COMPANY, LLC;
ELLIJAY TELEPHONE COMPANY;
FARMERS TELEPHONE
COOPERATIVE, INC.; FLATROCK
TELEPHONE COOP., INC.; FRANKLIN
TELEPHONE COMPANY, INC.;
FULTON TELEPHONE COMPANY,
INC.; GLENWOOD TELEPHONE
COMPANY; GRANBY TELEPHONE
LLC; HART TELEPHONE COMPANY;
HIAWATHA TELEPHONE COMPANY;
HOLWAY TELEPHONE COMPANY;
HOME TELEPHONE COMPANY (ST.
JACOB, ILL.); HOME TELEPHONE
COMPANY (MONCKS CORNER, SC);
HOPPER TELECOMMUNICATIONS
LLC; HORRY TELEPHONE
COOPERATIVE, INC.; INTERIOR
3
TELEPHONE COMPANY; KAPLAN
TELEPHONE COMPANY, INC.; KLM
TELEPHONE COMPANY; CITY OF
KETCHIKAN, ALASKA, d/b/a KPU
Telecommunications; LACKAWAXEN
TELECOMMUNICATIONS SERVICES,
INC.; LAFOURCHE TELEPHONE
COMPANY, LLC; LA HARPE
TELEPHONE COMPANY, INC.;
LAKESIDE TELEPHONE COMPANY;
LINCOLNVILLE TELEPHONE
COMPANY; LORETTO TELEPHONE
COMPANY, INC.; MADISON
TELEPHONE COMPANY;
MATANUSKA TELEPHONE
ASSOCIATION, INC.; MCDONOUGH
TELEPHONE COOPERATIVE; MGW
TELEPHONE COMPANY, INC.; MID
CENTURY COOPERATIVE.; MIDWAY
TELEPHONE COMPANY; MID-MAINE
TELECOM LLC; MOUND BAYOU
TELEPHONE & COMMUNICATIONS,
INC.; MOUNDVILLE TELEPHONE
COMPANY, INC.; MUKLUK
TELEPHONE COMPANY, INC.;
NATIONAL TELEPHONE OF
ALABAMA, INC.; ONTONAGON
COUNTY TELEPHONE COMPANY;
OTELCO MID-MISSOURI LLC;
OTELCO TELEPHONE LLC;
PANHANDLE TELEPHONE
COOPERATIVE, INC.; PEMBROKE
TELEPHONE COMPANY, INC.;
PEOPLES TELEPHONE CO.; PEOPLES
TELEPHONE COMPANY; PIEDMONT
RURAL TELEPHONE COOPERATIVE,
INC.; PINE BELT TELEPHONE
COMPANY, INC.; PINE TREE
TELEPHONE LLC; PIONEER
TELEPHONE COOPERATIVE, INC.;
POKA LAMBRO TELEPHONE
4
COOPERATIVE, INC.; PUBLIC
SERVICE TELEPHONE COMPANY;
RINGGOLD TELEPHONE COMPANY;
ROANOKE TELEPHONE COMPANY,
INC.; ROCK COUNTY TELEPHONE
COMPANY; SACO RIVER TELEPHONE
LLC; SANDHILL TELEPHONE
COOPERATIVE, INC.; SHOREHAM
TELEPHONE LLC; THE SISKIYOU
TELEPHONE COMPANY; SLEDGE
TELEPHONE COMPANY; SOUTH
CANAAN TELEPHONE COMPANY;
SOUTH CENTRAL TELEPHONE
ASSOCIATION; STAR TELEPHONE
COMPANY, INC.; STAYTON
COOPERATIVE TELEPHONE
COMPANY; THE NORTH-EASTERN
PENNSYLVANIA TELEPHONE
COMPANY; TIDEWATER TELECOM,
INC.; TOHONO O'ODHAM UTILITY
AUTHORITY; UNITEL, INC.; WAR
TELEPHONE LLC; WEST CAROLINA
RURAL TELEPHONE COOPERATIVE,
INC.; WEST TENNESSEE TELEPHONE
COMPANY, INC.; WEST WISCONSIN
TELCOM COOPERATIVE, INC.;
WIGGINS TELEPHONE ASSOCIATION;
WINNEBAGO COOPERATIVE
TELECOM ASSOCIATION; YUKON
TELEPHONE CO., INC.; ARIZONA
CORPORATION COMMISSION;
WINDSTREAM CORPORATION;
WINDSTREAM COMMUNICATIONS,
INC.,
Petitioners,
v.
FEDERAL COMMUNICATIONS
COMMISSION; UNITED STATES OF
5
AMERICA,
Respondents,
and
SPRINT NEXTEL CORPORATION;
LEVEL 3 COMMUNICATIONS, LLC;
CENTURYLINK, INC.; CONNECTICUT
PUBLIC UTILITIES
REGULATORY AUTHORITY;
INDEPENDENT TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
WESTERN TELECOMMUNICATIONS
ALLIANCE; NATIONAL EXCHANGE
CARRIER ASSOCIATION, INC.;
ARLINGTON TELEPHONE COMPANY;
THE BLAIR TELEPHONE COMPANY;
CAMBRIDGE TELEPHONE COMPANY;
CLARKS TELECOMMUNICATIONS
CO.; CONSOLIDATED TELEPHONE
COMPANY; CONSOLIDATED TELCO,
INC.; CONSOLIDATED TELECOM,
INC.; THE CURTIS TELEPHONE
COMPANY; EASTERN NEBRASKA
TELEPHONE COMPANY; GREAT
PLAINS COMMUNICATIONS, INC.; K.
& M. TELEPHONE COMPANY, INC.;
NEBRASKA CENTRAL TELEPHONE
COMPANY; NORTHEAST NEBRASKA
TELEPHONE COMPANY; ROCK
COUNTY TELEPHONE COMPANY;
THREE RIVER TELCO; RCA - The
Competitive Carriers Association; RURAL
TELECOMMUNICATIONS GROUP,
INC.; T-MOBILE USA, INC., CENTRAL
TEXAS TELEPHONE COOPERATIVE,
INC.; VENTURE COMMUNICATIONS
COOPERATIVE, INC.; ALPINE
COMMUNICATIONS, LC; EMERY
TELCOM; PEÑASCO VALLEY
6
TELEPHONE COOPERATIVE, INC.;
SMART CITY TELECOM; SMITHVILLE
COMMUNICATIONS, INC.; SOUTH
SLOPE COOPERATIVE TELEPHONE
CO., INC.; SPRING GROVE
COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC;
VIRGINIA STATE CORPORATION
COMMISSION OF THE STATE OF
KANSAS; MONTANA PUBLIC
SERVICE COMMISSION; VERIZON
WIRELESS; VERIZON; AT&T INC.;
COX COMMUNICATIONS, INC.;
NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION d/b/a
NTCA-THE RURAL BROADBAND
ASSOCIATION; INDEPENDENT
TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
NATIONAL EXCHANGE CARRIER
ASSOCIATION, INC. (NECA),
COMCAST CORPORATION; VONAGE
HOLDINGS CORPORATION; RURAL
TELECOMMUNICATIONS GROUP,
INC.; NATIONAL CABLE &
TELECOMMUNICATIONS
ASSOCIATION; CENTRAL TEXAS
TELEPHONE COOPERATIVE, INC.;
VENTURE COMMUNICATIONS
COOPERATIVE, INC.; ALPINE
COMMUNICATIONS, LC; EMERY
TELCOM; PEÑASCO VALLEY
TELEPHONE COOPERATIVE, INC.;
SMART CITY TELECOM; SMITHVILLE
7
COMMUNICATIONS, INC.; SOUTH
SLOPE COOPERATIVE TELEPHONE
CO., INC.; SPRING GROVE
COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC,
Intervenors.
STATE MEMBERS OF THE FEDERAL-
STATE JOINT BOARD ON UNIVERSAL
SERVICE,
Amicus Curiae.
PETITIONS FOR REVIEW OF ORDERS OF THE
FEDERAL COMMUNICATIONS COMMISSION
(FCC Nos. 11-161, 12-47)
Argued for Petitioners:
James Bradford Ramsay, National Association of Regulatory Utility Commissioners,
Washington, D.C., Russell Blau, Bingham McCutchen LLP, Washington, D.C., Robert
Allen Long, Jr., Covington & Burling, Washington, D.C., Michael B. Wallace, Wise
Carter Child & Caraway, Jackson, Mississippi, Pratik A. Shah, Akin Gump Strauss Hauer
& Feld LLP, Washigton, D.C, Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, Joseph K. Witmer, Pennsylvania Public Utility Commission,
Harrisburg, Pennsylvania, Christopher F. Van de Verg, Annapolis, Maryland, Lucas M.
Walker, Molo Lamken, Washington, D.C., Don L. Keskey, Public Law Resource Center
PLLC, Lansing, Michigan, Harvey Reiter, Stinson Leonard Street LLP, Washington,
8
David Bergmann, Columbus, Ohio, E. Ashton Johnston, Communications Law Counsel,
P.C., Washington, D.C., Heather M. Zachary, Wilmer Cutler Pickering Hale and Dorr
LLP, Washington, D.C., and W. Scott McCollough, McCollough Henry, Austin, Texas.
Argued for Respondents:
Richard K. Welch, James M. Carr, and Maureen Katherine Flood, Federal
Communications Commission, Washington, D.C.
Argued for Respondents-Intervenors:
Scott H. Angstreich, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.,
Washington, D.C., Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo,
P.C., and Samuel L. Feder, Jenner & Block LLP, Washington, D.C.
Appearances for Petitioners:
David R. Irvine, Salt Lake City, Utah, and Alan L. Smith, Salt Lake City, Utah, for Direct
Communications Cedar Valley, LLC, Totah Communications, Inc., H&B
Communications, Inc., The Moundridge Telephone Company, Pioneer Telephone
Association, Inc., Twin Valley Telephone, Inc., and Pine Telephone Company, Inc.
Bohdan R. Pankiw, Kathryn G. Sophy, Shaun A. Sparks, and Joseph K. Witmer,
Pennsylvania Public Utility Commission, Harrisburg, Pennsylvania, for Pennsylvania
Public Utility Commission.
Benjamin H. Dickens, Jr. and Mary J. Sisak, Blooston, Mordkofsky, Dickens, Duffy &
Prendergrast, LLP, and Craig S. Johnson, Johnson & Sporleder, Jefferson City, Missuori,
for Choctaw Telephone Company.
James Christopher Falvey and Charles Anthony Zdebski, Eckert Seamens Cherin &
Mellott, Washington, D.C., for Core Communications, Inc.
David Bergmann, Columbus, Ohio, Paula Marie Carmody, Maryland’s Office of People’s
Counsel, Baltimore, Maryland, and Christopher J. White, New Jersey Division of Rate
Counsel, Office of the Public Advocate, Newark, New Jersey, for National Association of
State Utility Consumer Advocates.
Russell Blau and Tamar Elizabeth Finn, Bingham McCutchen LLP, Washington, D.C.,
for National Telecommunications Cooperative Association d/b/a NTCA-The Rural
9
Broadband Association, U.S. TelePacific Corp., and Western Telecommunications
Alliance.
Rebecca Hawkins and Michael B. Wallace, Wise Carter Child & Caraway, Jackson,
Mississippi, David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, for Cellular South Inc.
Daniel T. Deacon, Kelly P. Dunbar, Jonathan E. Nuechterlein, and Heather M. Zachary,
Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., and Christopher M.
Heimann and Gary L. Phillips, AT&T Services, Inc., Washington, D.C., for AT&T Inc.
W. Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent, II,
Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and Steven
H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Halo Wireless, Inc.
Jennifer P. Bagg and E. Ashton Johnston, Communications Law Counsel, P.C., and
Donna M. Lampert, Lampert, O’Connor & Johnston, P.C., Washington, D.C., and Glenn
Richards, Pillsbury Winthrop Shaw Pittman, Washington, D.C., for The Voice on the Net
Coalition, Inc.
John Holland Jones, Office of the Ohio Attorney General, Columbus, Ohio, for Public
Utilities Commission of Ohio.
Thomas Jones, David Paul Murray, and Nirali Patel, Willkie, Farr & Gallagher LLP,
Washington, D.C., for tw telecom inc.
Bridget Asay, Office of the Attorney General for the State of Vermont, Montpelier,
Vermont, for Vermont Public Service Board.
W. Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent, II,
Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and Steven
H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Transcom Enhanced
Services, Inc.
Robert A. Fox, Kansas Corporation Commission Topeka, Kansas, for The State
Corporation Commission of the State of Kansas.
Yaron Dori, Robert Allen Long, Jr., Gerard J. Waldron, Mark Mosier, and Michael
Beder, Covington & Burling, Washington, D.C., for CenturyLink, Inc.
10
John Boles Capehart, Akin Gump Strauss Hauer & Feld, Dallas, Texas, Sean Conway,
Patricia Ann Millett, and James Edward Tysse, Akin Gump Strauss Hauer & Feld,
Washington, D.C., and Michael C. Small, Akin Gump Strauss Hauer & Feld,
Washington, D.C., for Gila River Indian Community and Gila River
Telecommunications, Inc.
Don L. Keskey, Lansing Michigan, forAllband Communications Cooperative.
Roger Dale Dixon, Jr., Law Offices of Dale Dixon, Carlsbad, California, for North
County Communications Corporation.
David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,
Virginia, for United States Cellular Corporation.
David LaFuria, Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez &
Sachs, LLP, McLean, Virginia, for Petitioners PR Wireless, Inc. and Docomo Pacific,
Inc., Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, for Petitioners Nex-Tech Wireless, LLC, and Cellular Network
Partnership, A Limited Partnership.
Russell Blau, Bingham McCutchen LLP, Washington, D.C., for Consolidated
Communications Holdings, Inc.
James Bradford Ramsay and Holly R. Smith, National Association of Regulatory Utility
Commissioners, Washington, D.C., for National Association of Regulatory Utility
Commissioners.
David Cosson, Washington, D.C., H. Russell Frisby, Jr., Dennis Lane, and Harvey Reiter,
Stinson Leonard Street LLP, Washington, D.C., for Rural Independent Competitive
Alliance, Rural Telephone Service Company, Inc., Adak Eagle Enterprises LLC, Adams
Telephone Cooperative, Alenco Communications, Inc., Arlington Telephone Company,
Bay Springs Telephone Company, Big Bend Telephone Company, The Blair Telephone
Company, Blountsville Telephone LLC, Blue Valley Tele-communications, Inc., Bluffton
Telephone Company, Inc., BPM, Inc., Brantley Telephone Company, Inc., Brazoria
Telephone Company, Brindlee Mountain Telephone LLC, Bruce Telephone Company,
Inc., Buggs Island Telephone Cooperative, Cameron Telephone Company, LLC, Chariton
Valley Telephone Corporation, Chequamegon Communications Cooperative, Inc.,
Chickamauga Telephone Corporation, Chicksaw Telephone Company, Chippewa County
Telephone Company, Clear Lake Independent Telephone Company, Comsouth
Telecommunications, Inc., Copper Valley Telephone Cooperative, Cordova Telephone
Cooperative, Crockett Telephone Company, Inc., Darien Telephone Company, Deerfield
11
Famers’ Telephone Company, Delta Telephone Company, Inc., East Ascention
Telephone Company, LLC, Eastern Nebraska Telephone Company, Eastex Telephone
Coop., Inc., Egyptian Telephone Cooperative Association, Elizabeth Telephone
Company, LLC, Ellijay Telephone Company, Farmers Telephone Cooperative, Inc.,
Flatrock Telephone Coop., Inc., Franklin Telephone Company, Inc., Fulton Telephone
Company, Inc., Glenwood Telephone Company, Granby Telephone Company LLC, Hart
Telephone Company, Hiawatha Telephone Company, Holway Telephone Company,
Home Telephone Company (St. Jacob Illinois), Home Telephone Company (Moncks
Corner, South Carolina), Hopper Telecommunications LLC., Horry Telephone
Cooperative, Inc., Interior Telephone Company, Kaplan Telephone Company, Inc., KLM
Telephone Company, City of Ketchikan, Alaska, Lackawaxen Telecommunications
Services, Inc., Lafourche Telephone Company, LLC, La Harpe Telephone Company,
Inc., Lakeside Telephone Company, Lincolnville Telephone Company, Loretto
Telephone Company, Inc., Madison Telephone Company, Matanuska Telephone
Association, Inc., McDonough Telephone Coop., MGW Telephone Company, Inc., Mid
Century Cooperative, Midway Telephone Company, Mid-Maine Telecom, LLC, Mound
Bayou Telephone & Communications, Inc., Mondville Telephone Company, Inc.,
Mukluk Telephone Company, Inc., National Telephone of Alabama, Inc., Ontonagon
County Telephone Company, Otelco Mid-Missouri LLC, Otelco Telephone LLC,
Panhandle Telephone Cooperative, Inc., Pembroke Telephone Company, Inc., People’s
Telephone Company, Peoples Telephone Company, Piedmont Rural Telephone
Cooperative, Inc., Pine Belt Telephone Company, Inc., Pine Tree Telephone LLC,
Pioneer Telephone Cooperative, Inc., Poka Lambro Telephone Cooperative, Inc., Public
Service Telephone Company, Ringgold Telephone Company, Roanoke Telephone
Company, Inc., Rock County Telephone Company, Saco River Telephone LLC, Sandhill
Telephone Cooperative, Inc., Shoreham Telephone LLC, The Siskiyou Telephone
Company, Sledge Telephone Company, South Canaan Telephone Company, South
Central Telephone Association, Star Telephone Company, Inc., Stayton Cooperative
Telephone Company, The North-Eastern Pennsylvania Telephone Company, Tidewater
Telecom, Inc., Tohono O’Odham Utility Authority, Unitel, Inc., War Telephone LLC,
West Carolina Rural Telephone Cooperative, Inc., West Tennessee Telephone Company,
Inc., West Wisconsin Telecom Cooperative, Inc., Wiggins Telephone Association,
Winnebago Cooperative Telecom Association, Yukon Telephone Co., Inc.
Maureen A. Scott, Wesley Van Cleve, and Janet F. Wagner, Arizona Corporation
Commission, Legal Division, Phoenix, Arizona, for Arizona Corporation Commission.
Jeffrey A. Lamken and Lucas M. Walker, Molo Lamken, Washington, D.C.,
for Windstream Communications, Inc., and Windstream Corporation.
Appearances for Respondents:
12
Laurence Nicholas Bourne, James M. Carr, Maureen Katherine Flood, Jacob Matthew
Lewis, Joel Marcus, Matthew J. Dunne, and Richard K. Welch, Federal Communications
Commission, Washington, D.C., for the Federal Communications Commission.
Robert Nicholson and Robert J. Wiggers, United States Department of Justice,
Washington, D.C., for United States of America.
Appearances for Intervenors:
Thomas J. Moorman, Woods & Aitken LLP, Washington, D.C. and Paul M. Schudel,
Woods & Aitken LLP, Lincoln, Nebraska, for Arlington Telephone Company, The
Blair Telephone Company. Cambridge Telephone Company, Clarks
Telecommunications Co., Consolidated Telco, Inc., Consolidated Telephone
Company, Inc., Consolidated Telecom, Inc., The Curtis Telephone Company,
Eastern Nebraska Telephone Company, Great Plains Communications, Inc., K. &
M. Telephone Company, Inc., Nebraska Central Telephone Company, Northeast
Nebraska Telephone Company, Rock County Telephone Company and Three River
Telco.
Yaron Dori, Robert Allen Long, Jr., Gerard J. Waldron, Mark Mosier, and Michael
Beder, Covington & Burling, Washington, D.C., for CenturyLink, Inc.
Gerard J. Duffy, Benjamin H. Dickens, Jr., Robert M. Jackson, and Mary J. Sisak,
Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP, Washington, D.C., for 3
Rivers Telephone Cooperative, Inc. , Venture Communications Cooperative, Inc., Alpine
Communications, LC, Emery Telcom, Peñasco Valley Telephone Cooperative, Inc.,
Smart City Telecom, Smithville Communications, Inc., South Slope Cooperative
Telephone Co., Inc., Spring Grove Communications, Star Telephone Company, Walnut
Telephone Company, and West River Cooperative Telephone Company, Inc.
Ivan C. Evilsizer, Evilsizer Law Office, Helena, Montana, for Ronan Telephone
Company and Hot Springs Telephone Company.
Helen E. Disenhaus and Ashton Johnston, Lampert, O’Connor & Johnston, P.C.,
Washington, D.C., for Hypercube Telecom, LLC.
Raymond L. Doggett, Jr., Virginia State Corporation Commission, Richmond, Virginia,
for Virginia State Corporation Commission.
13
Dennis Lopach, Montana Public Service Commission, Helena, Montana, for Montana
Public Service Commission.
Christopher M. Heimann and Gary L. Phillips, AT&T Services, Inc., Washington, D.C.,
and Daniel T. Deacon, Kelly P. Dunbar, Jonathan E. Nuechterlein, and Heather M.
Zachary, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., for AT&T Inc.
J.G. Harrington and David E. Mills, Cooley, LLP, Washington, D.C., for Cox
Communications, Inc.
Scott H. Angstreich, Joshua D. Branson, Brendan J. Crimmins, Kellogg, Huber, Hansen,
Todd, Evans & Figel, P.L.L.C., Washington, D.C., and Michael E. Glover and
Christopher M. Miller, Arlington, Virginia, for Verizon and Verizon Wireless.
Russell Blau, Bingham McCutchen LLP, Washington, D.C., for National
Telecommunications Cooperative Association, d/b/a NTCA-The Rural Broadband
Association.
Clare Kindall, Office of the Attorney General Energy Department, New Britain,
Connecticut, for Connecticut Public Utilities Regulatory Authority.
Samuel L. Feder and Luke C. Platzer, Jenner & Block LLP, Washington, D.C., for
Comcast Corporation.
Christopher J. Wright, Wiltshire & Grannis, LLP, Washington, D.C., for Level 3
Communications, LLC, Vonage Holdings Corp., and Sprint Nextel Corporation.
Rick C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National
Cable & Telecommunications Association, Washington, D.C., and Ernest C. Cooper,
Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky &
Popeo, P.C., Washington, D.C., for National Cable & Telecommunications Association.
Genevieve Morelli, The Independent Telephone & Telecommunications Alliance,
Washington, D.C., for Independent Telephone & Telecommunications Alliance.
Gerard J. Duffy, Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP,
Washington, D.C., for Western Telecommunications Alliance.
Gregory Jon Vogt, Law Offices of Gregory J. Vogt, PLLC, Alexandria, Virginia, and
Richard A. Askoff, Sr., National Exchange Carrier Association, Inc., Whippany, New
Jersey for National Exchange Carrier Association.
14
Craig Edward Gilmore, L. Charles Keller, and David H. Solomon, Wilkinson, Barker,
Knauer, LLP, Washington, D.C., for T-Mobile USA, Inc.
Caressa Davison Bennet, Kenneth Charles Johnson, Anthony Veach, and Daryl Altey
Zakov, Bennet & Bennet, Bethesda, Maryland, for Rural Telecommunications Group,
Inc. and Central Telephone Cooperative, Inc.
Appearances for Amicus Curiae:
James Hughes Cawley, Pennsylvania Public Utility Commission, Harrisburg,
Pennsylvania, and James Bradford Ramsay, National Association of Regulatory Utility
Commissioners, Washington, D.C., for State Members of the Federal-State Joint Board
on Universal Service.
Counsel on the briefs:
David Cosson, H. Russell Frisby, Jr., Dennis Lane, Harvey Reiter, Don L. Keskey,
Maureen A. Scott, Wesley Van Cleve, Janet F. Wagner, Russell D. Lukas, David A.
LaFuria, Todd B. Lantor, Rebecca Hawkins, Michael B. Wallace, Yaron Dori, Robert
Allen Long, Jr., Gerard J. Waldron, Benjamin H. Dickens, Jr., Mary J. Sisak, Craig S.
Johnson, James C. Falvey, Charles A. Zdebski, David R. Irvine, Alan Lange Smith,
Patricia A. Millet, James Edward Tysse, Sean T. Conway, John Boles Capehart, Michael
C. Small, James Bradford Ramsay, Holly R. Smith, David Bergmann, Paula Marie
Carmody, Christopher J. White, Russell Blau, Tamar Finn, Roger Dale Dixon, Jr.,
Bohdan R. Pankiw, Kathryn G. Sophy, Joseph K. Witmer, Shaun A. Sparks, John H.
Jones, Robert A. Fox, Jennifer P. Bagg, E. Ashton Johnston, Donna N. Lampert, Glenn
Richards, W. Scott McCollough, Steven H. Thomas, Bridget Asay, David P. Murray,
Thomas Jones, and Nirali Patel on the Joint Preliminary Brief.
Don L. Keskey, Maureen A. Scott, Wesley Van Cleave, Janet F. Wagner, Robert Allen
Long, Jr., Gerard J. Waldron, Yaron Dori, Mark W. Mosier, Benjamin H. Dickens, Jr.,
Mary J. Sisak, Craig S. Johnson, Clare E. Kindall, James C. Falvey, Charles A. Zdebski,
Patricia A. Millett, James E. Tyesse, Sean Conway, John B. Capehart, Michael C. Small,
Robert A. Fox, R. Dale Dixon, Paula M. Carmody, David C. Bergmann, Christopher J.
White, Russell Blau, Tamar Finn, Bohdan R. Pankiw, Kathryn G. Sophy, Joseph K.
Witmer, Shaun A. Sparks, John H. Jones, Raymond L. Doggett, Jr., David Cosson, H.
Russell Frisby, Jr., Dennis Lane and Harvey Reiter, on the Joint Intercarrier
Compensation Principal Brief and Reply Brief.
15
James C. Falvey, Charles A. Zdebski, Russell Blau, Tamar Finn, R. Dale Dickson, Jr.,
David Cosson, H. Russell Frisby, Jr., Dennis Lane, Harvey Reiter on the Additional
Intercarrier Compensation Issues Principal Brief and Reply Brief.
David Cosson, H. Russell Frisby, Jr., Dennis Lane, Harvey Reiter, Don L. Keskey,
Maureen A. Scott, Wesley Van Cleve, Janet F. Wagner, Rebecca Hawkins, Michael B.
Wallace, Benjamin H. Dickens, Jr., Mary J. Sisak, Craig S. Johnson, David R. Irvine,
Alan Lange Smith, Patricia A. Millet, James Edward Tysse, Sean T. Conway, John Boles
Capehart, Michael C. Small, James Bradford Ramsay, David Bergmann, Paula Marie
Carmody, Christopher J. White, Russell Blau, Tamar Finn, Bohdan R. Pankiw, Kathryn
G. Sophy, Joseph K. Witmer, Shaun A. Sparks, Holly Rachel Smith, and Bridget Asay,
on the Joint Universal Service Fund Principal Brief and Reply Brief.
David Cosson, H. Russell Frisby, Jr., Harvey Reiter, Don L. Keskey, Maureen A. Scott,
Wesley Van Cleve, Janet F. Wagner, James Bradford Ramsay, Russell Blau, Tamar Finn,
and Bridget Asay, Elisabeth H. Ross, Robert Allen Long, Jr., Gerard J. Waldron, Yaron
Dori, Michael P. Beder, Benjamin H. Dickens, Jr., and Holly Rachel Smith, on the
Additional Universal Service Fund Issues Principal Brief.
Russell D. Lukas, David A. LaFuria, and Todd B. Lantor, on the Wireless Carrier
Universal Service Fund Principal Brief and Reply Brief.
Christopher M. Heimann, Gary L. Phillips, Peggy Garber, Heather M. Zachary, and
Daniel T. Deacon, on the AT&T Inc. Principal Brief and Reply Brief.
E. Ashton Johnston, Jennifer P. Bagg, and Glenn S. Richards, on the Voice on the Net
Coalition, Inc. Principal Brief and Reply Brief.
Steven H. Thomas, and W. Scott McCollough, on the Transcom Principal and Reply
Briefs.
Michael C. Small, Patricia A. Millett, James E. Tysse, Sean T. Conway, John B.
Capehart, on the Tribal Carriers Principal Brief.
Paula M. Carmody, Christopher J. White, and David C. Bergmann, on the National
Association of State Utility Consumer Advocates Principal Brief and Reply Brief.
Thomas J. Moorman, Paul M. Schudel, Genevieve Morelli, Gregory J. Vogt, Richard A.
Askoff, Ivan C. Evilsizer, Benjamin H. Dickens, Jr., Mary J. Sisak, Robert M. Jackson,
Gerard J. Duffy, Russell M. Blau, Tamar E. Finn on Incumbent Local Exchange Carrier
Intervenors’ Brief and Reply Brief in Support of Petitioners.
16
Jeffrey A. Lamken and Lucas M. Walker, on the Windstream Principal Brief and Reply
Brief.
William J. Baer, Robert B. Nicholson, Robert J. Wiggers, Joel Marcus, Richard K.
Welch, Laurence N. Bourne, James M. Carr, Maureen K. Flood, and Matthew J. Dunne,
on the briefs for Respondents.
James H. Cawley on the Amicus Brief of the State Members of the Federal-State Joint
Board on Universal Service in Support of Petitioners.
Heather M. Zachary and Kelly P. Dunbar, Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C., Cathy Carpino, Gary L. Phillips, and Peggy Garber, AT&T Services,
Inc., Washington, D.C., Scott H. Angstreich, Brendan J. Crimmins, and Joshua D.
Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., and
Michael E. Glover, Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington,
Virginia, J.G. Harrington and David E. Mills, Cooley, LLP, Washington, D.C., and Rick
C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National Cable &
Telecommunications Association, Washington, D.C., Christopher J. Wright, Timothy J.
Simeone, and Brita D. Strandberg, Wiltshire & Grannis, LLP, Washington, D.C., Ernest
C. Cooper, Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris,
Glovsky & Popeo, P.C., Washington, D.C., L. Charles Keller, and David H. Solomon,
Wilkinson, Barker, Knauer, LLP, Washington, D.C., and Brendan Kasper, Vonage
Holdings Corporation, Holmdel, New Jersey, on the Intervenors Supporting Respondents
in Response to the Joint Intercarrier Compensation Brief.
Christopher J. Wright and Timothy J. Simeone, Wiltshire & Grannis, LLP, Washington,
D.C., Jonathan E. Nuechterlein, Heather M. Zachary and Kelly P. Dunbar, Wilmer Cutler
Pickering Hale and Dorr LLP, Washington, D.C., Cathy Carpino, Gary L. Phillips, and
Peggy Garber, AT&T Services, Inc., Washington, D.C., Scott H. Angstreich, Brendan J.
Crimmins, and Joshua D. Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel,
P.L.L.C., Washington, D.C., and Michael E. Glover, Christopher M. Miller, and Curtis L.
Groves, Verizon, Arlington, Virginia, and Rick C. Chessen, Neal M. Goldberg, Jennifer
McKee, and Steven F. Morris, National Cable & Telecommunications Association,
Washington, D.C., Ernest C. Cooper, Robert G. Kidwell, and Howard J. Symons, Mintz,
Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Washington, D.C., L. Charles Keller, and
David H. Solomon, Wilkinson, Barker, Knauer, LLP, Washington, D.C., on the
Intervenors’ Brief in Support of the Response of the Respondents to the Additional
Intercarrier Compensation Issues Brief.
17
Scott H. Angstreich, Brendan J. Crimmins, and Joshua D. Branson, Kellogg, Huber,
Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., and Michael E. Glover,
Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington, Virginia, Heather M.
Zachary and Kelly P. Dunbar, Wilmer Cutler Pickering Hale and Dorr LLP, Washington,
D.C., Cathy Carpino, Gary L. Phillips, and Peggy Garber, AT&T Services, Inc.,
Washington, D.C., Robert Allen Long, Jr., Gerard J. Waldron, Yaron Dori, and Michael
Beder, Covington & Burling, Washington, D.C., Howard J. Symons, Robert G. Kidwell,
and Ernest C. Cooper, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Washington,
D.C., Rick C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris,
National Cable & Telecommunications Association, Washington, D.C., Christopher J.
Wright, and Brita D. Strandberg, Wiltshire & Grannis, LLP, Washington, D.C., Brendan
Kasper, Vonage Holdings Corporation, Holmdel, New Jersey, on the Intervenors’ Brief
Supporting Respondents Re: The Joint Universal Service Fund Principal Brief.
Samuel L. Feder and Luke C. Platzer, Jenner & Block, LLP, Washington, D.C.,
J.G. Harrington and David E. Mills, Cooley, LLP, Washington, D.C., Christopher J.
Wright and John T. Nakahata, Wiltshire & Grannis, LLP, Washington, D.C., Rick C.
Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National Cable &
Telecommunications Association, Washington, D.C., E. Ashton Johnson and Helen E.
Diesenhaus, Lampert, O’Connor & Johnston, P.C., Washington, D.C., Ernest C. Cooper,
Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky &
Popeo, P.C., Washington, D.C., on the Final Brief of Intervenors in Support of Federal
Respondents in Response to the AT&T Principal Brief.
Russell M. Blau and Tamar E. Finn, Bingham McCutchen, LLP, Washington, D.C., on
the Brief of Intervenor National Telecommunications Cooperative Association in Support
of the FCC’s Response to the Voice on the Net Coalition, Inc. Brief.
Heather M. Zachary and Kelly P. Dunbar, Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C., Cathy Carpino, Gary L. Phillips, and Peggy Garber, AT&T Services,
Inc., Washington, D.C., Scott H. Angstreich, Brendan J. Crimmins, and Joshua D.
Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., and
Michael E. Glover, Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington,
Virginia, on the Brief of Intervenors Supporting Respondents in Response to the Brief of
the National Association of State Utility Consumer Advocates.
David E. Mills and J.G. Harrington, Cooley, LLP, Washington, D.C., Howard J. Symons,
Robert G. Kidwell, and Ernest C. Cooper, Mintz Levin Cohn Ferris Glovsky and Popeo,
P.C., Washington, D.C., Scott H. Angstreich, Brendan J. Crimmins, and Joshua D.
Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C.,
Michael E. Glover, Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington,
18
Virginia, Rick Chessen, Neal M. Goldberg, Steven Morris, and Jennifer McKee, The
National Cable & Telecommunications Association, Washington, D.C., on the Brief of
Intervenors Supporting Respondents in Response to the Windstream Principal Brief.
Before BRISCOE, Chief Judge, HOLMES and BACHARACH, Circuit Judges.
BRISCOE, Chief Judge.
In late 2011, the Federal Communications Commission (FCC or Commission)
issued a Report and Order and Further Notice of Proposed Rulemaking (Order)
comprehensively reforming and modernizing its universal service and intercarrier
compensation systems. Petitioners, each of whom were parties to the FCC’s rulemaking
proceeding below, filed petitions for judicial review of the FCC’s Order. The Judicial
Panel on Multidistrict Litigation consolidated the petitions in this court.
In the Joint Universal Service Fund Principal Brief, Additional Universal Service
Fund Issues Principal Brief, Wireless Carrier Universal Service Fund Principal Brief, and
Tribal Carriers Principal Brief, petitioners assert a host of challenges to the portions of the
Order revising how universal service funds are to be allocated to and employed by
recipients. After carefully considering those claims, we find them either unpersuasive or
barred from judicial review. Consequently, we deny the petitions to the extent they are
based upon those claims.
19
Table of Contents
I. Glossary
II. Background
A. Introduction
B. Distinction between telecommunications service providers and
information-service providers
C. The FCC’s pre-Order regulatory framework for telephone services
D. The deficiencies identified by the FCC regarding its pre-Order regulatory
framework
E. The FCC’s National Broadband Plan
F. The FCC’s Notice of Inquiry and Notice of Proposed Rulemaking
G. The FCC’s Report and Order of November 18, 2011
H. This litigation
III. Standards of review
A. The Chevron standard
B. The arbitrary and capricious standard
C. The de novo standard
IV. Universal Service Fund Issues
A. Joint Universal Service Fund Principal Brief
1. Did the FCC’s broadband requirement exceed its authority under
47 U.S.C. § 254?
2. Did the FCC act arbitrarily in simultaneously imposing the
broadband requirement and reducing USF support?
3. Does the FCC’s use of auctions to distribute USF violate § 214(e)?
4. Was the FCC’s decision to reduce USF support in areas with
“artificially low” end user rates unlawful or arbitrary?
5. Does the Order unlawfully deprive rural carriers of a reasonable
opportunity to recover their prudently-incurred costs?
6. Do the FCC’s regression and SNA rules have unlawful
retroactive effects?
7. Did the FCC disregard evidence that allocating USF to rural
price cap carriers by competitive bidding would reduce service
quality?
8. Does eliminating USF support for the highest-cost areas defeat
the very purpose of universal service?
9. Is the FCC’s decision to eliminate high-cost support to RLECs,
where an unsubsidized competitor offers voice and broadband to
20
all of the RLECs’ customers in the same study area, unlawful and
unsupported by substantial evidence?
10. Did the FCC arbitrarily fail to explain how its new definition of
supported telecommunications services took into account the four
factors it was required to consider under § 254(c)(1)?
11. Did the FCC arbitrarily disregard comments that the Order’s
incremental USF support provisions would duplicate or
undermine state-initiated plans for broadband deployment?
12. Did the Order unlawfully make changes not contained in the
FCC’s proposed rule that could not reasonably have been
anticipated by commenters?
B. Additional Universal Service Fund Issues Principal Brief
1. The FCC’s decision to limit USF support for broadband
deployment to price-cap ILECs
2. Did the FCC violate the mandatory referral duty imposed by 47
U.S.C. § 410(c)?
3. Did the FCC irrationally refuse to modify service obligations for
carriers to whom it denied USF support?
4. Is the Order, as applied to Allband and similarly-situated small
rural carriers, unconstitutional under due process principles and
as a bill of attainder, and/or does it violate the Act, principles of
estoppel and contract law?
C. Wireless Carrier Universal Service Fund Principal Brief
1. Does the FCC lack authority to redirect USF support to
broadband or to regulate broadband?
2. Must the USF portions of the Order be vacated?
3. Did the FCC act arbitrarily and capriciously in reserving CAF II
support for ILECs?
4. Did the FCC act arbitrarily and capriciously in repealing the
identical support rule and adopting a single-winner reverse
auction?
5. Did the FCC act arbitrarily and capriciously in setting the
Mobility II budget at $500 million?
6. Did the FCC fail to respond to comments calling for a separate
mobility fund for insular areas?
D. Tribal Carriers Principal Brief
1. Did the FCC act arbitrarily and capriciously in prescribing
funding cuts for tribal carriers?
V. Conclusion
21
I. Glossary
1996 Act Telecommunications Act of 1996
Act (or 1934 Act) Communications Act of 1934
APA Administrative Procedure Act
ARC Access Recovery Charge
Joint Board Federal-State Joint Board on Universal Service
CAF Connect America Fund
CETC Competitive Eligible Telecommunications Carrier
COLR Carrier of Last Resort
ETC Eligible Telecommunications Carrier
FCC (or Commission) Federal Communications Commission
HCLS High Cost Loop Support
IAS Interstate Access Support
ICC Intercarrier Compensation
ICLS Interstate Common Line Support
ILEC Incumbent Local Exchange Carrier
IP Internet Protocol
JA Joint Appendix
LEC Local Exchange Carrier
Mobility Fund CAF Mobility Fund
NPRM Notice of Proposed Rulemaking
22
PSTN Public Switched Telephone Network
RLEC Rate-of-Return ILEC
SA Supplemental Joint Appendix
SNA Safety Net Additive
USF Universal Service Fund
VoIP Voice over Internet Protocol
WCB FCC’s Wireline Competition Bureau
23
II. Background
A. Introduction
For nearly eighty years, the FCC has regulated interstate communications. When
it was first created by way of the Communications Act of 1934 (the 1934 Act or the Act),
the FCC’s regulatory activities were focused on “communication[s] by wire and radio.”
47 U.S.C. § 151. The FCC’s regulatory oversight subsequently expanded to include
telephone service. Most recently, the FCC was charged by Congress with developing a
“[N]ational [B]roadband [P]lan,” American Recovery and Reinvestment Act of 2009,
Pub. L. No. 111-5, § 6001(k)(1), 123 Stat. 115, 515, the purpose of which is “to ensure
that all people of the [U]nited [S]tates have access to broadband capability and [to]
establish benchmarks for meeting that goal,” id. § 6001(k)(2), 123 Stat. at 516.
In a statement issued on March 16, 2010, the FCC concluded that Congress’s
stated goals for the National Broadband Plan could not be achieved unless the FCC
“comprehensively reformed” its existing regulatory system for telephone service. JA at 2.
On February 9, 2011, the FCC issued a Notice of Proposed Rulemaking (NPRM)
“propos[ing] to fundamentally modernize the [FCC]’s Universal Service Fund (USF or
Fund) and intercarrier compensation (ICC) system.” Id. at 284 (NPRM ¶ 1). After
receiving and considering comments in response to the NPRM, the FCC on November
18, 2011 issued a Report and Order and Further Notice of Proposed Rulemaking (Order).
The Order, and the reforms it proposes, are the subject of this litigation.
24
B. Distinction between telecommunications service providers and
information-service providers
The 1934 Act, as amended by the Telecommunications Act of 1996 (the 1996
Act), “subjects all providers of ‘telecommunications servic[e]’ to mandatory common-
carrier regulation, [47 U.S.C.] § 153(44).” Nat’l Cable & Telecomm. Ass’n v. Brand X
Internet Servs., 545 U.S. 967, 973 (2005). “Telecommunications service” is defined as
“the offering of telecommunications for a fee directly to the public . . . regardless of the
facilities used.” 47 U.S.C. § 153(46). In turn, “[t]elecommunications” is “the
transmission, between or among points specified by the user, of information of the user’s
choosing, without change in the form or content of the information as sent and received.”
47 U.S.C. § 153(43). “Telecommunications carrier[s]” are defined as “provider[s] of
telecommunications services.” 47 U.S.C. § 153(44).
Notably, the 1934 Act, as amended by the 1996 Act, does not regulate
information-service providers. “[I]nformation service” is defined as “the offering of a
capability for generating, acquiring, storing, transforming, processing, retrieving,
utilizing, or making available information via telecommunications . . . .” 47 U.S.C. §
153(20). In March 2002, the FCC formally “concluded that broadband Internet service
provided by cable companies is an ‘information service’ but not a ‘telecommunications
service’ under the [1934] Act, and therefore not subject to mandatory Title II common-
carrier regulation.” Nat’l Cable, 545 U.S. at 977-78. In June 2005, the Supreme Court
held that this “conclusion [wa]s a lawful construction of the [1934] Act under Chevron
25
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778, 81
L. Ed. 2d 694 (1984), and the Administrative Procedure Act.” Nat’l Cable, 545 U.S. at
974.
C. The FCC’s pre-Order regulatory framework for telephone services
The pre-Order regulatory system for telephone service, which was developed by
the FCC over decades, was revised by the FCC in accordance with the 1996 Act. The
1996 Act, which “fundamentally restructure[d] local telephone markets,” AT&T Corp. v.
Iowa Util. Bd., 525 U.S. 366, 370 (1999), “sought to introduce competition to local
telephone markets” while simultaneously “preserving universal service.” Qwest Corp. v.
FCC, 258 F.3d 1191, 1196 (10th Cir. 2001) (Qwest Corp.). “Universal service” was
defined in the 1996 Act “[a]s an evolving level of telecommunications services that the
[FCC] shall establish periodically under [§ 254 of the 1996 Act], taking into account
advances in telecommunications and information technologies and services.” 47 U.S.C. §
254(c)(1). In other words, the 1996 Act “anticipate[d] . . . that in the future other types of
telecommunications m[ight] become necessary for the nation to remain at the forefront of
technological development,” and, consequently, it “outlin[ed] a process for the FCC to
adjust [the definition of ‘universal service’] as new technologies ar[o]se.” Wireless
World, LLC v. Virgin Islands Pub. Servs. Comm’n, No. Civ. A. 02-0061STT at *7 n.7
(D. Virgin Islands 2008).
The FCC implemented “high-cost universal service support . . . to help ensure that
consumers ha[d] access to telecommunications services in areas where the cost of
26
providing such services would otherwise be prohibitively high.” JA at 2. This “high-cost
[universal service] support [wa]s provided through a complicated patchwork of programs
. . . in which the types of support a carrier receive[d] depend[ed] on the size and
regulatory classification of the carrier.” Id. at 3. More specifically, “[t]he federal high-
cost support mechanism include[d] five major components,” id.:
1) “High-cost loop support [that] provide[d] support for intrastate network
costs to rural incumbent local exchange carriers (LECs) in service areas
where the cost to provide service exceed[ed] 115 percent of the national
average,” id.;
2) “Local switching support [that] provide[d] intrastate support for
switching costs for companies that serve[d] 50,000 or fewer access lines,”
id.;
3) “High-cost model support [that] provide[d] support for intrastate network
costs to non-rural incumbent LECs in states where the cost to provide
service in non-rural areas exceed[ed] two standard deviations above the
national average cost per line,” id.;
4) “Interstate access support (IAS) [that] provide[d] support for price cap
carriers to offset certain reductions in interstate access charges,” id.; and
5) “Interstate common line support (ICLS) [that] provide[d] support to rate-
of-return carriers, to the extent that subscriber line charge (SLC) caps d[id]
not permit such carriers to recover their interstate common line revenue
requirements,” id.
This system, often referred to as the intercarrier compensation or ICC system, was
“designed for an era of separate long-distance companies[,] . . . high per-minute charges,
and [little] competition . . . among telephone companies . . . .” Id. at 396 (Order ¶ 9).
27
D. The deficiencies identified by the FCC regarding its pre-Order
regulatory framework
In devising its National Broadband Plan, the FCC noted what it perceived as
deficiencies in its pre-Order regulatory framework. To begin with, “only voice [wa]s a
supported service” under this framework, and “there [wa]s no requirement to provide
broadband service to consumers, nor [wa]s there any mechanism to ensure that support
[wa]s targeted toward extending broadband service to unserved areas.” Id. at 3. Further,
“some of the . . . high-cost programs d[id] not provide support in an economically
efficient manner.” Id. “In addition, several programs provide[d] support based on an
incumbent carrier’s embedded costs, whether or not a competitor provide[d], or could
provide, service at a lower cost.” Id.1 Thus, “only non-rural high-cost support [wa]s
based on forward-looking economic cost, as determined by the [FCC]’s voice telephony
cost model.”2 Id. at 4. As a result, “[i]n 2009, the [FCC] disbursed almost $4.3 billion in
high-cost support, of which $331 million was calculated on the basis of forward-looking
costs.” Id. at 6-7.
1
The FCC defined “embedded costs” as “the costs that the incumbent LEC
incurred in the past and that are recorded in the incumbent LEC’s book of accounts.” 47
C.F.R. § 51.505(d)(1) (1997). Prior to the 1996 Act, “explicit federal universal service
support was based on embedded costs.” JA at 3. Despite its intention to abandon
embedded cost support following enactment of the 1996 Act, the FCC ultimately allowed
it to remain in place “for rural carriers pending more comprehensive reform.” Id. at 4.
2
The FCC’s cost model was based upon ten criteria and was intended to “estimate
the cost of providing service for all businesses and households within a geographic
region.” JA at 4-5 (internal quotation marks omitted).
28
E. The FCC’s National Broadband Plan
“On March 26, 2010, the [FCC] delivered to Congress [its] National Broadband
Plan.” Id. at 7. “The National Broadband Plan estimated that 14 million people living in
seven million housing units in the United States currently do not have access to terrestrial
broadband infrastructure capable of meeting this target, described as ‘the broadband
availability gap.’” Id. Consequently, the National Broadband Plan “recommend[ed] the
creation of a Connect America Fund [(CAF)] to address the broadband availability gap in
unserved areas and to provide any ongoing support necessary to sustain service in areas
that require public funding, including those areas that already may have broadband.” Id.
The National Broadband Plan outlined five principles that the CAF should adhere to,3 and
it recommended that the FCC “create a fast-track program in CAF for providers to receive
targeted funding for new broadband construction in unserved areas, and create a Mobility
Fund to provide one-time support for deployment of 3G networks, to bring all states to a
minimum level of 3G (or better) mobile service availability.” Id. at 7 (internal quotation
marks omitted). “The National Broadband Plan [also] recommend[ed] that the [FCC]
direct public investment toward meeting an initial national broadband availability target
3
The five principles included: (1) providing funding only in geographic areas
where there is no private sector business case to provide broadband and high-quality
voice-grade service; (2) allowing at most only one subsidized provider of broadband per
geographic area; (3) making the eligibility criteria for obtaining broadband support from
CAF company- and technology-agnostic so long as the service provided meets the FCC’s
specifications; (4) identifying ways to drive funding to efficient levels to determine the
firms that will receive CAF support and the amount of support they will receive; and (5)
making CAF support recipients accountable for its use and subject to enforceable
timelines for achieving universal access. JA at 7.
29
of 4 Mbps of actual download speed and 1 Mbps of actual upload speed.” Id. at 7. In
addition, the National Broadband Plan recommended that the FCC’s “long range goal
should be to replace all of the legacy High-Cost programs with a new program that
preserves the connectivity that Americans have today and advances universal broadband
in the 21st century.” Id. (internal quotation marks omitted). In other words, the National
Broadband Plan proposed “cap[ping] and cut[ting] the legacy high-cost programs and”
shifting the “realize[d] savings . . . to targeted investment in broadband infrastructure.”
Id. at 9.
F. The FCC’s Notice of Inquiry and Notice of Proposed Rulemaking
On April 21, 2010, the FCC issued a Notice of Inquiry and Notice of Proposed
Rulemaking (Notice of Inquiry). The Notice of Inquiry sought “comment on three
discrete groups of issues.” Id. at 8. First, the Notice of Inquiry sought “comment on use
of a model as a competitively neutral and efficient tool for helping [the FCC] to quantify
the minimum amount of universal service support necessary to support networks that
provide broadband and voice service, such that the contribution burden that ultimately
falls on American consumers is limited.” Id. Second, the Notice sought “comment on
potential approaches to providing such targeted funding on an accelerated basis in order
to extend broadband networks in unserved areas, such as a competitive procurement
auction.” Id. Third, the Notice sought “comment on specific proposals to cap and cut the
legacy high-cost programs [for voice services] and realize savings that c[ould] be shifted
to targeted investment in broadband infrastructure.” Id. at 8-9.
30
The FCC subsequently “received over 2,700 comments, reply comments, and ex
parte filings totaling over 26,000 pages, including hundreds of financial filings from
telephone companies of all sizes, including numerous small carriers that operate in the
most rural parts of the nation.” Id. at 398 (Order ¶ 12). The FCC “held over 400
meetings with a broad cross-section of industry and consumer advocates.” Id. The FCC
also “held three open, public workshops, and engaged with other federal, state, Tribal,
and local officials throughout the process.” Id.
G. The FCC’s Report and Order of November 18, 2011
On November 18, 2011, the FCC released its 752-page Order. Id. at 390. The
Order stated that “[t]he universal service challenge of our time is to ensure that all
Americans are served by networks that support high-speed Internet access—in addition to
basic voice service—where they live, work, and travel.” Id. at 395 (Order ¶ 5). In turn,
the Order stated that the “existing universal service and intercarrier compensation systems
[we]re based on decades-old assumptions that fail[ed] to reflect today’s networks, the
evolving nature of communications services, or the current competitive landscape.” Id. at
396 (Order ¶ 6). In light of these factors, the Order purported to “comprehensively
reform[] and modernize[] the universal service and intercarrier compensation systems to
ensure that robust, affordable voice and broadband service, both fixed and mobile, [we]re
available to Americans throughout the nation.” Id. at 394 (Order ¶ 1).
The Order summarized the key components of the universal service reform the
FCC would be implementing. Because the vast majority of Americans “that lack access
31
to residential fixed broadband at or above the [FCC]’s broadband speed benchmark live
in areas served by price cap carriers,” i.e., “Bell Operating Companies and other large and
mid-sized carriers,” the FCC stated that it “w[ould] introduce targeted, efficient support
for broadband in two phases” for these areas. Id. at 400 (Order ¶ 21). Phase I of this
plan, intended “[t]o spur immediate broadband buildout,” would freeze “all existing high-
cost support to price cap carriers” and make “an additional $300 million in CAF funding
. . . available.” Id. (Order ¶ 22). “Frozen support w[ould] be immediately subject to the
goal of achieving universal availability of voice and broadband, and subject to obligations
to build and operate broadband-capable networks in areas unserved by an unsubsidized
competitor over time.” Id. Phase II of the plan “w[ould] use a combination of a forward-
looking broadband cost model and competitive bidding to efficiently support deployment
of networks providing both voice and broadband service for five years.” Id. (Order ¶ 23).
With respect to rate-of-return carriers, which “serve[d] less than five percent of
access lines in the U.S.,” but received “total support from the high-cost fund . . .
approaching $2 billion annually,” the Order imposed substantial reforms. Id. at 401
(Order ¶ 26). In particular, any such carriers “receiving legacy universal service support,
or CAF support to offset lost ICC revenues,” were required to “offer broadband service
meeting initial CAF requirements . . . upon their customers’ reasonable requests.” Id.
The Order noted that, because of “the economic challenges of extending service in the
high-cost areas of the country served by rate-of-return carriers, this flexible approach
32
[would] not require rate-of-return companies to extend service to customers absent such a
request.” Id.
The Order indicated that a CAF Mobility Fund would be created to “promot[e] the
universal availability” of “mobile voice and broadband services.” Id. at 402 (Order ¶ 28).
Phase I of the CAF Mobility Fund would “provide up to $300 million in one-time support
to immediately accelerate deployment of networks for mobile voice and broadband
services in unserved areas.” Id. at 402. This support, the Order indicated, would “be
awarded through a nationwide reverse auction.” Id. Phase II of the Mobility Fund would
“provide up to $500 million per year in ongoing support” in order to “expand and sustain
mobile voice and broadband services in communities in which service would be
unavailable absent federal support.” Id. Included in this $500 million annual budget was
“ongoing support for Tribal areas of up to $100 million per year.” Id. Phase II also
anticipated “eliminat[ing] the identical support rule that determines the amount of support
for mobile, as well as wireline, competitive ETCs [(eligible telecommunications
carriers)],” id. (Order ¶ 29), and the creation of a “Remote Areas Fund” designed “to
ensure that Americans living in the most remote areas in the nation, where the cost of
deploying traditional terrestrial broadband networks is extremely high, can obtain
affordable access through alternative technology platforms, including satellite and
unlicensed wireless services,” id. (Order ¶ 30).
The Order also indicated that the FCC was reforming its intercarrier compensation
rules, including “adopt[ing] a uniform national bill-and-keep framework as the ultimate
33
end state for all telecommunications traffic exchanged with a LEC.” Id. at 403 (Order ¶
34). “Under bill-and-keep,” the Order noted, “carriers look first to their subscribers to
cover the costs of the network, then to explicit universal service support where
necessary.” Id. Relatedly, the Order noted that the FCC was “abandon[ing] the calling-
party-network-pays model that dominated ICC regimes of the last century.” Id.
However, the Order noted, “states will have a key role in determining the scope of each
carrier’s financial responsibility for purposes of bill-and-keep, and in evaluating
interconnection agreements negotiated or arbitrated under the framework in sections 251
and 252 of the Communications Act.” Id.
H. This litigation
Petitioners, who were parties to the FCC’s rulemaking proceeding below, each
filed petitions for judicial review of the Order. After the Judicial Panel on Multidistrict
Litigation consolidated the petitions in this court, we held oral argument on the petitions
on November 19, 2013.
III. Standards of review
The issues raised by petitioners in their respective briefs implicate three different
standards of review: the Chevron standard, which applies to all of the issues in which
petitioners assert that the FCC acted contrary to its statutory authority; the arbitrary and
capricious standard, which applies to petitioners’ challenges to rules implemented by the
FCC in its Order; and the de novo standard of review that applies to the constitutional
issues raised by petitioners.
34
A. The Chevron standard
In “review[ing] an agency’s construction of [a] statute which it administers,” the
first question for the court is “whether Congress has directly spoken to the precise
question at issue.” Chevron, 467 U.S. at 842. “If the intent of Congress is clear, that is
the end of the matter,” id., and both the agency and the court “must give effect to the
unambiguously expressed intent of Congress,” id. at 843. “If, however, . . . the statute is
silent or ambiguous with respect to the specific issue, the question for the court is whether
the agency’s answer is based on a permissible construction of the statute.” Id. This court
gives deference to the agency’s interpretation so long as that interpretation is not
arbitrary, capricious, or manifestly contrary to the statute. Id. at 844.
B. The arbitrary and capricious standard
The Administrative Procedure Act (APA) directs us to “hold unlawful and set
aside agency action, findings and conclusions found to be . . . arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
Under the arbitrary and capricious standard, “a reviewing court may not set aside an
agency rule that is rational, based on consideration of the relevant factors and within the
scope of the authority delegated to the agency by the statute.” Motor Vehicle Mfrs. Ass’n
of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). “The
scope of review under the ‘arbitrary and capricious’ standard is narrow and a court is not
to substitute its judgment for that of the agency.” Id. “Nevertheless, the agency must
examine the relevant data and articulate a satisfactory explanation for its action including
35
a rational connection between the facts found and the choice made.” Id. (internal
quotation marks omitted). A reviewing court must “uphold a decision of less than ideal
clarity if the agency’s path may reasonably be discerned.” Id. (internal quotation marks
omitted).
C. The de novo standard
The APA also compels us to “set aside agency action, findings and conclusions
found to be . . . contrary to constitutional right.” 5 U.S.C. § 706(2)(B). “Because
constitutional questions arising in a challenge to agency action under the APA fall
expressly within the domain of the courts, we review de novo whether agency action
violated a claimant’s constitutional rights.” Copar Pumice Co. v. Tidwell, 603 F.3d 780,
802 (10th Cir. 2010) (internal quotation marks omitted).
IV. Universal Service Fund Issues
In the Joint Universal Service Fund Principal Brief, Additional Universal Service
Fund Issues Principal Brief, Wireless Carrier Universal Service Fund Principal Brief, and
Tribal Carriers Principal Brief,4 petitioners assert various challenges to the portions of the
4
Petitioners filed twelve sets of briefs in this action: one joint preliminary brief,
four briefs addressing universal service fund issues, and seven briefs addressing
intercarrier compensation issues. In addition, intervening local exchange carriers filed a
brief in support of the petitioners. For ease of reference and citation, we have assigned a
number to each of these twelve briefs. The four briefs addressed in this opinion have
been assigned the following numbers:
Brief 3 - Joint Universal Service Fund Principal Brief;
Brief 4 - Additional Universal Service Fund Issues Principal Brief;
Brief 5 - Wireless Carrier Universal Service Fund Principal Brief; and
Brief 9 - Tribal Carriers Principal Brief.
36
Order revising how universal service funds are to be allocated to and employed by
recipients. We proceed to address each of those briefs and the issues raised therein.
A. Joint Universal Service Fund Principal Brief
1. Did the FCC’s broadband requirement exceed its authority under 47
U.S.C. § 254?
Petitioners argue that the FCC’s “continued classification of broadband Internet
access service as an ‘information service’ is fatal to” the FCC’s condition that “USF
support recipients . . . provide broadband Internet access to consumers on reasonable
request.” Pet’r Br. 3 at 11. More specifically, petitioners argue that the FCC, in requiring
USF support recipients to provide broadband Internet access to consumers upon
reasonable request, exceeded its authority under 47 U.S.C. § 254 in two ways. First,
petitioners argue that the Act “expressly dictates that supported services are limited to an
‘evolving level of telecommunications services.’” Id. (italics in brief). “But the Order,”
petitioners argue, “unlawfully mandates that carriers provide non-supported information
services to receive USF support.” Id. at 11-12. Second, petitioners argue that, although
the Act expressly provides that USF support is to go exclusively to telecommunications
carriers for the purpose of providing “telecommunications services,” the Order
“unlawfully gives USF support to entities that are not telecommunications carriers to
provide non-telecommunications services.” Id. at 11.
37
a) Relevant statutory language
In addressing petitioners’ arguments, we begin by quoting at length the statutory
language at issue. The primary statute upon which petitioners rely, 47 U.S.C. § 254,
provides, in pertinent part, as follows:
(b) Universal service principles. The [Federal-State] Joint Board[, which
was created in subsection (a) by the 1996 Act,] and the Commission shall
base policies for the preservation and advancement of universal service on
the following principles:
(1) Quality and rates. Quality services should be available at just,
reasonable, and affordable rates.
(2) Access to advanced services. Access to advanced
telecommunications and information services should be provided in
all regions of the Nation.
(3) Access in rural and high-cost areas. Consumers in all regions of
the Nation, including low-income consumers and those in rural,
insular, and high cost areas, should have access to
telecommunications and information services, including
interexchange services and advanced telecommunications and
information services, that are reasonably comparable to those
services provided in urban areas and that are available at rates that
are reasonably comparable to rates charged for similar services in
urban areas.
(4) Equitable and nondiscriminatory contributions. All providers of
telecommunications services should make an equitable and
nondiscriminatory contribution to the preservation and advancement
of universal service.
(5) Specific and predictable support mechanisms. There should be
specific, predictable and sufficient Federal and State mechanisms to
preserve and advance universal service.
(6) Access to advanced telecommunications services for schools,
health care, and libraries. Elementary and secondary schools and
classrooms, health care providers, and libraries should have access to
advanced telecommunications services as described in subsection
(h).
(7) Additional principles. Such other principles as the Joint Board
and the Commission determine are necessary and appropriate for the
38
protection of the public interest, convenience, and necessity and are
consistent with this Act.
(c) Definition. (1) In general. Universal service is an evolving level of
telecommunications services that the Commission shall establish
periodically under this section, taking into account advances in
telecommunications and information technologies and services. The Joint
Board in recommending, and the Commission in establishing, the definition
of the services that are supported by Federal universal service support
mechanisms shall consider the extent to which such telecommunications
services—
(A) are essential to education, public health, or public safety;
(B) have, through the operation of market choices by customers,
been subscribed to by a substantial majority of residential customers;
(C) are being deployed in public telecommunications networks by
telecommunications carriers; and
(D) are consistent with the public interest, convenience, and
necessity.
(2) Alterations and modifications. The Joint Board may, from time to time,
recommend to the Commission modifications in the definition of the
services that are supported by Federal universal service support
mechanisms.
(3) Special services. In addition to the services included in the definition of
universal service under paragraph (1), the Commission may designate
additional services for such support mechanisms for schools, libraries, and
health care providers for the purposes of subsection (h).
(d) Telecommunications carrier contribution. Every telecommunications
carrier that provides interstate telecommunications services shall contribute,
on an equitable and nondiscriminatory basis, to the specific, predictable,
and sufficient mechanisms established by the Commission to preserve and
advance universal service. The Commission may exempt a carrier or class
of carriers from this requirement if the carrier’s telecommunications
activities are limited to such an extent that the level of such carrier’s
contribution to the preservation and advancement of universal service
would be de minimis. Any other provider of interstate telecommunications
may be required to contribute to the preservation and advancement of
universal service if the public interest so requires.
(e) Universal service support. After the date on which Commission
regulations implementing this section take effect, only an eligible
39
telecommunications carrier designated under section 214(e) [47 U.S.C. §
214(e)] shall be eligible to receive specific Federal universal service
support. A carrier that receives such support shall use that support only for
the provision, maintenance, and upgrading of facilities and services for
which the support is intended. Any such support should be explicit and
sufficient to achieve the purposes of this section.
47 U.S.C. § 254(b), (c), (d), (e).
The terms “telecommunications,” “telecommunications carrier,” and
“telecommunications service,” which are used in § 254 and throughout the Act, are
defined in the following manner:
(50) Telecommunications. The term “telecommunications” means the
transmission, between or among points specified by the user, of information
of the user’s choosing, without change in the form or content of the
information as sent and received.
(51) Telecommunications carrier. The term “telecommunications carrier”
means any provider of telecommunications services, except that such term
does not include aggregators of telecommunications services (as defined in
section 226 [47 USCS § 226]). A telecommunications carrier shall be
treated as a common carrier under this Act only to the extent that it is
engaged in providing telecommunications services, except that the
Commission shall determine whether the provision of fixed and mobile
satellite service shall be treated as common carriage.
***
(53) Telecommunications service. The term “telecommunications service”
means the offering of telecommunications for a fee directly to the public, or
to such classes of users as to be effectively available directly to the public,
regardless of the facilities used.
47 U.S.C. § 153(50), (51), (53). Notably, “telecommunications service” is treated
distinctly under the Act from “information service,” which is defined under the Act as
“the offering of a capability for generating, acquiring, storing, transforming, processing,
40
retrieving, utilizing, or making available information via telecommunications . . . .” 47
U.S.C. § 153(24).
b) Is the FCC prohibited from imposing the broadband requirement?
Petitioners argue that § 254 unambiguously bars the FCC from conditioning USF
funding on recipients’ agreement to provide broadband internet access services. Pet’r Br.
3 at 12. In support, petitioners begin by noting that § 254(c)(1) “explicitly defines
‘universal service’ as ‘an evolving level of telecommunications services’ the [FCC] is to
establish, ‘taking into account advances in telecommunications and information
technologies and services.’” Id. at 12 (quoting 47 U.S.C. § 254(c)(1); emphasis added in
brief). In turn, petitioners note that “‘telecommunications services’ are common carrier
services under Title II of the Act, distinct from ‘information services’ defined in 47
U.S.C. § 153(24), and the [FCC] has declined to classify [broadband] services such as
Voice over Internet Protocol (‘VoIP’), as telecommunications services.” Id. In
particular, petitioners note that the FCC previously determined “that bundled broadband
internet access is an ‘information service,’ not a ‘telecommunications service,’” and that
this determination “was upheld [by the Supreme Court] as a permissible choice under
Chevron.” Id. at 14 n. 7 (citing Nat’l Cable & Telecomm. Ass’n v. Brand X Internet
Servs., Inc., 545 U.S. 967 (2005)).
Notwithstanding these facts, petitioners argue, the FCC concluded that, because
“consumers are increasingly obtaining voice services” not from traditional methods “but
through services like VoIP,” “its ‘authority to promote universal service . . . does not
41
depend on whether VoIP services are telecommunications services or information
services.’” Id. at 13 (quoting JA at 412 (Order ¶ 63)). “And,” petitioners assert, “based
on this conclusion, [the FCC] lumps supported telecommunications services with VoIP to
create a new ‘voice telephony service’ classification and orders USF recipients to provide
bundled Internet access, an information service, ‘on reasonable request’ as a condition of
continued USF support.” Id. at 13-14 (internal citations omitted).
Petitioners argue “that Section 254(c)(1)’s limits are unambiguous and deny the
FCC the authority it claims.” Id. at 14. More specifically, petitioners argue that the FCC,
“[h]aving declined [previously] to define broadband Internet access or VoIP as
telecommunications services, . . . is not then empowered to include them on the list of
supported services simply because advancing the availability of broadband is a desirable
goal.” Id. Petitioners further argue that “[a]ny doubt on this score is dispelled by
subsection (3) of Subsection 254(c).” Id. at 15. Section 245(c)(3), petitioners note,
authorizes the FCC to “designate additional services for support mechanisms for schools,
libraries and health care providers.” 47 U.S.C. § 254(c)(3). Petitioners argue that,
“[i]nterpreting the term ‘additional services,’ as the FCC has, to mean services in addition
to telecommunications services, leads, inescapably, to the conclusion that Section
254(c)(3) creates a limited ‘schools, libraries and hospitals’ exception to the requirement
that USF be used only to support ‘telecommunications services.’” Pet’r Br. 3 at 15.
“Under the doctrine of expressio unius est exclusio alterius (‘the express mention of one
thing excludes all others’),” petitioners argue, “the inclusion of this authorization in
42
Section 254(c)(3) to support non-telecommunications services in specified circumstances
precludes an interpretation authorizing the FCC to compel use of USF support to provide
broadband Internet access, a non-telecommunication service, in others.” Id. at 15-16
(italics in original).
The FCC, in its response, does not dispute that it has previously declined to
classify broadband services, including VoIP, as “telecommunications services.” But it
does not view this, or anything else in § 254(c)(1)’s definition of “universal service,” as a
limitation on its authority to require recipients of USF funds to expend some of those
funds to deploy networks capable of providing voice and broadband services. As it noted
in the Order, it believes its “authority to promote universal service in this context does not
depend on whether interconnected VoIP services are telecommunications services or
information services under the . . . Act.”5 JA at 412 (Order ¶ 63). Rather, the FCC
contends “that section 254(e) of the Act allow[s] it to . . . ‘require carriers receiving
federal universal service support to invest in modern broadband-capable networks.’”
FCC Br. 3 at 13 (quoting JA at 413-414 (Order ¶ 65)). The FCC explains that Congress,
by referring in § 254(e) “to ‘facilities’ and ‘services’ as distinct items for which federal
universal service funds may be used, . . . granted [the FCC] the flexibility not only to
5
The FCC concluded that “[i]f interconnected VoIP services are
telecommunications services, [its] authority under section 254 to define universal service
after ‘taking into account advances in telecommunications and information technologies
and services’ enables [it] to include interconnected VoIP services as a type of voice
telephony service entitled to federal universal service support.” JA at 412 (Order ¶ 63
n.67).
43
designate the types of telecommunications services for which support would be provided,
but also to encourage the deployment of the types of facilities that will best achieve the
principles set forth in section 254(b) and any other universal service principle that the
[FCC] may adopt under section 254(b)(7).” JA at 413 (Order ¶ 65).
The FCC further asserts that, under section 254(b), it possesses authority to create
inducements, such as linking the receipt of USF funds to the requirement of deploying
voice and broadband networks, to ensure that the universal service policies outlined in
section 254(b) are achieved. Id.
Thus, the resolution of this issue hinges, in substantial part, on the interpretation of
two subsections of § 254: subsection (c)(1) and subsection (e). Addressing these
subsections in order, it is beyond dispute that subsection (c)(1) expressly authorizes the
FCC to define “periodically” the types of telecommunications services that are
encompassed by “universal service” and thus “supported by Federal universal service
support mechanisms.” Further, there is no question that the FCC, to date, has interpreted
the term “telecommunications services” to include only telephone services and not VoIP
or other broadband internet services. All that said, however, nothing in the language of
subsection (c)(1) serves as an express or implicit limitation on the FCC’s authority to
determine what a USF recipient may or must do with those funds. More specifically,
nothing in subsection (c)(1) expressly or implicitly deprives the FCC of authority to direct
that a USF recipient, which necessarily provides some form of “universal service” and
has been deemed by a state commission or the FCC to be an eligible telecommunications
44
carrier under 47 U.S.C. § 214(e), use some of its USF funds to provide services or build
facilities related to services that fall outside of the FCC’s current definition of “universal
service.” In other words, nothing in the statute limits the FCC’s authority to place
conditions, such as the broadband requirement, on the use of USF funds.
That leaves § 254(e), the second sentence of which the FCC asserts authorizes it to
direct that USF recipients provide broadband Internet access to customers upon
reasonable request. The threshold question we must address, under Chevron, is whether
Congress in § 254(e) “has directly spoken to the precise question at issue,” 467 U.S. at
842, i.e., did Congress in the second sentence of § 254(e) delegate authority to the FCC to
identify precisely what a recipient of USF funds must do with those funds, id. at 844.
As noted above, the second sentence of subsection (e) provides that “[an eligible
telecommunications] carrier [designated under 47 U.S.C. § 214(e)] that receives [Federal
universal service] support shall use that support only for the provision, maintenance, and
upgrading of facilities and services for which the support is intended.” 47 U.S.C. §
254(e). Quite clearly, this language does not explicitly delegate any authority to the FCC.
But the question remains whether this language can reasonably be construed, as the FCC
suggests, as an implicit grant of authority to specify what a USF recipient may or must do
with the funds?
Upon careful examination, we conclude that the FCC’s interpretation of § 254(e) is
not “arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 U.S. at
844. Congress clearly intended, by way of the second sentence of § 254(e), to mandate
45
that USF funds be used by recipients “only for the provision, maintenance, and upgrading
of facilities and services for which the support is intended.” And it seems highly unlikely
that Congress would leave it to USF recipients to determine what “the support is
intended” for. Instead, as the FCC suggests, it is reasonable to conclude that Congress
left a gap to be filled by the FCC, i.e., for the FCC to determine and specify precisely how
USF funds may or must be used. And, as the FCC explained in the Order, carriers “that
benefit from public investment in their networks must be subject to clearly defined
obligations associated with the use of such funding.” JA at 418 (Order ¶ 74).
The FCC also, in our view, reasonably concluded that Congress’s use of the terms
“facilities” and “service” in the second sentence of § 254(e) afforded the FCC “the
flexibility not only to designate the types of telecommunications services for which
support would be provided, but also to encourage the deployment of the types of facilities
that will best achieve the principles set forth in section 254(b).” Id. at 412-13 (Order ¶
64). Indeed, the FCC’s interpretation “ensures that the term[s] [‘facilities’ and services’]
carr[y] meaning, as each word in a statute should.” Ransom v. FIA Card Servs., N.A.,
131 S. Ct. 716, 724 (2011).
To be sure, petitioners argue that the concluding phrase of the second sentence of §
254(e), which reads “for which the support is intended,” must be interpreted as a limit on
the FCC’s authority and effectively requires USF funds to be used, whether for
“facilities” or “services,” only in relation to “universal service,” which, petitioners again
note, the FCC has never expressly defined to include broadband or VoIP services. Pet’r
46
Br. 3 at 22-23. But that is not the only, or even the most sensible, interpretation of the
phrase “for which the support is intended.” Indeed, petitioners’ proposed interpretation
relies on the implicit assumption that USF funds were intended solely to support the
provision of universal service. Had Congress intended such a result, however, it clearly
could have said so in a more precise manner. For example, the concluding phrase could
have read “for universal service” (rather than “for which the support is intended”).
Because Congress instead chose to utilize broader language, it was certainly reasonable
for the FCC to have concluded that the language was intended as an implicit grant of
authority to the FCC to flesh out precisely what “facilities” and “services” USF funds
should be used for. And the FCC’s interpretation, we note, is consistent both with §
254(c)(1)’s express grant of authority to the FCC to periodically redefine “universal
service” and § 254(b)’s express charge to the FCC to “base policies for the preservation
and advancement of universal services on” a specific set of controlling principles outlined
by Congress.
That leads to one final point regarding the FCC’s interpretation of the second
sentence of § 254(e). The FCC concluded, in pertinent part, that Congress, “[b]y
referring [in the second sentence of § 254(e)] to ‘facilities’ and ‘services’ as distinct items
for which [USF] funds may be used, . . . granted the [FCC] the flexibility not only to
designate the types of telecommunications services for which support would be provided,
but also to encourage the deployment of types of facilities that will best achieve the
principles set forth in section 254(b) and any other universal service principle that the
47
[FCC] may adopt under section 254(b)(7).” JA at 412 (Order ¶ 64). This interpretation,
in our view, is reasonable because it “consider[s] the operation of the statute as a whole.”
Adoptive Couple v. Baby Girl, 133 S. Ct. 2552, 2573 (2013). Section 254(b) clearly states
that the FCC “shall base policies for the preservation and advancement of universal
service” on six specific principles outlined by Congress (in subsections (b)(1) through
(7)), as well as on “[s]uch other principles as . . . the [FCC] determine[s] are necessary
and appropriate for the protection of the public interest, convenience, and necessity and
are consistent with th[e] Act.” By interpreting the second sentence of § 254(e) as an
implicit grant of authority that allows it to decide how USF funds shall be used by
recipients, the FCC also acts in a manner consistent with the directive in § 254(b) and
allows itself to make funding directives that are consistent with the principles outlined in
§ 254(b)(1) through (7).
Thus, in sum, we conclude that petitioners are wrong in arguing that § 254
unambiguously bars the FCC from conditioning USF funding on recipients’ agreement to
provide broadband internet access services.
c) Is the FCC prohibited from providing USF support to entities that do not
provide telecommunications services?
Petitioners also assert that the FCC exceeded the authority granted to it under §
254 by “extending USF support to non-ETCs for provision of broadband Internet access,
a non-telecommunications service.” Pet’r Br. 3 at 1. In support, petitioners note that §
254(e) “provides that only ‘eligible telecommunications carriers,’ i.e., those
48
telecommunications carriers designated [by the FCC or a state commission] under Section
214, ‘shall be eligible to receive specific Federal universal service support.’” Id. at 17
(quoting 47 U.S.C. § 254(e)). “To ensure that USF support is limited to
telecommunications carriers providing telecommunications service,” petitioners assert,
Section 254(e) also provides that “‘[a] carrier that receives such support shall use that
support only for the provision, maintenance, and upgrading of facilities and services for
which the support is intended.’” Id. (quoting § 254(e)). In turn, petitioners argue, “[t]he
[FCC’s] broadband condition is unlawful because it does not limit support to
telecommunications carriers or require that USF be used for telecommunications
services.” Id. “Instead,” they argue, “it provides USF support for ‘voice telephony
service,’ which it called ‘a technically neutral approach, allowing companies to provision
voice service over any platform, including the PSTN and IP networks.’” Id. at 17-18
(internal citation omitted). Thus, petitioners argue, “[w]hile [USF] recipients must
provide ‘voice telephony service,’ they are not required to provide telecommunications
service subject to common carrier regulations under Title II of the Communications Act.”
Id. at 18 (emphasis in original; internal citation omitted). “Instead,” petitioners argue, “a
[USF] recipient may provide voice telephony service as VoIP, which the FCC has
declined to classify as a telecommunications service.” Id.
The FCC, acting under the express authority granted to it under § 254(c)(1), chose
in the Order “to simplify how [it] describe[d],” JA at 411 (Order ¶ 62), the types of
telecommunications services that are encompassed by “universal service” and thus
49
“supported by Federal universal service support mechanisms,” 47 U.S.C. § 254(c)(1).
Prior to the Order, the FCC had defined those services “in functional terms (e.g., voice
grade access to the PSTN, access to emergency services).” JA at 411 (Order at ¶ 62). In
the Order, the FCC chose instead to employ “a single supported service designated as
‘voice telephony service.’” Id. The FCC indicated that its primary justification for
adopting this designation was the fact that “consumers are [increasingly] obtaining voice
services not through traditional means but instead through interconnected VoIP providers
offering service over broadband networks.” Id. at 412 (Order ¶ 63). Although petitioners
do not expressly challenge the FCC’s decision in this regard, they contend that the FCC
has used this new, simpler classification to provide funding to what they claim are entities
that do not provide telecommunications services.
The fact remains, however, that in order to obtain USF funds, a provider must be
designated by the FCC or a state commission as an “eligible telecommunications carrier”
under 47 U.S.C. § 214(e). See 47 U.S.C. § 254(e) (“only an eligible telecommunications
carrier designated under section 214(e) . . . shall be eligible to receive specific Federal
universal service support.”). And, under the existing statutory framework, only “common
carriers,” defined as “any person engaged as a common carrier for hire . . . in interstate or
foreign communication by wire or radio or in interstate or foreign radio transmission of
energy,” 47 U.S.C. § 153(10), are eligible to be designated as “eligible
telecommunications carriers,” 47 U.S.C. § 214(e). Thus, under the current statutory
regime, only ETCs can receive USF funds that could be used for VoIP support.
50
Consequently, there is no imminent possibility that broadband-only providers will receive
USF support under the FCC’s Order, since they cannot be designated as “eligible
telecommunications carriers.” As a result, we agree with the FCC that the petitioners’
argument “will not be ripe for judicial review unless and until a state commission (or the
FCC) designates . . . an entity” that is not a telecommunications carrier as “an ‘eligible
telecommunications carrier’” under § 214(e). FCC Br. 3 at 5.
(d) Does Section 706 of the Act, 47 U.S.C. § 1302, serve as an independent
grant of authority to the FCC to impose the broadband requirement?
In a related attack on the FCC’s broadband requirement, petitioners argue that
Section 706 of the Act, 47 U.S.C. § 1302, does not, contrary to the conclusion reached by
the FCC in the Order, serve as an independent grant of authority to the FCC.
Section 706 of the 1996 Act, entitled “Advanced telecommunications incentives,”
provides, in pertinent part, as follows:
(a) In general. The Commission and each State commission with
regulatory jurisdiction over telecommunications services shall encourage
the deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans (including, in particular,
elementary and secondary schools and classrooms) by utilizing, in a manner
consistent with the public interest, convenience, and necessity, price cap
regulation, regulatory forbearance, measures that promote competition in
the local telecommunications market, or other regulating methods that
remove barriers to infrastructure investment.
(b) Inquiry. The Commission shall, within 30 months after the date of
enactment of this Act [enacted Oct. 10, 2008], and annually thereafter,
initiate a notice of inquiry concerning the availability of advanced
telecommunications capability to all Americans (including, in particular,
51
elementary and secondary schools and classrooms) and shall complete the
inquiry within 180 days after its initiation. In the inquiry, the Commission
shall determine whether advanced telecommunications capability is being
deployed to all Americans in a reasonable and timely fashion. If the
Commission’s determination is negative, it shall take immediate action to
accelerate deployment of such capability by removing barriers to
infrastructure investment and by promoting competition in the
telecommunications market.
***
(d) Definitions. For purposes of this subsection:
(1) Advanced telecommunications capability. The term “advanced
telecommunications capability” is defined, without regard to any
transmission media or technology, as high-speed, switched,
broadband telecommunications capability that enables users to
originate and receive high-quality voice, data, graphics, and video
telecommunications using any technology.
47 U.S.C. § 1302.
In the Order, the FCC interpreted Section 706 as providing it with “independent
authority . . . to fund the deployment of broadband networks.” JA at 414 (Order ¶ 66).
The FCC explained the basis for its decision as follows:
66. . . . In section 706, Congress recognized the importance of
ubiquitous broadband deployment to Americans’ civic, cultural, and
economic lives and, thus, instructed the Commission to “encourage the
deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans.” Of particular importance,
Congress adopted a definition of “advanced telecommunications capability”
that is not confined to a particular technology or regulatory classification.
Rather, “‘advanced telecommunications capability’ is defined, without
regard to any transmission media or technology, as high-speed, switched,
broadband telecommunications capability that enables users to originate and
receive high-quality voice, data, graphics, and video communications using
any technology.” Section 706 further requires the Commission to
“determine whether advanced telecommunications capability is being
deployed to all Americans in a reasonable and timely fashion” and, if the
52
Commission concludes that it is not, to “take immediate action to accelerate
deployment of such capability by removing barriers to infrastructure
investment and by promoting competition in the telecommunications
market.” The Commission has found that broadband deployment to all
Americans has not been reasonable and timely and observed in its most
recent broadband deployment report that “too many Americans remain
unable to fully participate in our economy and society because they lack
broadband.” This finding triggers our duty under section 706(b) to
“remov[e] barriers to infrastructure investment” and “promot[e]
competition in the telecommunications market” in order to accelerate
broadband deployment throughout the Nation.
67. Providing support for broadband networks helps achieve section
706(b)’s objectives. First, the Commission has recognized that one of the
most significant barriers to investment in broadband infrastructure is the
lack of a “business case for operating a broadband network” in high-cost
areas “[i]n the absence of programs that provide additional support.”
Extending federal support to carriers deploying broadband networks in
high-cost areas will thus eliminate a significant barrier to infrastructure
investment and accelerate broadband deployment to unserved and
underserved areas of the Nation. The deployment of broadband
infrastructure to all Americans will in turn make services such as
interconnected VoIP service accessible to more Americans.
68. Second, supporting broadband networks helps “promot[e]
competition in the telecommunications market,” particularly with respect to
voice services. As we have long recognized, “interconnected VoIP service
‘is increasingly used to replace analog voice service.’” Thus, we previously
explained that requiring interconnected VoIP providers to contribute to
federal universal service support mechanisms promoted competitive
neutrality because it “reduces the possibility that carriers with universal
service obligations will compete directly with providers without such
obligations.” Just as “we do not want contribution obligations to shape
decisions regarding the technology that interconnected VoIP providers use
to offer voice services to customers or to create opportunities for regulatory
arbitrage,” we do not want to create regulatory distinctions that serve no
universal service purpose or that unduly influence the decisions providers
will make with respect to how best to offer voice services to consumers.
The “telecommunications market” — which includes interconnected VoIP
and by statutory definition is broader than just telecommunications services
— will be more competitive, and thus will provide greater benefits to
53
consumers, as a result of our decision to support broadband networks,
regardless of regulatory classification.
69. By exercising our authority under section 706 in this manner, we
further Congress’s objective of “accelerat[ing] deployment” of advanced
telecommunications capability “to all Americans.” Under our approach,
federal support will not turn on whether interconnected VoIP services or the
underlying broadband service falls within traditional regulatory
classifications under the Communications Act. Rather, our approach
focuses on accelerating broadband deployment to unserved and underserved
areas, and allows providers to make their own judgments as to how best to
structure their service offerings in order to make such deployment a reality.
70. We disagree with commenters who assert that we lack authority
under section 706(b) to support broadband networks. While 706(a) imposes
a general duty on the Commission to encourage broadband deployment
through the use of “price cap regulation, regulatory forbearance, measures
that promote competition in the local telecommunications market, or other
regulating methods that remove barriers to infrastructure investment,”
section 706(b) is triggered by a specific finding that broadband capability is
not being “deployed to all Americans in a reasonable and timely fashion.”
Upon making that finding (which the Commission has done), section 706(b)
requires the Commission to “take immediate action to accelerate”
broadband deployment. Given the statutory structure, we read section
706(b) as conferring on the Commission the additional authority, beyond
what the Commission possesses under section 706(a) or elsewhere in the
Act, to take steps necessary to fulfill Congress’s broadband deployment
objectives. Indeed, it is hard to see what additional work section 706(b)
does if it is not an independent source of authority.
71. We also reject the view that providing support for broadband
networks under section 706(b) conflicts with section 254, which defines
universal service in terms of telecommunications services. Information
services are not excluded from section 254 because of any policy judgment
made by Congress. To the contrary, Congress contemplated that the federal
universal service program would promote consumer access to both
advanced telecommunications and advanced information services “in all
regions of the Nation.” When Congress enacted the 1996 Act, most
consumers accessed the Internet through dial-up connections over the
PSTN, and broadband capabilities were provided over tariffed common
carrier facilities. Interconnected VoIP services had only a nominal presence
54
in the marketplace in 1996. It was not until 2002 that the commission first
determined that one form of broadband — cable modem service — was a
single offering of an information service rather than separate offerings of
telecommunications and information services, and only in 2005 did the
Commission conclude that wireline broadband service should be governed
by the same regulatory classification. Thus, marketplace and technological
developments and the Commission’s determinations that broadband
services may be offered as information services have had the effect of
removing such services from the scope of the explicit reference to
“universal service” in section 254(c). Likewise, Congress did not exclude
interconnected VoIP services from the federal universal service program;
indeed, there is no reason to believe it specifically anticipated the
development and growth of such services in the years following the
enactment of the 1996 Act.
72. The principles upon which the Commission “shall base policies
for the preservation and advancement of universal service” make clear that
supporting networks used to offer services that are or may be information
services for purposes of regulatory classifications is consistent with
Congress’s overarching policy objectives. For example, section 254(b)(2)’s
principle that “[a]ccess to advanced telecommunications and information
services should be provided in all regions of the Nation” dovetails
comfortably with section 706(b)’s policy that “advanced
telecommunications capability [be] deployed to all Americans in a
reasonable and timely fashion.” Our decision to exercise authority under
Section 706 does not undermine section 254’s universal service principles,
but rather ensures their fulfillment. By contrast, limiting federal support
based on the regulatory classification of the services offered over broadband
networks as telecommunications services would exclude from the universal
service program providers who would otherwise be able to deploy
broadband infrastructure to consumers. We see no basis in the statute, the
legislative history of the 1996 Act, or the record of this proceeding for
concluding that such a constricted outcome would promote the
Congressional policy objectives underlying sections 254 and 706.
73. Finally, we note the limited extent to which we are relying on
section 706(b) in this proceeding. Consistent with our longstanding policy
of minimizing regulatory distinctions that serve no universal service
purpose, we are not adopting a separate universal service framework under
section 706(b). Instead, we are relying on section 706(b) as an alternative
basis to section 254 to the extent necessary to ensure that the federal
55
universal service program covers services and networks that could be used
to offer information services as well as telecommunications services.
Carriers seeking federal support must still comply with the same universal
service rules and obligations set forth in sections 254 and 214, including the
requirement that such providers be designated as eligible to receive support,
either from state commissions or, if the provider is beyond the jurisdiction
of the state commission, from this Commission. In this way, we ensure that
our exercise of section 706(b) authority will advance, rather than detract
from, the universal service principles established under section 254 of the
Act.
JA at 414-18 (Order ¶¶ 66-73) (internal footnotes omitted).
Petitioners offer a number of arguments in opposition to the FCC’s conclusions.
First, petitioners assert that the FCC previously concluded, in a 1998 order entitled In re
Deployment of Wireline Servs. Offering Advanced Telecomms. Capability, 13 F.C.C.R.
24,012, 24,047, ¶ 77 (1998) (In re Deployment), that Section 706 “does not constitute an
independent grant of authority.” That prior conclusion, petitioners assert, is still binding
and is directly contrary to the conclusion reached by the FCC in the Order at issue.
The problem with petitioners’ argument, however, is that the FCC’s conclusion in
the 1998 order was confined to interpreting Section 706(a). See In re Deployment, 13
F.C.C.R. at 24,046-24,048. The 1998 order made no mention of, let alone attempted to
interpret, Section 706(b). And, as outlined above, it is Section 706(b) that the FCC
concludes in the Order provides it with independent authority relevant to this case. Thus,
petitioner’s argument fails.
Petitioners next take issue with the FCC’s conclusion, in ¶ 70 of the Order, that “it
is hard to see what additional work section 706(b) does if it is not an independent source
56
of authority.” According to petitioners, “[s]ubsection (b) . . . is not redundant at all.”
Pet’r Br. 3 at 25. More specifically, petitioners assert that subsection (a) imposes a
general duty on the FCC without mandating any specific action, and that subsection (b),
in turn, “mandates ‘immediate action’ if the FCC reaches a negative determination on
‘whether advanced telecommunications capability is being deployed to all Americans in a
reasonable and timely fashion.’” Id. (quoting 47 U.S.C. § 1302(b)). “This language,”
petitioners argue, “tells the FCC to put the powers it has to ‘immediate action’ but does
not purport to grant any new powers.” Id. at 26.
We reject petitioners’ arguments. To be sure, both section 706(a) and section
706(b) focus on “the deployment . . . of advanced telecommunications capability to all
Americans.” Further, both sections make reference, in terms of achieving such
deployment, to the removal of “barriers to infrastructure investment.” But that is where
the similarities end. As noted, section 706(a) is a general directive stating that the FCC
“shall encourage the deployment . . . of advanced telecommunications capability to all
Americans . . . by utilizing . . . price cap regulation, regulatory forbearance, measures that
promote competition in the local telecommunications market, or other regulating methods
that remove barriers to infrastructure investment.” The FCC has concluded “that section
706(a) gives [it] an affirmative obligation to encourage the deployment of advanced
services, relying on [its] authority established elsewhere in the [1996] Act.” In re
Deployment, 13 F.C.C.R. at 24,046 (¶74). In other words, the FCC has concluded that
section 706(a) is “not . . . an independent grant of authority, but rather, . . . a direction to
57
the [FCC] to use the forbearance [and other] authority granted elsewhere in the Act.” Id.
at 24,047 (¶76).
In contrast, section 706(b) requires the FCC to perform two related tasks. First,
the FCC must conduct an annual inquiry to “determine whether advanced
telecommunications capability is being deployed to all Americans in a reasonable and
timely fashion.” Second, and most importantly for purposes of this appeal, if the FCC’s
annual “determination is negative,” it is required to “take immediate action to accelerate
deployment of such capability by removing barriers to infrastructure investment and by
promoting competition in the telecommunications market.” Unlike section 706(a),
section 706(b) does not specify how the FCC is to accomplish this latter task, or
otherwise refer to forms of regulatory authority that are afforded to the FCC in other parts
of the Act. As the FCC concluded in the Order, section 706(b) thus appears to operate as
an independent grant of authority to the FCC “to take steps necessary to fulfill Congress’s
broadband deployment objectives,” and “it is hard to see what additional work section
706(b) does if it is not an independent source of authority.” JA at 416 (Order ¶ 70).
Lastly, petitioners argue that section 706(b), even if it does function as an
independent source of authority for the FCC, cannot allow the FCC to ignore the
limitations that section 254 imposes on the use of USF funds. Pet’r Br. 3 at 27. In
support, petitioners repeat their previous argument that “[s]ection 254 expressly limits the
availability of USF support to telecommunications carriers and defines
‘telecommunications services’ as the only services eligible for support.” Id. For the
58
reasons we have outlined above, however, that argument is without merit. In other words,
section 254 does not limit the use of USF funds to “telecommunications services.” Thus,
to the extent the FCC relies on section 706(b) as support for its broadband requirement,
section 706(b) is not contrary to section 254.
In sum, then, we conclude that the FCC reasonably construed section 706(b) as an
additional source of support for its broadband requirement.
2. Did the FCC act arbitrarily in simultaneously imposing the broadband
requirement and reducing USF support?
Petitioners next complain that the FCC’s broadband requirement was “impose[d]
. . . in the face of a net reduction to USF and related intercarrier compensation revenues
for rural carriers.” Pet’r Br. 3 at 29 (emphasis in original). They argue, in turn, that
“[t]his ‘do more with less’ directive flies in the face of Congress’s interrelated
requirements under Section 254(b) that the FCC use USF to keep quality service
‘affordable,’ that consumers in high cost areas receive services comparable to those
available to their urban counterparts at ‘reasonably comparable’ rates, that USF support
mechanisms be ‘predictable and sufficient’ to preserve and advance universal service, and
that telecommunications service providers contribute equitably to achieve that objective.”
Id. (citing 47 U.S.C. §§ 254(b)(1), (3), (5)). And, they argue, the FCC “made no attempt
to measure whether reduced support, coupled with the added costs of the broadband
obligation, will allow carriers to meet the universal service objectives of Section 254(b).”
Id. at 30.
59
As previously noted, § 254(b) provides as follows:
(b) Universal service principles. The [Federal-State] Joint Board[, which
was created in subsection (a) by the 1996 Act,] and the Commission shall
base policies for the preservation and advancement of universal service on
the following principles:
(1) Quality and rates. Quality services should be available at just,
reasonable, and affordable rates.
(2) Access to advanced services. Access to advanced
telecommunications and information services should be provided in
all regions of the Nation.
(3) Access in rural and high-cost areas. Consumers in all regions of
the Nation, including low-income consumers and those in rural,
insular, and high cost areas, should have access to
telecommunications and information services, including
interexchange services and advanced telecommunications and
information services, that are reasonably comparable to those
services provided in urban areas and that are available at rates that
are reasonably comparable to rates charged for similar services in
urban areas.
(4) Equitable and nondiscriminatory contributions. All providers of
telecommunications services should make an equitable and
nondiscriminatory contribution to the preservation and advancement
of universal service.
(5) Specific and predictable support mechanisms. There should be
specific, predictable and sufficient Federal and State mechanisms to
preserve and advance universal service.
(6) Access to advanced telecommunications services for schools,
health care, and libraries. Elementary and secondary schools and
classrooms, health care providers, and libraries should have access to
advanced telecommunications services as described in subsection
(h).
(7) Additional principles. Such other principles as the Joint Board
and the Commission determine are necessary and appropriate for the
protection of the public interest, convenience, and necessity and are
consistent with this Act.
47 U.S.C. § 254(b).
60
This is not the first time we have analyzed § 254(b). In Qwest Corp., we noted
that “[t]he plain text of the statute . . . indicates a mandatory duty on the FCC” to “base its
universal policies on the principles listed in § 254(b).” 258 F.3d at 1200. “However,” we
emphasized, “each of the principles in § 254(b) internally is phrased in terms of
‘should,’” which “indicates a recommended course of action, but does not itself imply the
obligation associated with ‘shall.’” Id. Consequently, we held, “the FCC must base its
policies on the principles, but any particular principle can be trumped in the appropriate
case.” Id. In other words, “the FCC may exercise its discretion to balance the principles
against one another when they conflict, but may not depart from them altogether to
achieve some goal.” Id.
a) Does the Order fail to ensure that USF support for rural carriers is
sufficient to preserve and advance universal service?
Petitioners argue that the FCC failed to ensure that USF support for rural carriers is
“‘sufficient’ . . . to achieve Congress’s goals.” Pet’r Br. 3 at 30. “The overarching
problem,” petitioners assert, “is that the [FCC] improperly limited its analysis to whether,
without reform [i.e., a fixed budget], USF support would be excessive.” Id. at 31
(emphasis in original). As a result, petitioners assert, “[t]he Order leaves unanalyzed
whether reduced USF support will be sufficient to preserve and enhance traditional voice
services.” Id.
The term “sufficient” is mentioned in both § 254(b)(5) (“There should be specific,
predictable and sufficient Federal and State mechanisms to preserve and advance
61
universal service.”) and § 254(e) (“Any such support should be . . . sufficient to achieve
the purposes of this section.”). The Fifth Circuit has concluded, however, that “§ 254(b)
[simply] identifies a set of principles and does not lay out any specific commands for the
FCC,” and that “[e]ven § 254(e), which is framed as a direct, statutory command, is
ambiguous as to what constitutes ‘sufficient’ support.” Texas Office of Public Util.
Counsel v. FCC, 183 F.3d 393, 425 (5th Cir. 1999). Consequently, the Fifth Circuit
concluded, a reviewing court need “not consider the language an expression of
Congress’s ‘unambiguous intent’ allowing Chevron step-one review,” and instead need
only “review [the FCC’s] interpretation for reasonability under Chevron step-two.” Id. at
425-26. Because we agree with the Fifth Circuit, we need determine in this case only that
the FCC’s “sufficiency” analysis was not arbitrary, capricious, or manifestly contrary to
the statute.
At the outset, we note that the FCC’s counsel conceded at oral argument that the
FCC, in preparing the Order and establishing the amount of USF funding, made no
attempt to determine the precise cost for each potential USF recipient to fulfill the
broadband requirement. According to the FCC’s counsel, that would have been
exceedingly difficult to do, given the fact that there are approximately eight hundred rate-
62
of-return carriers in the United States.6 Instead, the FCC chose a different strategy for
achieving the goal of budgetary “sufficiency.”7
In setting the overall budget for the Connect America Fund (CAF), the FCC
expressed a “commitment to controlling the size of the universal service fund,” and,
consequently, it “sought comment on setting an overall budget for the CAF such that the
sum of the CAF and any existing legacy high-cost support mechanisms . . . in a given
year would remain equal to current funding levels.” JA at 437 (Order ¶ 121). “[A] broad
cross-section of interested stakeholders . . . agreed” with this proposal, “with many urging
the [FCC] to set that budget at $4.5 billion per year, the estimated size of the program in
fiscal year (FY) 2011.” Id. (Order ¶ 122). After considering these comments, the FCC
concluded that the “establish[ment] [of] a defined budget for the high-cost component of
6
As discussed below, even objectors to the FCC’s proposed budget failed to offer
the FCC details of their individual circumstances.
7
The dissent, relying on Qwest Corp., effectively rejects the FCC’s strategy and
takes it to task for not “estimat[ing] . . . the cost of its new broadband requirements on the
industry as a whole.” Dissent at 5. But Qwest, though useful for its general analysis of §
254(b), does not provide a relevant point of comparison when it comes to assessing
whether the Order in this case achieves the goal of budgetary “sufficiency.” That is
because Qwest dealt with a cost model employed by the FCC for purposes of determining
universal service funding for non-rural telecommunications carriers in areas “where the
average cost of providing service exceeded [a] national benchmark defined in terms of the
average cost across the nation.” 258 F.3d at 1197. Necessarily, a cost model is intended
to estimate, with some degree of accuracy, the costs of a product or project. In contrast,
the Order at issue in this case never purported, nor was it statutorily required, to estimate
the costs of broadband deployment, either per carrier or for the industry as a whole.
We also, in any event, question how the FCC could have “estimate[d] . . . the cost
of its new broadband requirements on the industry as a whole” when, as the dissent itself
concedes, the FCC “could not have determined the cost of the broadband condition for
each carrier seeking relief through the Universal Service Fund.” Dissent at 5.
63
the universal service fund” would “best ensure that [it] ha[d] in place ‘specific,
predictable, and sufficient’ funding mechanisms to ensure [its] universal service
objectives.” Id. (Order ¶ 123). In reaching this conclusion, the FCC expressed concern
that, “were the CAF to significantly raise the end-user cost of services, it could undermine
[the FCC’s] broader policy objectives to promote broadband and mobile deployment and
adoption.” Id. at 438 (Order ¶ 124). And, consistent with many of the comments it
received, the FCC “establish[ed] an annual funding target, set at the same level as [its]
current estimate for the size of the high-cost program for FY 2011, of no more than $4.5
billion.”8 Id. (Order ¶ 125). The FCC found “that amount [was not] excessive given” its
decision to “expand the high-cost program in important ways to promote broadband and
mobility; facilitate intercarrier compensation reform; and preserve universal voice
connectivity.” Id. “At the same time,” the FCC found that “a higher budget [was not]
warranted, given the substantial reforms [it was] adopt[ing] to modernize [its] legacy
funding mechanisms to address long-standing inefficiencies and wasteful spending.” Id.
The FCC also noted that it would need “to evaluate the effect of these reforms before
adjusting [its] budget,” id., and it specifically stated that it “anticipate[d] . . . revisit[ing]
and adjust[ing] accordingly the appropriate size of each of [its] programs by the end of
the six-year period, based on market developments,” id. at 399 (Order ¶ 18).
8
Of this amount, “approximately $4 billion . . . will be divided between areas
served by price cap carriers and areas served by rate-of-return carriers, with no more than
$1.8 billion available annually for price cap territories . . . and up to $2 billion available
annually for rate-of-return territories.” JA at 438 (Order ¶ 126).
64
After establishing this overall budget, the FCC stated that it intended to “step away
from distinctions based on whether a company is classified as a rural carrier or a non-
rural carrier” and to “establish two pathways for how support is determined—one for
companies whose interstate rates are regulated under price caps, and the other for those
whose interstate rates are regulated under rate-of-return.” Id. at 440 (Order ¶ 129). The
FCC then proceeded to allocate portions of the overall CAF budget to these two groups of
carriers.
Turning first to price cap carriers, the FCC noted that they serve “[m]ore than 83
percent of the approximately 18 million Americans who lack access to fixed broadband.”
Id. at 439 (Order ¶ 127). The FCC outlined a two-phase framework for distributing CAF
funds to these carriers. “CAF Phase I,” the FCC explained, would “freeze support under
[its] existing high-cost support mechanisms . . . for price cap carriers and their rate of
return affiliates,” and would also, in order “to spur the deployment of broadband in
unserved areas, . . . allocate up to $300 million in additional support to such carriers.” Id.
(Order ¶ 128). The distribution of this additional, or “incremental support,” the FCC
stated, would be “distribute[d] . . . using a simplified forward-looking cost estimate” that
was not objected to by any party. Id. at 442 (Order ¶ 133); see id. at 442-43 (Order ¶
134). The FCC emphasized that this incremental support was not intended to cover the
full costs of broadband deployment:
We acknowledge that our existing cost model, on which our distribution
mechanism for CAF Phase I incremental funding is based, calculates the
cost of providing voice service rather than broadband service, although we
65
are requiring carriers to meet broadband deployment obligations if they
accept CAF Phase I incremental funding. We find that using estimates of
the cost of deploying voice service, even though we impose broadband
deployment obligations, is reasonable in the context of this interim support
mechanism. First, this interim mechanism is designed to identify the most
expensive wire centers, and the same characteristics that make it expensive
to provide voice service to a wire center (e.g., lack of density) make it
expensive to provide broadband service to that wire center as well. Using a
cost estimation function based on our existing model will help to identify
which wire centers are likely to be the most expensive to provide broadband
service to, even if it does not reliably identify precisely how expensive those
wire centers will be to serve. Second, and related, our funding threshold is
determined by our budget limit of $300 million for CAF Phase I
incremental support rather than by a calculation of what amount we expect
a carrier to need to serve that area. That is, this interim mechanism is not
designed to “fully” fund any particular wire center—it is not designed to
fund the difference between (i) the deployment cost associated with the
most expensive wire center in which we could reasonably expect a carrier to
deploy broadband without any support at all and (ii) the actual estimated
deployment cost for a wire center. Instead, the interim mechanism is
designed to provide support to carriers that serve areas where we expect that
providing broadband service will require universal service support.
Id. at 444 (Order ¶ 137 n.220). In short, the FCC stated, its objective for CAF Phase I
was not “to identify the precise cost of deploying broadband to any particular location,”
but instead “to identify an appropriate standard to spur immediate broadband deployment
to as many unserved locations as possible, given [its] budget constraint.”9 Id. at 445
9
For purposes of CAF Phase I incremental funding, the FCC found “that a one-
time support payment of $775 per unserved location for the purpose of calculating
broadband deployment obligations for companies that elect[ed] to receive additional
support [wa]s appropriate.” JA at 445 (Order ¶ 139). In arriving at this amount, the FCC
“considered broadband deployment projects undertaken by a mid-sized price cap carrier
under the BIP program,” id. (Order ¶ 140), “data from the analysis done as part of the
National Broadband Plan,” id. (Order ¶ 141), its own “analysis using the ABC plan cost
model, which calculate[d] the cost of deploying broadband to unserved locations on a
census block basis,” id. at 444-45 (Order ¶ 142), and “estimates of the per-location cost of
extending broadband to unserved locations” placed in the record by several carriers, id. at
66
(Order ¶ 139). Relatedly, the FCC noted that it “expect[ed] that carriers w[ould]
supplement incremental support with their own investment.”10 Id. at 446 (Order ¶ 144).
The FCC’s Order also “adopt[ed] Phase II of the Connect America Fund” for
price-cap carriers, which established “a framework for extending broadband to millions of
unserved locations over a five-year period, . . . while sustaining existing voice and
broadband services.” Id. at 452 (Order ¶ 156). “Within the total $4.5 billion annual
[CAF] budget, [the FCC] set the total annual CAF budget for areas currently served by
price cap carriers at no more than $1.8 billion for a five-year period.” Id. (Order ¶ 158).
The FCC concluded that this amount “represent[ed] a reasonable balance” of several
considerations, including its “universal service mandate to unserved consumers residing
in [price cap] communities,” and its need “to balance many competing demands for
universal service funds.” Id. And the FCC “adopt[ed] the following methodology for
providing CAF support in price cap areas” during CAF Phase II:
First, the Commission will model forward-looking costs to estimate the cost
of deploying broadband-capable networks in high-cost areas and identify at
a granular level the areas where support will be available. Second, using
the cost model, the Commission will offer each price cap LEC annual
support for a period of five years in exchange for a commitment to offer
voice across its service territory within a state and broadband service to
supported locations within that service territory, subject to robust public
interest obligations and accountability standards. Third, for all territories
445 (Order ¶ 143).
10
The Order emphasized that price cap carriers were free to decline CAF Phase I
incremental support, in which case they would be under no obligation to satisfy the
broadband conditions outlined in the Order. JA at 444 (Order ¶ 138); id. at 447 (Order ¶
144).
67
for which price cap LECs decline to make that commitment, the
Commission will award ongoing support through a competitive bidding
mechanism.
Id. at 454-55 (Order ¶ 166).
The FCC then turned to rate-of-return carriers and, as with price cap carriers,
established a new funding framework. To begin with, the FCC allocated “approximately
$2 billion per year” to rate-of-return carriers, an amount “approximately equal to current
levels.” Id. at 465 (Order ¶ 195). In doing so, the FCC expressed its belief “that keeping
rate-of-return carriers at approximately current support levels in the aggregate during
th[e] transition [to a more incentive-based form of regulation] appropriately balance[d]
the competing demands on universal service funding and the desire to sustain service to
consumers and provide continued incentives for broadband expansion as [it] improve[d]
the efficiency of rate-of-return mechanisms.” Id.
Along with setting this annual budget for rate-of-return carriers, the FCC
“implement[ed] a number of reforms to eliminate waste and inefficiency and improve
incentives for rational investment and operation by rate-of-return LECs.” Id. These
included: (1) establish[ing] parameters for what actual unseparated loop and common line
costs carriers [could] seek recovery for under the federal universal service program,” id.
(Order ¶ 196); (2) “reduc[ing] . . . high-cost loop support to the extent that a [rural]
carrier’s local rates [we]re below a specified urban local rate floor,” id. at 466 (Order ¶
197); (3) eliminating safety net additive support received as a result of line loss, id.
(Order ¶ 198); (4) eliminating local switching support, id. (Order ¶ 199); (5)
68
“eliminat[ing] support for rate-of-return companies in any study area that is completely
overlapped by an unsubsidized competitor,” id. (Order ¶ 200); and (6) “adopt[ing] a rule
that support in excess of $250 per line per month will no longer be provided to any
carrier,” id. (Order ¶ 201).
In a section of the Order entitled “Public Interest Obligations of Rate-of-Return
Carriers,” the FCC announced its requirement “that [rate-of-return] recipients use their
support in a manner consistent with achieving universal availability of voice and
broadband.” Id. at 467 (Order ¶ 205). But, the FCC emphasized, “rather than
establishing a mandatory requirement to deploy broadband-capable facilities to all
locations within their service territory, [it would] continue to offer a more flexible
approach for these smaller carriers.” Id. (Order ¶ 206). In particular, the FCC
emphasized that “rate-of-return carriers w[ould] not necessarily be required to build out to
and serve the most expensive locations within their service area,” id. at 468 (Order ¶
207), nor would they be subject to “intermediate build-out milestones or increased speed
requirements for future years,” id. at 467-68 (Order ¶ 206). Thus, the relative cost of
providing broadband service to a particular location is a relevant factor in determining
whether a customer’s request to a rate-of-return carrier for broadband service is
reasonable. And, as the FCC’s counsel emphasized at oral argument, the Order leaves it
to rate-of-return carriers in the first instance to determine whether a customer’s request
for broadband service is reasonable.
69
In a separate section discussing the “Connect America Fund in Remote Areas,” the
Order expressly “exempted the most remote areas, including fewer than 1 percent of all
American homes, from the home and business broadband service obligations that
otherwise apply to CAF recipients.” Id. at 564-65 (Order ¶ 533). The Order also noted
that “universal service revenues account for [only] approximately 30 percent of the
typical rate-of-return carrier’s total revenues,” and it concluded that the intercarrier
compensation reforms outlined in the Order “w[ould] provide rate-of-return carriers with
access to a new explicit recovery mechanism in [the Connect American Fund], offering a
source of stable and certain revenues that the [prior] intercarrier system c[ould] no longer
provide.” Id. at 496-97 (Order ¶ 291).
The Order also, in a section entitled “Impact of these Reforms on Rate-of-Return
Carriers and the Communities They Serve,” addressed the likely impact of its proposed
reforms on rate-of-return carriers and the communities served by those carriers. To begin
with, the Order concluded that its intercarrier compensation reforms and set budget would
“provide greater certainty and a more predictable flow of revenues [to those carriers] than
the status quo.” Id. at 495 (Order ¶ 286). The Order in turn opined “that carriers that
invest and operate in a prudent manner w[ould] be minimally affected by th[e] Order.”
Id. at 496 (Order ¶ 289). In support, the Order concluded “that nearly 9 out of 10 rate-of-
return carriers w[ould] see reductions in high-cost universal service receipts of less than
20 percent annually, . . . approximately 7 out of 10 w[ould] see reductions of less than 10
70
percent,” and “almost 34 percent w[ould] see an increase in high-cost universal service
receipts.” Id. (Order ¶ 290).
Lastly, the Order noted that “various parties . . . ha[d] argued that reductions in
current support levels would threaten their financial viability, imperiling service to
consumers in the areas they serve[d].” Id. at 566 (Order ¶ 539). The FCC determined it
could not “evaluate those claims absent detailed information about individualized
circumstances,” and thus “conclude[d] that they [we]re better handled in the course of a
case-by-case review.”11 Id. Consequently, the Order authorizes “any carrier negatively
affected by the universal service reforms” adopted in the Order “to file a petition for
waiver that clearly demonstrates that good cause exists for exempting the carrier from
some or all of those reforms, and that waiver is necessary and in the public interest to
ensure that consumers in the area continue to receive voice service.” Id.
In sum, the FCC determined that budgetary “sufficiency” for price cap and rate-of-
return carriers could be achieved through a combination of measures, including, but not
limited to: (1) maintaining current USF funding levels while reducing or eliminating
waste and inefficiencies that existed in the prior USF funding scheme; (2) affording
11
Although the dissent asserts that “[t]he sufficiency of the budget was challenged
in the FCC proceedings,” it cites to only two objections contained in the record. Dissent
at 3. And, as it turns out, only one of those two (from tribal carrier Gila River
Telecommunications, Inc.) offered any details of the costs of complying with the
broadband requirement (and in that regard, Gila cited only one extreme example, rather
than outlining its average or overall costs of broadband deployment). See JA at 4094
(“Costs of deploying fiber-to-the-home have been as high as $12,000 for a single
residence.”).
71
carriers the authority to determine which requests for broadband service are reasonable;
(3) allowing carriers, when necessary, to use the waiver process; and (4) conducting a
budgetary review by the end of six years. And, relatedly, the FCC quite clearly rejected
any notion that budgetary “sufficiency” is equivalent to “complete” or “full” funding for
carrying out the broadband and other obligations imposed upon carriers who are
voluntary recipients of USF funds. In our view, these determinations were not arbitrary,
capricious, or manifestly contrary to the directives outlined in § 254. To contrary, the
FCC’s determinations, particularly when considered in light of the other statutory
directives the FCC was charged with achieving, were reasonable and sufficient to survive
scrutiny under Chevron step-two analysis.
b) Does the Order fail to ensure service and rate comparability between
rural and urban areas?
According to petitioners, the FCC “acknowledges it has not investigated what
broadband service or rate levels are offered in either rural or urban areas.” Pet’r Br. 3 at
33. Petitioners argue, in turn, that the FCC “cannot possibly confirm that its policies
enable rural carriers to provide broadband service ‘at rates reasonably comparable to rates
charged for similar services in urban areas,’ Section 254(b)(3), if it has failed to
determine the urban rate and service levels to which rural rates and service are to be
compared.” Id. at 33-34.
We reject petitioners’ arguments, however, because they ignore the FCC’s efforts
to accurately assess urban rates and satisfy its statutory obligations. In the Order, the
72
FCC noted that it “ha[d] never compared broadband rates for purposes of section
254(b)(3).” JA at 435 (Order ¶ 113). Consequently, the FCC “directed [its Wireline
Competition Bureau and its Wireless Telecommunications Bureau] to develop a specific
methodology for defining that reasonable range, taking into account that retail broadband
service is not rate regulated and that retail offerings may be defined by price, speed, usage
limits, if any, and other elements.” Id. The FCC also sought “comment on how
specifically to define a reasonable range.” Id. Relatedly, the FCC “delegate[d] to the
Wireline Competition Bureau and Wireless Telecommunications Bureau the authority to
conduct an annual survey of urban broadband rates, if necessary, in order to derive a
national range of rates for broadband service.” Id. at 435 (Order ¶ 114). “By conducting
[its] own survey,” the FCC concluded, it “w[ould] be able to tailor the data specifically to
[its] need to satisfy [its] statutory obligation.” Id.
c) Does the Order’s establishment of a budget cap, without widening the
contribution base, fail to protect affordability or ensure equitable fund
contributions?
Petitioners argue that the Order’s imposition of a USF budget cap, “[w]ithout
widening the contribution base, . . . will do nothing to ensure affordability.” Pet’r Br. 3 at
34. “The problem,” according to petitioners, “is that telecommunications voice revenues
are declining.” Id. As a result, they argue, “[e]ven a fixed budget will have to be
recovered from fewer customers, whose individual charges will go up (become less
affordable), unless the contribution base is widened.” Id. at 34-35 (emphasis in original).
In turn, petitioners argue that, even assuming that the FCC acted within its authority in
73
imposing the broadband mandate, “it is inequitable to exempt telecommunications
providers who also offer broadband from being required to contribute to universal service
from the revenues they receive for such services, particularly since rural carriers
assuming a broadband obligation will incur added costs.” Id. at 35. And, they argue, it is
not enough for the FCC to “decide at some unspecified future date . . . whether to expand
its contribution base.” Id.
Two points are clear from the Order and the parties’ briefs. First, the Order
concluded that the existing contribution framework (which is comprised of assessments
paid by interstate telecommunications service providers) was sufficient to satisfy the
annual USF budget established in the Order. Second, the FCC chose to address potential
changes to the contribution framework in a separate proceeding. More specifically, the
FCC in a separate rulemaking docket has sought comment on proposals to reform and
modernize how USF contributions are assessed and recovered. See Universal Service
Contribution Methodology; A National Broadband Plan for Our Future, 27 FCC Rcd
5357, 5358 (2012).
As the FCC correctly notes in its appellate response brief, 47 U.S.C. § 154(j)
affords it the discretion to “conduct its proceedings in such manner as will best conduce
to the proper dispatch of business and to the ends of justice.” FCC Br. 3 at 68. And we
agree with the FCC that its decision to address USF contributions not in the Order, but
rather in a separate proceeding, falls well within that discretion.
74
d) Does the FCC’s “regression rule” violate § 254’s predictability
requirement?
Petitioners next take issue with what they describe as the Order’s “regression
rule.”12 According to petitioners, the regression rule is inconsistent with § 254(b)(5)’s
mandate that “[t]here should be specific, predictable and sufficient Federal and State
mechanisms to preserve and advance universal service.” 47 U.S.C. § 254(b)(5). More
specifically, petitioners assert that “[t]he Order’s regression rule . . . contravenes this
mandate in three respects: (1) it delegates authority to devise a rule limiting USF support
to its Wireline Competition Bureau (‘WCB’) in violation of its own rules and then
compounds the uncertainty thereby created by (2) leaving the WCB unbounded discretion
to devise the rule and subsequently (3) to revise it without abiding by APA notice and
comment procedures.” Pet’r Br. 3 at 36-37. The end result, petitioners argue, is
unpredictability because “a carrier simply cannot know from year to year which
investment or expenses will be supported and which will not,” and thus will be “at a loss
as to how to make business plans for the future.” Id. at 38.
The “regression rule” referred to by petitioners, as best we can tell, is part of the
FCC’s new “benchmarking rule” for limiting the reimbursable capital and operating
expenses in the formula used to determine high-cost loop support (HCLS) for rate-of-
return carriers. See FCC Br. 3 at 41. The benchmarking rule was adopted by the FCC in
the Order to “ensur[e] that companies do not receive more support than necessary to serve
12
Notably, petitioners fail to identify in their briefs where the so-called “regression
rule” is discussed in the Order.
75
their communities,” JA at 468 (Order ¶ 210), and to “create structural incentives for rate-
of-return companies to operate more efficiently and make prudent expenditures,” id. at
469 (Order ¶ 210). The benchmarking rule is based on the FCC’s “proposed . . .
regression analyses to estimate appropriate levels of capital expenses and operating
expenses for each incumbent rate-of-return study area and limit expenses falling above a
benchmark based on this estimate.” Id. (Order ¶ 212). “Th[is] methodology,” the Order
stated, “will generate caps, to be updated annually, for each rate-of-return company.” Id.
at 470 (Order ¶ 214).
The FCC, in the Order, “delegate[d] authority to the Wireline Competition Bureau
to implement a methodology.” Id. at 469 (Order ¶ 210). In doing so, the Order “set forth
in” an attached Further Notice of Proposed Rulemaking “a specific methodology for
capping recovery for capital expenses and operating expenses using quantile regression
techniques and publicly available cost, geographic and demographic data.” Id. at 470
(Order ¶ 216). The FCC “invite[d] public input . . . on that methodology.” Id. at 471
(Order ¶ 471). On April 25, 2012, the Wireline Competition Bureau completed its
assigned task and finalized the benchmarking methodology after considering the record
compiled in response to the Further Notice of Proposed Rulemaking. FCC Br. 3 at 42.
According to the FCC, the challenges that petitioners now pose to the
benchmarking and regression rules were never raised by petitioners during the
administrative process. In particular, the FCC asserts, “[p]etitioners did not raise these
contentions before the [FCC] in a petition for reconsideration.” Id. at 43. Consequently,
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the FCC asserts, the contentions must be considered waived pursuant to 47 U.S.C. §
405(a).
Section 405(a) authorizes a party to file with the FCC a motion for reconsideration
of “an order, decision, report, or action” of the FCC. 47 U.S.C. § 405(a). “[F]iling a
petition for reconsideration before the [FCC] is ‘a condition precedent to judicial review .
. . where the party seeking such review . . . relies on questions of fact or law upon which
the [FCC] . . . has been afforded no opportunity to pass.’” See Globalstar, Inc. v. FCC,
564 F.3d 476, 483 (D.C. Cir. 2009) (quoting § 405(a)). “Thus, even when a petitioner has
no reason to raise an argument until the FCC issues an order that makes the issue
relevant, the petitioner must file a petition for reconsideration with the [FCC] before it
may seek judicial review.” Id. at 484 (internal quotation marks omitted). In short, then, §
405(a) requires that the FCC be given an “opportunity to pass” on an issue before the
issue is raised in federal court. Id. at 479. If the FCC has not been given such an
opportunity, the issue is deemed waived for purposes of federal court review. Id.
In their reply brief, petitioners assert that “[t]he illegality of [the regression rule]’s
delegation was in fact raised in [the] Petition for Reconsideration and Clarification of the
National Exchange Carrier Association, Inc., et al.” Pet’r Reply Br. 3 at 20 n.8. A review
of the Joint Appendix confirms that the National Exchange Carrier Association (NECA),
an entity that is not a petitioner or intervenor in this appeal, did, in fact, move for
reconsideration of the FCC’s adoption of the use of annual regression analysis.
Petitioners have not identified with specificity, however, which statements in the NECA’s
77
petition for reconsideration they believe related to the arguments they now seek to assert.
Having conducted our own review of the NECA’s petition for reconsideration, we note
that two sentences therein specifically addressed the FCC’s “use of a regression analysis.”
JA at 4087. The first sentence stated: “By firmly adopting the use of regression analysis
before giving parties the ability to consider whether this approach truly works or whether
other constraints might yield better result, the [FCC] has ventured down a path that could
limit cost recovery in unworkable or unlawful ways.” Id. The second, and immediately
following sentence, stated: “The [FCC] should accordingly reconsider its conclusion to
utilize a regression analysis to develop the new caps, and should state instead that it will
examine a regression analysis approach . . . , subject to adequate notice and comment,
before it adopts and implements a particular form of investment or operating expense
constraint.” Id. (emphasis in original). The NECA’s petition for reconsideration also, in
reference to the FCC’s “decision to change the caps each year based upon a refreshed
‘run’ of the regression analyses,” complained that “this dynamic capping does nothing to
restore predictability to the high-cost program but instead only exacerbates uncertainty.”
Id. Lastly, the NECA’s petition for reconsideration asserted in a footnote that the FCC’s
“decision to delegate to the Wireline Competition Bureau the authority to establish
regression-based constraints raises serious legal concerns as well.”13 Id. n.22.
13
The NECA’s petition for reconsideration did not otherwise specify the purported
“serious legal concerns.” Instead, it simply cited to a “Letter from Michael R. Romano,
NTCA, to Marlene H. Dortch, FCC, WC Docket No. 10-90, et al. (filed Oct. 21, 2011) at
2.” Notably, petitioners in this appeal have not themselves cited to the “Letter from
Michael R. Romano,” nor have they cited to where in the record this document can be
78
We conclude that none of these statements in the NECA’s petition for
reconsideration are sufficiently specific to encompass the petitioners’ arguments that the
FCC’s regression rule “(1) . . . delegates authority to devise a rule limiting USF support to
its Wireline Competition Bureau . . . in violation of its own rules and then compounds the
uncertainty thereby created by (2) leaving the WCB unbounded discretion to devise the
rule and subsequently (3) to revise it without abiding by APA notice and comment
procedures.” Pet’r Br. 3 at 36-37. Consequently, we deem these arguments waived since
the FCC was never given an opportunity pass on them prior to this appeal. See
Globalstar, 564 F.3d at 484 (holding that, when a party complains of a technical or
procedural mistake, the party must raise the precise claim before the FCC).
We are persuaded, however, that petitioners’ general attack on the predictability of
the FCC’s regression rule was sufficiently raised in the NECA’s petition for
reconsideration and thus is subject to judicial review. But, that said, we agree with the
FCC that there is no merit to this attack. To begin with, the method to be utilized by the
WCB in arriving at the annual HCLS disbursement amounts is far from unpredictable.
The Order circumscribed the WCB’s authority by “set[ting] forth . . . parameters of the
methodology that the [WCB must] use to limit payments from HCLS.”14 JA at 471
found. And our own examination indicates that the October 21, 2011 “Letter from
Michael R. Romano” was not included in the Joint Appendix. Consequently, we
conclude that the NECA’s reference to “serious legal concerns” was simply too vague to
have alerted the FCC to the specific concerns now asserted by petitioners.
14
These parameters “require that companies’ costs be compared to those of
similarly situated companies,” “that statistical techniques should be used to determine
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(Order ¶ 217). In turn, the Order requires the WCB “[e]ach year” to “publish in a public
notice the updated capped values that will be used.” Id. (Order ¶ 218). Together, we
believe, these measures are sufficient to satisfy § 254(b)(5)’s predictability requirement.
See Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608, 622 (5th Cir. 2000) (concluding that
“[t]he methodology governing subsidy disbursements” was predictable because it was
“plainly stated and made available to” carriers). Relatedly, we agree with the FCC that
nothing in the Act guarantees that HCLS disbursements will be the same from year to
year. Nor does the Act guarantee “predictable market outcomes” or “protection from
competition.” Alenco, 201 F.3d at 622.
3. Does the FCC’s use of auctions to distribute USF violate § 214(e)?
Petitioners contend that the FCC’s use of auctions to distribute USF violates 47
U.S.C. § 214(e). According to petitioners, “Congress,” by way of § 214(e), “expressly
gave State commissions the job of deciding who would receive universal service support
and where supported services would be advertised and provided by the carrier.” Pet’r Br.
3 at 40 (emphasis in original). More specifically, petitioners assert, § 214(e) “provides
that only ETCs may receive USF support and that, with narrow exceptions, only states
may designate ETCs and their service areas.” Id. at 39. And, they assert, “[o]nce an ETC
is designated by a state commission to serve a particular service area under Section
which companies shall be deemed similarly situated,” a “non-exhaustive list of variables
that may be considered” by the WCB, and a grant of authority to the WCB “to determine
whether other variables . . . would improve the regression analysis. JA at 471 (Order ¶
217).
80
214(e)(2), it is eligible to receive funding and must offer and advertise the supported
services throughout its service area.” Id.
Petitioners complain that “[t]he Order contravenes this statutory scheme in two
respects.” Id. (italics in original). “First,” petitioners assert, the Order “adopted various
competitive bidding mechanisms to distribute USF support, and provided that the [FCC]
will define the geographic areas to be auctioned off.” Id. at 39-40. “Second,” petitioners
assert, “the FCC created an entirely new ‘conditional designation,’ nowhere mentioned in
the statute, that will require state commissions to conditionally designate ‘ETCs’ before
auctions to distribute Mobility Fund support are concluded.” Id. at 40.
To properly address petitioners’ arguments, it is useful to begin with the language
of § 214(e). That section, entitled “Provision of universal service,” provides, in pertinent
part, as follows:
(1) Eligible telecommunications carriers. A common carrier designated as
an eligible telecommunications carrier under paragraph (2), (3), or (6) shall
be eligible to receive universal service support in accordance with section
254 [47 USCS § 254] and shall, throughout the service area for which the
designation is received—
(A) offer the services that are supported by Federal universal service
support mechanisms under section 254(c) [47 USCS § 254(c)], either
using its own facilities or a combination of its own facilities and
resale of another carrier’s services . . . ; and
(B) advertise the availability of such services and the charges
therefor using media of general distribution.
(2) Designation of eligible telecommunications carriers. A State
commission shall upon its own motion or upon request designate a common
carrier that meets the requirements of paragraph (1) as an eligible
telecommunications carrier for a service area designated by the State
commission. * * *
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(3) Designation of eligible telecommunications carriers for unserved areas.
If no common carrier will provide the services that are supported by Federal
universal support mechanisms under section 254(c) [47 USCS 254(c)] to an
unserved community or any portion thereof that requests such service, the
Commission, with respect to interstate services or an area served by a
common carrier to which paragraph (6) applies, or a State commission, with
respect to intrastate services, shall determine which common carrier or
carriers are best able to provide such service to the requesting unserved
community or portion thereof and shall order such carrier or carriers to
provide such service for that unserved community or portion thereof. * * *
***
(6) Common carriers not subject to State commission jurisdiction. In the
case of a common carrier providing telephone exchange service and
exchange access that is not subject to the jurisdiction of a State commission,
the Commission shall upon request designate such a common carrier that
meets the requirements of paragraph (1) as an eligible telecommunications
carrier for a service area designated by the Commission consistent with
applicable Federal and State law. * * *
47 U.S.C. § 214(e).
As the FCC notes in its response brief, its Order “reformed the distribution of
high-cost universal service support, [but] left intact the state commissions’ authority to
designate ETCs and their service areas.” FCC Br. 3 at 63. In particular, the Order
“decline[d] to adopt the structure of the [existing] competitive ETC rules, which
provide[d] support for multiple providers in an area.” JA at 506 (Order ¶ 316). In the
FCC’s view, “that structure . . . led to duplicative investment by multiple competitive
ETCs in certain areas at the expense of investment that could be directed elsewhere,
including areas that are not currently served.” Id. In place of the existing system, the
FCC adopted, in pertinent part, “a competitive bidding mechanism” that “award[s]
support based on the lowest per-unit bid amounts submitted in a reverse auction, subject
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to the constraint . . . that there will be no more than one recipient per geographic area, so
as to make the limited funds available go as far as possible.”15 Id. at 507 (Order ¶ 321).
Notably, the Order emphasized that “[c]arriers seeking federal support must still
comply with the same universal service rules and obligations set forth in sections 254 and
214, including the requirement that such providers be designated as eligible to receive
support, either from state commissions or, if the provider is beyond the jurisdiction of the
state commission, from th[e] [FCC].” Id. at 418 (Order ¶ 73). In other words, “parties
that seek to participate in the auction must be ETCs in the areas for which they will seek
support at the deadline for applying to participate in the auction.” Id. at 525 (Order ¶
389). The Order “decline[d] to adopt the alternative of allowing parties to bid for support
prior to being designated an ETC.” Id. at 526 (Order ¶ 392). Relatedly, the Order
recognized that “the states have primary jurisdiction to designate ETCs; the [FCC]
designates ETCs where states lack jurisdiction.” Id. at 525 (Order ¶ 390 n.662). Lastly,
the Order concluded that “nothing in the statute compels that every party eligible for
support actually receives it.” Id. at 507 (Order ¶ 318).
The key flaw in petitioners’ argument, as the FCC correctly notes in its response
brief, is that “it conflates eligibility for subsidies with the right to receive subsidies.”
15
For price cap areas, the Order indicated that the FCC would “offer each price cap
LEC annual support for a period of five years in exchange for a commitment to offer
voice across its service territory, subject to robust public interest obligations and
accountability standards.” JA at 454 (Order ¶ 166). However, “for all territories for
which price cap LECs decline to make that commitment, the [FCC] will award ongoing
support through” the reverse auction process. Id.
83
FCC Br. 3 at 62. To be sure, § 214(e) authorizes state commissions to decide which
entities will be designated as ETCs and, relatedly, to determine the service areas served
by those ETCs.16 But nothing in § 214(e) gives authority to the state commissions to
allocate USF funds, nor does § 214(e) give a designated ETC the absolute right to receive
USF funds. Rather, as the language of § 214(e)(1) makes clear, “[a] common carrier
designated as an eligible telecommunications carrier under paragraph (2), (3), or (6) shall
be eligible to receive universal service support in accordance with section 254 [47 USCS
§ 254].” 47 U.S.C. § 214(e) (emphasis added). Had Congress intended designated ETCs
to automatically receive USF funds, it could and should have omitted the phrase “be
eligible to” from the language of § 214(e)(1).
4. Was the FCC’s decision to reduce USF support in areas with
“artificially low” end user rates unlawful or arbitrary?
Petitioners contend that the FCC’s decision to reduce USF support in areas with
“artificially low” end user rates was both unlawful and arbitrary.
The portion of the Order being challenged by petitioners is a section entitled
“Reducing High Cost Loop Support for Artificially Low End-User Rates.” Therein, the
Order “adopt[ed] a rule,” applicable “to both rate-of-return carriers and price cap
companies,” “to limit high-cost support where end-user rates do not meet a specified local
16
States will continue to define the larger geographic regions for ETC status, and
the FCC will use the smaller parts of these regions (through census blocks) to determine
the existence and level of financial support. JA at 812-13 (Order ¶¶ 1191-92); see id. at
455 (Order ¶ 167), 459 (Order ¶ 179). Thus, states will continue to define the service
areas for ETCs, while the FCC will decide (on a census block basis) the zones within
those areas that are eligible for support through competitive bidding.
84
floor.” JA at 476 (Order ¶ 235). In doing so, the Order noted there was “evidence in the
record” indicating that “there [were] a number of carriers with local rates that [we]re
significantly lower than rates that urban consumers pay.” Id. at 477 (Order ¶ 235). “For
example,” the Order noted, there were “two carriers in Iowa and one carrier in Minnesota
[that] offer[ed] local residential rates below $5 per month.” Id. The Order concluded that
Congress did not “intend[] to create a regime in which universal service subsidizes
artificially low local rates in rural areas when it adopted the reasonably comparable
principle in section 254(b); rather, [the Order concluded], it [wa]s clear from the overall
context and structure of the statute that its purpose [wa]s to ensure that rates in rural areas
not be significantly higher than in urban areas.” Id. (emphasis in original). Relatedly, the
Order concluded:
It is inappropriate to provide federal high-cost support to subsidize local
rates beyond what is necessary to ensure reasonable comparability. Doing
so places an undue burden on the Fund and consumers that pay into it.
Specifically, we do not believe it is equitable for consumers across the
country to subsidize the cost of service for some consumers that pay local
service rates that are significantly lower than the national urban average.
Id. at 478 (Order ¶ 237).
The Order stated that the FCC would “phase in [a] rate floor in three steps,
beginning with an initial rate floor of $10 for the period July 1, 2012 through June 30,
2013 and $14 for the period July 1, 2013 through June 30, 2014.” Id. (Order ¶ 239).
“Beginning July 1, 2014,” the Order stated, “and in each subsequent calendar year, the
85
rate floor will be established after the Wireline Competition Bureau completes an updated
annual survey of voice rates.” Id.
Petitioners argue that “the de facto effect of the Order” is that the FCC is setting
local rates. Pet’r Br. 3 at 41 (italics in original). “And,” they argue, “since local rate
setting is exclusively the province of state commissions under the Act, 47 U.S.C. §
152(b), the Order unlawfully usurps a power reserved to the states.” Id. (italics in
original). “The perverse result of” this portion of the Order, petitioners argue, is that to
avoid depriving local carriers of needed USF support, states must raise some local rates
above levels they would have deemed reasonable.” Id. at 41-42.
The FCC asserts, however, and we agree, that we are not bound to examine the
“practical effect” of an agency order. Cable & Wireless P.L.C. v. FCC, 166 F.3d 1224,
1230 (D.C. Cir. 1999). As the District of Columbia Circuit has noted, “no canon of
administrative law requires [a reviewing court] to view the regulatory scope of agency
actions in terms of their practical or even foreseeable effects.” Id. As the District of
Columbia Circuit noted, “[o]therwise, [a reviewing court] would have to conclude, for
example, that the Environmental Protection Agency regulates the automobile industry
when it requires states and localities to comply with national ambient air quality
standards, or that the Department of Commerce regulates foreign manufacturers when it
collects tariffs on foreign-made goods.” Id. Thus, we summarily reject the petitioners’
argument regarding the practical effect of the Order’s new rate floors.
86
In any event, to the extent the Order encourages states to adjust local rates to
ensure that they are not excessively low in comparison to urban rates, that appears to be
permissible under, and indeed is consistent with, the universal service principles outlined
in the Act. As we noted in Qwest Corp., “the FCC may not simply assume that the states
will act on their own to preserve and advance universal service.” 258 F.3d at 1204.
Rather, the FCC “remains obligated to create some inducement . . . for the states to assist
in implementing the goals of universal service,” i.e., in this case to ensure that rural rates
are not artificially low. Id. The portion of the Order at issue appears to serve that
purpose by encouraging states to set rural rates that are least comparable to urban rates.
Petitioners also argue that this portion of the Order is arbitrary and capricious in
two respects. First, they argue, it “fails to give adequate consideration to . . . comments
explaining that the rural and urban basic services at issue may not be comparable.” Pet’r
Br. 3 at 42. Second, they argue that the Order failed to consider “the fact that rate[s] may
have been kept low by state funds, placing no burden on the federal USF fund.” Id.
(emphasis in original).
Addressing these arguments in order, the record on appeal indicates that the
Missouri Small Telephone Company Group (MSTCG), in response to the FCC’s Notice
of Proposed Rulemaking, filed initial comments with the FCC regarding the proposed
benchmark rule. The MSTCG stated, in pertinent part: “Because rural calling scopes are
smaller, many rural subscribers incur greater long distance charges to place calls to
schools, health care facilities, and government offices.” JA at 2284. “As a result,” the
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MSTCG asserted, “the total bills for rural customers (including both local and long
distance calling) may be comparable to or higher than the bills of urban customers, and
the proposal to establish a nationwide benchmark does not take into account local calling
scopes.” Id. “Therefore,” MSTCG argued, “the FCC may wish to consider establishing a
separate rural benchmark.” Id.
As far as we can determine, the FCC did not expressly respond to these comments
in the Order. In its appellate response brief, the FCC asserts that the MSTCG’s comment
was “‘unsupported by any data’ showing that rural customers actually pay as much, or
more, for telecommunications services than their urban counterparts by incurring greater
long distance charges.” FCC Br. 3 at 58 (quoting Vt. Pub. Serv. Bd. v. FCC, 661 F.3d 54,
63 (D.C. Cir. 2011)). “Thus,” the FCC argues, “it [wa]s not a significant comment that
warranted a response from the agency.” Id.
It is well established that “agencies need not respond to every comment.” Vt. Pub.
Serv. Bd., 661 F.3d at 63. In particular, “[c]omments must be significant enough to step
over a threshold requirement of materiality before any lack of agency response or
consideration becomes of concern.” Vt. Yankee Nuclear Power Corp. v. NRDC, 435
U.S. 519, 553 (1978) (internal quotation marks omitted). Here, the three sentence-
comment offered by MSTCG, though not necessarily frivolous, was entirely speculative.
As the FCC now notes, the MSTCG offered virtually no evidence in support of the
comment. Instead, the MSTCG merely surmised that there might be a difference between
urban and rural areas in what it uniquely deemed “local calling scopes.” Given the
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speculative nature of the comment and the complete lack of supporting evidence, we
conclude that the FCC did not act arbitrarily or capriciously in failing to address the
comment in the Order.
As for petitioners’ argument that the FCC failed to consider “the fact that rate[s]
may have been kept low by state funds,” this claim was never presented to the FCC.
Consequently, the claim is waived. See 47 U.S.C. § 405(a).
5. Does the Order unlawfully deprive rural carriers of a reasonable
opportunity to recover their prudently-incurred costs?
Petitioners argue that the Order unlawfully deprives rural carriers of a reasonable
opportunity to recover their prudently-incurred costs. In support, petitioners assert that
“they are required to continue to provide current services and, at considerable additional
expense, to provide broadband service as well.” Pet’r Br. 3 at 43. “At the same time,”
they assert, “their ICC revenue streams are being narrowed and their USF support will be
capped, reduced or eliminated outright (depending on their regulatory status).” Id. In
turn, petitioners argue that “[i]t would be one thing if the [FCC] had tied the reductions in
USF support to a determination that the individual carriers had imprudently incurred
costs, or that they were recovering the costs of investments not ‘used and useful’ in
delivering regulated services, or that these costs could somehow be recovered from end
users without violating the statutory universal service principle calling for rural service
rates to be reasonably comparable with those in urban areas.” Id. at 44. “But,” they
assert, “the FCC made none of these findings.” Id. at 45. Lastly, petitioners acknowledge
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that the Order contains a waiver provision, but they argue that that provision applies only
in narrow circumstances and does not reflect “[t]he constitutional test,” which they assert
“is whether the carrier has been afforded a reasonable opportunity to recover its costs.”
Id.
The FCC asserts, in response, that all of this amounts to an “unsubstantiated
takings claim” that “is not ripe.” FCC Br. 3 at 39. The FCC notes that the Order made
clear that if “any rate-of-return carrier can effectively demonstrate that it needs additional
support to avoid constitutionally confiscatory rates, the [FCC] will consider a waiver
request for additional support.” JA at 498 (Order ¶ 294). The FCC thus argues that “[n]o
takings claim is ripe until a party has invoked that process and been denied.” FCC Br. 3
at 39.
In their reply brief, petitioners deny asserting a takings claim. Pet’r Reply Br. 3 at
15. Instead, they assert, their argument is that “the Order was arbitrary and inconsistent
with the statutory requirement of ‘sufficient support’ because it will not provide them a
reasonable opportunity to recover prudently incurred costs.” Id. (italics in original). The
problem, however, is that these arguments were not clearly framed at all in petitioners’
opening brief. Indeed, their opening brief made no mention of the Order being arbitrary
(in fact, the discussion did not use the word “arbitrary” at all), nor did they clearly assert
that the Order violated a statutory requirement of “sufficient support.” Instead, the
arguments in petitioners’ opening brief made reference to a “constitutional test” for
“whether [a] carrier has been afforded a reasonable opportunity to recover its costs,” Pet’r
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Br. 3 at 45, and also cited to a Supreme Court takings case, id. at 43 (citing Duquesne
Light Co. v. Barasch, 488 U.S. 299, 307-08 (1989)). Thus, we would be well within our
discretion to invoke our longstanding rule that a party waives issues and arguments raised
for the first time in a reply brief.17 See Reedy v. Werholtz, 660 F.3d 1270, 1274 (10th
Cir. 2011).
In any event, however, it is clear to us that the FCC did not act arbitrarily in
implementing changes to the USF mechanisms. Notably, the Order includes a section
expressly discussing the “Impact of These Reforms on Rate-of-Return Carriers and the
Communities They Serve.” JA at 495. In that section, the FCC concluded that its
“intercarrier compensation reforms” would provide rate-of-return carriers with “greater
certainty and a more predictable flow of revenues than the status quo.” Id. (Order ¶ 286).
The FCC further noted that the Order’s “package of universal service reforms [wa]s
targeted at eliminating inefficiencies and closing gaps in [the] system, not at making
indiscriminate industry-wide reductions.” Id. at 496 (Order ¶ 287). Relatedly, the FCC
noted that its “reforms w[ould] not affect all carriers in the same manner or in the same
magnitude,” but it expressed confidence “that carriers that invest and operate in a prudent
manner will be minimally affected.” Id. (Order ¶ 289). In support, the FCC stated that its
“analysis show[ed] that nearly 9 out of 10 rate-of-return carriers w[ould] see reductions in
high-cost universal service receipts of less than 20 percent annually, . . . approximately 7
17
The FCC has moved to strike these arguments on the grounds that they were not
adequately raised in petitioners’ opening brief.
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out of 10 w[ould] see reductions of less than 10 percent, . . . almost 34 percent . . .
w[ould] see no reductions whatsoever, and more than 12 percent . . . w[ould] see an
increase in high-cost universal service receipts.” Id. (Order ¶ 290). The FCC also
“reject[ed] the sweeping argument that the rule changes . . . would unlawfully necessarily
affect a taking.” Id. at 497 (Order ¶ 293). And it emphasized “that carriers have no
vested property interest in USF.” Id. More specifically, it noted “there [wa]s no statutory
provision or Commission rule that provides companies with a vested right to continued
receipt of support at current levels, and we are not aware of any other, independent source
of law that gives particular companies an entitlement to ongoing USF support.” Id. at 498
(Order ¶ 293). Lastly, the FCC concluded that “carriers ha[d] not shown that elimination
of USF support w[ould] result in confiscatory end-user rates.” Id. (Order ¶ 294). In
reaching this conclusion, the FCC noted that, “[t]o the extent that any rate-of-return
carriers can effectively demonstrate that it needs additional support to avoid
constitutionally confiscatory rates, the Commission will consider a waiver request for
additional support.” Id.
Nothing about this analysis is remotely arbitrary or capricious. Rather, we
conclude the FCC’s analysis is both reasoned and reasonable. Further, the FCC’s
analysis is entirely consistent with the overarching universal service principles outlined in
47 U.S.C. § 254(b), including the principle that “[t]here should be specific, predictable
and sufficient Federal and State mechanisms to preserve and advance universal service.”
47 U.S.C. § 254(b)(5).
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6. Do the FCC’s regression and SNA rules have unlawful retroactive
effects?
Petitioners argue that “the FCC’s regression and SNA [(Safety Net Additive)]
rules,” “by limiting recovery of costs lawfully incurred pursuant to federal and state law
before the Order was adopted,” “violate the strong judicial presumption against
retroactive rulemaking.” Pet’r Br. 3 at 46 (italics in original). According to petitioners,
prior to the Order they incurred “capital and operating expenses . . . to comply with the
ETC [eligible telecommunications carrier] provisions of Section 214(e) of the Act, Rural
Utilities Service (‘RUS’) loan covenants and/or state Carrier of Last Resort (‘COLR’)
requirements.” Id. And, they assert, under the pre-Order regulatory scheme, they were
able to receive SNA support to compensate them for those expenses.
The SNA support petitioners refer to is considered to be a “component” of high-
cost loop support (HCLS). JA at 401 (Order ¶ 27). HCLS, which was established by the
FCC in 1997 during its implementation of the 1996 Act, “provides support for the ‘last
mile’ of connection for rural companies in service areas where the cost to provide this
service exceeds 115% of the national average cost per line.” Universal Service
Administrative Company, High Cost, http://www.usac.org/hc/legacy/incumbent-
carriers/step01/hcl.aspx (last visited Dec. 16, 2013). SNA, like HCLS generally, was
“available to rural price-cap and rate-of-return carriers and competitive carriers providing
service in the areas of these rural companies.” Universal Service Administrative
Company, http://www.usac.org/hc/legacy/incumbent-carriers/step01/sna.aspx (last visited
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Dec. 16, 2013). “SNA support [wa]s support ‘above the cap’ for carriers that ma[d]e
significant investment in rural infrastructure in years in which HCL support [wa]s
capped.” Id. It “[wa]s intended to provide rural carriers with the appropriate incentives
to invest in the network infrastructure serving their communities.” Id.
Beginning in early 2010, however, the FCC began notifying carriers “that [it]
intended to undertake comprehensive universal service reform in the near term.” JA at
485 (Order ¶ 252 n.409). And in the Order, the FCC “conclude[d] the [SNA] [wa]s not
designed effectively to encourage additional significant investment in
telecommunications plant.” Id. at 484 (Order ¶ 250). Instead, the FCC concluded, “[t]he
majority of incumbent LECs that currently are receiving the [SNA] qualified in large part
due to significant loss of lines, not because of significant increases in investment, which
is contrary to the intent of the rule.” Id. (Order ¶ 249).
Consequently, the Order “phase[s] out the [SNA] over time.” Id. at 401 (Order ¶
27). In particular, during “CAF Phase I,” effective January 1, 2012, the Order “freeze[s]
support under [the] existing high-cost support mechanisms,” including HCLS and SNA,
“for price cap carriers and their rate-of-return affiliates.” Id. at 439 (Order ¶ 128). CAF
Phase I, the Order stated, “set[s] the stage for a full transition to a system where support
in price cap territories is determined based on competitive bidding or the forward-looking
costs of a modern multi-purpose network.” Id. at 440 (Order ¶ 129). And, as we have
already discussed, the Order adopted a new “benchmarking rule” for limiting the
reimbursable capital and operating expenses in the formula used to determine high-cost
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loop support (HCLS) for rate-of-return carriers. FCC Br. 3 at 41. This benchmarking
rule was based on the FCC’s “proposed . . . regression analyses to estimate appropriate
levels of capital expenses and operating expenses for each incumbent rate-of-return study
area and limit expenses falling above a benchmark based on this estimate.” JA at 469
(Order ¶ 212).
Petitioners now argue that “[t]he [Order’s] regression and SNA rules violate the
presumption against retroactive rulemaking because each ‘takes away or impairs vested
rights’ or ‘attaches new legal consequences to events completed before its enactment.’”
Pet’r Br. 3 at 47 (quoting Arkema, Inc. v. EPA, 618 F.3d 1, 16 (D.C. Cir. 2010)).
Alternatively, petitioners argue that “even if reasonable and prudent expenditures made
pursuant to federal and state law are not deemed to entail a vested right to federal support,
they render the regression and SNA rules invalid as arbitrary and capricious under the
‘secondary retroactivity’ standard . . . because they ‘alter[] future regulation in a manner
that makes worthless substantial past investment incurred in reliance upon the prior
rule.’” Id. (quoting Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 220 (1988)
(Scalia, J., concurring)).
We reject petitioners’ arguments. “Retroactive rules ‘alter[] the past legal
consequences of past actions.’” Mobile Relay Assoc. v. FCC, 457 F.3d 1, 11 (D.C. Cir.
2006) (quoting Bowen, 488 U.S. at 219 (Scalia, J., concurring); emphasis in Bowen).
“[A]n agency order that alters the future effect, not the past legal consequences of an
action, or that upsets expectations based on prior law, is not retroactive.” Id. (internal
95
quotation marks omitted). Consequently, the Order in this case, which makes only
prospective changes to the reimbursement framework, including the elimination of SNA,
is not retroactive. “To conclude otherwise would hamstring not only the FCC in its
[telecommunications] management, but also any agency whose decision affects the
financial expectations of regulated entities.” Id. As the District of Columbia Circuit
noted in Mobile Relay, “[i]t is often the case that a business will undertake a certain
course of conduct based on the current law, and will then find its expectations frustrated
when the law changes.” Id. “This has never been thought to constitute retroactive
lawmaking, and indeed most economic regulation would be unworkable if all laws
disrupting prior expectations were deemed suspect.” Id.
“Secondary activity—which occurs if an agency’s rule affects a regulated entity’s
investment made in reliance on the regulatory status quo before the rule’s
promulgation—will be upheld if it is reasonable, i.e., if it is not arbitrary or capricious.”
Id. (internal quotation marks omitted); see Bowen, 488 U.S. at 220 (Scalia, J.,
concurring)(suggesting that “[a] rule that has unreasonable secondary retroactivity . . .
may for that reason be ‘arbitrary’ or capricious’ and thus invalid.”). Our review of the
Order in this case persuades us that the FCC’s elimination of the SNA rule and its
adoption of the new benchmarking rule was neither arbitrary nor capricious. As outlined
above, the FCC considered in detail the rationale for the SNA rule and concluded, for
reasons detailed at length in the Order, that a new framework needed to be created and
enacted. Because the FCC’s actions in this regard were neither arbitrary nor capricious,
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that is sufficient to overcome the petitioners’ objection grounded on the theory of
secondary retroactivity.
7. Did the FCC disregard evidence that allocating USF to rural price cap
carriers by competitive bidding would reduce service quality?
Petitioners assert that the FCC, “[i]n adopting an auction mechanism” for the
allocation of USF to rural price cap carriers, “has arbitrarily either ignored entirely or
failed adequately to address arguments and evidence that the auction approach would
result in a ‘race to the bottom,’ where bidders need only meet minimum service standards
inadequate to . . . satisfy future customer needs.” Pet’r Br. 3 at 49. Although petitioners
concede that the Order acknowledged their arguments, they assert that the Order “never
tackled them,” which, they argue, is “a hallmark of arbitrary agency action.” Id. at 50
(emphasis in original; citing Motor Vehicle Mfrs. Ass’n of the United States v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).
The FCC responds that “[t]his claim is not ripe for judicial review, because the
FCC did not ‘adopt[] an auction mechanism’ for price cap carriers in the Order,” but
“[r]ather . . . merely sought comment on how best to design and implement such a
mechanism in the attached FNPRM [(Further Notice of Proposed Rulemaking)].” FCC
Br. 3 at 54. The FCC in turn argues that it “addressed the ‘arguments’ that it allegedly
‘ignored’ by seeking comment on them in that FNPRM.” Id. Lastly, the FCC argues
that, “[u]ntil [it] adopts an auction mechanism based on the record developed under the
outstanding FNPRM, the Court will not be able to determine whether [it] adequately
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responded to petitioners’ arguments that competitive bidding will degrade service and
disadvantage small carriers.” Id. at 55.
Our review of the Order confirms the FCC’s arguments. The Order, in Section
XVII, entitled “FURTHER NOTICE OF PROPOSED RULEMAKING,” expressly
“adopt[ed] a framework for USF reform in areas served by price cap carriers where
support will be determined using a combination of a forward-looking broadband cost
model and competitive bidding to efficiently support deployment of networks providing
both voice and broadband service over the next several years.” JA at 812 (Order ¶ 1189).
The Order explained this framework:
In each state, each incumbent price cap carrier will be asked to undertake a
state-level commitment to provide affordable broadband to all high-cost
locations in its service territory in that state, excluding locations served by
an unsubsidized competitor, for a model-determined efficient amount of
support. In areas where the incumbent declines to make that commitment,
we will use a competitive bidding mechanism to distribute support in a way
that maximizes the extent of robust, scalable broadband service and
minimizes total cost. This FNPRM addresses proposals for this competitive
bidding process, which we refer to here as the CAF auction for price cap
areas. The FNPRM proposes program and auction rules, consistent with the
goals of the CAF and the [FCC]’s broader objectives for USF reform.
Id. The Order then proceeded to outline, in detail, how the proposed auction process
would work and the performance requirements that successful bidders would be required
to meet. Notably, the Order sought comment on all of these details.
Although petitioners’ opening brief cites to various points in the Order where the
FCC purportedly recounted and then briefly responded to arguments in opposition to the
proposed auction process, those cited portions deal with the FCC’s “discussion of a
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different auction mechanism for [dispersing Mobility Fund Phase I funds to] wireless
carriers.” FCC Br. 3 at 54; see JA at 502-04 (Order ¶¶ 306-11).
We therefore conclude that petitioners’ challenges to the FCC’s proposed auction
mechanism for price-cap carriers are not yet ripe for review.
8. Does eliminating USF support for the highest-cost areas defeat the very
purpose of universal service?
Petitioners complain that the Order delays indefinitely, and thereby effectively
eliminates, support for remote, so-called “extremely high-cost areas,” and thus defeats the
very purpose of universal service. Pet’r Br. 3 at 52.
We begin our analysis of this claim by outlining the Order’s treatment of universal
funding for “extremely high-cost” service areas. The Order, in pertinent part, “adopt[s]
Phase II of the Connect America Fund: a framework for extending broadband to millions
of unserved locations over a five-year period, including households, businesses, and
community anchor institutions, while sustaining existing voice and broadband services.”
JA at 452 (Order ¶ 156). The primary focus of CAF Phase II is to provide “increased
support to areas served by price cap carriers.” Id. (Order ¶ 159). Those areas, the Order
noted, accounted for “more than 83 percent of the unserved locations in the nation” in
2010, but only “receive[d] approximately 25 percent of high-cost support.” Id. (Order ¶
158).
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“CAF Phase II will have an annual budget of no more than $1.8 billion,” which
will be distributed “us[ing] a combination of competitive bidding and a new forward-
looking model of the cost of constructing modern multi-purpose networks.” Id. “Using
th[is] [forward-looking] model,” the FCC “will estimate the support necessary to serve
areas where costs are above a specified benchmark, but below a second ‘extremely high-
cost’ benchmark.” Id. The FCC “delegate[d] to the Wireline Competition Bureau the
responsibility for setting the extremely high-cost threshold in conjunction with adoption
of a final-cost model.” Id. at 456 (Order ¶ 169).
Relatedly, the Order created a “Remote Areas Fund” intended “to ensure that the
less than one percent of Americans living in remote areas where the cost of deploying
traditional terrestrial broadband networks is extremely high can obtain affordable
broadband.” Id. at 819 (Order ¶ 1224). The Remote Areas Fund, the Order indicated,
will receive “$100 million in annual CAF funding to maximize the availability of
affordable broadband in such areas.” Id. at 455 (Order ¶ 168). In the FNPRM portion of
the Order, the FCC “s[ought] comment on how best to utilize” the Remote Areas Fund.
Id. The Order proposed that the “universal service goals [could be fulfilled in extremely
high-cost areas] by taking advantage of services such as next-generation broadband
satellite service or wireless internet service provider (WISP).” Id. The Order also sought
“comment on how to structure the Remote Areas Fund.” Id. at 820 (Order ¶ 1225). In
doing so, the Order proposed several alternative structures, including “a portable
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consumer subsidy,” id., “a competitive bidding process,” id. at 820 (Order ¶ 1226), and “a
competitive proposal evaluation process,” id. (Order ¶ 1227).
As the FCC notes in its response brief, until the Remote Areas Fund distribution
rules “are in place, extremely high-cost areas will continue to receive support under
existing mechanisms for price cap and rate-of-return carriers.” FCC Br. 3 at 64 (citing JA
at 442 (Order ¶¶ 133 (freezing support for price-cap carriers), 195 (maintaining support
for rate-of-return carriers)).
In light of these undisputed facts, it is readily apparent that the Order neither
“indefinitely” delays distribution of the Remote Areas Fund, nor effectively denies USF
funding to extremely high-cost areas.18 Further, any specific challenges that petitioners
may seek to assert against the manner in which the Remote Areas Fund is distributed are
not yet ripe.
9. Is the FCC’s decision to eliminate high-cost support to RLECs, where an
unsubsidized competitor offers voice and broadband to all of the RLECs’
customers in the same study area, unlawful and unsupported by substantial
evidence?
18
In their reply brief, petitioners offer two new arguments. First, they assert that
“the FCC’s rule provides that if a census block in a price cap service area exceeds the
alternative technology threshold by even one dollar, the area is removed from Phase II
support entirely and instead relegated to a separate remote areas fund.” Pet’r Reply Br. 3
at 24. Second, and relatedly, they complain that the FCC failed to respond to
“[c]ommenters [who] offered an alternative in which the alternative technology threshold
would serve as a cap on support instead of an absolute limit.” Id. Because we generally
“decline to consider arguments not raised in [an appellant’s] opening brief,” United States
v. Ford, 613 F.3d 1263, 1272 n.2 (10th Cir. 2010), we shall grant the FCC’s motion to
strike these arguments.
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Petitioners argue that “[t]he Order’s directive that high cost support to RLECs be
phased out as unnecessary where unsubsidized competitors offer voice and broadband to
all of an RLEC’s residential and business customers in the same study area is unlawful
and unsupported by substantial evidence.” Pet’r Br. 3 at 54. According to petitioners,
“unsubsidized competitors have no obligation either to continue providing voice or
broadband service to existing customers or to serve new ones once the RLEC’s support is
eliminated, much less an obligation to provide services comparable in quality and prices
to those enjoyed by customers of urban telecommunications carriers.” Id. “The Order,”
petitioners argue, “disregards entirely evidence that the moment the rural carrier loses its
USF support . . . , consumers are at risk.” Id. at 55-56 (italics in original).
At issue here is a section of the Order entitled “Elimination of Support in Areas
with 100 Percent Overlap.” JA at 493. In the first paragraph of that section, entitled
“Background,” the FCC explained that “in many areas of the country, universal service
provides more support than necessary to achieve [the FCC’s] goals by subsidizing a
competitor to a voice and broadband provider that is offering service without
governmental assistance.” Id. (Order ¶ 280; internal quotation marks omitted). In the
ensuing paragraphs, entitled “Discussion,” the FCC “adopt[ed] a rule to eliminate
universal service support where an unsubsidized competitor — or a combination of
unsubsidized competitors — offers voice and broadband service throughout an incumbent
carrier’s study area, and [sought] comment on a process to reduce support where such an
unsubsidized competitor offers voice and broadband service to a substantial majority, but
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not 100 percent of the study area.” Id. at 494 (Order ¶ 281). The FCC thus “exclude[d]
from the CAF areas that are overlapped by an unsubsidized competitor.” Id. The FCC
also announced its intent to discontinue its “current levels of high-cost support to rate-of-
return companies where there is overlap with one or more unsubsidized competitors.” Id.
More specifically, the FCC “adopt[ed] a rule to phase out all high-cost support received
by incumbent rate-of-return carriers over three years in study areas where an unsubsidized
competitor — or a combination of unsubsidized competitors — offers voice and
broadband service at” certain specified speeds “for 100 percent of the residential and
business locations in the incumbent’s study area.” Id. 494-95 (Order ¶ 283).
In announcing these rules, the FCC “recognize[d] that there [we]re instances where
an unsubsidized competitor offer[ed] broadband and voice service to a significant
percentage of the customers in a particular study area (typically where customers are
concentrated in a town or other higher density sub-area), but not to the remaining
customers in the rest of the study area, and that continued support may be required to
enable the availability of supported voice services to those remaining customers.” Id. at
494 (Order ¶ 282). “In those cases,” the FCC concluded, “there should be a process to
determine appropriate support levels.” Id. “The FNPRM” thus sought “comment on the
methodology and data for determining overlap.” Id. at 495 (Order ¶ 284). The Order also
“direct[ed] the Wireline Competition Bureau to publish a finalized methodology for
determining areas of overlap.” Id.
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Although petitioners complain that the Order “disregards entirely evidence that the
moment the rural carrier loses its USF support (because there is an unsubsidized
competitor offering to serve all its customers), consumers are at risk,” Pet’r Br. 3 at 55-
56, they fail to cite to any such evidence in the record. In any event, the purported “risks”
cited by the petitioners appear, at best, speculative, and, at worst, nonexistent. Indeed, as
the FCC notes in its response brief, it “made a very different predictive judgment”
regarding the effects of its decision: “that an ‘unsubsidized competitor’ — which, by
definition, is a facilities-based provider that is not eligible for support yet serves the
incumbent LEC’s entire geographic service area — would have an incentive to recover its
investment by continuing to serve every possible customer.” FCC Br. 3 at 60. We agree
with the FCC that this predictive judgment was “entirely reasonable.” Id.
Further, as the FCC also points out, both it and the state commissions possess
authority under 47 U.S.C. § 214(e)(3) (“Designation of eligible telecommunications
carriers for unserved areas”) to order one or more carriers “to provide . . . service for [an]
unserved community or portion thereof.” And any carrier(s) ordered to do so must in turn
satisfy the requirements to be designated an ETC under § 214(e)(1). 47 U.S.C. §
214(e)(3). Thus, to the extent that a currently served area would become “unserved,” the
FCC possesses authority to remedy that situation.
10. Did the FCC arbitrarily fail to explain how its new definition of
supported telecommunications services took into account the four factors it
was required to consider under § 254(c)(1)?
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Petitioners next assert that “[s]ection 254(c)(1) of the Act requires the FCC, in
consultation with the [Federal-State] Joint Board [on Universal Service], to consider four
specific factors in establishing its definition of supported telecommunications services,
namely the extent to which such telecommunications services (a) are essential to
education, public health, or safety, (b) have been freely purchased by a substantial
majority of residential customers, (c) are actually being publicly deployed by
telecommunications carriers and (d) are in the public interest.”19 Pet’r Br. 3 at 56. “But,”
they argue, “with the exception of brief references . . . to the first, third and fourth factors,
the Order fails to discuss how its new ‘voice telephony service’ definition takes any of
these factors into account.” Id. (italics in original). “That failure,” they argue, “was
arbitrary.” Id.
What petitioners ignore or overlook, however, is that the FCC’s new “voice
telephony service” definition was intended by the FCC merely “to simplify how [it]
describe[s] the various supported services that [it] historically has defined in functional
terms (e.g., voice grade access to the PSTN, access to emergency services) into a single
supported service.” JA at 411 (Order ¶ 62). In other words, the FCC was not, in adopting
its new “voice telephony service” definition, adding new services that would be
19
The header to this argument in petitioners’ opening brief makes reference to the
FCC’s “new definition of supported information services.” Pet’r Br. 3 at 56. But the
FCC clearly did not classify “voice telephony service” as an “information service.”
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“supported by Federal universal service support mechanisms.”20 47 U.S.C. § 254(c)(1).
Thus, under the wording of the statute, it was unnecessary for the FCC to review in detail,
or at all, the four factors listed § 254(c)(1)(A) through (D).
11. Did the FCC arbitrarily disregard comments that the Order’s
incremental USF support provisions would duplicate or undermine state-
initiated plans for broadband deployment?
Petitioners argue that, assuming the FCC possesses authority to impose its
broadband requirement, the FCC nevertheless failed to consider petitioner’s argument
“that it was arbitrary and discriminatory to distribute USF support only to carriers in
states who [have done] nothing to promote broadband, while carriers in states with
extensive broadband development commitments . . . get nothing to upgrade what they
have done.” Pet’r Br. 3 at 57.
In the Order, the FCC noted that “[c]arriers have been steadily expanding their
broadband footprints, funded through a combination of support provided under current
mechanisms and other sources, and we expect such deployment will continue.” JA at 444
(Order ¶ 137). The FCC in turn stated that it “intend[ed] for CAF Phase I to enable
additional deployment beyond what carriers would otherwise undertake absent this
reform.” Id. In other words, the FCC explained, “CAF Phase I incremental support [wa]s
designed to provide an immediate boost to broadband deployment in areas that are
20
To be sure, the Order recognized interconnected VoIP as a form of “telephony
voice service.” But, as the Order noted, interconnected VoIP is simply a nontraditional
method that consumers are increasingly using to obtain voice services. JA at 412 (Order
¶ 63). Thus, the service at issue (i.e., “voice service”) is unchanged; only the delivery
method is new.
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unserved by any broadband provider.” Id. In a related footnote, the FCC stated that its
“distribution mechanism for CAF Phase I incremental funding [wa]s . . . designed to
identify the most expensive wire centers, and [that] the same characteristics that make it
expensive to provide voice service to a wire center . . . make it expensive to provide
broadband service to that wire center as well.” Id. (Order ¶ 137 n.220). Thus, the FCC’s
“interim mechanism [wa]s designed to provide support to carriers that serve areas where
[the FCC] expects that providing broadband service will require universal service
support.” Id.
Although it is apparent that petitioners disagree with the policy judgments made by
the FCC regarding how to allocate CAF Phase I funds, we conclude that the FCC’s
decision was neither arbitrary nor capricious. In particular, it is clear from the above-
quoted provisions of the Order that the FCC was focused on promoting universal service
to the areas most in need, rather than allocating additional funds to areas that were already
served by broadband providers.
12. Did the Order unlawfully make changes not contained in the FCC’s
proposed rule that could not reasonably have been anticipated by
commenters?
Petitioners argue that “[k]ey provisions in the Order were not part of the proposed
rule” and that, “because Petitioners had no reasonable opportunity to comment on these
rule changes[,] the Order violated Sections 553(b) and (c) of the APA,” i.e., the APA’s
notice-and-comment requirements. Pet’r Br. 3 at 58. In particular, petitioners point to
“the ARC rules,” id., the “dual process for ICC revenue recovery for price cap carriers
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and rate-of-return carriers,” id. at 59, and the decision to “give[] price cap carriers an
exclusive right of first refusal . . . to receive $300 million in CAF Phase I funding for
unserved areas,” id.
According to the FCC, however, this issue “was not presented to [it] either before
[it] issued the Order or on reconsideration once [it] allegedly acted without notice.” FCC
Br. 3 at 65. In their reply brief, petitioners do not dispute that they failed to present the
issue to the FCC. Instead, they assert that they were not required to present this issue to
the FCC because 47 U.S.C. § 405(a) does not apply to claims of lack of APA notice.
Pet’r Reply Br. 3 at 28. Alternatively, they argue, “this Court has denied the FCC’s
request to stay proceedings while reconsideration petitions are pending, . . . and the
FCC’s history of sitting on pending reconsideration petitions would have made a
reconsideration request futile anyway.” Id.
As we have previously discussed, 47 U.S.C. § 405(a), which authorizes a party to
file with the FCC a motion for reconsideration of “an order, decision, report, or action” of
the FCC, essentially requires, in part, that the FCC be given an “opportunity to pass” on
an issue before the issue is raised in federal court. See Globalstar, 564 F.3d at 479. The
District of Columbia Circuit has “strictly construed § 405(a), holding that [it] generally
lack[s] jurisdiction to review arguments that have not first been presented to the [FCC].”
Id. at 483 (internal quotation marks omitted; brackets added). “Thus,” it has held, “even
when a petitioner has no reason to raise an argument until the FCC issues an order that
makes the issue relevant, the petitioner must file a petition for reconsideration with the
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[FCC] before it may seek judicial review.” Id. (internal quotation marks omitted;
brackets added). Notably, the District of Columbia Circuit has adhered to this strict
construction rule even in instances “[w]hen . . . a party complains of only a technical or
procedural mistake, such as an obvious violation of a specific APA requirement.” Id. at
484 (internal quotation marks omitted). In other words, even in cases involving only a
purported technical or procedural mistake, the District of Columbia Circuit “ha[s] insisted
that a party raise the precise claim before the [FCC].” Id. The court has explained that
“such rigid adherence to § 405(a) is necessary with respect to claims of procedural error
in order to give the agency the opportunity to consider the claim in the first instance and
to correct any error in the rulemaking process prior to judicial review.” Id.
Although we are not bound by the District of Columbia Circuit’s decision in
Globalstar, we find its reasoning to be both sound and persuasive and we thus adopt it in
this case. In doing so, we note that petitioners have failed to cite to a single case in which
another circuit has interpreted § 405(a) differently. Further, petitioners have made no
attempt to refute the District of Columbia Circuit’s reasoning for adopting a strict
construction of § 405(a). Consequently, we conclude that petitioners have waived their
inadequate notice and comment claim by failing to present it at any time to the FCC.
That leaves only petitioners’ arguments that it would have been futile for them to
file a petition for reconsideration because (a) this court refused the FCC’s request to stay
these proceedings while petitions for reconsideration were pending, and (b) the FCC has a
history of “sitting on pending reconsideration petitioners.” Pet’r Reply Br. 3 at 28. These
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arguments, however, are unsupported by the record. To begin with, a review of the
docket sheet in this case fails to confirm that the FCC filed a motion to stay these
proceedings. Indeed, the only motion for stay was filed by one of the petitioners (the
National Telecommunications Cooperative Association) seeking to delay implementation
of the Order. Notably, the FCC opposed that motion and this court ultimately denied it.
As for petitioners’ assertion that the FCC has a “history of sitting on pending
reconsideration petitions,” they cite to nothing in the record or elsewhere that would
confirm that assertion. Thus, both of petitioners’ assertions are baseless.
B. Additional Universal Service Fund Issues Principal Brief
We now proceed to address the issues raised by petitioners in Brief 4, entitled
“Additional Universal Service Fund Issues Principal Brief.”
1. The FCC’s decision to limit USF support for broadband deployment to
price-cap ILECs
Petitioners argue that the FCC’s decision to “deny[] any USF support to
competitive carriers for broadband and reserving it exclusively to price cap ILECs was
arbitrary in two respects.” Pet’r Br. 4 at 7. “First,” they argue, “the FCC failed to explain
how a USF policy reserving USF support for incumbents and excluding competitive rural
carriers from USF support could be reconciled with the Act’s directive that local telecom
markets be open to competition.” Id. In petitioners’ view, “making CAF II support
accessible only to the largest LECs will serve only to preserve and advance their
dominance in the local telecom market.” Id. (internal quotation marks omitted).
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“Second,” petitioners argue, “the FCC departed without reasoned explanation from its
own USF competitive neutrality principle that ‘universal support mechanisms and rules
neither unfairly advantage or disadvantage one provider over another.’” Id. at 8 (quoting
Universal Service Order, 12 F.C.C.R. 8776, ¶¶ 46-48 (1997)). According to petitioners,
the FCC “could not logically claim that admittedly disparate treatment is acceptable as
long as it is not ‘unfair’ without addressing how it could possibly be fair to exclude
CETCs from USF support entirely and still preserve competitive neutrality.” Id.
a) The relevant portions of the Order
The Order “create[d] the Connect America Fund [(CAF)], which will ultimately
replace all existing high-cost support mechanisms.” JA at 400 (Order ¶ 20). The Order
summarized the CAF in the following manner:
The CAF will help make broadband available to homes, businesses, and
community anchor institutions in areas that do not, or would not otherwise,
have broadband, including mobile voice and broadband networks in areas
that do not, or would not otherwise, have mobile service, and broadband in
the most remote areas of the nation. The CAF will also help facilitate our
ICC reforms. The CAF will rely on incentive-based, market-driven
policies, including competitive bidding, to distribute universal service funds
as efficiently and effectively as possible.
Id.
Because “[m]ore than 83 percent of the approximately 18 million Americans that
lack access to residential fixed broadband at or above the [FCC]’s broadband speed
benchmark live in areas served by price cap carriers—Bell Operating Companies and
other large and mid-sized carriers,” the Order stated that “the CAF will introduce
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targeted, efficient support for broadband in two phases.” Id. (Order ¶ 21). Phase I,
intended “[t]o spur immediate broadband buildout, . . . will provide additional funding for
price cap carriers to extend robust, scalable broadband to hundreds of thousands of
unserved Americans in early 2012.” Id. (Order ¶ 22). “To enable this [Phase I]
deployment, all existing legacy high-cost support to price cap carriers will be frozen and
an additional $300 million in CAF funding will be made available.” Id. Phase II of the
process “will use a combination of a forward-looking broadband cost model,” to be
developed by the FCC’s Wireline Competition Bureau, “and competitive bidding to
efficiently support deployment of networks providing both voice and broadband service
for five years.” Id. (Order ¶ 23). Phase II “of the CAF will distribute a total of up to $1.8
billion annually in support for areas with no unsubsidized broadband competitor.” Id. at
401 (Order ¶ 25). More specifically, “[i]n determining areas eligible for support, [the
FCC] will . . . exclude areas where an unsubsidized competitor offers broadband service
that meets the broadband performance requirements” outlined in the Order. Id. at 456
(Order ¶ 170). In areas that are not served by an unsubsidized competitor, “[e]ach
incumbent carrier will . . . be given an opportunity to accept, for each state it serves, the
public interest obligations associated with all the eligible census blocks in its territory, in
exchange for the total [cost] model-derived annual [CAF Phase II] support associated
with those census blocks, for a period of five years.” Id. (Order ¶ 171). “If the
incumbent accepts the state-level broadband commitment, it . . . shall be the presumptive
recipient of the model-derived support amount for the five-year CAF Phase II period.”
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Id. After that five-year CAF Phase II period, however, the FCC anticipates distributing
all support through a competitive bidding process. Id. at 459 (Order ¶ 178); FCC Br. 4 at
4.
The Order also “transition[s] existing competitive ETC support to the CAF . . .
over a five-year period beginning July 1, 2012.” JA at 557 (Order ¶ 513). In doing so,
the Order found “that a five-year transition w[ould] be sufficient for competitive ETCs
that are currently receiving high-cost support to adjust and make necessary operational
changes to ensure that service is maintained during the transition.” Id. at 558 (Order ¶
513). The Order outlined a “phase-down” framework in which “[c]ompetitive ETC
support” would first “be frozen at the 2011 baseline” level, and then reduced in each of
the ensuing five years until the competitive ETCs received no support at all. Id. at 559
(Order ¶ 519).
b) Relevant statutory provisions
Sections 214(e)(1) and (2) of the Act, which address the “provision of universal
service,” provide as follows:
(1) Eligible telecommunications carriers. A common carrier designated as
an eligible telecommunications carrier under paragraph (2), (3), or (6) shall
be eligible to receive universal service support in accordance with section
254 [47 USCS § 254] and shall, throughout the service area for which the
designation is received—
(A) offer the services that are supported by Federal universal service
support mechanisms under section 254(c) [47 USCS 254(c)], either
using its own facilities or a combination of its own facilities and
resale of another carrier’s services (including the services offered by
another eligible telecommunications carrier); and
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(B) advertise the availability of such services and the charges
therefor using media of general distribution.
(2) Designation of eligible telecommunications carriers. A State
commission shall upon its own motion or upon request designate a common
carrier that meets the requirements of paragraph (1) as an eligible
telecommunications carrier for a service area designated by the State
commission. Upon request and consistent with the public interest,
convenience, and necessity, the State commission may, in the case of an
area served by a rural telephone company, and shall, in the case of all other
areas, designate more than one common carrier as an eligible
telecommunications carrier for a service area designated by the State
commission, so long as each additional requesting carrier meets the
requirements of paragraph (1). Before designating an additional eligible
telecommunications carrier for an area served by a rural telephone
company, the State commission shall find that the designation is in the
public interest.
47 U.S.C. §§ 214(e)(1), (2).
Section 254(e), entitled “Universal service support,” provides as follows:
After the date on which Commission regulations implementing this section
take effect, only an eligible telecommunications carrier designated under
section 214(e) [47 USCS § 214(e)] shall be eligible to receive specific
Federal universal service support. A carrier that receives such support shall
use that support only for the provision, maintenance, and upgrading of the
facilities and services for which the support is intended. Any such support
should be explicit and sufficient to achieve the purposes of this section.
47 U.S.C. § 254(e).
c) Arguments and analysis
Petitioners argue that “[t]he Act requires both that only designated ETCs may
receive universal service support, 47 U.S.C. §§ 214(e)(1) and 254(e), and that additional
qualified carriers shall be designated ETCs in the areas of non-rural carriers[,] 47 U.S.C.
§ 214(e)(2).” Pet’r Br. 4 at 9. “These provisions,” petitioners argue, “reflect the dual
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nature of the FCC’s obligations under the Act, namely that it must see to it that both
universal service and local competition are realized.” Id. at 9-10 (internal quotation
marks and italics omitted). But, they argue, the FCC “has rendered meaningless the
competition-promoting aspect of its dual statutory obligations” by “determining . . . that
only price cap carriers (the great majority of which are non-rural), but not their
competitors, are eligible for additional USF support over the next five years – while their
competitors’ existing support is phased out during that same time period.” Id. at 10.
We conclude, however, that the FCC reasonably interpreted § 214(e)(2) as not
requiring it to offer USF support to all ETCs in a particular area. The Order itself notes,
and we agree, that “nothing in the statute compels that every party eligible for support
actually receives it.” JA at 507 (Order ¶ 318). Rather, both §§ 214(e) and 254(e) clearly
speak only in terms of “eligibility” for USF support. Further, as the Order reasonably
noted, “the statute’s goal is to expand availability of service to users,” id., “not to
subsidize competition through universal service in areas that are challenging for even one
provider to serve,” id. (Order ¶ 319).
To be sure, the FCC, acting pursuant to 47 U.S.C. § 254(b)(7), adopted and
generally attempts to adhere to a principle of “competitive neutrality.” That principle
holds that “universal service support mechanisms . . . should not unfairly advantage nor
disadvantage one provider over another, and neither unfairly favor nor disfavor one
technology over another.” Id. at 458 (Order ¶ 176; internal quotation marks omitted).
But that is only one of the seven statutory principles outlined in 47 U.S.C. § 254(b)(1)-(7)
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that are intended to guide the FCC “in drafting policies to preserve and advance universal
service,” including the distribution of USF support. Qwest Comm’n Int’l, Inc. v. FCC,
398 F.3d 1222, 1234 (10th Cir. 2005) (Qwest Comm’n). As we have noted, the “FCC
may exercise its discretion to balance the principles against one another when they
conflict,” and “any particular principle can be trumped in the appropriate case.” Id.
(internal quotation marks omitted). The only caveat is that the FCC “may not depart from
[the principles] altogether to achieve some other goal.” Id. (internal quotation marks
omitted).
Here, the FCC’s Order concluded that, for price cap areas that are not served by an
unsubsidized competitor,21 “adhering to strict competitive neutrality at the expense of
state-level commitment process would unreasonably frustrate achievement of the
universal service principles of ubiquitous and comparable broadband services and
promoting broadband deployment,” and would also “unduly elevate the interests of
competing providers over those of unserved and under-served consumers . . . as well as
. . . consumers and telecommunications providers who make payments to support the
Universal Service Fund.” JA at 459 (Order ¶ 178). In making that decision, the FCC
found that in price-cap areas that lack an unsubsidized competitor, the incumbent LEC is
likely to be the only provider with wireline facilities that are already deployed. The FCC
also found that incumbent LECs, in contrast to competitive LECs, “generally continue to
21
As previously noted, the Order eliminates all USF support in price-cap areas that
are served by an unsubsidized competitor.
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have carrier of last resort [“COLR”] obligations for voice services,” id. at 457-58 (Order
¶ 175), and therefore must maintain networks capable of “ensur[ing] service to consumers
who request it” throughout their designated service area, id. at 458-59 (Order ¶ 177
n.290). “[C]ompetitive LECs,” the FCC found, “typically have not built out their
networks subject to COLR obligations” and, as a result, typically serve much smaller
geographic areas. Id. at 692-93 (Order ¶ 864). As the FCC explains in its response brief,
it essentially “predicted that it could get more ‘bang for its buck’ by providing subsidies
to incumbent LECs to upgrade their extensive existing facilities than by providing
subsidies to competitive ETCs . . . to deploy entirely new facilities.” FCC Br. 4 at 9.
Notably, the interim USF arrangement adopted by the Order for price-cap carriers
is not wholly dissimilar from the pre-Order balance of USF funding. According to the
FCC, “wireline competitive ETCs . . . received only $23 million of high-cost universal
service support annually prior to the Order.” FCC Br. 4 at 10. “By contrast, price cap
carriers received more than $1 billion annually.” Id. (citing Order ¶¶ 7, 158, 501, 503
n.834). “That differential,” the FCC argues, “underscores the fact that competitive ETCs
serve very few lines relative to the price cap carriers.” Id.
Finally, it is true, as petitioners suggest, “that by far the largest amount—both in
absolute and percentage terms—of areas unserved by broadband are in the service areas
of the price cap companies.” Pet’r Br. 4 at 14. But the inference that petitioners draw
from that fact, i.e., that price cap carriers “have previously ignored” large portions of their
service areas, id. at 12, is not entirely accurate. In the Order, the FCC found that the price
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cap areas only “receive[d] approximately 25 percent of high-cost support” under the pre-
Order USF funding framework. JA at 452 (Order ¶ 158). The FCC thus inferred, and it
appears reasonably so, that the coverage gaps in price cap areas were a product of
inadequate funding, rather than price-cap carrier mismanagement or inattention.
We thus conclude that the FCC reasonably exercised its discretion in adopting this
USF funding framework for price-cap areas, particularly since the framework applies
only during the interim period marked by CAF Phase II. See generally Rural Cellular
Ass’n v. FCC, 588 F.3d 1095, 1105 (D.C. Cir. 2009) (“The ‘arbitrary and capricious’
standard is particularly deferential in matters implicating predictive judgments and
interim regulations.”); id. at 1106 (holding that “the FCC should be given ‘substantial
deference’ when acting to impose interim regulations”).
2. Did the FCC violate the mandatory referral duty imposed by 47 U.S.C. §
410(c)?
Petitioners next assert that the FCC violated the mandatory referral duty imposed
by 47 U.S.C. § 410(c) when it (a) “directly adopted new separations rules with new
formal separations methodologies,” Pet’r Br. 4 at 4, and (b) “made decisions that had as
much effect on separations as direct changes to the rules themselves, such as by ordering
the reduction of intrastate access rates (and thereby revenues) and replacing them in part
with a new interstate charge, without also adjusting the allocation of the underlying costs
between jurisdictions,” id. at 4-5.
a) Jurisdictional separations under the Act
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The 1934 Act “establishe[d], among other things, a system of dual state and
federal regulation over telephone service.” La. Pub. Serv. Comm’n v. FCC, 476 U.S.
355, 360 (1986). “In broad terms, the [1934] Act grant[ed] to the FCC the authority to
regulate ‘interstate and foreign commerce in wire and radio communication,’ 47 U.S.C. §
151, while expressly denying [the FCC] ‘jurisdiction with respect to . . . intrastate
communication service,’ 47 U.S.C. § 152(b).” Id. “[T]he realities of technology and
economics,” however, “belie . . . a clean parceling of responsibility” between the FCC
and the states. Id. Thus, “[t]he determination of whether any particular service or facility
is ‘interstate’ or ‘intrastate’ is not always a straightforward matter; any particular facility
or service often provides some combination of the two.” Puerto Rico Tel. Co. v. T-
Mobile Puerto Rico LLC, 678 F.3d 49, 64 (1st Cir. 2012).
“Addressing this issue, the Act establishes a process designed to resolve what is
known as jurisdictional separations matters, by which process it may be determined what
portion of an asset is employed to produce or deliver interstate as opposed to intrastate
service.” Id. (internal quotation marks omitted; citing 47 U.S.C. §§ 221(c), 410(c)). To
begin with, Section 221(c) of the Act authorizes the FCC to “classify the property” of any
“carriers engaged in wire telephone communication” in order to “determine what property
of said carrier shall be considered as used in interstate or foreign telephone toll service.”
47 U.S.C. § 221(c). In turn, § 410(c) of the Act, 47 U.S.C. § 410(c), “creates a
‘Federal–State Joint Board,’ and provides that ‘[t]he Commission shall refer any
proceeding regarding the jurisdictional separation of common carrier property and
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expenses between interstate and intrastate operations . . . to a Federal–State Joint Board.’”
Puerto Rico Tel., 678 F.3d at 64 (quoting 47 U.S.C. § 410(c)). Although the Board is
composed of “three Commissioners of the Commission and . . . four State
commissioners,” the State commissioners are allowed only to participate in deliberations
and may not vote. 47 U.S.C. § 410(c). The Board “is charged with ‘prepar[ing] a
recommended decision for prompt review and action by the Commission.’” Puerto Rico
Tel., 678 F.3d at 64 (quoting § 410(c)).
“[T]he separations process literally separates costs such as taxes and operating
expenses between interstate and intrastate service,” and thereby “facilitates the creation or
recognition of distinct spheres of regulation.” Louisiana Pub. Serv. Comm’n v. FCC, 476
U.S. 355, 375 (1986). According to the FCC’s web site, “[t]he primary purpose of
separations is to determine whether a local exchange carrier (LEC)’s cost of providing
regulated services are to be recovered through its rates for intrastate services or through
its rates for interstate services.” Jurisdictional Separations, FCC Encyclopedia,
http://www.fcc.gov/encyclopedia/jurisdictional-separations (last visited Dec. 16, 2013);
see State Corp. Comm’n of State of Kan. v. FCC, 787 F.2d 1421, 1423 (10th Cir. 1986)
(“The process of ‘jurisdictional separations’ determines how . . . costs are allocated for
ratemaking purposes.”). “The first step in the current separations process requires carriers
to apportion regulated costs among categories of plant and expenses.” Jurisdictional
Separations, FCC Encyclopedia, supra. “In the second step of the current separations
process, the costs in each category are apportioned between intrastate and interstate
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jurisdictions.” Id. “Once costs are separated between the jurisdictions, carriers can then
apportion their interstate regulated costs among their interexchange services and their
intrastate costs among intrastate services.” Id. Historically, one of the primary purposes
of the separations process has been to prevent incumbent LECs from recovering the same
costs in both the interstate and intrastate jurisdictions.
b) The jurisdictional separations process is currently frozen
In 2001, the FCC, acting pursuant to the recommendation of the Federal-State
Joint Board on Jurisdictional Separations, froze the jurisdictional separations process.
Although the freeze was intended originally to last only five years, it has since been
extended and remains currently in effect (until June 30, 2014). JA at 729 (Order ¶ 932)
(“The jurisdictional process, which has been frozen for some time, is currently the subject
of a referral to the Separations Joint Board.”). In its most recent order extending the
freeze, the FCC noted that the freeze remained appropriate to afford “Joint Board
members” the “significant time and effort” it will take “to educate themselves about the
impacts of . . . reforms” to intercarrier compensation and universal service “on
separations.” FCC Report and Order, FCC 12-49 at ¶13, p.5 (May 8, 2012).
The FCC has expressly noted the freezing of the jurisdictional separations process
in its regulations. 47 C.F.R. § 36.3. And, notably, the Order stated that “[t]he
jurisdictional separations process . . . is currently the subject of a referral to the
Separations Joint Board.” JA at 729 (Order ¶ 932).
c) Did the Order effectively impact or change jurisdictional separations?
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Petitioners point to “a number of key changes” that the Order purportedly made
“to separations rules and policies” and that in turn necessitated referral to the Joint Board.
Pet’r Br. 4 at 17. To begin with, petitioners assert, the Order “made numerous and
substantial changes directly to [the FCC’s] Part 36 rules,”22 including “limit[ing] the
portion of nationwide loop cost expense that certain carriers could allocate to the
interstate jurisdiction,” “curtail[ing] carriers’ ability to receive ‘Safety net additive
support’ for new Telecommunications Plant in Service,” “limit[ing] the amount of
Corporate Operations Expenses carriers could allocate to the interstate jurisdiction,” and
“giving [FCC] staff[, i.e., the Wireline Competition Bureau,] discretion to publish a
schedule each year establishing new limits on unseparated loop cost allocated to the
interstate jurisdiction.” Id. Further, petitioners argue that the Order’s “changes to [the]
universal service rules affected [the FCC’s] separations rules, thereby [again] requiring
referral” to the Joint Board. Id. at 20. In particular, they note that the Order “capped the
level of High Cost Loop (‘HCL’) Fund limit the support carriers would receive for
various expenses, including capital and operating expenses,” id., and “reduced HCL
support for carriers whose intrastate end user local rates were below a local rate floor,” id.
at 20-21. These changes, petitioners assert, “essentially reassigned to the intrastate
jurisdiction for possible recovery from other sources” “[c]osts that were [originally]
assigned to the interstate jurisdiction for recovery from the Universal Service Fund.” Id.
22
The “Part 36 rules” referred to by petitioners are the jurisdictional separations
procedures outlined by the FCC in 47 C.F.R. Part 36.
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at 21. Petitioners also assert that the Order, “[t]hrough its intercarrier compensation
reform, . . . reduced and eliminated certain intrastate access charges over a transition
period.” Id. at 22. “For many carriers,” petitioners assert, “the intrastate access revenues
can represent a substantial portion of their existing intrastate revenues.” Id. “The [Order]
also,” petitioners assert, “allowed carriers to charge a new interstate-approved rate, the
Access Recovery Charge, and receive some limited support from the Connect America
Fund as a partial and limited means of addressing substantial lost revenue.” Id. But,
petitioners argue, “[t]he FCC failed to reclassify carrier access costs between jurisdictions
as a corollary to these actions,” thus leaving the states with these costs “in their intrastate
allocations for ratemaking.” Id. at 23.
The FCC argues, in response, that there “was no . . . jurisdictional separation here:
the Order did not reallocate costs for any type of telecommunications plant or any
operating expense between the federal and the state jurisdictions.” FCC Br. 4 at 13
(italics omitted). Addressing the specific points raised by petitioners, the FCC asserts as
follows:
• the only changes the Order made to Part 36 were to Subpart F thereof,
which “contains universal service rules governing high-cost loop support
(‘HCLS’) for rate-of-return carriers,” id., and those changes, which “simply
adjusted the amount of universal service funding that is prospectively
available for HCLS,” id. at 14 (emphasis in original), “have nothing to do
with jurisdictional separations,” id.;
• the amended rules eliminating Safety Net Additive Support and imposing
new limits on recoverable corporate operations expenses, capital expenses,
and operating expenses . . . merely prohibit carriers from obtaining
universal service subsidies to cover certain costs already allocated to the
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federal jurisdiction” and thus “did not change the jurisdictional allocation of
costs,” id.;
• the reductions in “universal service support and intercarrier compensation
revenues” implemented by the Order do not constitute “formal changes to
the allocation of costs” that would “require consultation with the Joint
Board,” id. at 15;
• “petitioners’ assertion that states have been ‘left’ with the responsibility to
recover certain carrier access costs overlooks the Order’s explicit holding
that ‘states will not be required to bear the burden of establishing and
funding state recovery mechanisms for intrastate access reductions,’” id. at
16 (quoting Order ¶ 795); and
• “the Order established a federal recovery mechanism to ‘provide carriers
with recovery for reductions to eligible interstate and intrastate [intercarrier
compensation] revenue.’” id. (quoting Order ¶ 795), “[a]nd the backstop
Total Cost and Earnings Review process permits a carrier to make a
comprehensive cost showing to the FCC that additional recovery is needed
to avoid a taking,” id. at 17.
Although § 410(c) does not expressly indicate who determines whether a particular
FCC proceeding concerns “the jurisdictional separation of common carrier property and
expenses between interstate and intrastate operations,” the only reasonable conclusion
that can be drawn from the statute is that Congress afforded the FCC the authority and
discretion to make that determination (subject, of course, to judicial review). See
Crockett Tel. Co. v. FCC, 963 F.2d 1564, 1570 (D.C. Cir. 1992) (holding that “[n]o
procedural requirements are triggered [under § 410(c)] absent the Commission’s
discretionary choice to adopt a new formal separation guideline.”). And, consequently,
under the Administrative Procedure Act, the FCC’s determination as to whether a
particular proceeding involved “jurisdictional separation” issues could be held unlawful
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and set aside only it if was found by a court to be “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
In this case, we are not persuaded that the FCC, in determining that the Order did
not involve jurisdictional separations issues, has violated that deferential standard. Quite
clearly, the purpose of the FNPRM and the Order was not “to adopt a new formal
separation guideline” or methodology. Crockett, 963 F.2d at 1570. Rather, as the Order
itself notes, the purpose was to “comprehensively reform[] and modernize[] the universal
service and intercarrier compensation systems to ensure that robust, affordable voice and
broadband service . . . [we]re available to Americans throughout the nation.” JA at 394
(Order ¶ 1). Relatedly, the Order makes no changes to the FCC’s “formal separation
guideline[s].” Crockett, 963 F.2d at 1570; see Southwestern Bell Tel. Co. v. FCC, 153
F.3d 523, 556 (D.C. Cir. 1992) (holding that FCC order deciding “that federal support for
universal service should be applied to satisfy the interstate revenue requirement” did not
involve a jurisdictional separations issue that required referral to the joint board; “the
FCC was not allocating jointly used plant, nor was it changing the proportions for
allocating jointly used plant to interstate and intrastate jurisdictions.”). Consequently, we
conclude that the FCC did not violate § 410(c) in adopting the Order.
3. Did the FCC irrationally refuse to modify service obligations for
carriers to whom it denied USF support?
Petitioners argue that, even assuming it was proper for the FCC to eliminate USF
support for all carriers serving any territory that is also served by an unsubsidized
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competitor, the FCC nevertheless erred “by refusing to relieve Eligible
Telecommunications Carriers (ETCs) of their ongoing duty to serve all comers without
USF support.” Pet’r Br. 4 at 24. According to petitioners, the “statutory structure” of 47
U.S.C. § 214(e) “leaves no room for doubt that Congress intended eligibility for support
and the duty to serve to be two sides of the same coin.” Id. at 26.
a) The requirements imposed by § 214(e)
As noted by petitioners, § 214(e)(1) of the Act imposes certain requirements on
ETCs:
(1) Eligible telecommunications carriers. A common carrier designated as
an eligible telecommunications carrier under paragraph (2), (3), or (6) shall
be eligible to receive universal service support in accordance with section
254 [47 USCS § 254] and shall, throughout the service area for which the
designation is received—
(A) offer the services that are supported by Federal universal service
support mechanisms under section 254(c) [47 USCS § 254(c)], either
using its own facilities or a combination of its own facilities and
resale of another carrier’s services . . . ; and
(B) advertise the availability of such services and the charges
therefor using media of general distribution.
47 U.S.C. § 214(e)(1).
b) Relevant portions of the Order
In the Order, the FCC found that “USF support should be directed to areas where
providers would not deploy and maintain network facilities absent a USF subsidy, and not
in areas where unsubsidized facilities-based providers already are competing for
customers.” JA at 494 (Order ¶ 281; internal quotation marks omitted). In turn, the FCC,
in a portion of the Order entitled “Elimination of Support in Areas with 100 Percent
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Overlap,” id. at 493, outlined certain changes to the USF funding system. In the first
paragraph of that section, entitled “Background,” the FCC explained that “in many areas
of the country, universal service provides more support than necessary to achieve [the
FCC’s] goals by subsidizing a competitor to a voice and broadband provider that is
offering service without governmental assistance.” Id. (Order ¶ 280; internal quotation
marks omitted). In the ensuing paragraphs, entitled “Discussion,” the FCC “adopt[ed] a
rule to eliminate universal service support where an unsubsidized competitor — or a
combination of unsubsidized competitors — offers voice and broadband service
throughout an incumbent carrier’s study area, and [sought] comment on a process to
reduce support where such an unsubsidized competitor offers voice and broadband
service to a substantial majority, but not 100 percent of the study area.” Id. at 494 (Order
¶ 281). The FCC thus “exclude[d] from the CAF areas that are overlapped by an
unsubsidized competitor.” Id. The FCC also announced its intent to discontinue its
“current levels of high-cost support to rate-of-return companies where there is overlap
with one or more unsubsidized competitors.” Id. More specifically, the FCC “adopt[ed]
a rule to phase out all high-cost support received by incumbent rate-of-return carriers over
three years in study areas where an unsubsidized competitor — or a combination of
unsubsidized competitors — offers voice and broadband service at” certain specified
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speeds “for 100 percent of the residential and business locations in the incumbent’s study
area.”23 Id. at 494-95 (Order ¶ 283).
In announcing these rules, the FCC “recognize[d] that there [we]re instances where
an unsubsidized competitor offer[ed] broadband and voice service to a significant
percentage of the customers in a particular study area (typically where customers are
concentrated in a town or other higher density sub-area), but not to the remaining
customers in the rest of the study area, and that continued support may be required to
enable the availability of supported voice services to those remaining customers.” Id. at
494 (Order ¶ 282). “In those cases,” the FCC concluded, “there should be a process to
determine appropriate support levels.” Id. “The FNPRM” thus sought “comment on the
methodology and data for determining overlap.” Id. at 495 (Order ¶ 284). And the Order
“direct[ed] the Wireline Competition Bureau to publish a finalized methodology for
determining areas of overlap.” Id.
The Order also recognized the possibility that ETCs might be required to provide
service in areas where they no longer receive support, or receive reduced support. As a
result, in the attached FNPRM, the FCC sought comment on whether the reductions in
USF support “should be accompanied by relaxation of those carriers’ section 214(e)(1)
voice service obligations in some cases.” Id. at 790 (Order ¶ 1095); see id. at 791 (Order
¶ 1096). Although petitioners contend “[i]t was arbitrary, capricious, unreasonable and
23
Likewise, in areas served by price cap carriers, a new rule eliminates high-cost
support in a census block only where an unsubsidized competitor already serves that
census block. JA at 456 (Order ¶¶ 170-71).
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contrary to law for the [FCC] to maintain the [214(e)] service obligations while
eliminating support,” Pet’r Br. 4 at 27, they make no attempt to explain precisely how it
was arbitrary or capricious. And a reading of the Order refutes that assertion; clearly, the
FCC is taking a reasoned approach to the situation by seeking comment regarding the
possible relaxation of service obligations. As for their assertion that the FCC is acting
“contrary to law,” petitioners argue simply that “Congress clearly intended the[]
obligations and benefits [outlined in § 214(e)] to be complementary.” Id. But that
argument rests on the faulty assumption that being designated an ETC under § 214(e)
entitles a carrier to USF funds. As we have explained, ETC designation simply makes a
carrier eligible for USF. Nothing in the language of § 214(e) entitles an ETC to USF
funding.
Finally, as the FCC notes in its response, once it finalizes its rules following
comment and further order, ETCs will “have avenues to seek relief should their
continuing section 214(e)(1) obligations prove too onerous.” FCC Br. 4 at 21. In
particular, the Order expressly authorizes “any carrier negatively affected by the universal
service reforms . . . to file a petition for waiver that clearly demonstrates that good cause
exists for exempting the carrier from some or all of those reforms, and that waiver is
necessary and in the public interest to ensure that consumers in the area continue to
receive voice service.” JA at 566 (Order ¶ 539). To be sure, the Order cautions that the
FCC will “subject such requests to a rigorous, thorough and searching review comparable
to a total company earnings review,” and will “take into account not only all revenues
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derived from network facilities that are supported by universal service but also revenues
derived from unregulated and unsupported services as well.” Id. at 567 (Order ¶ 540).
But the Order states that “[w]aiver w[ill] be warranted where an ETC can demonstrate
that, without additional universal service funding, its support would not be sufficient to
achieve the purposes of [section 254 of the Act].” Id. (internal quotation marks omitted;
brackets in original).
c) The FCC’s notice of supplemental authority
On November 5, 2013, the FCC filed with this court a Rule 28(j) letter advising
that on October 31, 2013, the FCC’s Wireline Competition Bureau (WCB) released an
order that allows ETCs to challenge a price-cap ILEC’s exclusive right to high-cost
support. Connect America Fund, Report and Order, WC Docket 10-90 (rel. Oct. 31,
2013) (WCB Order). More specifically, the WCB Order states, in pertinent part, as
follows:
The Commission directed the [WCB] to exclude areas with unsubsidized
competitors from Phase II funding. The codified rule states that an
unsubsidized competitor is one that “does not receive high-cost support.”
The Commission’s intent in adopting this rule was to preclude support to
areas where voice and broadband is available without burdening the federal
support mechanisms. We will presume that any recipient of high-cost
support at the time the challenge process is conducted does not meet the
literal terms of the definition, but will entertain challenges to that
presumption from any competitive eligible telecommunications carrier that
otherwise meets or exceeds the performance obligations established herein
and whose high-cost support is scheduled to be eliminated during the five-
year term of Phase II. This will provide an opportunity for the Commission
to consider whether to waive application of the “unsubsidized” element of
the unsubsidized competitor definition in situations that would result in
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Phase II support being used to overbuild an existing broadband-capable
network.
WCB Order ¶ 41, p.18.
We agree with the FCC that this portion of the WCB Order further serves to
undercut petitioners’ argument that the Order violates the FCC’s principle of competitive
neutrality. Specifically, “[a] competitive ETC that successfully utilizes the challenge
process will not be forced to compete against an ILEC whose service in the same areas is
subsidized by federal universal service funding.” FCC Rule 28(j) Letter at 2.
4. Is the Order, as applied to Allband and similarly-situated small rural
carriers, unconstitutional under due process principles and as a bill of
attainder, and/or does it violate the Act, principles of estoppel and contract
law?
The fourth and final issue of Brief 4 is devoted exclusively to issues raised by
Allband Communications Cooperative (Allband).
a) Background information regarding Allband
Allband is a communications cooperative created in 2003 to offer communications
services to residents in four rural contiguous counties in northern Michigan. In 2005, the
FCC approved Allband as an ILEC. Allband, in turn, obtained $8 million in loans from
the USDA Rural Utility Service (RUS), premised upon receipt of USF revenues as
security. With those loan proceeds, Allband constructed an advanced communications
network and began offering partial service in late 2005. By 2010, Allband had completed
its network and was offering services to the residents in its rural exchange area.
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According to petitioners, “[t]he annual USF funds provided to Allband comprise the bulk
of the revenues necessary to make payments on Allband’s RUS loans.” Pet’r Br. 4 at 30.
Shortly after the Order at issue was released, Allband, acting pursuant to the
authority granted to it in the Order, filed a petition for waiver of both the $250 per-line
cap and the benchmarking rule adopted in the Order. FCC Br. 4 at 24. The FCC’s
Wireline Competition Bureau (WCB) considered the petition and found “good cause to
grant [Allband] a waiver of [the $250 per-line cap] for three years.” Id. (internal
quotation marks omitted). The WCB advised Allband, however, that it was expected “to
actively pursue any and all cost-cutting and revenue generating measures in order to
reduce its dependency on federal high-cost USF support.” Id. (internal quotation marks
omitted). The WCB also expressly noted Allband’s willingness to work with RUS to
restructure its loan terms. But the WCB did not grant Allband the unlimited waiver
Allband had requested. Instead, the WCB concluded it would reassess Allband’s
financial condition to determine whether a waiver remained necessary in the future.
Allband sought full Commission review of the WCB’s Order and has asked the
FCC to waive both the $250 per-line cap and the regression rule until 2026, when Allband
will have repaid its loan from RUS. Allband’s petition remains pending before the FCC.
b) The issues raised by Allband in this appeal
Allband argues that the Order violates its constitutional rights in several respects.
Pet’r Br. 4 at 31. In support, Allband begins by asserting that it “fully meets all of the
provisions and purposes of the 1996 Act, such as the USF provisions of Section 254(b).”
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Id. In turn, Allband argues that the Order “contravenes the provisions[] and . . . goals and
objectives of Congress under Section 254(b)(5) and 254(d) of the Act, requiring ‘specific,
predictable and sufficient . . . mechanisms to preserve and advance universal service’; and
under Section 254(e) which requires that universal service support provided to ETC
Providers ‘should be explicit and sufficient to achieve the purposes of this section.’” Id.
(quoting statutes). Continuing, Allband argues that the Order “imposes a drastic
reduction in the per-line USF funding support to be provided some small rural companies
such as Allband, and also established a ‘benchmark regression rule’ which purports to
impose limitations on capital and operations costs reimbursable from the USF.” Id. at 32.
Allband argues that this benchmark regression rule “is . . . hopelessly vague,
unascertainable, uncertain, and arbitrary as applied to small companies such as Allband.”
Id.
Ultimately, Allband argues that the Order, as applied to it, is “unconstitutional
under the Due Process clause because (i) it imposes a retroactive reversal of Commission
orders and USF program commitments upon which Allband (and the RUS) have relied in
establishing Allband and in incurring capital costs, . . . and (ii) because the expense
reimbursement limitations under the ever-changeable ‘benchmark regression rule,’ on a
going-forward basis, are hopelessly vague and unascertainable.” Id. “The Order thus
fails,” Allband argues, “to meet the holdings and reasoning stated in Federal
Communications Commission, et al. v. Fox Television Stations, Inc., 132 S. Ct. 2307
(2012).” Pet’r Br. 4 at 32-33 (italics in original omitted).
133
We readily reject Allband’s due process claim. To begin with, it is questionable
whether Allband has supported the due process claim with sufficient reasoned argument.
At best, Allband mentions the term “due process” and cites to a single case in support,
i.e., Fox Television, without explaining its relevance. In any event, our own independent
review of that case persuades us it is inapposite. At issue in Fox Television was whether
the FCC had violated the due process rights of two television networks by failing to give
them fair notice that, in contrast to a prior FCC policy, a fleeting expletive or a fleeting
shot of nudity could be actionably indecent. In addressing this issue, the Supreme Court
noted that “[a] fundamental principle in our legal system is that laws which regulate
persons or entities must give fair notice of conduct that is forbidden or required.” 132
S. Ct. at 2317. In turn, the Court held that “[t]his requirement of clarity in regulation is
essential to the protections provided by the Due Process Clause of the Fifth Amendment.”
Id. In the case at hand, there is no basis for us to conclude that the FCC failed to give
petitioners, including Allband, adequate notice of its intent or planned regulations.
Indeed, the FCC issued a NPRM and allowed petitioners to file comments thereto. Thus,
in short, there is no lack of fair notice in this case. Relatedly, it is unclear precisely what
“process” Allband is claiming it was deprived of. Notably, Allband was given notice and
an opportunity to comment, like all other carriers, and was also allowed to file a petition
for waiver from certain of the Order’s new USF rules. And, as noted, the FCC has
granted Allband temporary relief from certain of those rules.
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Allband also argues that the Order is “unconstitutional as applied to Allband under
the Fifth Amendment Due Process clause” because it “would effect a confiscation of
Allband’s (and its customer-members’ property), and will financially destroy
commitments made by Allband to its employees, vendors, and entities providing credit
and loans.” Pet’r Br. 4 at 33. The only cases that Allband cites in support of its claim,
however, are distinguishable. For example, in Bluefield Waterworks & Improvement Co.
v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679, 690 (1923), the Supreme Court held that
public utility rates established by a state commission that “are not sufficient to yield a
reasonable return on the value of the property used at the time it is being used to render
the service are unjust, unreasonable and confiscatory, and their enforcement deprives the
public utility company of its property in violation of the Fourteenth Amendment.” In the
instant case, in contrast, Allband is not a public utility, and, in any event, the Order is not
reasonably comparable to a rate-setting order issued by a state utility commission.
Moreover, as the FCC notes in its response brief, any takings-type claim is not yet ripe
because the FCC has exempted Allband for a period of three years from the USF reforms
outlined in the Order, and has also afforded Allband the opportunity to seek an additional
waiver at the end of that time period.
Allband next argues that the Order “constitutes an unconstitutional Bill of
Attainder.” Pet’r Br. 4 at 34. That is because, Allband argues, the “benchmark regression
rule” adopted in the Order “threatens to reduce reimbursement funding from the USF,
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crippling Allband and a small class of rural carriers which relied on the 1996 Act’s USF.”
Id.
Allband’s argument, however, is clearly baseless. According to the Supreme
Court, “the Bill of Attainder Clause was intended . . . as an implementation of the
separation of powers, a general safeguard against legislative exercise of the judicial
function, or more simply-trial by legislature.” United States v. Brown, 381 U.S. 437, 442
(1965). Thus, “[a] bill of attainder is a legislative act which inflicts punishment without a
judicial trial.” United States v. Lovett, 328 U.S. 303, 315 (1946) (internal quotation
marks omitted). In this case, there has been no legislative act, let alone one that punishes
Allband without a judicial trial.24 Consequently, Allband has failed to establish the
existence of an unconstitutional Bill of Attainder.
In addition to these constitutional arguments, Allband also asserts several other
non-constitutional claims. To begin with, Allband argues that the Order “is irrational to
the extreme” and “should be reversed as applied to Allband based upon estoppel
principles.” Pet’r Br. 4 at 35. Notably, however, Allband fails to flesh out this estoppel
claim by citing any case law or outlining the essential elements of an estoppel claim.
Consequently, the claim is inadequately briefed. In any event, as the FCC notes in its
response brief, it never represented to Allband that USF funding would remain constant
24
Presumably, Allband would have us treat the Order as a legislative act. Even if
we were to do so, there clearly has been no “punishment” of Allband that would render
the Order an unconstitutional bill of attainder.
136
for the duration of Allband’s loan with RUS, or, for that matter, any other set length of
time. Thus, there is no basis for an estoppel claim.
Relatedly, Allband argues that the Order “arbitrarily failed to consider Allband’s
assertions that the USF funding should not be reduced as applied to already invested
capital and expenses incurred in reliance on the USF, and at most, should apply only to
prospective investment incurred after the Order.” Id. at 36 (italics omitted). And,
Allband further argues, the Order “will cause a prompt default by Allband of its RUS loan
contracts and obligations,” and “wholly ignores that the pre-Order USF revenue stream
was relied upon by both Allband and the RUS to pay back the RUS loans.” Id. at 37. As
we have noted, however, the FCC, in its pre-Order USF funding system, never promised
Allband or any other carriers that they would continue to receive USF funding
indefinitely. And, in any event, the FCC has effectively considered Allband’s unique
situation by granting Allband’s petition for waiver and authorizing Allband to seek an
additional waiver at the end of three years.
Allband next argues that the Order is “arbitrary because it fails to recognize that
the destructive impacts upon Allband (or similar rural small carriers) are wholly
unnecessary to achieve the stated goals or objectives of the Order.” Pet’r Br. 4 at 35
(italics omitted). In support, Allband argues that there is “no evidence of waste or
insufficiency attributable to [it].” Id. at 36. But, notwithstanding the fact that Allband
may operate efficiently (and Allband cites to no evidence in the record on this point), the
Order found that there were systemic inefficiencies in the existing USF funding system
137
that required a complete alteration of that system. Notably, Allband does not dispute the
Order’s findings on that point. Further, the purported “destructive effects” on Allband
have clearly been mitigated, at least in the short term, by the FCC’s grant of Allband’s
petition for waiver. Consequently, there is no merit to this claim.
Lastly, Allband argues that the Order is “unlawful and beyond the jurisdiction of
the FCC because it intrudes much too far into the economic market place” and “serves to
pick ‘winners and losers’ among companies.” Id. at 37. Allband, however, fails to cite to
a single case or statute in support of its claim. Consequently, we deem the claim
inadequately briefed and thus waived. See Adler v. Wal-Mart Stores, Inc., 144 F.3d 664,
679 (10th Cir. 1998).
C. Wireless Carrier Universal Service Fund Principal Brief
1. Does the FCC lack authority to redirect USF support to broadband or to
regulate broadband?
In the first issue of Brief 5, petitioners assert that the FCC lacks statutory authority
to redirect USF support to broadband or to regulate broadband. The specific arguments
offered by petitioners in support are, in large part, identical to those raised in the first
issue of Brief 3. We therefore reject those arguments for the reasons we have outlined
above. Petitioners in Brief 5 have also asserted that the Order’s broadband condition is
contrary to three additional provisions of the Act. We thus turn to address that argument.
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a) Does the Order violate Congressional intent as expressed in 47 U.S.C.
§§ 153(51), 214(e)(1) and 254?
Petitioners argue that the Order’s broadband condition violates Congressional
intent as expressed in 47 U.S.C. §§ 153(51), 214(e)(1) and 254. Section 153(51) defines
the term “Telecommunications carrier” to mean:
[A]ny provider of telecommunications services, except that such term does
not include aggregators of telecommunications services (as defined in
section 226 [47 USCS §226]). A telecommunications carrier shall be
treated as a common carrier under this Act only to the extent that it is
engaged in providing telecommunications services, except that the
Commission shall determine whether the provision of fixed and mobile
satellite service shall be treated as common carriage.
47 U.S.C. § 153(51).
The terms “common carrier,” “telecommunications,” and “telecommunications
service,” all of which are used in the above-quoted definition, are themselves defined as
follows:
(11) Common carrier. The term “common carrier” or “carrier” means any
person engaged as a common carrier for hire, in interstate or foreign
communication by wire or radio or in interstate or foreign radio
transmission of energy, except where reference is made to common carriers
not subject to this Act; but a person engaged in radio broadcasting shall not,
insofar as such person is so engaged, be deemed a common carrier.
***
(50) Telecommunications. The term “telecommunications” means the
transmission, between or among points specified by the user, of information
of the user’s choosing, without change in the form or content of the
information as sent and received.
***
(53) Telecommunications service. The term “telecommunications service”
means the offering of telecommunications for a fee directly to the public . . .
regardless of the facilities used.
139
47 U.S.C. §§ 153(11), (50), (53).
Title II of the Act imposes certain specific requirements on “common carriers” in
their provision of “telecommunications services.” Because telephone service is quite
clearly a “telecommunications service,” entities that provide telephone service are treated
and regulated as common carriers under Title II. Broadband internet service, however,
has been treated differently by the FCC. In 2002, the FCC determined that cable
broadband service was not a “telecommunications service” subject to regulation under
Title II, but rather was an “information service” subject only to the FCC’s ancillary
authority under Title I of the Act.
All of which leads to petitioners’ argument that § 153(51)’s definition of
“telecommunications carrier” “clearly prohibits the FCC from treating telecom carriers as
common carriers under Title II when they are engaged in providing an information
service.” Pet’r Br. 5 at 14. In other words, petitioners argue, the statement in § 153(51)
that “[a] telecommunications carrier shall be treated as a common carrier under this Act
only to the extent that it is engaged in providing telecommunications services,” “places a
statutory limitation on the FCC’s jurisdiction to regulate.” Id. at 13.
Relatedly, petitioners argue that when 47 U.S.C. §§ 153(51), 214(e)(1) and 254 are
considered together, the only conclusion that can be drawn is “that a common-carrier
ETC shall be eligible to receive USF support only to the extent it is engaged in providing
telecom services on a common-carrier basis.” Pet’r Br. 5 at 17. And in turn, petitioners
argue that Congress, “[b]y specifying [in 47 U.S.C. § 214(e)(1)] that only a common
140
carrier can be an ETC [(eligible telecommunications carrier)], . . . imposed the
requirement that an ETC provide USF-supported telecom services on a common-carrier
basis.” Id. at 16. In short, petitioners argue, the wording of the relevant statutes clearly
indicates that (a) USF funding may only be given to ETCs providing telecommunications
services, and (b) ETCs that receive USF funding may use that funding only for the
provision of telecommunications services. Consequently, they argue, the FCC lacked
statutory authority (which they refer to in their brief as “jurisdiction”) to require ETCs to
offer broadband service upon reasonable request.
We conclude, however, that the FCC has the better of the argument. As the FCC
notes in its response brief, petitioners’ arguments “fail to acknowledge that carriers use
the same facilities to provide both telecommunications and information services [i.e.,
broadband].” FCC Br. 5 at 16-17. Indeed, the FCC asserts, at the present time “more
than 800 incumbent LECs voluntarily offer broadband subject to common carrier
regulation under Title II of the Act.” Id. at 21. Consequently, petitioners’ reading of the
Act “would prohibit universal service support for any dual-use facilities — despite the
fact that hundreds of carriers, including petitioners, expended support on such facilities
under the FCC’s prior ‘no barriers’ policy.” Id. at 17-18 (citing Order ¶¶ 64-65, 308).
Petitioners’ suggested reading of the Act also ignores 47 U.S.C. § 254(b), which,
as we have already discussed, outlines a set of “Universal service principles” that the
FCC must follow in establishing “policies for the preservation and advancement of
universal service.” Notably, these principles include providing “[a]ccess to advanced
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telecommunications and information services . . . in all regions of the Nation,” 47 U.S.C.
§ 254(b)(2), and ensuring that “[c]onsumers in all regions of the Nation, including low-
income consumers and those in rural, insular, and high cost areas, . . . have access to
telecommunications and information services,” 47 U.S.C. § 254(b)(3).
Thus, considering the Act as a whole, and in context of the realities of existing
technology, we agree with the FCC that it was entirely reasonable for it to conclude that,
“[s]o long as a provider offers some service on a common carrier basis, it may be eligible
for universal service support as an ETC under sections 214(e) and 254(e), even if it offers
other services - including ‘information services’ like broadband Internet access- on a non-
common carrier basis.” FCC Br. 5 at 19.
Finally, it is clear that the Order does not regulate broadband internet service or
providers. Rather, it merely imposes broadband-related conditions on those ETCs that
voluntarily seek to participate in the USF funding scheme. As the FCC notes, a provider
of telecommunications services is not required to seek USF funding. But if it does so, it
clearly can be subjected to certain conditions that the FCC may choose to attach to the
funding. As the FCC notes, “[a] funding condition, like the broadband public interest
obligation, is unlike common carrier regulation because providers voluntarily assume the
condition in exchange for support and ‘retain[] the ability to opt out of [the condition]
entirely by declining . . . federal universal service subsidies.’” Id. at 22 (quoting WWC
Holding Co. v. Sopkin, 488 F.3d 1262, 1274 (10th Cir. 2007)).
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2. Must the USF portions of the Order be vacated?
Petitioners argue, relatedly, that the USF portions of the Order must be vacated.
Pet’r Br. 5 at 31. But that argument is dependent upon a ruling in petitioners’ favor on
their claim that the Order’s broadband condition is contrary to statutory authority.
Because we have rejected this latter claim, there is no basis for vacating the USF portions
of the Order.
3. Did the FCC act arbitrarily and capriciously in reserving CAF II
support for ILECs?
Petitioners next argue that, even if the FCC possessed statutory authority to impose
the broadband condition, it acted arbitrarily and capriciously in “mak[ing] its CAF II
support program the virtual preserve of the big ILEC price-cap carriers.” Pet’r Br. 5 at
33. This issue is identical to the first issue raised in Brief 4 (“Additional Universal
Service Fund Issues Principal Brief”) that we rejected above.
4. Did the FCC act arbitrarily and capriciously in repealing the identical
support rule and adopting a single-winner reverse auction?
Petitioners challenge the FCC’s decision to “[a]bandon[] its practice of providing
USF support to multiple CETCs in an area” and instead “disburse Mobility I support to
only one CETC per area,” i.e., “the winning bidder in a reverse auction.” Id. at 36.
a) The Order’s plan for disbursement of the Mobility Fund
“In 2008, the [FCC] concluded that rapid growth in support to competitive ETCs
as a result of the identical support rule threatened the sustainability of the universal
service fund.” JA at 499 (Order ¶ 296). The FCC also found at that time “that providing
143
the same per-line support amount to competitive ETCs had the consequence of
encouraging wireless competitive ETCs to supplement or duplicate existing services
while offering little incentive to maintain or expand investment in unserved or
underserved areas.” Id. Accordingly, “the [FCC] adopted an interim state-by-state cap
on high-cost universal support for competitive ETCs, . . . pending comprehensive high-
cost universal service reform.” Id.
In the Order, the FCC “establish[ed] the Mobility Fund,” id. at 500 (Order ¶ 299),
to “secure funding for mobility directly, rather than as a side-effect of the competitive
ETC system, while rationalizing how universal service funding is provided to ensure that
it is cost-effective and targeted to areas that require public funding to receive the benefits
of mobility,” id. at 499-500 (Order ¶ 298). “The first phase of the Mobility Fund will
provide one-time support through a reverse auction, with a total budget of $300 million,
and will provide the [FCC] with experience in running reverse auctions for universal
service support.” Id. at 500 (Order ¶ 299). “The second phase of the Mobility Fund will
provide ongoing support for mobile service . . . with an annual budget of $500 million.”
Id. “This dedicated support for mobile service supplements the other competitive bidding
mechanisms under the Connect America Fund.” Id.
According to the FCC’s response brief, it “completed the Mobility Fund Phase I
Auction” on September 27, 2012. FCC Br. 5 at 32. “Based on this auction, thirty-three
winning bidders became eligible to receive a total of $299,998,632 in one-time universal
service support to provide third-generation or better mobile voice and broadband services
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covering up to 83,494 road miles in 795 biddable geographic areas located in thirty-one
states and one territory.” Id.
b) Petitioners’ specific challenges to the Mobility Fund disbursement plan
In attacking the Order’s Mobility Fund Phase I plan, petitioners begin by arguing
that “the FCC ignored its prior policy choice of ensuring competitively-neutral funding.”
Pet’r Br. 5 at 37. But as the FCC correctly notes, the Order expressly discussed and
ultimately “eliminate[d] the [pre-existing] identical support rule.” JA at 554 (Order ¶
502). The “identical support rule,” the Order noted, “provide[d] competitive ETCs the
same per-line amount of high-cost universal service support as the incumbent local
exchange carrier serving the same area.” Id. at 552 (Order ¶ 498). The Order further
noted that the “rule’s primary role ha[d] been to support mobile services, [even though]
the [FCC] did not identify that purpose when it adopted the rule.” Id. For example, the
Order noted, “the largest competitive ETC recipient by holding company in 2010 was
AT&T, which received $289 million,” and in 2011, “about $611 million went to one of
the four national wireless providers.” Id. at 553 (Order ¶ 501). The Order concluded that
the “rule fail[ed] to efficiently target support where it [wa]s needed,” and thus “ha[d] not
functioned as intended.”25 Id. at 554 (Order ¶ 502). Thus, rather than “ignoring” the pre-
existing identical support rule as suggested by petitioners, the Order expressly reviewed
and rejected it.
25
The Order explains in much greater detail the inefficiencies that resulted from
the identical support rule. JA at 555 (Order ¶¶ 502-506).
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Petitioners next argue that “[t]he FCC did not explain how its goal [of providing
appropriate levels of support for the efficient deployment of mobile services] was based
on any of the § 254(b) principles insofar as broadband services are ineligible for USF
support.” Pet’r Br. 5 at 37. According to petitioners, “[t]he FCC was obliged to provide
a detailed explanation of how its ‘balancing calculus’ of the statutory principles led it to
replace the rule with the Mobility I auction.” Id. at 38.
This argument is flawed in several respects. To begin with, the Mobility Fund
Phase I auction was not intended to replace the identical support rule. Rather, this auction
was intended to “swiftly extend[] current generation wireless coverage in areas where it is
cost effective to do so with one-time support.” JA at 505 (Order ¶ 314). Further, the
Order directly addressed and rejected the argument that broadband services are ineligible
for USF support:
307. As an initial matter, it is wholly apparent that mobile wireless
providers offer “voice telephony services” and thus offer services for which
federal universal support is available. Furthermore, wireless providers have
long been designated as ETCs eligible to receive universal service support.
***
308. . . . [W]e reject the argument that we may not support mobile
networks that offer services other than the services designated for support
under section 254. As we have already explained, under our longstanding
“no barriers” policy, we allow carriers receiving high-cost support “to
invest in infrastructure capable of providing access to advanced services” as
well as supported voice services. Moreover, section 254(e)’s reference to
“facilities” and “services” as distinct items for which federal universal
service funds may be used demonstrates that the federal interest in universal
service extends not only to supported services but also the nature of the
facilities over which they are offered. Specifically, we have an interest in
promoting the deployment of the types of facilities that will best achieve the
146
principles set forth in section 254(b) (and any other universal service
principles that the Commission may adopt under section 254(b)(7)),
including the principle that universal service program [sic] be designed to
bring advanced telecommunications and information services to all
Americans, at rates and terms that are comparable to the rates and terms
enjoyed in urban areas. Those interests are equally strong in the wireless
arena. We thus conclude that USF support may be provided to networks,
including 3G and 4G wireless services networks, that are capable of
providing additional services beyond supported voice services.
309. . . . [T]he Mobility Fund will be used to support the provision of
“voice telephony service” and the underlying mobile network. That the
network will also be used to provide information services to consumers
does not make the network ineligible to receive support; to the contrary,
such use directly advances the policy goals set forth in section 254(b), our
new universal service principle recommended by the Joint Board, as well as
section 706.
JA at 502-03 (Order ¶¶ 307-309; internal footnotes omitted). Finally, as the above-quoted
language makes clear, the FCC expressly considered the principles outlined in § 254(b)
and concluded that the Mobility Fund Phase I auction was consistent with and served to
promote those principles. Nothing about the FCC’s analysis on this point strikes us as
arbitrary or capricious.
Lastly, petitioners argue that “[b]y virtue of the FCC’s decision ‘not to subsidize
competition,’ and its adoption of a single-winner Mobility I auction, States were deprived
of their § 214(e)(2) authority to designate more than one CETC in a given area.” Pet’r
Br. 5 at 39. That is, petitioners argue, “[b]y unilaterally deciding that it would define the
areas throughout which CETCs would provide USF-supported services based on census
blocks, the FCC preempted the primary jurisdiction of the States to establish such areas.”
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Id. at 39-40. Petitioners argue that “§ 214(e)(2) conferred on the States the authority ‘to
designate more than one . . . ETC in a given area’ and to ‘determine whether that is in the
public interest.’” Id. at 40. “That conferral of authority,” petitioners assert, “necessarily
deprived the FCC of authority to limit Mobility I support to one CETC in any FCC-
designated, census block-based service area.” Id.
Contrary to petitioners’ arguments, nothing in the Order deprives states of their
statutory authority to designate ETCs. Indeed, only designated ETCs may participate in
the Mobility Fund Phase I auction. JA at 524 (Order ¶ 386) (“to be eligible for Mobility
Fund support, entities must (1) be designated as a wireless ETC pursuant to section
214(e) of the Communications Act, by the state public utilities commission”).
Ultimately, petitioners’ arguments rest on the faulty assumption that ETC designation by
a State entitles an entity to USF funding. As we have discussed elsewhere in this opinion,
ETC designation by a State simply makes an entity eligible for, but not entitled to, USF
funding. Consequently, the rules adopted by the Order for distributing Mobility Fund
Phase I funds are not contrary to § 214(e), nor do they deprive the states of their
designation authority under that statute.
5. Did the FCC act arbitrarily and capriciously in setting the Mobility II
budget at $500 million?
Petitioners also argue that the FCC acted arbitrarily and capriciously in setting the
Mobility Fund Phase II annual budget at $500 million, particularly when “compared to a
$4 billion annual budget for ILECs.” Pet’r Br. 5 at 42. Although petitioners concede that
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the FCC concluded in its Order that “the Mobility II budget would ‘be sufficient to
sustain and expand the availability of mobile broadband,’” they argue that the Order
“failed to supply a nexus between any record findings and [that] conclusion.” Id.
(quoting Order ¶ 495). In particular, petitioners complain that (a) “[t]he FCC did not cite
to any record representation by Verizon, Sprint, AT&T or T-Mobile that [they] would
maintain current coverage if [their] USF support is phased out,” id. at 43, (b) “[t]he FCC
made no findings supporting its conclusions that $579 million was sufficient support for
regional and small wireless CETCs in 2010 and that $500 million in annual support
would be sufficient for them in the future,” id., and (c) “no findings supported the FCC’s
conclusion that providing 800 percent more USF funding to large ILECs than to wireless
CETCs would constitute competitively-neutral funding,” id. at 43-44.
Addressing these three complaints in turn, the FCC concluded in the Order that it
was “reasonable to assume that the four national [wireless] carriers will maintain at least
their existing coverage footprints even if the [USF] support they receive today [i.e., pre-
Order] is phased out.” JA at 551 (Order ¶ 495). Contrary to petitioners’ suggestion, the
FCC made this prediction based upon the record evidence that was compiled in response
to the Further Notice of Proposed Rulemaking. In particular, the FCC noted that “[u]nder
2008 commitments to phase down their competitive ETC support, Verizon Wireless and
Sprint have already given up significant amounts of the support they received under the
identical support rule, and there is nothing in the record showing that either carrier is
reducing coverage or shutting down towers” as a result of this reduction in USF support.
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Id. Further, the FCC noted that there was no evidence “in the record . . . suggest[ing]
AT&T or T-Mobile would reduce coverage or shut down towers in the absence of ETC
support.” Id. In light of this analysis, we are not persuaded that the FCC’s predictive
judgment that the four major wireless carriers would continue their existing coverage
even in the absence of USF support was arbitrary or capricious.
The same can be said for petitioners’ complaint that the FCC failed to support its
conclusion that an annual $500 million budget was sufficient for regional and small
wireless carriers. In the Order, the FCC found that “[i]n 2010, $579 million flowed to
regional and small carriers, i.e., carriers other than the four nationwide providers.” Id. In
support of that finding, the FCC cited to its “2010 Disbursement Analysis.” Id. (Order ¶
495 n.821). Notably, petitioners make no attempt to discredit that report. In turn, the
FCC found in the Order that “[o]f this $579 million, we know in many instances that this
support is being provided to multiple wireless carriers in the same geographic area.” Id.
(Order ¶ 495). In support of that finding, the FCC cited to its “Response to United States
House of Representatives Committee on Energy and Commerce, Universal Service Fund
Data Request of June 22, 2011, Request 7: Study Areas with the Most Eligible
Telecommunications Carriers (Table 1: Study Areas with the Most Eligible
Telecommunications Carriers in 2010).” Id. (Order ¶ 495 n.822). Again, petitioners
make no attempt to discredit this source of evidence. Lastly, the FCC “note[d] that the
State Members of the Federal State Joint Board on Universal Service have proposed that
the Commission establish a dedicated Mobility Fund that would provide $50 million in
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the first year, $100 million in the second year, and then increase by $100 million each
year until support reaches $500 million annually.” Id. at 551-52 (Order ¶ 495).
Considering this recommendation together with its factual findings, the FCC opined “that
[its] $500 million budget w[ould] be sufficient to sustain and expand the availability of
mobile broadband.” Id. at 552 (Order ¶ 495). Nothing about this predictive judgment
was arbitrary or capricious.
Finally, and again contrary to petitioners’ assertions, the FCC expressly justified
its decision to provide substantially less USF funding to wireless carriers than to other
types of carriers, including large ILECs. To begin with, the FCC noted that “[a]lthough
the budget for fixed services exceeds the budget for mobile services, . . . today
significantly more Americans have access to 3G mobile coverage than have access to
residential broadband via fixed wireless, DSL, cable, or fiber.” Id. at 551 (Order ¶ 494).
In turn, the FCC predicted “that as 4G mobile service is rolled out, this disparity will
persist — private investment will enable the availability of 4G mobile service to a larger
number of Americans than will have access to fixed broadband with speeds of at least 4
Mbps downstream and 1 Mbps upstream.” Id. In support of this finding and prediction,
the FCC cited to the “15th Annual Mobile Wireless Competition Report, 26 FCC Rcd at
9736-41, paras. 109-116 and Table 11.” Id. (Order ¶ 494 n.820). Petitioners have made
no attempt to challenge this source of information. Thus, in sum, we conclude the FCC
acted neither arbitrarily nor capriciously in deciding to provide substantially more USF
funding to “fixed services” than to wireless services.
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6. Did the FCC fail to respond to comments calling for a separate mobility
fund for insular areas?
In the final issue of Brief 5, petitioners complain that the FCC did not respond to
comments calling for a separate mobility fund for insular areas. According to petitioners,
“[t]he FCC received comments from wireless CETCs in insular areas urging it to
establish a separate insular component of the Mobility Fund.” Pet’r Br. 5 at 46. The FCC
in turn, petitioners complain, “relegated its one-sentence response to the wireless CETCs’
comments to the margin of the Order,” and “declined to create a Mobility Fund for insular
areas[] because ‘these areas generally do not face the same level of deployment
challenges as Tribal areas.’” Id. (quoting Order ¶ 481 n.790). “That unexplained
statement,” petitioners assert, “was unresponsive to the comments the FCC invited and
received” and was therefore irrational. Id.
The statement at issue was contained in a footnote to the portion of the Order
establishing the Tribal Mobility Fund Phase I, which was intended by the FCC “to
provide one-time support to deploy mobile broadband to unserved Tribal lands.” JA at
546 (Order ¶ 481). In that footnote, the FCC stated:
Some carriers request a separate funding mechanism for insular areas. See,
e.g., PR Wireless Mobility Fund NPRM Comments at 1-5. Because these
areas generally do not face the same level of deployment challenges as
Tribal lands, we decline to create a separate component of the Mobility
Fund for them.
Id. (Order ¶ n.790).
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The FCC asserts in its response brief that it was unnecessary for the Order to go
into greater detail in justifying this conclusion. In support, the FCC notes that in 2010 it
issued an order, referred to in the record as the “2010 Insular Order,” that “declin[ed] to
adopt a new high-cost support mechanism for non-rural insular carriers.” JA at 974
(Appendix D at ¶ 1). The Puerto Rico Telephone Company (PRTC) filed a petition for
reconsideration of the 2010 Insular Order. In Appendix D to the Order, the FCC rejected
PRTC’s petition. In doing so, the FCC noted that PRTC “failed to show that consumers
in Puerto Rico lack access to supported voice services because of inadequate federal
universal service support.” Id. Relatedly, the FCC noted, to the extent that telephone
subscribership in Puerto Rico “falls below the national average because of the number of
low-income consumers who are unable to afford access to telephone service,” id. at 976-
977, “it [wa]s not at all apparent why the Commission should establish a new insular
high-cost support mechanism rather than increase support for low-income consumers
through its existing low-income support programs,” id. at 977. Indeed, the FCC noted,
“subscribership in Puerto Rico [wa]s on the rise due, in part, to efforts by the
Commission, the Telecommunications Regulatory Board of Puerto Rico, and
telecommunications carriers in Puerto Rico to improve the effectiveness and consumer
awareness of federal low-income support programs.” Id. The FCC also rejected the
notion that it was “arbitrarily treat[ing] carriers serving insular areas differently from
carriers . . . serv[ing] rural areas.” Id.
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According to the FCC, “[p]etitioners’ requests for an insular mobility fund relied
on the same flawed arguments” as those raised by PRTC and other non-rural insular
carriers. FCC Br. 5 at 45. In short, the FCC asserts, “there [we]re no changed
circumstances that would [have] require[d] [it] to reconsider its longstanding (and
repeatedly confirmed) view that a separate support mechanism for insular areas [wa]s
unnecessary because those areas do not exhibit cost or other characteristics that warrant
an exemption from generally applicable high-cost support mechanisms.” Id. at 45-46.
“Thus,” the FCC asserts, “it was sufficient for [it] to deny petitioners’ request by
reiterating that insular areas do not face unique ‘deployment challenges’ that would
warrant the creation of a separate support mechanism.” Id. at 46.
Petitioners’ reply brief is silent on this issue: they make no attempt to rebut the
FCC’s assertion that the issues they now raise regarding the need for a mobility insular
fund are substantially similar to the issues raised by PRTC regarding the purported need
for a special insular fund for Puerto Rico. Consequently, we reject petitioners’ argument
on this issue.
D. Tribal Carriers Principal Brief
1. Did the FCC act arbitrarily and capriciously in prescribing funding cuts
for tribal carriers?
In Brief 9, petitioners Gila River Indian Community and Gila River
Telecommunications, Inc. (collectively Gila River26) challenge the FCC’s decision in the
26
Gila River Indian Community is a federally recognized Indian tribe that is
“centered in a[] . . . reservation in rural southern Arizona.” Pet’r Br. 9 at 8. The Gila
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Order to cut USF funding to many rate-of-return carriers serving Tribal lands. More
specifically, Gila River argues that the Order’s application of § 254’s universal service
principles is arbitrary and capricious because there is no rational connection between the
FCC’s findings regarding the dismal state of communications services on Tribal lands and
its subjection of tribal carriers to rules that result in funding cuts. In support, Gila River
offers four specific arguments. As outlined below, however, we find no merit to any of
these arguments, and we conclude that the FCC’s decision was neither arbitrary nor
capricious.
a) The relevant portions of the Order
In the Order, the FCC concluded that its existing high-cost support rules were
outdated. JA at 396 (Order ¶ 6). In place of these rules, the FCC adopted what it
considered “fiscally responsible, accountable, incentive-based policies” that further “a
framework [designed] to distribute universal service funding in the most efficient and
technologically neutral manner possible.” Id. at 394 (Order ¶ 1). For instance, the Order
establishes, for the first time, a “budget for the high-cost programs within USF” of $4.5
billion over six years, the apportionment of which “represent[s the FCC’s] predictive
judgment as to how best to allocate limited resources.” Id. at 399 (Order ¶ 18). And
because the reforms are “focused on rooting out inefficiencies, [they] will not affect all
carriers in the same manner or in the same magnitude.” Id. at 496 (Order ¶ 289).
River tribe “wholly own[s] and operate[s]” Gila River Telecommunications, Inc. Id. at i.
Gila River Telecommunications, Inc. is “the only Tribal carrier to challenge the Order.”
FCC Br. 9 at 14. The tribe and the carrier will be referred to, collectively, as “Gila River.”
155
At the same time, the Order also implements several new measures aimed at
helping Tribal lands, which, the FCC expressly noted, “have significant
telecommunications deployment and connectivity challenges.” Id. at 546 (Order ¶ 481).
First, the FCC created the Tribal Mobility Fund Phase I, which is a $50 million fund
distributed by reverse auction “to provide one-time support to deploy mobile broadband
to unserved Tribal lands.” Id. This is in addition to the general $300 million Mobility
Fund Phase I, for which Tribal lands are eligible. Id. Second, the FCC “adopt[ed] a
preference for Tribally-owned or controlled providers seeking general or Tribal Mobility
Fund Phase I support.” Id. at 550 (Order ¶ 490). This preference comes in the form of a
bidding credit in the reverse auction. Third, of the $500 million designated annually “for
ongoing support for mobile services” as part of the Mobility Fund Phase II, up to $100
million will be allocated “to address the special circumstances of Tribal lands.” Id. at 551
(Order ¶ 494). The FCC “designated [this] substantial level of funding to ensure that
[Tribal] communities are not left behind.” Id. at 552 (Order ¶ 497). Finally, carriers
serving Tribal lands, like all carriers, can petition for an exemption (“waiver”) from a
reduction in subsidies. Id. at 566 (Order ¶ 539).
b) Did the FCC fail to explain how it balanced the § 254(b) universal service
principles in determining how much funding to give rate-of-return carriers serving
Tribal lands?
Gila River asserts that the FCC “fail[ed] to articulate [in the Order] how it
balanced the Section 254(b) principles as they pertain to rate-of-return carriers serving
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Tribal lands,” and that this failure “renders the Order arbitrary and capricious with respect
to such carriers.” Pet’r Br. 9 at 25.
We conclude, however, that the FCC offered sufficient justification for its
decision. In its Order, the FCC stated that the funding it was allocating to rate-of-return
carriers serving Tribal lands was enough to “make a difference” while remaining
“consistent with [the FCC’s] commitment to fiscal responsibility and the varied
objectives [it had] for [its] limited funds.” JA at 548 (Order ¶ 485). In support, the FCC
pointed out that the $50 million in allocated funding “is approximately 25 percent of the
ongoing support awarded to competitive ETCs serving Covered Locations in 2010,”
which the FCC predicted will be enough to “help the availability of mobile voice and
broadband services” on Tribal lands. Id. at 547 (Order ¶ 482), 548 (Order ¶ 485).
Moreover, the FCC noted, the $100 million from the Mobility Fund Phase II “is roughly
equivalent to the amount of funding currently provided to Tribal lands in the lower 48
states and in Alaska, excluding support awarded to study areas that include the most
densely populated communities in Alaska.” Id. at 552 (Order ¶ 497). In short, the FCC
concluded, taking into account the special concerns facing carriers serving Tribal lands,
that its funding allocations struck the right balance between fiscal efficiency and the need
to advance telecommunications access on Tribal lands. Although Gila River disagrees
with the FCC, we are not persuaded that the FCC acted arbitrarily or capriciously in
reaching its decision.
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c) Was it arbitrary and capricious for the FCC to treat carriers serving Tribal
lands in a manner similar to rate-of-return carriers or to give certain funding to
price-cap carriers and not to rate-of-return carriers?
Gila River next argues that the Order’s “nearly universal cutbacks in support for
rate-of-return carriers simply cannot be squared with the evidentiary record that the FCC
itself made documenting quite powerfully that Tribal carriers are in an entirely different
situation from other carriers.” Pet’r Br. 9 at 28. We agree with the FCC, however, that
Gila River’s “assertion is . . . difficult to fathom.” FCC Br. 9 at 22. As explained above,
the Order contains several Tribal-specific initiatives that differ from the treatment of rate-
of-return carriers generally. We therefore reject Gila River’s argument.
Gila River also asserts that the FCC’s “decision to maintain the annual support of
price-cap carriers, including those serving Tribal lands, at 2011 levels, while also making
these same carriers (but not rate-of-return carriers) eligible for up to an additional $300
million of new funding to promote broadband deployment, is arbitrary and capricious.”
Pet’r Br. 9 at 28. This is because, Gila River asserts, “nowhere did the FCC conclude that
Tribal lands served by price-cap carriers were worse served than Tribal lands served by
rate-of-return carriers.” Id.
As the FCC correctly points out, however, “[t]his contention overlooks the
historical distinctions between the existing universal service regimes for price cap and
rate-of-return carriers.” FCC Br. 9 at 28. The previous framework for rate-of-return
carriers provided a stable return “regardless of the necessity or prudence of any given
investment.” JA at 496 (Order ¶ 287). As a result, the FCC’s goal of “rooting out
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inefficiencies” requires particular focus on rate-of-return carriers. Id. (Order ¶ 289).
Furthermore, although “more than 83 percent of the unserved locations in the nation are
in price cap areas, . . . such areas currently receive approximately 25 percent of high-cost
support.” Id. at 452 (Order ¶ 158). In light of these facts, the FCC “conclude[d]
increased support to areas served by price cap carriers . . . [wa]s warranted.” Id. at 452
(Order ¶ 159). And we cannot say that this conclusion was arbitrary or capricious.
d) Did the FCC fail to explain how its funding cuts will allow carriers serving
Tribal lands to reasonably fulfill the new broadband obligations imposed in the
Order?
Gila River complains that “[a]t the same time it financially hobbled rate-of-return
carriers serving Tribal lands, the FCC increased their load, imposing new and expensive
broadband obligations on them.” Pet’r Br. 9 at 30. In other words, Gila River argues,
“the Order irrationally mandates that rate-of-return carriers serving Tribal lands do vastly
more while depriving them of the funding needed just to break even.” Id. And that, Gila
River asserts, “confounds the fundamental purpose of Section 254” and is thus arbitrary
and capricious. Id.
“[W]hen an agency's decision is primarily predictive, our role is limited; we
require only that the agency acknowledge factual uncertainties and identify the
considerations it found persuasive.” Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1105
(D.C. Cir. 2009). The FCC did that here. By way of the Order, the FCC explained its
reasoning for each of the subsidies and initiatives that it chose to promote
telecommunications access on Tribal lands.
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Particularly irksome to Gila River is the Order’s repeal of the “identical support
rule.” The identical support rule provided competitive ETCs the same per-line amount of
high-cost universal service support as the incumbent carriers in the same area, regardless
of the competitive carriers’ costs. But the FCC, “[b]ased on more than a decade of
experience with the operation of the [identical support] rule and having received a
multitude of comments noting that [it] fail[ed] to efficiently target support where it [wa]s
needed,” concluded “that [it] ha[d] not functioned as intended.” JA at 554, ¶ 502.
Gila River points out that the identical support rule was worth $150 million in
2011 to carriers serving Tribal lands. But Gila River fails to acknowledge that the
combination of $50 million from the Tribal Mobility Fund Phase I, up to $100 million
annually from the Mobility Fund Phase II, and the additional amount that carriers will
receive from the general $300 million Mobility Fund Phase I, should cover most, if not
all, of the funds lost from the identical support rule. And, in any event, because the FCC
made no claims that the Order would be revenue neutral, a deficit is not fatal to the Order.
For these reasons, we conclude that Gila River has failed to demonstrate that the
FCC’s line-drawing was unreasonable.
e) Did the FCC act arbitrarily and capriciously by granting an exemption to one
Tribally-owned carrier?
Although the Order imposes a five-year funding phase-out of all high-cost support
that competitive carriers receive under the identical support rule, one Tribally-owned
carrier, Standing Rock Telecommunications, received a two-year freeze at current
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funding levels. JA at 563 (Order ¶ 530). Gila River argues that the reasoning behind this
exemption applies equally to Gila River and other Tribally-owned carriers. And, Gila
River argues, “[t]he very essence of arbitrariness and capriciousness is the erratic and
profoundly disparate treatment of identically situated entities without any reasoned
explanation.” Pet’r Br. 9 at 35.
Gila River ignores, however, the key distinction noted by the FCC in its Order.
The Order explained that Standing Rock is “a nascent Tribally-owned ETC that was
designated to serve its entire Reservation and the only such ETC to have its ETC
designation modified since release of the USF-ICC Transformation NPRM in February
2011.” JA at 564 (Order ¶ 531). The FCC concluded that because the company was new,
it needed extra time “to ramp up its operations in order to reach a sustainable scale to
serve consumers in its service territory.” Id. In other words, the FCC explained, it was
adopting this approach “in order to enable Standing Rock to reach a sustainable scale so
that consumers on the Reservation c[ould] realize the benefits of connectivity that, but for
Standing Rock, they might not otherwise have access to.” Id.
To be sure, Gila River argues in its reply brief that the age of Standing Rock
should not be dispositive, and that “[s]upport for older carriers could promote Tribal self-
sufficiency and economic development just as much as support for newer carriers.” Pet’r
Reply Br. 9 at 15. But, that argument notwithstanding, we discern no unreasonableness in
the FCC’s limited exemption, aimed at giving a new carrier an extra subsidy in order to
advance universal service.
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V. Conclusion
We GRANT in part and DENY in part respondent’s Motion to Strike New
Arguments in the Joint Universal Service Fund Reply Brief of Petitioners. We DENY the
petitions for review, to the extent they are based upon the issues raised in the Joint
Universal Service Fund Principal Brief, the Additional Universal Service Fund Issues
Principal Brief, the Wireless Carrier Universal Service Fund Principal Brief, and the
Tribal Carriers Principal Brief.
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In re FCC 11-9900,
BACHARACH, J., concurring in part and dissenting in part.
I join virtually all of Chief Judge Briscoe’s thorough, persuasive opinion. But, I
respectfully dissent on Part IV(A)(2). There, the majority rejects the Petitioners’
challenge to the sufficiency of the budget for the Universal Service Fund. On this limited
issue, I respectfully dissent. In my view, the FCC failed to supply a rational basis for its
conclusion that an annual budget of $4.5 billion would suffice with the new requirements
for broadband capability. In this respect, I believe the FCC acted arbitrarily in violation
of the Administrative Procedure Act.
The FCC budgeted $4.5 billion for the high-cost portion of the Universal Service
Fund. See 2 Rawle at 399 ¶ 18, 438-39 ¶¶ 125-26.1 This fund includes a variety of
mechanisms to provide financial support to carriers. Id. at 399 n.16. One of these
mechanisms is called the “Connect America Fund.” Id. at 394 ¶ 1, 399 n.16. To obtain
support from this fund, a carrier “must provide broadband with actual speeds of at least 4
[megabits per second] downstream and 1 [megabit per second] upstream.” Id. at 400 ¶
22, 423-24 ¶¶ 92-93.
The FCC does not suggest that it considered any cost projections for the new
broadband requirements. See Combined Responses of Federal Respondents and Support
Intervenors to the Joint Universal Services Fund Principal Brief at 36-38 (July 29, 2013).
Nonetheless, the FCC urges us to endorse its $4.5 billion budget as a “reasonable
1
On the challenges involving sufficiency of the budget, many of the
petitioners are rate-of-return carriers. The FCC has budgeted $2 billion (out of the annual
$4.5 billion) for rate-of-return carriers. See 2 Rawle at 438-39 ¶ 126.
predictive judgment.” Id. at 33. It is true that predictive judgments within an agency’s
area of expertise are entitled to “particularly deferential review, so long as they are
reasonable.” BNSF Ry. Co. v. Surface Transp. Bd., 526 F.3d 770, 781 (D.C. Cir. 2008).
But here, the FCC’s prediction is not reasonable, for it lacks support in any empirical
findings or even rough estimates of the anticipated costs of requiring carriers to upgrade
their equipment to meet the newly mandated requirements. Without at least some
findings or estimate regarding the new costs, how could the FCC reasonably predict that
its $4.5 billion budget for universal fund support would be “sufficient . . . to preserve and
advance universal service”? 47 U.S.C. § 254(b)(5).2
The majority notes that in Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2001),
we qualified the sufficiency requirement, stating that the FCC “should” (rather than
“shall”) base its universal service policies on sufficiency. Majority Op. at 61. But there,
we emphasized the need for at least some data before the FCC could determine the
sufficiency of financial support for carriers. Qwest Corp., 258 F.3d at 1195, 1202.
In Qwest, the FCC had set a benchmark figure to determine the amount of support
that a state would receive. See id. at 1197, 1202. The FCC attempted to justify the
benchmark as “a ‘reasonable compromise of commenters’ proposals.’” Id. at 1202. We
2
The majority concludes that the FCC had no duty to estimate the cost of the
new broadband requirements. Majority Op. at 63 n.7. I respectfully disagree. The FCC
imposed these requirements to promote universal service and justified the budget for
high-cost support based on its sufficiency “to achieve [the FCC’s] universal service
objectives.” 2 Rawle at 397 ¶ 10, 437-38 ¶ 123. The FCC cannot rationally justify the
sufficiency of its high-cost support for universal service without considering the costs that
are being imposed on the industry.
-2-
rejected this justification because the FCC had not made any empirical findings on
sufficiency. Without such findings, we concluded that the FCC had failed to set forth a
rational basis for the chosen benchmark. Id. at 1195, 1202. We reasoned that the FCC is
not
a mediator whose job is to pick the “midpoint” of a range or to come to a
“reasonable compromise” among competing positions. As an expert
agency, its job is to make rational and informed decisions on the record
before it in order to achieve the principles set by Congress. Merely
identifying some range and then picking a compromise figure is not rational
decision-making.
Id.
The $4.5 billion budget is just as arbitrary as the benchmark struck down in Qwest
Corp. The FCC has required carriers to upgrade their broadband speeds, as a condition of
universal service fund support, without pointing to any data or estimates of the costs to be
borne by the carriers.
The sufficiency of the budget was challenged in the FCC proceedings. See, e.g., 6
Rawle at 4074-75 (petition for reconsideration by Windstream Communications, Inc. and
Frontier Communications Corp.), 4094, 4098-99 (comments of Gila River
Telecommunications, Inc.). For example, the Rural Broadband Alliance stated in the
FCC proceedings:
[America’s Broadband Connectivity Plan] assumes that the
[Universal Service Fund] is constrained as suggested by the [notice of
proposed rulemaking]. We respectfully submit that the size of the fund
required to meet the statutory requirements of the Act should be determined
by the FCC on the basis of fact and applicable law. The fact that a group of
carriers has utilized the proposed $4.5 billion “budget” in the formulation of
-3-
a consensus proposal does not provide the Commission with a basis to
constrain the fund in the absence of specific findings consistent with the
Commission’s obligations under the Act. It is not sufficient for the
Commission to claim that it has discretion to constrain the size of the
[Universal Service Fund] on the basis that a group of providers suggest that
a $4.5 billion fund is “sufficient.”
Id. at 3182; see also id. at 3316-17 (Moss Adams LLP’s challenge to the sufficiency of
the $4.5 billion fund in light of the new cost of developing and upgrading broadband
networks).
Other carriers pointed out that only a minority of existing broadband networks
were able to satisfy the new speed requirements. See id. at 2053-54 (comments of
CenturyLink); see also Supp. R. at 60-61 ¶ 170 & Figure 8 (FCC’s reference to a survey
by the National Telecommunications Cooperative Association, showing that in 2010,
75% of the member carriers reported offering internet access speeds of 1.5 to 3.0
megabits per second).
Faced with these comments, the FCC defended its $4.5 billion budget based on
expectations of greater efficiencies, the presence of “safety valves,” and the difficulty of
projecting the cost for each carrier seeking support from the Universal Service Fund. In
my view, these arguments do not supply a rational basis for the FCC’s conclusion that the
budget would be sufficient with the new broadband requirements.
First, the FCC predicted that its efforts to “root[] out inefficiencies” and “improve
accountability” in the legacy system would reduce reliance on the Universal Service
Fund. 2 Rawle at 437-38 ¶ 123; 496 ¶ 289. At the same time, the FCC set the budget at the
-4-
2011 expenditure level. Id. at 399 ¶ 18. But the FCC did not compare the anticipated
cost savings to the cost burdens associated with the new broadband requirements. Thus,
the FCC did not articulate a reasonable basis to predict that the new cost-control measures
would materially soften the burden of the new broadband requirements.
Second, the FCC relied on the presence of “safety valves.” For example, if a rate-
of-return carrier obtains a request for broadband service, it can decline when the request
would be considered “unreasonable.” Id. at 468 ¶¶ 207-08. And when a carrier
encounters extenuating circumstances, it can seek relief under the Total Cost and
Earnings Review Mechanism. Id. at 723-24 ¶ 924. In light of these safety valves, the
FCC may have considered the industry-wide cost to be sufficient because it is planning
to: (1) generously consider refusals to provide broadband service, and (2) liberally apply
the Total Cost and Earnings Review Mechanism. But these safety valves are designed to
relieve carriers on a case-by-case basis, not to relieve an entire industry of the additional
costs of the new requirements for broadband speed.
Finally, the FCC’s counsel argued that the agency could not have determined the
cost of the broadband condition for each carrier seeking relief through the Universal
Service Fund. I agree, and no one has suggested otherwise. But the FCC made no effort
to provide any estimate regarding the cost of its new broadband requirements on the
industry as a whole.
The development of industry-wide cost estimates were not only feasible, but also
part of the record. Six price-cap companies proffered a plan, called “America’s
-5-
Broadband Connectivity Plan,” which included broadband speed requirements similar to
those adopted by the FCC. 5 Rawle at 2990. For these speed requirements, proponents of the
plan provided three cost estimates: $2.2 billion, $5.9 billion, and $9.7 billion. Id. at
2993-3004. The applicable estimate depended on whether the FCC would require
broadband service beyond the areas already being served by price-cap carriers or exclude
the highest-cost census blocks. Id. The FCC did not comment on these cost estimates or
explain how they would affect the scope of the eventual broadband condition.
As the FCC’s counsel states, the agency couldn’t feasibly project the eventual
costs for every single carrier to construct facilities allowing for the newly mandated
broadband speeds. But the six price-cap carriers provided detailed estimates of the
overall cost, and the FCC never explains its inability to provide this sort of estimate.
Instead, the FCC states that it regards the $4.5 billion budget as “sufficient” without any
information, estimate, or even guess about the cost of what it is requiring.
In Qwest we required more of the FCC, and we should do so here. Accordingly, I
respectfully dissent on Part IV(A)(2) of the majority opinion.
-6-
FILED
United States Court of Appeals
Tenth Circuit
May 23, 2014
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
DIRECT COMMUNICATIONS CEDAR
VALLEY, LLC, a Utah limited liability
company; TOTAH COMMUNICATIONS, 11-9900
INC., an Oklahoma corporation; H & B
COMMUNICATIONS, INC., a Kansas
Corporation; THE MOUNDRIDGE Consolidated Case Nos.:
TELEPHONE COMPANY OF 11-9581, 11-9585, 11-9586, 11-9587,
MOUNDRIDGE, a Kansas business 11-9588, 11-9589, 11-9590, 11-9591, 11-
organization; PIONEER TELEPHONE 9592, 11-9594, 11-9595, 11-9596, 11-
ASSOCIATION, INC., a Kansas 9597, 12-9500, 12-9510, 12-9511, 12-
corporation; TWIN VALLEY 9513, 12-9514, 12-9517, 12-9520, 12-
TELEPHONE, INC., a Kansas corporation; 9521, 12-9522, 12-9523, 12-9524, 12-
PINE TELEPHONE COMPANY, INC., an 9528, 12-9530, 12-9531, 12-9532, 12-
Oklahoma corporation; PENNSYLVANIA 9533, 12-9534, 12-9575
PUBLIC UTILITY COMMISSION;
CHOCTAW TELEPHONE COMPANY;
CORE COMMUNICATIONS, INC.;
NATIONAL ASSOCIATION OF STATE
UTILITY CONSUMER ADVOCATES;
NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION;
CELLULAR SOUTH, INC.; AT&T, INC.;
HALO WIRELESS, INC.; THE VOICE
ON THE NET COALITION, INC.;
PUBLIC UTILITIES COMMISSION OF
OHIO; TW TELECOM INC.; VERMONT
PUBLIC SERVICE BOARD; THE STATE
CORPORATION COMMISSION OF THE
STATE OF KANSAS; CENTURYLINK
INC.; GILA RIVER INDIAN
COMMUNITY; GILA RIVER
TELECOMMUNICATIONS, INC.;
ALLBAND COMMUNICATIONS
COOPERATIVE; NORTH COUNTY
COMMUNICATIONS CORPORATION;
UNITED STATES CELLULAR
CORPORATION; PR WIRELESS, INC.;
DOCOMO PACIFIC, INC.; NEX-TECH
WIRELESS, LLC; CELLULAR
NETWORK PARTNERSHIP, A LIMITED
PARTNERSHIP; U.S. TELEPACIFIC
CORP.; CONSOLIDATED
COMMUNICATIONS HOLDINGS, INC.;
NATIONAL ASSOCIATION OF
REGULATORY UTILITY
COMMISSIONERS; RURAL
TELEPHONE SERVICE COMPANY,
INC.; ADAK EAGLE ENTERPRISES
LLC; ADAMS TELEPHONE
COOPERATIVE; ALENCO
COMMUNICATIONS, INC.;
ARLINGTON TELEPHONE COMPANY;
BAY SPRINGS TELEPHONE
COMPANY, INC.; BIG BEND
TELEPHONE COMPANY, INC.; THE
BLAIR TELEPHONE COMPANY;
BLOUNTSVILLE TELEPHONE LLC;
BLUE VALLEY
TELECOMMUNICATIONS, INC.;
BLUFFTON TELEPHONE COMPANY,
INC.; BPM, INC., d/b/a Noxapater
Telephone Company; BRANTLEY
TELEPHONE COMPANY, INC.;
BRAZORIA TELEPHONE COMPANY;
BRINDLEE MOUNTAIN TELEPHONE
LLC; BRUCE TELEPHONE COMPANY;
BUGS ISLAND TELEPHONE
COOPERATIVE; CAMERON
TELEPHONE COMPANY, LLC;
CHARITON VALLEY TELEPHONE
CORPORATION; CHEQUAMEGON
COMMUNICATIONS COOPERATIVE,
INC.; CHICKAMAUGA TELEPHONE
CORPORATION; CHICKASAW
TELEPHONE COMPANY; CHIPPEWA
COUNTY TELEPHONE COMPANY;
CLEAR LAKE INDEPENDENT
TELEPHONE COMPANY; COMSOUTH
TELECOMMUNICATIONS, INC.;
COPPER VALLEY TELEPHONE
COOPERATIVE; CORDOVA
TELEPHONE COOPERATIVE;
CROCKETT TELEPHONE COMPANY,
INC.; DARIEN TELEPHONE
COMPANY; DEERFIELD FARMERS'
TELEPHONE COMPANY; DELTA
TELEPHONE COMPANY, INC.; EAST
ASCENSION TELEPHONE COMPANY,
LLC; EASTERN NEBRASKA
TELEPHONE COMPANY; EASTEX
TELEPHONE COOP., INC.; EGYPTIAN
TELEPHONE COOPERATIVE
ASSOCIATION; ELIZABETH
TELEPHONE COMPANY, LLC;
ELLIJAY TELEPHONE COMPANY;
FARMERS TELEPHONE
COOPERATIVE, INC.; FLATROCK
TELEPHONE COOP., INC.; FRANKLIN
TELEPHONE COMPANY, INC.;
FULTON TELEPHONE COMPANY,
INC.; GLENWOOD TELEPHONE
COMPANY; GRANBY TELEPHONE
LLC; HART TELEPHONE COMPANY;
HIAWATHA TELEPHONE COMPANY;
HOLWAY TELEPHONE COMPANY;
HOME TELEPHONE COMPANY (ST.
JACOB, ILL.); HOME TELEPHONE
COMPANY (MONCKS CORNER, SC);
HOPPER TELECOMMUNICATIONS
COMPANY, INC.; HORRY TELEPHONE
COOPERATIVE, INC.; INTERIOR
TELEPHONE COMPANY; KAPLAN
TELEPHONE COMPANY, INC.; KLM
TELEPHONE COMPANY; CITY OF
KETCHIKAN, ALASKA, d/b/a KPU
Telecommunications; LACKAWAXEN
TELECOMMUNICATIONS SERVICES,
INC.; LAFOURCHE TELEPHONE
COMPANY, LLC; LA HARPE
TELEPHONE COMPANY, INC.;
LAKESIDE TELEPHONE COMPANY;
LINCOLNVILLE TELEPHONE
COMPANY; LORETTO TELEPHONE
COMPANY, INC.; MADISON
TELEPHONE COMPANY;
MATANUSKA TELEPHONE
ASSOCIATION, INC.; MCDONOUGH
TELEPHONE COOP., INC.; MGW
TELEPHONE COMPANY, INC.; MID
CENTURY TELEPHONE COOP., INC.;
MIDWAY TELEPHONE COMPANY;
MID-MAINE TELECOM LLC; MOUND
BAYOU TELEPHONE &
COMMUNICATIONS, INC.;
MOUNDVILLE TELEPHONE
COMPANY, INC.; MUKLUK
TELEPHONE COMPANY, INC.;
NATIONAL TELEPHONE OF
ALABAMA, INC.; ONTONAGON
COUNTY TELEPHONE COMPANY;
OTELCO MID-MISSOURI LLC;
OTELCO TELEPHONE LLC;
PANHANDLE TELEPHONE
COOPERATIVE, INC.; PEMBROKE
TELEPHONE COMPANY, INC.;
PEOPLE'S TELEPHONE COMPANY;
PEOPLES TELEPHONE COMPANY;
PIEDMONT RURAL TELEPHONE
COOPERATIVE, INC.; PINE BELT
TELEPHONE COMPANY; PINE TREE
TELEPHONE LLC; PIONEER
TELEPHONE COOPERATIVE, INC.;
POKA LAMBRO TELEPHONE
COOPERATIVE, INC.; PUBLIC
SERVICE TELEPHONE COMPANY;
RINGGOLD TELEPHONE COMPANY;
ROANOKE TELEPHONE COMPANY,
INC.; ROCK'S COUNTY TELEPHONE;
SACO RIVER TELEPHONE LLC;
SANDHILL TELEPHONE
COOPERATIVE, INC.; SHOREHAM
TELEPHONE LLC; THE SISKIYOU
TELEPHONE COMPANY; SLEDGE
TELEPHONE COMPANY; SOUTH
CANAAN TELEPHONE COMPANY;
SOUTH CENTRAL TELEPHONE
ASSOCIATION; STAR TELEPHONE
COMPANY, INC.; STAYTON
COOPERATIVE TELEPHONE
COMPANY; THE NORTH-EASTERN
PENNSYLVANIA TELEPHONE
COMPANY; TIDEWATER TELECOM,
INC.; TOHONO O'ODHAM UTILITY
AUTHORITY; UNITEL, INC.; WAR
TELEPHONE LLC; WEST CAROLINA
RURAL TELEPHONE COOPERATIVE,
INC.; WEST TENNESSEE TELEPHONE
COMPANY, INC.; WEST WISCONSIN
TELCOM COOPERATIVE, INC.;
WIGGINS TELEPHONE ASSOCIATION;
WINNEBAGO COOPERATIVE
TELECOM ASSOCIATION; YUKON
TELEPHONE CO., INC.; ARIZONA
CORPORATION COMMISSION;
WINDSTREAM CORPORATION;
WINDSTREAM COMMUNICATIONS,
INC.,
Petitioners,
v.
FEDERAL COMMUNICATIONS
COMMISSION; UNITED STATES OF
AMERICA,
Respondents,
and
SPRINT NEXTEL CORPORATION;
LEVEL 3 COMMUNICATIONS, LLC;
CENTURYLINK, INC.; CONNECTICUT
PUBLIC UTILITIES REGULATORY
AUTHORITY; INDEPENDENT
TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
ORGANIZATION FOR THE
PROTECTION AND ADVANCEMENT
OF SMALL TELEPHONE COMPANIES,
a/k/a ORGANIZATION FOR THE
PROMOTION AND ADVANCEMENT
OF SMALL TELECOMMUNICATIONS
COMPANIES (OPASTCO); WESTERN
TELECOMMUNICATIONS ALLIANCE;
NATIOINAL EXCHANGE CARRIER
ASSOCIATION, INC.; ARLINGTON
TELEPHONE COMPANY; THE BLAIR
TELEPHONE COMPANY; CAMBRIDGE
TELEPHONE COMPANY; CLARKS
TELECOMMUNICATIONS CO.;
CONSOLIDATED TELEPHONE
COMPANY; CONSOLIDATED TELCO,
INC.; CONSOLIDATED TELCOM, INC.;
THE CURTIS TELEPHONE COMPANY;
EASTERN NEBRASKA TELEPHONE
COMPANY; GREAT PLAINS
COMMUNICATIONS, INC.; K. & M.
TELEPHONE COMPANY, INC.;
NEBRASKA CENTRAL TELEPHONE
COMPANY; NORTHEAST NEBRASKA
TELEPHONE COMPANY; ROCK
COUNTY TELEPHONE COMPANY;
THREE RIVER TELCO; RCA - The
Competitive Carriers Association; RURAL
TELECOMMUNICATIONS GROUP,
INC.; CENTRAL TEXAS TELEPHONE
COOPERATIVE, INC.; VENTURE
COMMUNICATIONS COOPERATIVE,
INC.; ALPINE COMMUNICATIONS,
LC; EMERY TELCOM; PENASCO
VALLEY TELEPHONE COOPERATIVE,
INC.; SMART CITY TELECOM;
SMITHVILLE COMMUNICATIONS,
INC.; SOUTH SLOPE COOPERATIVE
TELEPHONE CO., INC.; SPRING
GROVE COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC;
VIRGINIA STATE CORPORATION
COMMISSION; MONTANA PUBLIC
SERVICE COMMISSION, VERIZON;
AT&T, INC.; SPRINT NEXTEL
CORPORATION; LEVEL 3
COMMUNICATIONS, LLC;
CENTURYLINK INC.; COX
COMMUNICATIONS, INC.; NATIONAL
TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION;
INDEPENDENT TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
ORGANIZATION FOR THE
PROTECTION AND ADVANCEMENT
OF SMALL TELEPHONE COMPANIES,
a/k/a ORGANIZATION FOR THE
PROMOTION AND ADVANCEMENT
OF SMALL TELECOMMUNICATIONS
COMPANIES (OPASTCO); METROPCS
COMMUNICATIONS, INC.;
ARLINGTON TELEPHONE COMPANY;
THE BLAIR TELEPHONE COMPANY;
CAMBRIDGE TELEPHONE COMPANY;
CLARKS TELECOMMUNICATIONS
CO.; CONSOLIDATED TELEPHONE
COMPANY; CONSOLIDATED TELCO,
INC.; CONSOLIDATED TELCOM, INC.;
THE CURTIS TELEPHONE COMPANY;
EASTERN NEBRASKA TELEPHONE
COMPANY; GREAT PLAINS
COMMUNICATIONS, INC.; K. & M.
TELEPHONE COMPANY, INC.;
NEBRASKA CENTRAL TELEPHONE
COMPANY; NORTHEAST NEBRASKA
TELEPHONE COMPANY; ROCK
COUNTY TELEPHONE COMPANY;
THREE RIVER TELCO; NATIONAL
EXCHANGE CARRIER ASSOCIATION,
INC. (NECA), COMCAST
CORPORATION; VONAGE HOLDINGS
CORPORATION; RURAL
TELECOMMUNICATIONS GROUP,
INC.; NATIONAL CABLE &
TELECOMMUNICATIONS
ASSOCIATION; CENTRAL TEXAS
TELEPHONE COOPERATIVE, INC.;
VENTURE COMMUNICATIONS
COOPERATIVE, INC.; ALPINE
COMMUNICATIONS, LC; EMERY
TELCOM; PENASCO VALLEY
TELEPHONE COOPERATIVE, INC.;
SMART CITY TELECOM; SMITHVILLE
COMMUNICATIONS, INC.; SOUTH
SLOPE COOPERATIVE TELEPHONE
CO., INC.; SPRING GROVE
COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC,
Intervenors.
STATE MEMBERS OF THE FEDERAL-
STATE JOINT BOARD ON UNIVERSAL
SERVICE,
Amicus Curiae.
PETITION FOR REVIEW OF ORDERS OF THE
FEDERAL COMMUNICATIONS COMMISSION
(FCC No. 11-161)
Before BRISCOE, HOLMES, and BACHARACH, Circuit Judges.
BACHARACH, Circuit Judge.
Argued for Petitioners:
James Bradford Ramsey, National Association of Regulatory Utility Commissioners,
Washington, D.C., Russell Blau, Bingham McCutchen LLP, Washington, D.C., Robert
Allen Long, Jr., Covington & Burling, Washington, D.C., Michael B. Wallace, Wise
Carter Child & Caraway, Jackson, Mississippi, Pratik A. Shah, Akin Gump Strauss Hauer
& Feld LLP, Washington, D.C, Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, Joseph K. Witmer, Pennsylvania Public Utility Commission,
Harrisburg, Pennsylvania, Christopher F. Van de Verg, Annapolis, Maryland, Lucas M.
Walker, Molo Lamken, Washington, D.C., Don Lee Keskey, Public Law Resource Center
PLLC, Lansing, Michigan, Harvey Reiter, Stinson Morrison Hecker LLP, Washington,
David Bergmann, Columbus, Ohio, E. Ashton Johnston, Lampert, O’Connor & Johnston,
P.C., Washington, D.C., Heather Marie Zachary, Wilmer Cutler Pickering Hale and Dorr,
Washington, D.C., and William Scott McCollough, McCollough Henry, Austin, Texas.
Argued for Respondents:
Richard Welch, James M. Carr, and Maureen Katherine Flood, Federal Communications
Commission, Washington, D.C.
Argued for Respondents-Intervenors:
Scott H. Angstreich, Huber, Hansen, Todd, Evans & Figel, Washington, D.C., Howard J.
Symons, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., and Samuel L. Feder,
Jenner & Block LLP, Washington, D.C.
Appearances for Petitioners:
David R. Irvine, Jenson Stavros & Guelker, and Alan L. Smith, Salt Lake City, Utah, for
Direct Communications Cedar Valley, LLC, Totah Communications, Inc., H&B
Communications, Inc., The Moundridge Telephone Company of Moundridge, Pioneer
Telephone Association, Inc., Twin Valley Telephone, Inc., and Pine Telephone Company,
Inc.
Bohdan R. Pankiw, Kathryn G. Sophy, Shaun A. Sparks, and Joseph K. Witmer,
Pennsylvania Public Utility Commission, Harrisburg, Pennsylvania, for Pennsylvania
Public Utility Commission.
Benjamin H. Dickens, Jr. and Mary J. Sisak, Blooston, Mordkofsky, Dickens, Duffy &
Prendergrast, LLP, and Craig S. Johnson, Johnson & Sporleder, Jefferson City, Missouri,
for Choctaw Telephone Company.
James Christopher Falvey and Charles Anthony Zdebski, Eckert Seamens Cherin &
Mellott, Washington, D.C., for Core Communications, Inc.
David Bergmann, Columbus, Ohio, Paula Marie Carmody, Maryland’s Office of People’s
Counsel, Baltimore, Maryland, and Christopher J. White, New Jersey Division of Rate
Counsel, Office of the Public Advocate, Newark, New Jersey, for National Association of
State Utility Consumer Advocates.
Russell Blau and Tamar Elizabeth Finn, Bingham McCutchen LLP, Washington, D.C.,
for National Telecommunications Cooperative Association, U.S. Telepacific Corp.,
OPASTCO, and Western Telecommunications Alliance.
Rebecca Hawkins and Michael B. Wallace, Wise Carter Child & Caraway, Jackson,
Mississippi, David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, for Cellular South Inc.
Daniel Deacon, Jonathan Nuechterlein and Heather Marie Zachary, Wilmer Cutler
Pickering Hale and Dorr, Washington, D.C., and Christopher M. Heimann and Gary L.
Phillips, AT&T, Inc., Washington, D.C., for AT&T, Inc.
William Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent,
II, Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and
Steven H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Halo
Wireless, Inc.
Jennifer P. Bagg, E. Ashton Johnston, and Donna M. Lampert, Lampert, O’Connor &
Johnston, P.C., Washington, D.C., and Glenn Richards, Pillsbury Winthrop Shaw
Pittman, Washington, D.C., for The Voice on the Net Coalition, Inc.
John Holland Jones, Office of the Ohio Attorney General, Columbus, Ohio, for Public
Utilities Commission of Ohio.
Thomas Jones, David Paul Murray, and Nirali Patel, Willkie, Farr & Gallagher LLP,
Washington, D.C., for TW Telecom Inc.
Bridget Asay, Office of the Attorney General for the State of Vermont, Montpelier,
Vermont, for Vermont Public Service Board.
William Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent,
II, Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and
Steven H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Transcom
Enhanced Services, Inc.
Robert A. Fox, Kansas Corporation Commission Topeka, Kansas, for The State
Corporation Commission.
Yaron Dori, Robert Allen Long, Jr., and Gerard J. Waldron, Covington & Burling,
Washington, D.C., for Centurylink, Inc.
John Boles Capehart, Akin Gump Strauss Hauer & Feld, Dallas, Texas, Sean Conway,
Patricia Ann Millett, and James Edward Tysse, Akin Gump Strauss Hauer & Feld,
Washington, D.C., and Michael C. Small, Akin Gump Strauss Hauer & Feld,
Washington, D.C., for Gila River Indian Community and Gila River
Telecommunications, Inc.
Don Lee Keskey, Public Law Resources Center PLLC, Lansing Michigan, for
Consolidated Telco, Inc.
Roger Dale Dixon, Jr., Law Offices of Dale Dixon, Carlsbad, California, for North
County Communications Corporation.
David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,
Virginia, for United States Cellular Corporation.
David LaFuria, Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez &
Sachs, LLP, McLean, Virginia, for Petitioners PR Wireless, Inc. and Docomo Pacific,
Inc.
Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,
Virginia, for Petitioners Nex-Tech Wireless, LLC, and Cellular Network Partnership, A
Limited Partnership.
Russell Blau, Bingham McCutchen LLP, Washington, D.C., for Consolidated
Communications Holdings, Inc.
James Bradford Ramsay and Holly R. Smith, National Association of Regulatory Utility
Commissioners, Washington, D.C., for National Association of Regulatory Utility
Commissioners.
David Cosson, Washington, D.C., H. Russell Frisby, Jr., Dennis Lane, and Harvey Reiter,
Stinson Morrison Hecker LLP, Washington, D.C., for Rural Independent Competitive
Alliance, Rural Telephone Service Company, Inc., Adak Eagle Enterprises LLC, Adams
Telephone Cooperative, Alenco Communications, Inc., Arlington Telephone Company,
Bay Springs Telephone Company, Big Bend Telephone Company, The Blair Telephone
Company, Blountsville Telephone LLC, Blue Valley Telecommunications, Inc., Bluffton
Telephone Company, Inc., BPM, Inc., Brantley Telephone Company, Inc., Brazoria
Telephone Company, Brindlee Mountain Telephone LLC, Bruce Telephone Company,
Bugs Island Telephone Cooperative, Cameron Telephone Company, LLC, Chariton
Valley Telephone Corporation, Chequamegon Communications Cooperative, Inc.,
Chickamauga Telephone Corporation, Chicksaw Telephone Company, Chippewa County
Telephone Company, Clear Lake Independent Telephone Company, Comsouth
Telecommunications, Inc., Copper Valley Telephone Cooperative, Cordova Telephone
Cooperative, Crockett Telephone Company, Inc., Darien Telephone Company, Deerfield
Famers’ Telephone Company, Delta Telephone Company, Inc., East Ascention
Telephone Company, LLC, Eastern Nebraska Telephone Company, Eastex Telephone
Coop., Inc., Egyptian Telephone Cooperative Association, Elizabeth Telephone
Company, LLC, Ellijay Telephone Company, Farmers Telephone Cooperative, Inc.,
Flatrock Telephone Coop., Inc., Franklin Telephone Company, Inc., Fulton Telephone
Company, Inc., Glenwood Telephone Company, Granby Telephone Company LLC, Hart
Telephone Company, Hiawatha Telephone Company, Holway Telephone Company,
Home Telephone Company (St. Jacob Illinois), Home Telephone Company (Moncks
Corner, South Carolina), Hopper Telecommunications Company, Inc., Horry Telephone
Cooperative, Inc., Interior Telephone Company, Kaplan Telephone Company, Inc., KLM
Telephone Company, City of Ketchikan, Alaska, Lackawaxen Telecommunications
Services, Inc., Lafourche Telephone Company, LLC, La Harpe Telephone Company,
Inc., Lakeside Telephone Company, Lincolnville Telephone Company, Loretto
Telephone Company, Inc., Madison Telephone Company, Matanuska Telephone
Association, Inc., McDonough Telephone Coop., Inc., MGW Telephone Company, Inc.,
Mid Century Telephone Coop., Inc., Midway Telephone Company, Mid-Maine Telecom,
LLC, Mound Bayou Telephone & Communications, Inc., Mondville Telephone
Company, Inc., Mukluk Telephone Company, Inc., National Telephone of Alabama, Inc.,
Ontonagon County Telephone Company, Otelco Mid-Missouri LLC, Otelco Telephone
LLC, Panhandle Telephone Cooperative, Inc., Pembroke Telephone Company, Inc.,
People’s Telephone Company, Peoples Telephone Company, Piedmont Rural Telephone
Cooperative, Inc., Pine Belt Telephone Company, Pine Tree Telephone LLC, Pioneer
Telephone Cooperative, Inc., Poka Lambro Telephone Cooperative, Inc., Public Service
Telephone Company, Ringgold Telephone Company, Roanoke Telephone Company,
Inc., Rock County Telephone Company, Saco River Telephone LLC, Sandhill Telephone
Cooperative, Inc., Shoreham Telephone LLC, The Siskiyou Telephone Company, Sledge
Telephone Company, South Canaan Telephone Company, South Central Telephone
Association, Star Telephone Company, Inc., Stayton Cooperative Telephone Company,
The North-Eastern Pennsylvania Telephone Company, Tidewater Telecom, Inc., Tohono
O’Odham Utility Authority, Unitel, Inc., War Telephone LLC, West Carolina Rural
Telephone Cooperative, Inc., West Tennessee Telephone Company, Inc., West Wisconsin
Telecom Cooperative, Inc., Wiggins Telephone Association, Winnebago Cooperative
Telecom Association, Yukon Telephone Co., Inc.
Maureen A. Scott, Wesley Van Cleve, and Janet F. Wagner, Arizona Corporation
Commission, Legal Division, Phoenix, Arizona, for Arizona Corporation Commission.
Jeffrey A. Lamken and Lucas M. Walker, Molo Lamkin, Washington, D.C.,
for Windstream Communications, Inc., and Windstream Corporation.
Appearances for Respondents:
Laurence Nicholas Bourne, James M. Carr, Maureen Katherine Flood, Jacob Matthew
Lewis, Austin Schlick, and Richard Welch, Federal Communications Commission,
Washington, D.C., for the Federal Communications Commission.
Robert Nicholson and Robert J. Wiggers, United States Department of Justice,
Washington, D.C., for United States of America.
Appearances for Intervenors:
Thomas J. Moorman, Woods & Aitken, Washington, D.C. and Paul M. Schudel, Woods
& Aitken, Lincoln, Nebraska, for The Blair Telephone Company, Clarks
Telecommunications Co., Consolidated Telco, Inc., Consolidated Telephone Company,
Consolidated Telecom, Inc., The Curtis Telephone Company, Great Plains
Communication, Inc. K&M Telephone Company, Inc., Nebraska Central Telephone
Company, Rock County Telephone Company, Three River Telco, Cambridge Telephone
Company, Northeast Nebraska Telephone Company.
David Cosson, Washington, D.C., for Eastern Nebraska Telephone Company, and H.
Russell Frisby, Jr., Dennis Lane, and Harvey Reiter, Stinson Morrison Hecker LLP,
Washington, D.C., and Thomas J. Moorman, Woods & Aitken, Washington, D.C. and
Paul M. Schudel, Woods & Aitken, Lincoln, Nebraska, for Arlington Telephone
Company.
Yaron Dori, Robert Allen Long, Jr., and Gerard J. Waldron, Covington & Burling,
Washington, D.C., for Centurylink, Inc.
Gerard J. Duffy, Benjamin H. Dickens, Jr., Robert M. Jackson, and Mary J. Sisak,
Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP, Washington, D.C., for 3
Rivers Telephone Cooperative, Inc. , Venture Communications Cooperative, Inc., Alpine
Communications, LC, Emery Telcom, Penasco Valley Telephone Cooperative, Inc.,
Smart City Telecom, Smithville Communications, Inc., South Slope Cooperative
Telephone Co., Inc., Spring Grove Communications, Star Telephone Company, Walnut
Telephone Company, and West River Cooperative Telephone Company, Inc.
Ivan C. Evilsizer, Evilsizer Law Office, Helena, Montana, for Ronan Telephone
Company and Hot Springs Telephone Company.
Helen E. Disenhaus and Ashton Johnston, Lampert, O’Connor & Johnston, P.C.,
Washington, D.C., for Hypercube Telecom, LLC.
Raymond Lee Doggett, Jr., Virginia State Corporation Commission, Richmond, Virginia,
for Virginia State Corporation Commission.
Dennis Lopach, Montana Public Service Commission, Helena, Montana, for Montana
Public Service Commission.
Christopher M. Heimann and Gary L. Phillips, SBC Communications, Washington, D.C.,
Jonathan Nuechterlein and Heather Marie Zachary, Wilmer Cutler Pickering Hale and
Dorr, Washington, D.C., for AT&T, Inc.
J. G. Herrington and David E. Mills, Dow Lohnes, PLLC, Washington, D.C., for Cox
Communications.
Scott H. Angstreich, Joshua D. Branson, Brendan J. Crimmins, Kellogg, Huber, Hansen,
Todd, Evans & Figel, Washington, D.C., and Michael E. Glover and Christopher Michael
Miller, Verizon Communications, Inc., Arlington, Virginia, for Verizon.
Russell Blau, Bingham McCutchen LLP, Washington, D.C., for National
Telecommunications Cooperative Association.
Carl W. Northrop, Telecommunications Law Professionals PLLC, Washington, D.C.,
Mark A. Stachiw, MetroPCS Communications, Inc., Richardson, Texas, for MetroPCS
Communications, Inc.
Clare Kindall, Office of the Attorney General Energy Department, New Britain,
Connecticut, for Connecticut Public Utilities Regulatory Authority.
Samuel L. Feder and Luke C. Platzer, Jenner & Block LLP, Washington, D.C., for
Comcast Corporation.
Christopher J. Wright, Wiltshire & Grannis, LLP, Washington, D.C., for Level 3
Communications, LLC, Vonage Holdings Corp., and Sprint Nextel Corporation.
Rick C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National
Cable & Telecommunications Association, Washington, D.C., and Ernest C. Cooper,
Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky &
Popeo, P.C., Washington, D.C., for National Cable & Telecommunications Association.
Genevieve Morelli, The Independent Telephone & Telecommunications Alliance,
Washington, D.C., for Independent Telephone & Telecommunications Alliance.
Gerard J. Duffy, Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP,
Washington, D.C., for Western Telecommunications Alliance.
Gregory Jon Vogt, Law Offices of Gregory J. Vogt, PLLC, Alexandria, Virginia, and
Richard A. Askoff, Sr., National Exchange Carrier Association, Inc., Whippany, New
Jersey for National Exchange Carrier Association.
Craig Edward Gilmore, L. Charles Keller, and David H. Solomon, Wilkinson, Barker,
Knauer, LLP, Washington, D.C., for T-Mobile USA, Inc.
Caressa Davison Bennet, Kenneth Charles Johnson, Anthony Veach, and Daryl Altey
Zakov, Bennet & Bennet, Bethesda, Maryland, for Rural Telecommunications Group,
Inc. and Central Telephone Cooperative, Inc.
Appearances for Amicus Curiae:
James Hughes Cawley, Pennsylvania Public Utility Commission, Harrisburg,
Pennsylvania, and James Bradford Ramsay, National Association of Regulatory Utility
Commissioners, Washington, D.C., for State Members of the Federal-State Joint Board
on Universal Service.
Table of Contents
Page
I. The FCC’s Restructuring of the Telecommunications Market 2
A. The Old Regime 2
B. The New Regime 7
C. The Transition from the Old Regime to the New
Regime 8
D. The Types of Challenges 9
II. Challenges to the FCC’s Authority to Implement a National
Bill-and-Keep Framework for All Traffic 10
A. Standard of Review 11
B. The FCC’s Authority Over Access Charges on All Traffic 13
1. Traffic Between LECs and Long-Distance Carriers 13
a. The FCC’s Rationale 13
b. The Petitioners’ Arguments 14
c. Traffic Between LECs and IXCs
as “Reciprocal Compensation” 15
i. “Reciprocal Compensation” as a Term
of Art 15
ii. Plain Meaning of the Term
“Reciprocal Compensation” 17
d. The Petitioners’ Reliance on §§ 252(d)(2)(A)
and 251(c)(2)(A) 18
i
i. Section 252(d)(2)(A) 19
ii. Section 251(c)(2)(A) 20
2. Preemption of State Regulatory Authority Over
Intrastate Access Charges 22
a. Sections 152(b) and 601(c) 22
b. Section 253 24
c. Section 251(d)(3) 26
d. Section 251(g) 27
3. FCC Authority Over Intrastate Origination Charges 29
a. Section 251(b)(5) and Originating
Access Traffic 30
b. The FCC’s Interpretations of
“Transport” and “Termination” 31
c. The Purported Prohibition of Originating
Access Charges 32
C. Bill-and-Keep as a Default Methodology 33
1. Consideration Under § 252 35
2. The “Just and Reasonable” Rate
Requirement in §§ 201(b) and 252(d)(2) 41
a. Consideration of a Statutory Right
to Payments from Other Carriers 43
b. Sufficiency of Cost Recovery 44
D. Authority for the States to Suspend or Modify the
New Requirements 45
ii
III. Challenges to Cost Recovery as Arbitrary and Capricious 47
A. The Transitional Plan 47
B. The Petitioners’ Challenges 49
C. Standard of Review 49
D. Consideration of the Apportionment
Requirement in Smith 51
1. The Apportionment Requirement 51
2. Application of Smith to the FCC’s
Recovery Mechanism 52
3. Waiver of the Challenge to the Access
Recovery Charge 54
4. Recovery of Interstate Costs through
End-User Rates and Universal Service Support 55
E. Challenges Involving the Adequacy of the Recovery
Mechanism 56
IV. Procedural Irregularities in the Rulemaking Process 58
A. The FCC Proceedings 58
B. The Petitioners’ Arguments 60
1. The Waiver Issue 60
2. The FCC’s Motion to Strike 61
C. Our Review of the Constitutional Challenges 62
D. The Petitioners’ Due Process Challenges 63
1. General Challenges to the Ex Partes 63
iii
2. Ex Parte Challenges Based on Specific
Documents 65
3. The FCC’s Placement of Documents in the
Rulemaking Record 66
4. The FCC’s Decision to Rule on Pending Petitions 67
5. Adequacy of the August 3, 2011, Notice 68
6. Length of the Comment Period 68
7. Cumulative Challenge 69
E. “Commandeering” of State Commissions 69
V. Individual Challenges to the Order 71
A. Rural Independent Competitive Alliance’s Challenge
to the FCC’s Limitation on Funding Support for
Rural Competitive LECs 71
B. The Challenge by National Telecommunications
Cooperative Association, U.S. TelePacific Corporation,
and North County Communications Corporation to the
Transition of CMRS-LEC Traffic to Bill-and-Keep 75
C. Core Communications, Inc. and North County
Communications Corporation’s Challenge to the
FCC’s New Regulations on Access Stimulation 77
1. The FCC’s Refusal to Allow CLECs to Use
ILEC Ratemaking Procedures 78
2. The FCC’s Requirement for Access-Stimulating
CLECs to Benchmark to the Price-Cap LEC
with the State’s Lowest Access Rates 81
iv
D. AT&T, Inc.’s Challenge to the FCC’s Decision
to Allow VoIP-LEC Partnerships to Collect
Intercarrier Compensation Charges for Services
Performed by the VoIP Partner 83
E. Voice on the Net Coalition, Inc.’s Challenges to the
FCC’s No-Blocking Obligation 86
1. The Waiver Test 87
2. Challenge to the Notice 89
3. Challenge to the Adequacy of the Explanation 91
4. Challenge to the FCC’s Ancillary Jurisdiction 91
F. Transcom Enhanced Services, Inc.’s Challenges to
the FCC’s IntraMTA Rule, Provisions on Call-
Identification, and Blocking of Calls 93
1. Transcom’s Challenge to the FCC’s IntraMTA
Rule 93
2. Transcom’s Challenge to the Call-Identifying
Rules 97
3. Transcom’s Challenge to the FCC’s No-
Blocking Rules 99
G. Windstream Corporation and Windstream
Communications, Inc.’s Challenges to Origination
Charges 99
1. Windstream’s Challenge to the FCC’s
Explanation in the Original Order 101
2. Windstream’s Challenge to the FCC’s
Explanation for the New Rule 102
v
3. Windstream’s Challenge to the FCC’s
Failure to Provide Funding Support 104
4. Windstream’s Challenge to the Initial
Period of Six Months 108
VI. Conclusion 108
vi
Issues Involving Intercarrier Compensation
Exercising its rulemaking authority under the Communications Act of 1934 and
the Telecommunications Act of 1996, the FCC overhauled the intercarrier compensation
regime and adopted a “uniform national bill-and-keep framework . . . for all
telecommunications traffic exchanged with a [local exchange carrier].” 2 Rawle at 403 ¶ 34.
To ease the transition to a new regime of bill-and-keep, the FCC also adopted a
comprehensive plan to phase out the old intercarrier compensation system. See id. at 403-
04 ¶ 35. The Petitioners challenge the plan on grounds that it exceeded the FCC’s
authority, was arbitrary and capricious, and resulted in a denial of due process.1 These
challenges are rejected.
1
This opinion involves arguments the Petitioners and Intervenors presented in the
following briefs:
! Joint Intercarrier Compensation Principal Brief of Petitioners (July 17,
2013);
! Additional Intercarrier Compensation Issues Principal Brief (Pet’rs) (July
11, 2013);
! AT&T Principal Brief (July 16, 2013);
! Voice on the Net Coalition, Inc. Principal Brief (July 15, 2013);
! Transcom Principal Brief (July 12, 2013);
! National Association of State Utility Consumer Advocates Principal Brief
(July 12, 2013);
! Windstream Principal Brief (July 17, 2013);
! Incumbent Local Exchange Carrier Intervenors’ Brief in Support of
Petitioners (July 15, 2013).
I. The FCC’s Restructuring of the Telecommunications Market
In assessing the Petitioners’ challenges to this plan, we must take into account
what the FCC was trying to accomplish.
A. The Old Regime
The FCC adopted the plan against the backdrop of two types of arrangements.
One provided reciprocal compensation for local calls, and the other involved charges for
long-distance carriers to connect to a local carrier’s network. In the Order, the FCC
revamped this regime, exercising authority over all traffic exchanged with a local
exchange carrier (“LEC”), including intrastate calls. See id. at 632 ¶ 739, 642 ¶¶ 761-62.
Before 1996, regulation of telecommunications was generally divided between the
FCC and state commissions. The FCC regulated interstate service, and state commissions
regulated intrastate service. La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 360 (1986).
Under this division of authority, states granted exclusive franchises to LECs within their
designated service areas. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371 (1999).
Through these franchises, the LECs owned the local telecommunications networks. Id.
In 1996, Congress set out to restructure the market to enhance competition. These
efforts led to enactment of the Telecommunications Act of 1996. In this statute, Congress
empowered the FCC and created a new breed of competitors (called “Competitive LECs”
or “CLECs”). See id. at 378 n.6; MCI Telecomm. Corp. v. Bell Atl. Pa., 271 F.3d 491,
498 (3d Cir. 2001).
2
Under the new statute, all LECs would assume certain duties. See 47 U.S.C.
§ 251. One of these duties involved the establishment of arrangements for “reciprocal
compensation” in the “transport and termination of telecommunications.” Id. at
§ 251(b)(5). This statutory duty includes two key terms underlying the present litigation:
“reciprocal compensation” and “telecommunications.” In the Order, the FCC recently
interpreted these terms to cover all traffic, including intrastate service and use of local
networks by long-distance carriers. Id. at 643 ¶ 764, 644 n.1374, 647 ¶ 772, 754-55
¶ 971.
This interpretation reflects a departure from the FCC’s previous reading of the
1996 Act. In the past, for example, the FCC had narrowly read the phrase “reciprocal
compensation” as limited to local traffic. See Bell Atl. Tel. Cos. v. FCC, 206 F.3d 1, 4
(D.C. Cir. 2000). Under the FCC’s previous interpretation, the parties or state
commissions set the charges for intrastate traffic between two LECs. Supp. R. at 20-21
¶ 53.
The charges were called “access charges” because long-distance carriers (called
“IXCs”) paid LECs for the opportunity to use their networks at the start- and end-points
of the calls. See id. at 19 ¶ 48. This system is known as “exchange access.” 47 U.S.C.
§ 153(20).
3
In exchange access, long-distance calls start (or “originate”) on an LEC’s network,
continue on the IXC’s network to another local telephone exchange, and end (or
“terminate”) on the network of another LEC. This process is illustrated in Diagram 1:
Under the old regime, compensation between local- and long-distance carriers
involved one of three combinations:
! between an IXC and two LECs for an interstate call,
! between an IXC and two LECs for a call within the boundaries of a single
state, and
! between two LECs.
The three different combinations led to three different types of access charges,
each with its own mode of regulation:
! Interstate IXC-LEC Traffic: For this kind of traffic, the IXC paid an access
charge to the originating LEC and a terminating interstate access charge to
the terminating LEC. The access charges were regulated by the FCC.
Supp. R. at 21 ¶ 53. For example, Diagram 2 illustrates a call from Denver
to Oklahoma City:
4
! Intrastate IXC-LEC Traffic: For traffic within a single state by an IXC and
LEC, the IXC paid an access charge to the originating LEC and an access
charge to the terminating LEC. The access charge was governed by state
law and was typically set above interstate rates. Id. This illustration
reflects a typical intrastate call, one from Denver to Colorado Springs:
! Local LEC-LEC Traffic: For local traffic between two LECs, the LECs
paid each other consistently with their reciprocal compensation
arrangement. The arrangement was either negotiated by the parties or set
by the states using a methodology prescribed by the FCC under 47
§§ 201(b) and 251(b)(5). Id. An example appears in Diagram 4, which
shows a call from someone in Denver to another person in Denver:
5
Each arrangement assumed that the calling party should pay for the call. 2 Rawle at
634 ¶ 744. This assumption was based on the view that the callers were the only persons
that benefited from the call and that they should bear all of the costs. Id. Thus, callers
paid their own carriers, which in turn paid other carriers for access to their networks to
reach the person being called. Diagram 5 shows the payments for local- and long-
distance calls:
6
B. The New Regime
In the Order, the FCC restructured this system in three ways. First, the FCC
reinterpreted the 1996 law to cover all traffic, including traffic subject to charges for
access to a network. Id. at 642 ¶ 761-62. Second, the FCC claimed that it could prevent
state commissions from approving access charges for intrastate calls in the absence of an
7
agreement between the parties. Id. at 644 ¶ 766. Third, the FCC rejected the idea that a
caller should bear the full cost of the call; thus, the FCC prescribed a new system, known
as “bill-and-keep,” for all traffic. Id. at 632 ¶ 741; see id. at 634 ¶ 744, 640 ¶ 756.
“Bill-and-keep” anticipates that carriers will recover their costs from their end-user
customers rather than from other carriers. See id. at 631 ¶ 737, 648 ¶ 775 n.1408. In
moving to “bill-and-keep,” the FCC reasoned that the parties to a call should split the
costs because both enjoy the benefits. Id. at 634 ¶ 744, 640 ¶ 756, 649 n.1409. Once bill-
and-keep is fully implemented for all traffic exchanged with an LEC, the calling party
and the called party will divide the costs. Id. at 649 n.1409.
C. The Transition from the Old Regime to the New Regime
Recognizing that the change would disrupt the market, the FCC opted to gradually
transition to bill-and-keep. In the transition period, incumbent LECs (“ILECs”) could
recover some, but not all, of their lost intercarrier compensation revenue through the
FCC’s funding mechanisms. Id. at 683-84 ¶¶ 847-48.
The length of the transitional period will vary for different types of LECs. To
determine the transitional period, the FCC classifies ILECs based on the way that they are
regulated: “Price-cap ILECs” are LECs that must set rates at or below a price cap, and
“rate-of-return ILECs” are allowed to charge based on a set rate of return. Nat’l Rural
Telecomm. Ass’n v. FCC, 988 F.2d 174, 177-78 (D.C. Cir. 1993). For price-cap ILECs,
the FCC set a six-year period to gradually decrease reciprocal compensation charges and
8
access charges for termination; for rate-of-return ILECs, the transition for these
intercarrier charges will last nine years. 2 Rawle at 661-63 ¶ 801, 661-63 Figure 9.
CLECs are generally required to benchmark rates to an ILEC and utilize its
timeline for the transition. Id. at 272 ¶ 801. Traffic involving a wireless provider (called
“CMRS”) must transition to bill-and-keep either immediately or within six months,
depending on whether the traffic was subject to an existing agreement on intercarrier
compensation. Id. at 765 ¶ 996 (ordering an immediate transition); id. at 1145-46 ¶ 7
(extending the transition to six months for some CMRS-LEC traffic).
The FCC allows ILECs to recover some, but not all, of their lost intercarrier
compensation revenues through a federal recovery mechanism. See id. at 683-84 ¶¶ 847-
48. Through this mechanism, carriers can recover some of their lost revenue through an
Access Recovery Charge on their end users. See id. at 715 ¶ 908. Carriers unable to
recover all of their eligible recovery through the Access Recovery Charge are eligible for
explicit support through the Connect America Fund. See id. at 721-22 ¶ 918.
D. The Types of Challenges
The Petitioners challenge four aspects of the reforms: (1) implementation of bill-
and-keep for all traffic; (2) limitations on funding mechanisms during the transitional
period; (3) irregularities in the rule-making process; and (4) application of the reforms to
particular circumstances. We reject all of the challenges.
9
II. Challenges to the FCC’s Authority to Implement a National Bill-and-Keep
Framework for All Traffic
In the Order, the FCC concluded that 47 U.S.C. § 251(b)(5) applied to all
telecommunications traffic exchanged with an LEC. Based on this conclusion, the FCC
prescribed bill-and-keep as the default methodology for that traffic. The Petitioners
challenge not only the FCC’s authority to regulate the traffic, but also the way in which
the FCC chose to exercise this authority. Thus, we must address both challenges: the
FCC’s authority and the content of the new regulations.
The FCC claims authority under 47 U.S.C. §§ 251(b)(5) and 201(b) to implement
bill-and-keep as the default intercarrier compensation framework for all traffic exchanged
with an LEC. See id. at 641 ¶ 760. For traffic between LECs and wireless providers, the
FCC also invokes authority under 47 U.S.C. § 332. Id. at 641 ¶ 760 n.1350, 675-76
¶¶ 834-36. And for interstate traffic, the FCC relies on 47 U.S.C. § 201. Id. at 646-47
¶ 771, 675-76 ¶¶ 834-36.
Attacking this framework, the Petitioners raise three challenges.
First, they challenge the FCC’s authority under § 251(b)(5). Joint Intercarrier
Compensation Principal Br. of Pet’rs at 7-28 (July 17, 2013). This challenge
encompasses three aspects of the traffic: (1) the FCC’s authority to regulate access
charges imposed by LECs on long-distance carriers; (2) the exclusive authority of states
in regulating intrastate access charges; and (3) the FCC’s authority over origination
charges. Id.
10
Second, the Petitioners argue that bill-and-keep does not constitute a permissible
methodology for at least some of the traffic. Id. at 28-45.
Third, the Petitioners argue that the FCC lacks authority to order state
commissions to refuse exemptions to the bill-and-keep regime. Id. at 46-49.
A. Standard of Review
Congress has unambiguously authorized the FCC to administer the
Communications Act through rulemaking and adjudication. City of Arlington v. FCC, __
U.S. __, 133 S. Ct. 1863, 1874 (2013). Thus, we apply Chevron deference to the FCC’s
interpretation of the statute and its own authority. Id. at 1874; Sorenson Commc’ns, Inc.
v. FCC, 659 F.3d 1035, 1042 (10th Cir. 2011).
Chevron involves a two-step inquiry. Chevron U.S.A., Inc. v. Natural Res. Def.
Council, Inc., 467 U.S. 837, 842-43 (1984); Sorenson, 659 F.3d at 1042.
In the first step, we ask whether Congress has spoken on the issue. Qwest
Commc’ns Int’l, Inc. v. FCC, 398 F.3d 1222, 1229-30 (10th Cir. 2005) (quoting Chevron,
467 U.S. at 842). When the statute is unambiguous, we look no further and “give effect
to Congress’s unambiguously expressed intent.” Qwest, 398 F.3d at 1230 (citing
Chevron, 467 U.S. at 842-43).
“[I]f the statute is silent or ambiguous with respect to the specific issue,” we must
decide “whether the agency’s answer is based on a permissible construction of the
statute.” Chevron, 467 U.S. at 843; see City of Arlington, 133 S. Ct. at 1874 (“Where
11
Congress has established a clear line, the agency cannot go beyond it; and where
Congress has established an ambiguous line, the agency can go no further than the
ambiguity will fairly allow.”). When we address this issue, the Petitioners must show that
the FCC’s interpretation of the statute was impermissible. Nat’l Cable & Telecomms.
Ass’n, Inc. v. Gulf Power Co., 534 U.S. 327, 333 (2002).
We review changes in the FCC’s interpretation of the Communications Act under
the Administrative Procedure Act (“APA”). See Nat’l Cable & Telecomms. Ass’n v.
Brand X Internet Servs., 545 U.S. 967, 981 (2005). But the APA does not subject the
FCC’s change in position to heightened review. FCC v. Fox Television Stations, Inc.,
556 U.S. 502, 514 (2009); Qwest Corp. v. FCC, 689 F.3d 1214, 1224 (10th Cir. 2012).
The APA requires only that “‘the new policy [be] permissible under the statute, [and] that
there are good reasons for it.’” Qwest Corp., 689 F.3d at 1225 (quoting Fox Television,
556 U.S. at 515). This requirement is satisfied if the FCC acknowledges that it is
changing position and provides a reasoned explanation for “disregarding facts and
circumstances that underlay or were engendered by the prior policy.” Fox Television, 556
U.S. at 515.2
In applying Chevron and the APA, we confine our review to the grounds relied on
by the agency. Nat’l R.R. Passenger Corp. v. Bos. & Me. Corp., 503 U.S. 407, 420
2
The Petitioners contended at oral argument that the FCC could not take an
expansive approach to its statutory authority when the agency had earlier taken a contrary
position. We reject this contention. An agency’s earlier interpretation of a statute does
not restrict future exercises of authority under Chevron. See Nat’l Cable & Telecomms.
Ass’n, 545 U.S. at 981.
12
(1992) (citing S.E.C. v. Chenery Corp., 318 U.S. 80, 88 (1943)); S. Utah Wilderness
Alliance v. Office of Surface Mining Reclamation & Enforcement, 620 F.3d 1227, 1236
(10th Cir. 2010). But we can rely on “implicitly adopted rationales . . . as long as they
represent the ‘fair and considered judgment’ of the agency, rather than a ‘post hoc
rationalization.’” S. Utah Wilderness Alliance, 620 F.3d at 1236 (quoting Auer v.
Robbins, 519 U.S. 452, 462 (1997)).
B. The FCC’s Authority Over Access Charges on All Traffic
The FCC interprets 47 U.S.C. § 201(b) and § 251(b)(5) to apply to all traffic,
including access given to long-distance carriers, intrastate traffic, and origination. This
interpretation is reasonable.
1. Traffic Between LECs and Long-Distance Carriers
In adopting the new regulations, the FCC concluded that it had jurisdiction over all
traffic between LECs and long-distance carriers. 2 Rawle at 641 ¶ 760, 642 ¶¶ 761-62, 646-
47 ¶¶ 771-72.
a. The FCC’s Rationale
This interpretation flows in part from the language in § 251(b)(5). This section
provides that each LEC must “establish reciprocal compensation arrangements for the
transport and termination of telecommunications.” 47 U.S.C. § 251(b)(5). The term
“telecommunications” is defined in the statute and “encompasses communications traffic
of any geographic scope . . . or regulatory classification.” 47 U.S.C. § 153(50). Because
13
the term is untethered to geographic or regulatory limits, the FCC regards its authority
under § 251(b)(5) to cover all traffic regardless of geography or regulatory classification.
2 Rawle at 642 ¶ 761.
In addition, the FCC relies on 47 U.S.C. § 201(b), which authorizes the adoption
of regulations as necessary to carry out §§ 251 and 252. Id. at 641 ¶ 760; see 47 U.S.C.
§ 201(b); AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 (1999).
Based on the broad definition of “telecommunications” and the text of § 201, the
FCC recently concluded that § 251(b)(5) covers all traffic between IXCs and LECs. 2 Rawle
at 642 ¶ 761, 643-44 ¶ 765. In doing so, the FCC recognized that it had changed its
interpretation of § 251(b)(5). Id. at 642 ¶ 761. But the FCC reasoned that its earlier
reading of the law had been “inconsistent” with the text. Id.3
b. The Petitioners’ Arguments
The Petitioners oppose this interpretation, contending that: (1) the statutory term
“reciprocal compensation” does not include traffic between IXCs and LECs, and (2)
other sections in the Communications Act preclude this reading of the FCC’s statutory
authority. These contentions fail under Chevron.
3
The Petitioners contend that we should prefer an agency interpretation adopted
“when the origins of both the statute and the finding were fresh in the minds of their
administrators.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 12 n.9 (July
17, 2013) (quoting Sec’y of Labor v. Excel Mining, LLC, 334 F.3d 1, 7 (D.C. Cir. 2003)).
Because the FCC’s interpretation of the Communications Act is entitled to Chevron
deference under settled law, its “freshness” is irrelevant. See Brand X Internet Servs., 545
U.S. at 1001-02.
14
c. Traffic Between LECs and IXCs as “Reciprocal
Compensation”
The FCC broadly interprets the phrase “reciprocal compensation” to encompass
any intercarrier compensation agreements between carriers. See id. at 641-42 ¶¶ 761-62,
643-44 ¶ 765. The Petitioners raise two challenges to this conclusion under the first step
of Chevron: (1) Congress used the term “reciprocal compensation” as a technical term of
art to denote local traffic between two LECs; and (2) the plain meaning of “reciprocal
compensation” cannot include traffic between IXCs and LECs because the payments go
only one way (to the LECs). Joint Intercarrier Compensation Principal Br. of Pet’rs at 7-
13 (July 17, 2013).
i. “Reciprocal Compensation” as a Term of Art
The Petitioners contend that Congress used the term “reciprocal compensation” as
a term of art. Id. at 7-9. According to the Petitioners, the term “reciprocal compensation”
was used in 1996 to refer to intercarrier compensation for local calls. Id. at 8-9. The
Petitioners’ evidence does not remove the ambiguity in the phrase “reciprocal
compensation.”
Under step one of Chevron, we start with the statutory text to determine whether
the phrase “reciprocal compensation” is a term of art. See Ass’n of Am. R.R.s v. Surface
Transp. Bd., 161 F.3d 58, 64 (D.C. Cir. 1998). At this step, we give technical terms of art
their established meaning absent a contrary indication in the statute. McDermott Int’l Inc.
v. Wilander, 498 U.S. 337, 342 (1991); La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355,
15
371-72 (1986). Thus, we must decide whether the Petitioners have shown that Congress
referred to the term “reciprocal compensation” as a term of art limited to local traffic. We
conclude that the Petitioners did not satisfy this burden.
The Petitioners rely on two pieces of evidence: (1) an FCC website description of
the term “reciprocal compensation,” which limited its application to local calls; and (2)
accounts in the trade press, which discussed state-imposed reciprocal compensation
requirements for local traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at 8
n.4, 9 n.5 (July 17, 2013). The two pieces of evidence do not eliminate ambiguity in the
phrase.
The website simply described “reciprocal compensation” as the FCC did at the
time. The FCC was then defining “reciprocal compensation” as limited to local traffic
between two LECs. The FCC now embraces a contrary definition, and we have no reason
to treat the prior interpretation as evidence of a term of art and disregard the current
interpretation.
Accounts in the trade press also do little to eliminate ambiguity in the phrase
“reciprocal compensation.” Before enactment of the statute in 1996, the trade press
included some references to reciprocal compensation on local calls. See 3 Rawle at 1471
n.19. But these accounts do not suggest that the term “reciprocal compensation” is
inherently limited to local calls.
16
Accordingly, the Petitioners have not shown that the term “reciprocal
compensation” embodied a term of art limited to local traffic.
ii. Plain Meaning of the Term “Reciprocal
Compensation”
The Petitioners also argue that the FCC has distorted the plain meaning of the term
“reciprocal compensation.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 25-
26 (July 17, 2013). According to the Petitioners, traffic between an LEC and IXC is not
“reciprocal” because the charges and traffic go only one way. Id. at 10, 25-26; Joint
Intercarrier Compensation Reply Br. of Pet’rs at 9-10 (July 31, 2013). For this position,
the Petitioners contend that for compensation to be “reciprocal,” both carriers must pay
each other. Joint Intercarrier Compensation Principal Br. of Pet’rs at 10 (July 17, 2013).
Relying on this definition, the Petitioners argue that access charges “are never reciprocal”
because the IXC pays the LECs on both ends to originate and terminate the traffic. Id.
(emphasis omitted).
In effect, the Petitioners are arguing at step one of Chevron that § 251(b)(5) is
unambiguous because access charges are always paid to the LEC and never to the IXC.
But the nature of access charges does not remove ambiguities in the phrase “reciprocal
compensation.” See Pac. Bell v. Cook Telecom, Inc., 197 F.3d 1236, 1242-44 (9th Cir.
1999) (concluding that § 251(b)(5) can plausibly be read to cover an agreement between
an LEC and one-way paging provider even though the compensation flows only one
way).
17
Section 251(b)(5) requires LECs to establish arrangements for “reciprocal
compensation.” 47 U.S.C. § 251(b)(5). Thus, we could adopt the Petitioners’
interpretation only if the statute requires traffic and compensation to “actually flow to and
from both carriers . . . to be a ‘reciprocal compensation arrangement.’” Pac. Bell, 197
F.3d at 1244. This is a reasonable reading of the statute. But the statute can also be read
to simply require the existence of reciprocal obligations. See id. (concluding that one-
way paging providers were entitled to reciprocal compensation under the statute even
through traffic and payment are never reciprocal). A carrier can have a reciprocal
entitlement to compensation for transporting and terminating traffic even if it does not
ultimately transport or terminate a call. See Atlas Tel. Co. v. Okla. Corp. Comm’n, 400
F.3d 1256, 1264 (10th Cir. 2005) (stating that under 47 U.S.C. § 251(b)(5), the term
“reciprocal compensation” can cover traffic transported on an IXC’s network).
The statutory term “reciprocal compensation” is ambiguous; thus, we reach the
second step of Chevron. At step two, we conclude that the FCC reasonably interpreted
the term “reciprocal compensation” for “telecommunications” to include the traffic
between IXCs and LECs.
d. The Petitioners’ Reliance on §§ 252(d)(2)(A) and
251(c)(2)(A)
The Petitioners argue that two other statutory sections (§§ 252(d)(2)(A) and
251(c)(2)(A)) would prevent application of § 251(b)(5) to access traffic. Joint Intercarrier
Compensation Principal Br. of Pet’rs at 10-11 (July 17, 2013). We disagree.
18
i. Section 252(d)(2)(A)
The Petitioners invoke § 252(d)(2)(A), arguing that it precludes an expansive
reading of § 251(b)(5) because traffic never originates on an IXC’s network. Id. at 11-12;
Joint Intercarrier Compensation Reply Br. of Pet’rs at 9 (July 31, 2013). This argument is
invalid.
Section 252(d)(2)(A) applies to state commission arbitrations of interconnection
agreements between an ILEC and another telecommunications carrier. See 47 U.S.C.
§ 252. Under this section, state commissions can consider reciprocal compensation terms
just and reasonable only if they “provide for the mutual and reciprocal recovery by each
carrier of costs associated with the transport and termination on each carrier’s network
facilities of calls that originate on the network facilities of the other carrier.” Id. at
§ 252(d)(2)(A). Because IXCs do not originate calls, the Petitioners contend that
reciprocal compensation arrangements cannot apply to traffic between LECs and IXCs.
See Joint Intercarrier Compensation Principal Br. of Pet’rs at 11-12 (July 17, 2013).
The FCC rejected this argument, reasoning that § 252(d)(2)(A) does not limit
§ 251(b)(5). See 2 Rawle at 645-46 ¶ 768. In rejecting the argument, the FCC found that
§ 252(d)(2)(A) “‘deals with the mechanics of who owes what to whom,’” but “‘does not
define the scope of traffic to which § 251(b)(5) applies.’” Id. (quoting In re High-Cost
Universal Serv. Support, 24 FCC Rcd. 6475, 6481 ¶ 12 (2008)). With this finding, the
FCC reiterated that Congress did not intend “‘the pricing standards in section 252(d)(2) to
19
limit the otherwise broad scope of section 251(b)(5).’” 2 Rawle at 645-46 ¶ 768 (quoting
High-Cost Universal Serv. Support, 24 FCC Rcd. 6475, 6480 ¶ 11 (2008)). Instead, the
FCC concluded that § 252(d)(2)’s pricing rules do “not address what happens when
carriers exchange traffic that originates or terminates on a third carrier’s network.” In re
High-Cost Universal Serv. Support, 24 FCC Rcd. at 6481 ¶ 12.
The FCC’s interpretation is reasonable. Section 251(b)(5) broadly refers to “the
transport and termination of telecommunications.” 47 U.S.C. § 251(b)(5). This section is
incorporated into § 252(d)(2), but not the other way around. Consequently, there is
nothing in § 252(d)(2) to suggest that it limits the scope of § 251(b)(5). In these
circumstances, the FCC reasonably relied on the breadth of § 251(b)(5) to conclude that it
is not narrowed by § 252(d)(2).
ii. Section 251(c)(2)(A)
The Petitioners also rely on § 251(c)(2)(A), which distinguishes between
“exchange access” and “exchange service.” This section requires ILECs to provide
telecommunications carriers with interconnection to their networks “for the transmission
and routing of telephone exchange service [local calls] and exchange access [long-
distance calls].” 47 U.S.C. § 251(c)(2)(A). Because the section distinguishes between
“exchange service” and “exchange access,” the Petitioners argue that “reciprocal
compensation” must refer to something other than “exchange access.” Joint Intercarrier
Compensation Principal Br. of Pet’rs at 11-12 (July 17, 2013). We reject this argument.
20
The Petitioners’ argument does not render § 251(b)(5) unambiguous or vitiate the
reasonableness of the FCC’s interpretation. For this argument, the Petitioners incorrectly
conflate “exchange service” and “reciprocal compensation.” Section 251(c)(2)(A) refers
to an ILEC’s duty to allow others to interconnect for local- and long-distance calls. This
duty is distinct from the duty in § 251(b)(5) to establish arrangements for reciprocal
compensation. See, e.g., Verizon Cal., Inc. v. Peevey, 462 F.3d 1142, 1146 (9th Cir.
2006). Thus, § 251(c)(2)(A) does not unambiguously shed light on how the FCC should
interpret § 251(b)(5).
The Petitioners cite a House Conference report. Joint Intercarrier Compensation
Principal Br. of Pet’rs at 11 n.8 (July 17, 2013); Joint Intercarrier Compensation Reply
Br. of Pet’rs at 11 n.12 (July 31, 2013). But the report does not remove the ambiguity in
§ 251(b)(5). The House Report addressed only the need for the FCC to preserve its own
authority under § 201 and the FCC’s continued authority over access charges. “The
obligations and procedures prescribed in [§ 251] do not apply to interconnection
arrangements between local exchange carriers and telecommunications carriers under
§ 201 of the Communications Act for the purpose of providing interexchange service, and
nothing in this section is intended to affect the Commission’s access charge rules.” H.R.
Conf. Rep. 104-458, at 117. The House Report does not undermine the FCC’s authority
to enact a national reciprocal compensation framework under §§ 251(b)(5) and 201(b).
21
2. Preemption of State Regulatory Authority Over Intrastate
Access Charges
The Petitioners argue that even if the FCC can regulate IXC-LEC traffic, this
authority would include calls that were interstate, but not intrastate. Joint Intercarrier
Compensation Principal Br. of Pet’rs at 14-25 (July 17, 2013). For this argument, the
Petitioners rely on:
! 47 U.S.C. § 152(b),
! 47 U.S.C. § 601(c),
! § 601(c) of the Telecommunications Act of 1996,
! 47 U.S.C. § 253,
! 47 U.S.C. § 251(d)(3), and
! 47 U.S.C. § 251(g).
We disagree with the Petitioners in their interpretation of these sections.
a. Sections 152(b) and 601(c)
According to the Petitioners, 47 U.S.C. § 152(b) and § 601(c)(1) of the
Telecommunications Act of 1996 insulate intrastate access charges from federal
regulation under § 251(b)(5). Joint Intercarrier Compensation Principal Br. of Pet’rs at
14-15 (July 17, 2013).
Sections 152(b) and 601(c)(1) provide in part:
47 U.S.C. § 152(b): [N]othing in this chapter shall be construed to
apply or to give the Commission jurisdiction with respect to (1)
charges, classifications, practices, services, facilities, or regulations
22
for or in connection with intrastate communication service by wire or
radio of any carrier.
****
§ 601(c)(1) of the Telecommunications Act of 1996: No Implied
Effect. This Act and the amendments made by this Act . . . shall not
be construed to modify, impair, or supersede Federal, State, or local
law unless expressly so provided in such Act or amendments.4
Because the FCC’s earlier, valid interpretation did not require preemption of intrastate
access charges, the Petitioners argue that § 251(b)(5) cannot be read more broadly to
require preemption now. Id. at 15.
The Petitioners address the argument as if it arises at the first Chevron step. But
the argument is insufficient at this step because Congress intended the 1996 Act to apply
to intrastate communications and expressly allowed the FCC to preempt state law. AT&T
Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 n.6 (1999); MCI Telecomms. Corp. v. Pub.
Serv. Comm’n of Utah, 216 F.3d 929, 938 (10th Cir. 2000).
Nonetheless, the Petitioners argue that § 152(b) and § 601(c)(1) require the FCC to
narrowly interpret § 251(b)(5) to avoid interference with state regulation of intrastate
traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at 14-15, 19, 39 n.29 (July
17, 2013). We disagree. Otherwise, we would be interpreting §§ 152(b) and 601(c)(1) in
a way that would upset the regulatory scheme envisioned in the 1996 Act. See Geier v.
Am. Honda Motor Co., Inc., 529 U.S. 861, 870 (2000).
4
Section 601(c)(1) was codified at 47 U.S.C. § 152 in the Historical and Statutory
Notes.
23
Section 152(b) simply limits the FCC’s ancillary jurisdiction. See AT&T Corp.,
525 U.S. at 380-81 & n.7 (stating that § 152(b) serves only to limit the FCC’s ancillary
authority). And, § 601(c)(1) does not limit Congress’s actual delegation of authority to
the FCC. See Qwest Corp. v. Minn. Pub. Utils. Comm’n, 684 F.3d 721, 731 (8th Cir.
2012) (§ 601(c)(1) does not save state regulatory action conflicting with FCC
regulations); Farina v. Nokia, Inc., 625 F.3d 97, 131 (3d Cir. 2010) (declining to interpret
§ 601(c)(1) broadly “where a federal regulatory scheme reflects a careful balancing”).
Because §§ 152(b) and 601(c)(1) do not unambiguously narrow the scope of § 251(b)(5),
we proceed to Chevron’s second step. See City of Arlington v. FCC, __ U.S. __, 133 S.
Ct. 1863, 1868 (2013).
At that step, we defer to the FCC’s interpretation of a statutory ambiguity that
concerns the scope of its regulatory authority. See id. at 1874. This deference applies to
“statutes designed to curtail the scope of agency discretion.” Id. at 1872.
Administrative deference is suitable here. Congress appears to grant plenary
authority to the FCC through § 251, and §§ 152(b) and 601(c)(1) do not preclude the FCC
from interpreting § 251(b)(5) to allow preemption of state regulation over intrastate
access charges.
b. Section 253
The Petitioners also argue that the FCC has usurped state authority to promote
broadband development through a system of intercarrier compensation. Joint Intercarrier
24
Compensation Principal Br. of Pet’rs at 16-18, 22 (July 17, 2013). For this argument, the
Petitioners use Pennsylvania as an example. Id. According to the Petitioners,
Pennsylvania uses access charges to promote broadband development and Pennsylvania’s
laws are not preempted under 47 U.S.C. § 253. Id. at 22 & n.20. Reliance on § 253 is
misguided.
We have not been asked to decide the validity of the Pennsylvania law. Instead,
the Petitioners ask us to decide if the FCC acted arbitrarily and capriciously in deciding to
preempt intrastate access charges under § 251(b)(5). In deciding to preempt regimes for
state access charges, the FCC did not act arbitrarily or capriciously.
The FCC’s policy choice is not undermined by the alleged efforts in Pennsylvania.
Though the Petitioners boast of efforts in Pennsylvania, they are silent regarding the steps
to promote broadband in the 49 other states. Without evidence of a nationwide effort to
promote broadband, the FCC concluded that a national approach would promote certainty
and predictability. 2 Rawle at 656 ¶ 790. In reaching this conclusion, the FCC expressed
concern regarding “variability and unpredictability” when broadband development is left
to the states. Id. at 657-58 ¶ 794.
The lone example of Pennsylvania, as a leader in developing broadband networks,
does little to undermine the FCC’s concern with variability among the states. The FCC
explained its preference for a national strategy to develop broadband, and the Petitioners’
example of Pennsylvania does not render the FCC’s strategy arbitrary or capricious.
25
c. Section 251(d)(3)
The Petitioners further rely on 47 U.S.C. § 251(d)(3) to rebut the FCC’s
interpretation that § 251(b)(5) includes intrastate traffic between IXCs and LECs. Joint
Intercarrier Compensation Principal Br. of Pet’rs at 16-18 (July 17, 2013). Section
251(d)(3), entitled “Preservation of State access regulations,” prevents the FCC from
preempting state commissions’ regulations, orders, or policies that: (1) establish LEC
access and interconnection obligations, (2) are consistent with the requirements of § 251,
and (3) do not substantially prevent implementation of the requirements of § 251 and the
purposes of the Act. 47 U.S.C. § 251(d)(3). According to the Petitioners, § 251(d)(3)
prevents the FCC from preempting state access charges. Joint Intercarrier Compensation
Principal Br. of Pet’rs at 16-18 (July 17, 2013).
This argument is unpersuasive. The FCC reasonably concluded that § 251(d)(3)
does not speak to the preemptive effect of § 251(b)(5) or limit the permissible
interpretations of the statute or the FCC’s rulemaking authority. 2 Rawle at 644 n.1374, 644-
45 ¶ 767. The FCC has interpreted intrastate traffic as subject to § 251(b)(5); and, in
exercising the grant of power under § 251(b)(5), the FCC is establishing a national bill-
and-keep policy for all access traffic.
This is the context for our consideration of § 251(d)(3). As noted above,
§ 251(d)(3) preserves state regulations only if they would not substantially prevent
implementation of § 251. And, in exercising its powers under § 251, the FCC views
26
intrastate access charges as an obstacle to reform. Id. at 644-45 ¶ 767. That finding is
enough for the FCC to exercise its authority to preempt intrastate access charges under
§ 251(d)(3). See Qwest Corp. v. Ariz. Corp. Comm’n, 567 F.3d 1109, 1120 (9th Cir.
2009) (holding that state requirements were inconsistent with, and prevented
implementation of, § 251 because the FCC had precluded the requirements); Ill. Bell Tel.
Co. v. Box, 548 F.3d 607, 611 (7th Cir. 2008) (concluding that § 251(d)(3) did not save
state regulations that were contrary to the FCC’s determinations). As a result, § 251(d)(3)
does not preclude the FCC’s broad interpretation of its authority under § 251(b)(5).
d. Section 251(g)
Section 251(g) preserved existing obligations to provide access and
interconnection, along with compensation, until they are explicitly superseded by FCC
regulations. 47 U.S.C. § 251(g). This section does not undermine the FCC’s
interpretation of § 251(b)(5).
Both sides point to § 251(g) as support for their interpretations of § 251(b)(5). The
Petitioners argue that § 251(g) involved only interstate traffic, reasoning that when this
section took effect, no court or agency decision had purported to give the FCC
jurisdiction over intrastate traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs
at 23-25 (July 17, 2013). The FCC argues the opposite: that § 251(g) shows that
Congress contemplated FCC regulation over intrastate traffic. Federal Resp’ts’ Final
Resp. to the Joint Intercarrier Compensation Principal Br. of Pet’rs at 18 (July 29, 2013).
27
We need not choose between these conflicting interpretations of § 251(g) because the
FCC did not rely on this section. See 2 Rawle at 644 n.1374 (noting that the FCC “need not
resolve [the] issue, because all traffic terminated on an LEC [would], going forward, be
governed by section 251(b)(5) regardless of whether section 251(g) previously covered
the state intrastate access regime”).
And the Petitioners’ argument would not require us to narrow the scope of traffic
governed by § 251(b)(5). At most, the Petitioners’ argument would lead to a narrow
reading of § 251(g), for it would address only the viability of agreements involving
intrastate traffic until the FCC acted. This reading would leave § 251(g) silent on the
continued viability of compensation arrangements for intrastate traffic.
Under the first step of Chevron, we are called upon to decide whether the FCC’s
interpretation of § 251(b)(5) is unambiguously foreclosed by § 251(g). For the sake of
argument, we can assume that the Petitioners are correct in stating that § 251(g) did not
address intrastate traffic. If that is true, however, § 251(g) could not act as an
unambiguous expression of congressional intent on the extent of the FCC’s authority over
intrastate traffic.
The resulting issue is whether the FCC’s broad reading of § 251(b)(5) is
permissible notwithstanding § 251(g). We conclude that the FCC’s interpretation is
permissible. Section 251(g) provides only for the continuation of arrangements for access
charges under any consent decree existing when the 1996 statute went into effect. See 47
28
U.S.C. § 251(g). But the statute also provides that these arrangements would end when
the FCC acted. See id.
When Congress enacted the 1996 law, the D.C. District Court had required access
charges for calls that were both interstate and intrastate. United States v. AT&T, 552 F.
Supp. 131, 169 n.161 (D.D.C. 1982). Under § 251(g), these arrangements would end
when they were superseded by the FCC. 47 U.S.C. § 251(g). In light of § 251(g), the
FCC could reasonably conclude that it had the power to supersede the arrangements for
access charges that were both interstate and intrastate because all had arisen out of the
same consent decree. See 2 Rawle at 644 n.1374.
This interpretation was not the only one possible. For example, one could also
view § 251(g) to reflect the widespread assumptions in 1996 that states (not the FCC)
regulated intrastate access. But under the second step of Chevron, the FCC’s contrary
reading of § 251(g) was at least reasonable. As a result, we defer to the FCC’s reading of
§ 251(g).
3. FCC Authority Over Intrastate Origination Charges
With this reading, we conclude that the FCC enjoys at least some regulatory
authority over intrastate traffic between LECs and IXCs. But we must address the scope
of this authority, for the Petitioners argue that it would not extend to origination charges.
This argument is three-fold: (1) Originating access traffic is exempt from reciprocal
compensation because § 251(b)(5) refers only to “transport and termination,” not
29
“origination”; (2) the FCC failed to acknowledge that it had changed its definitions of
“transport” and “termination”; and (3) the FCC’s preemption of originating access
charges is arbitrary and capricious because it does not allow originating LECs to recover
their origination costs. Joint Intercarrier Compensation Principal Br. of Pet’rs at 25-28
(July 17, 2013). The first two challenges lack merit, and the third challenge is not ripe.
a. Section 251(b)(5) and Originating Access Traffic
In the Order, the FCC capped charges for originating access. 2 Rawle at 836-37
¶ 1298, 661 ¶ 801, 661 Figure 9, 667 ¶ 22. The Petitioners deny regulatory authority over
origination charges even under the FCC’s interpretation of § 251(b)(5). According to the
Petitioners, originating access charges are not subject to § 251(b)(5) because it refers to
“transport and termination,” but not “origination.” Joint Intercarrier Compensation
Principal Br. of Pet’rs at 26 (July 17, 2013) (citing 47 U.S.C. § 251(b)(5)). We reject the
Petitioners’ interpretation of § 251(b)(5).
This section authorizes arrangements for the reciprocal compensation of “transport
and termination.” Both sides point to the omission of origination charges.
For their part, the Petitioners suggest that the omission leaves the FCC powerless
to reform origination charges. Id. The FCC argues the opposite: If § 251(b)(5)
authorizes arrangements for reciprocal compensation involving transport and termination,
the omission of origination charges must have meant that LECs are unable to charge
access fees for origination. R. at 669 ¶ 817 (citing In re Implementation of the Local
30
Competition Provisions in the Telecomms. Act of 1996, 11 FCC Rcd. 15499, 16016
¶ 1042 (1996)); Federal Resp’ts’ Final Resp. to the Joint Intercarrier Compensation
Principal Br. of Pet’rs at 21-22 (July 29, 2013).
This view is supported by “a venerable canon of statutory construction,” “[t]he
maxim ‘expressio unius est exclusio alterius’—which translates roughly as ‘the
expression of one thing is the exclusion of other things.’” United States v. Hernandez-
Ferrer, 599 F.3d 63, 67-68 (1st Cir. 2010).
The FCC’s interpretation reflects a reasonable approach. The Petitioners state that
for toll calls, carriers must perform three types of functions: origination, transport, and
termination. Joint Intercarrier Compensation Principal Br. of Pet’rs at 26 (July 17, 2013).
Two of the three functions are included in § 251(b)(5). The single omission could
suggest that Congress intended to exclude “origination” from the duty to provide
compensation. Because the FCC’s interpretation of § 251(b)(5) is reasonable, it is
entitled to deference under Chevron. Thus, we reject the Petitioners’ challenge to FCC
regulation of origination charges.
b. The FCC’s Interpretations of “Transport” and
“Termination”
The Petitioners argue that the FCC has arbitrarily changed its definition of the
statutory term “termination” without acknowledging the change. Joint Intercarrier
Compensation Principal Br. of Pet’rs at 12-13 (July 17, 2013). According to the
31
Petitioners, the FCC previously defined the term “termination” in a way that excluded
“origination.” Id. at 13.
This argument is incorrect, for the FCC has not changed its definition of
“termination.” 2 Rawle at 642 ¶ 761. Instead, the FCC has changed its view regarding the
traffic that is subject to § 251(b)(5). Id. With this change, the FCC provided an
explanation. Id. at 642-43 ¶¶ 761-64.
In light of this explanation, we reject the Petitioners’ challenge. It presupposes
that the FCC has redefined the terms “transport” and “termination” without saying why.
But these definitions have not changed. Instead, the FCC has refocused on the statutory
term “telecommunications,” concluding that it is this term—rather than “transport” or
“termination”—that determines the scope of § 251(b)(5). Id. at 647 ¶ 761. By focusing
on the term “telecommunications” and explaining this focus, the FCC stated why it was
reassessing the scope of § 251(b)(5); accordingly, we reject the Petitioners’ challenge.
c. The Purported Prohibition of Originating Access Charges
The Petitioners also argue that the prohibition on originating access charges is
arbitrary and capricious because the FCC did not explain why the “prohibition on
origination charges applies where the originating LEC receives no further compensation
from its end-user.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 27-28 (July
17, 2013). This challenge is not ripe.
32
The FCC has announced that it will eventually abolish originating access charges
and has capped originating access charges at current levels. See 2 Rawle at 650 ¶¶ 777-78. In
the interim, the FCC has sought further comment “on other possible approaches to
originating access reform, including implementation issues and our legal authority to
adopt any such reforms.” Id. at 839 ¶ 1305. Because the FCC has not yet abolished
originating access charges, this challenge is unripe. See AT&T Corp. v. Iowa Utils. Bd.,
525 U.S. 366, 386 (1999) (“When . . . there is no immediate effect on the plaintiff’s
primary conduct, federal courts normally do not entertain pre-enforcement challenges to
agency rules and policy statements.”).
C. Bill-and-Keep as a Default Methodology
The FCC not only extended its regulations to all access traffic, but also began a
transition to bill-and-keep as the default standard for reciprocal compensation. 2 Rawle at
646 ¶ 769. According to the FCC’s interpretation of its authority, § 201(b) allows the
adoption of rules and regulations to implement § 251(b)(5). Id. at 646 ¶ 770. In
implementing § 251(b)(5), the FCC considers bill-and-keep to be “just and reasonable”
under § 201(b); thus, the FCC concluded it has statutory authority to implement bill-and-
keep as the default reciprocal compensation standard for all traffic subject to § 251(b)(5).
Id. at 646-47 ¶¶ 771-72.
In arriving at this conclusion, the FCC addressed opposition based on §§ 252(c)
and 252(d)(2). Id. at 647-48 ¶ 773. Section 252 does two things: (1) It preserves state
33
rate-setting authority in state commission arbitrations involving ILECs and other carriers;
and (2) it defines “just and reasonable” rates. 47 U.S.C. § 252.
For two reasons, the FCC concluded that these provisions did not prevent adoption
of a bill-and-keep methodology. 2 Rawle at 647-48 ¶¶ 774-75. First, the FCC pointed to
AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 384 (1999), which authorizes the FCC to
establish a pricing methodology for state commissions to apply in these arbitrations. 2 Rawle
at 648 ¶ 773. In choosing among pricing methodologies, the FCC found specific
approval of bill-and-keep in 47 U.S.C. § 252(d)(2)(B). Id. at 648-49 ¶ 775. Second, the
FCC found that bill-and-keep is just and reasonable under § 252(d)(2) because it allows
carriers to recover their transport and termination costs from their end-users. Id. at 648-
49 ¶¶ 775-76.
Both conclusions are criticized by the Petitioners. Joint Intercarrier Compensation
Principal Br. of Pet’rs at 28-45 (July 17, 2013). They argue that: (1) bill-and-keep
effectively sets a zero rate that infringes on state rate-setting authority under § 252(d), and
(2) bill-and-keep does not lead to just and reasonable intercarrier compensation rates
under §§ 252(d)(2)(A) and 201(b). Id. at 28-45.
We apply Chevron and defer to the FCC’s interpretation of its authority to enact
bill-and-keep as the default standard for reciprocal compensation.
34
1. Consideration Under § 252
The Petitioners contend that the FCC cannot establish bill-and-keep as a
methodology because it intrudes on state rate-setting authority under § 252. Id. at 28-31.
State authority is preserved in three parts of § 252: (b), (c), and (d).
In (b), Congress preserved the authority of states in arbitrating interconnection
agreements between ILECs and other carriers. See 47 U.S.C. § 252(b).
In (c), § 252 required state commissions—not the FCC—to “establish any rates for
interconnection, services, or network elements according to subsection (d) of this
section.” Id. at § 252(c)(2).
And in (d), Congress preserved state arbitration authority over “[c]harges for the
transport and termination of traffic.” Id. § 252(d)(2). Under this section, a state
commission cannot consider reciprocal compensation terms and conditions just and
reasonable unless:
(i) such terms and conditions provide for the mutual and
reciprocal recovery by each carrier of costs associated with
the transport and termination on each carrier’s network
facilities of calls that originate on the network facilities of the
other carrier; and
(ii) such terms and conditions determine such costs on the basis
of a reasonable approximation of the additional costs of
terminating such calls.
Id. at § 252(d)(2)(A). Though subsection (d) preserves state arbitration authority over
charges, it also expressly allows approval of bill-and-keep arrangements, prohibiting a
35
construction that would “preclude arrangements that afford the mutual recovery of costs
through the offsetting of reciprocal obligations, including arrangements that waive mutual
recovery (such as bill-and-keep arrangements).” Id. at § 252(d)(2)(B)(i).
The FCC has focused on this language, pointing out that Congress specifically
stated that bill-and-keep arrangements are considered “just and reasonable.” 2 Rawle at 648-
49 ¶ 775.
The Petitioners argue that the FCC has misinterpreted § 252(d)(2)(B)(i), stating
that it simply requires carriers to voluntarily waive payments and submit to bill-and-keep
arrangements. Joint Intercarrier Compensation Principal Br. of Pet’rs at 36-37 (July 17,
2013). This interpretation conflicts with the statute. Section 252(d)(2)’s pricing
standards apply only to terms imposed through compulsory arbitration. See 47 U.S.C.
§ 252(c). Voluntarily negotiated terms can contradict the statutory requirements and are
not subject to this pricing provision. See id. at § 252(a)(1). Thus, the FCC was entitled to
reject the Petitioners’ narrow interpretation of § 252(d)(2).
Because the statute expressly authorizes bill-and-keep arrangements along with
state rate-setting authority, we believe the FCC’s interpretation of § 252(d)(2) is
reasonable and entitled to deference under Chevron. See City of Arlington v. FCC, __
U.S. __, 133 S. Ct. 1863, 1874 (2013).
Under Section 252(d)(2), states continue to enjoy authority to arbitrate “terms and
conditions” in reciprocal compensation. See 47 U.S.C. § 252(d)(2). For example, even
36
under bill-and-keep arrangements, states must arbitrate the “edge” of carrier’s networks.
2 Rawle at 649-50 ¶ 776. This reservoir of state authority can be significant.
The “edge” of a carrier’s network consists of the points “at which a carrier must
deliver terminating traffic to avail itself of bill-and-keep.” Id. The location of the “edge”
of a carrier’s network determines the transport and termination costs for the carrier.
The impact is illustrated in Diagram 6. In this scenario, Carrier A has low
transport and termination costs because it needs only to transport the calls a short distance
(between Points A and B).
A different delineation of the edge could significantly increase Carrier A’s costs.
This impact is illustrated in Diagram 7, which would reflect a state commission’s decision
to set the edge of Carrier A’s network at Point D rather than Point A:
37
The FCC reasonably determined that by continuing to set the network “edge,”
states retain their role under § 252(d) in “determin[ing] the concrete result in particular
circumstances.” Id. at 649-50 ¶ 776 (quoting AT&T v. Iowa Utils. Bd., 525 U.S. 366, 384
(1999)).
The Petitioners disagree. In their view, AT&T Corp. v. Iowa Utilities Board, 525
U.S. 366 (1999), and Iowa Utilities Board v. Federal Communications Commission, 219
F.3d 744 (8th Cir. 2000), rev’d in part by Verizon Commc’ns. Inc. v. FCC, 535 U.S. 467
(2002), preserved the states’ role in “establishing the actual reciprocal compensation rate,
not finding points on a network at which a carrier must deliver traffic.” Joint Intercarrier
Compensation Principal Br. of Pet’rs at 29-31 (July 17, 2013). The Petitioners argue that
bill-and-keep effectively sets the intercarrier compensation rate at zero and intrudes on
38
state rate-setting authority.5 Id. at 29-30 (citing Iowa Utils. Bd., 219 F.3d at 757, rev’d in
part, Verizon Commc’ns, Inc. v. FCC, 535 U.S. 467 (2002)).
We reject the Petitioners’ broad reading of AT&T and Iowa Utilities Board.
In AT&T, the Supreme Court upheld the FCC’s rule-making authority over §§ 251
and 252. AT&T, 525 U.S. at 378. Interpreting § 252(c)(2)’s reservation of rate-setting
authority to state commissions, the Court upheld the FCC’s requirement that state
commissions use a particular methodology for prices involving interconnection and
5
In their reply brief, the Petitioners also challenge the FCC’s rate limitations during
the transition to bill-and-keep. Joint Intercarrier Compensation Reply Br. of Pet’rs at 15
(July 31, 2013). This challenge is new. In their opening brief, the Petitioners did not
challenge the FCC’s decision to prescribe interim rates. Instead, the Petitioners
challenged only the FCC’s final prescription of bill-and-keep as a methodology for all
traffic. Indeed, the term “interim rates” was mentioned just once in the Petitioners’
opening brief. Joint Intercarrier Compensation Principal Br. of Pet’rs at 40 (July 17,
2013). And that reference came in a quotation that the Petitioners used for an unrelated
argument, addressing the applicability of § 252(d)(2)(A) to interstate intercarrier
compensation rates under § 201. See id. Because “[a]rguments inadequately briefed in
the opening brief are waived,” Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th
Cir. 1998), we would ordinarily decline to reach the Petitioners’ new contention in their
reply brief regarding the invalidity of the FCC’s interim rates. See Joint Intercarrier
Compensation Reply Br. of Pet’rs at 14-15 (July 31, 2013).
Though the Petitioners did not challenge interim rates in their opening brief, the
LEC Intervenors did. See Incumbent Local Exchange Carrier Intervenors’ Br. in Supp. of
Pet’rs at 8 (July 15, 2013) (“Nonetheless, the Order end-runs the statutory directive by
adopting a methodology that prescribes specific transition rates plus a specific ultimate
rate of zero.”). But intervenors generally cannot raise new issues. Arapahoe Cnty. Pub.
Airport Auth. v. FAA, 242 F.3d 1213, 1217 n.4 (10th Cir. 2001). This prohibition is
prudential and should be avoided only in “extraordinary” cases. Id. Because we are
“hesitant to definitively opine on such [a] legally significant issue[] when [it has] received
such cursory treatment,” United States v. Gordon, 710 F.3d 1124, 1150 (10th Cir. 2013),
we decline to disregard the general rule. As a result, we do not reach the Petitioners’
arguments in their reply brief on the validity of the FCC’s interim rates.
39
unbundled access. See id. at 384-85. In doing so, the Supreme Court concluded that the
FCC has rulemaking authority to implement a pricing methodology for the states to
implement, “determining the concrete result in particular circumstances. That is enough
to constitute the establishment of rates.” Id. at 384.
In Iowa Utilities Board, the Eighth Circuit Court of Appeals applied judicial
estoppel to strike down the FCC’s proxy prices for interconnection, network element
charges, wholesale rates, and transport and termination rates. 219 F.3d at 756-57. The
court did not distinguish between reciprocal compensation rates and interconnection,
network element charges, and wholesale rates. Id. Instead, the court held that “[s]etting
specific prices goes beyond the FCC’s authority to design a pricing methodology and
intrudes on the states’ right to set the actual rates pursuant to § 252(c)(2).” Id. at 757.
Against the backdrop of AT&T and Iowa Utilities Board, the FCC reasonably
concluded that bill-and-keep involves a permissible methodology notwithstanding the
states’ authority to set rates under § 252(c). The Petitioners assume that the state
commissions have authority to require intercarrier compensation, for the states can set
“rates” for interconnection under § 252(c)(2). This assumption is belied by § 252(d)(2),
which governs state arbitrations over the “terms and conditions for reciprocal
compensation.” 47 U.S.C. § 252(d)(2).
The phrase “terms and conditions” does not necessarily require intercarrier
compensation, for the statute expressly provides that § 252(d)(2)(A) should “not be
40
construed . . . to preclude . . . bill-and-keep arrangements.” Id. at § 252(d)(2)(B)(i). If the
states’ rate-setting authority required carriers to pay one another, the statutory approval of
bill-and-keep arrangements would not make sense. See The Telecomms. Act of 1996:
Law & Legislative History 6 (eds. Robert E. Emeritz, Jeffrey Tobias, Kathryn S. Berthat,
Kathleen C. Dolan, & Michael M. Eisenstadt 1996) (stating that under § 251(b), “each
LEC must . . . enter into reciprocal compensation arrangements with interconnecting
carriers, a requirement that can be met by ‘bill-and-keep’ arrangements”). Thus, the FCC
reasonably interpreted the statute to allow the elimination of any intercarrier
compensation through the adoption of bill-and-keep.
As the Petitioners argue, this methodology would eliminate the existence of any
“rates” for intercarrier compensation. With elimination of these “rates,” the state
commissions would have less to arbitrate under § 252(c). But that is the product of the
statutory approval of “bill-and-keep” rather than an invention of the FCC. Through bill-
and-keep, state commissions will continue to define the edges of the networks; that role
preserves state regulatory authority over the “terms and conditions” of reciprocal
compensation. There is no violation of § 252(c).
2. The “Just and Reasonable” Rate Requirement in §§ 201(b) and
252(d)(2)
The Petitioners point to 47 U.S.C. §§ 201(b) and 252(d)(2), arguing that they
require rates to be “just and reasonable.” Joint Intercarrier Compensation Principal Br. of
Pet’rs at 39-40 (July 17, 2013); see 47 U.S.C. §§ 201(b), 252(d)(2). Invoking these
41
sections, the Petitioners argue that the FCC’s bill-and-keep methodology is not “just and
reasonable.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 39-42 (July 17,
2013). This argument is invalid under Chevron.
According to the FCC, bill-and-keep allows for just and reasonable rates by
providing for the “mutual and reciprocal recovery of costs through the offsetting of
reciprocal obligations.” Federal Resp’ts’ Final Resp. to the Joint Intercarrier
Compensation Principal Br. of Pet’rs at 33-34 (July 29, 2013). Under a bill-and-keep
arrangement, each carrier obtains an “in kind” exchange. To illustrate:
In Diagram 8, Carrier 1 transports and terminates calls that originate on Carrier 2’s
network. In exchange, Carrier 2 transports and terminates calls that originate on Carrier
1’s network. Both parties obtain reciprocal benefits, and both can recover their additional
costs from their end-users. 2 Rawle at 648-49 ¶ 775 & n.1408, 649-50 ¶ 776.
The FCC reasoned that under this methodology, a carrier that terminates a call that
originates with another carrier performs a service for its end-user, the call’s recipient.
42
Because both end-users benefit from the call, the end-users should split the cost and pay
their respective carriers for the call. Through this in-kind exchange of services, bill-and-
keep allows carriers to obtain compensation for the call from their own customers. Id. at
640-41 ¶¶ 756-57, 648 n.1408, 649 n.1410.
The Petitioners contend that bill-and-keep leads to unreasonable rates for two
reasons: (1) Carriers have a statutory right to payment from other carriers; and (2)
reciprocal compensation arrangements do not allow for sufficient cost recovery. Joint
Intercarrier Compensation Principal Br. of Pet’rs at 34-38, 41-43 (July 17, 2013).
a. Consideration of a Statutory Right to Payments from
Other Carriers
The first contention involves a statutory right to payments from other carriers. Id.
at 42. For this contention, however, the Petitioners do not point to any statutory
language. Instead, they rely on Louisiana Public Service Commission v. Federal
Communications Commission, 476 U.S. 355, 364-65 (1986), for the proposition that
carriers are entitled to recover their reasonable expenses and a fair return on their
investment through customer rates. Id. at 41. But Louisiana Public Service Commission
requires only that carriers recover their reasonable expenses and a fair return on their
investment from their customers and does not specify the source of this recovery. La.
Pub. Serv. Comm’n, 476 U.S. at 364-65. Therefore, the FCC rationally concluded that §§
201(b) and 252(d)(2) are satisfied by an in-kind exchange of services. See id. at 646-47
¶ 771, 649-650 ¶ 776.
43
b. Sufficiency of Cost Recovery
Under Section 252(d)(2)(A)(ii), state commissions can consider terms and
conditions just and reasonable only if they permit recovery by each carrier of costs based
on a “reasonable approximation of the additional costs of terminating such calls.” 47
U.S.C. § 252(d)(2)(A)(ii). Pointing to this provision, the Petitioners argue that: (1) the
FCC was inconsistent by acknowledging that carriers incur costs for termination and
generally cannot raise end-user rates because of competition, (2) the FCC failed to
explain its departure from earlier reliance on termination costs, and (3) bill-and-keep is
not “just and reasonable” because it does not allow sufficient recovery of costs. Joint
Intercarrier Compensation Principal Br. of Pet’rs at 34-38 (July 17, 2013). These
arguments are unpersuasive.
Bill-and-keep anticipates that carriers will recover their costs from their end-users.
2 Rawle at 648 ¶ 775 & n.1408, 649-50 ¶ 776. States are free to set end-user rates, and the
Order does not prevent states from raising end-user rates to allow a fair recovery of
termination costs. See id. at 649-50 ¶ 776.
The Petitioners’ fall-back position is that the FCC failed to explain its change in
position. Joint Intercarrier Compensation Principal Br. of Pet’rs at 37-38 (July 17, 2013).
We disagree, for the FCC pointed to new analyses showing that both parties benefit from
a call and that bill-and-keep allows for mutual recovery of costs. 2 Rawle at 640-41 ¶¶ 755-
59.
44
Finally, the Petitioners contend that bill-and-keep violates § 252(d)(2) by failing to
explicitly provide for cost recovery. Joint Intercarrier Compensation Principal Br. of
Pet’rs at 37-38 (July 17, 2013). We reject this argument for two reasons. First, as
discussed in Chief Judge Briscoe’s separate opinion, the FCC reforms include funds for
carriers that would otherwise lose revenues. 2 Rawle at 683-88 ¶¶ 847-53. Second, the FCC
has found that carriers can offset lost revenue by increasing charges on end-users. Id. at
403 ¶ 34, 648-49 ¶ 775 n.1408. The FCC’s rationale involves a reasonable predictive
judgment, warranting our deference. See Ace Tel. Ass’n v. Koppendrayer, 432 F.3d 876,
880 (8th Cir. 2005) (holding that a reciprocal compensation rate of zero did not violate
the “just and reasonable” requirement in 47 U.S.C. § 252(d)(2)); MCI Telecomms. Corp.
v. U.S. W. Commc’ns, 204 F.3d 1262, 1271-72 (9th Cir. 2000) (upholding a determination
that bill-and-keep was “just and reasonable” under 47 U.S.C. § 252(d)(2)(A)). As a
result, we conclude that the FCC did not arbitrarily or capriciously fail to provide for cost
recovery.
D. Authority for the States to Suspend or Modify the New Requirements
The Petitioners also argue that the FCC has assumed powers reserved to state
commissions under 47 U.S.C. § 251(f)(2). This section empowers state commissions to
suspend or modify requirements under § 251(b) for small LECs that would otherwise
incur an undue burden. 47 U.S.C. § 251(f)(2).
45
The FCC addressed § 251(f)(2), cautioning “states that suspensions or
modifications of the bill-and-keep methodology . . . would . . . re-introduce regulatory
uncertainty . . . and undermine the efficiencies gained from adopting a uniform national
framework.” 2 Rawle at 671-72 ¶ 824. In light of this concern, the FCC discouraged grants
of relief under § 251(f)(2), stating that any suspension or modification of bill-and-keep
would likely undermine the public interest. Id. The FCC added that it would “monitor
state action” and might “provide specific guidance” in the future. Id.
The Petitioners object to this admonition, contending that the FCC prejudged state
commission decisions and effectively prohibited states from modifying the bill-and-keep
regime. Joint Intercarrier Compensation Principal Br. of Pet’rs at 46-48 (July 17, 2013).
This challenge is not ripe.
The FCC’s cautionary statement does not constitute a binding rule; instead, it
reflects only a prediction that applications for suspension or modification would fail
under the statutory standard. See 2 Rawle at 671-72 ¶ 824. Because this prediction does not
“impose an obligation, deny a right or fix some legal relationship,” the Petitioners’
challenge is premature. Chi. & S. Air Lines v. Waterman S.S. Corp., 333 U.S. 103, 112-
13 (1948); see Nat’l Ass’n of Broadcasters v. FCC, 569 F.3d 416, 425 (D.C. Cir. 2009)
(holding that a challenge to the FCC’s “prediction,” which involved future waiver
requests, was not ripe); see also Minn. Pub. Utils. Comm’n v. FCC, 483 F.3d 570, 582-83
46
(8th Cir. 2007) (holding that a state regulator’s challenge to an FCC order was not ripe
because it involved only a prediction of what the FCC would do in the future).
III. Challenges to Cost Recovery as Arbitrary and Capricious
The Petitioners have challenged not only the ultimate goal of the reforms, but also
the way in which the FCC chose to transition toward a national bill-and-keep
methodology.
A. The Transitional Plan
Perceiving that an immediate change would unduly disrupt the market, the FCC
elected to gradually move toward a bill-and-keep methodology. 2 Rawle at 659-60 ¶ 798,
661-62 ¶ 801 & Figure 9. The FCC decided to transition terminating access charges to
bill-and-keep over a six-year period for price cap carriers and over a nine-year period for
rate-of-return carriers. See id. at 661-62 ¶ 801 & Figure 9. The FCC limited interstate
originating access charges to existing levels, but has not yet decided how to transition
these charges to bill-and-keep. See id. at 669 ¶¶ 817-18.
The FCC created a federal recovery mechanism to ease the transition to bill-and-
keep for incumbent LECs. See id. at 683 ¶ 847. This recovery mechanism is not revenue
neutral, for the FCC helps incumbent LECs recover only part of their lost revenues. See
id. at 684-85 ¶ 851, 723-24 ¶ 924. The amount of the recovery will be based on existing
trends that show declining revenues. See id. at 684-85 ¶ 851. For price-cap carriers, the
recovery generally starts at 90% of 2011 revenues and declines 10% per year. Id. For
47
rate-of-return carriers, the recovery starts at 2011 revenues for switched access and net
reciprocal compensation. Id. When the FCC acted, rate-of-return carriers were
experiencing yearly drops in revenue of: (1) 3% for interstate switched access, and (2)
10% for intrastate intercarrier compensation. Choosing a benchmark between 3% and
10%, the FCC chose to reduce the eligible recovery for rate-of-return carriers by 5% each
year. Id.
Under the FCC’s recovery mechanism, carriers can recover part of their lost
revenues through: (1) a federally tariffed Access Recovery Charge on end-users, and (2)
supplemental support from the Connect America Fund. Id. at 685-88 ¶¶ 852-53. The
Access Recovery Charge is limited to prevent individual end-users from paying excessive
rates and is allocated at a carrier’s holding-company level. Id. at 685-688 ¶ 852, 717
¶ 910. To obtain supplemental support from the Connect America Fund, carriers must
meet certain broadband obligations. Id. at 721-22 ¶ 918.
Although the FCC predicts this recovery mechanism will suffice for regulated
services, carriers can request additional support and waiver of their broadband obligations
through a “Total Cost and Earnings Review” process. See id. at 723-24 ¶ 924, 725 ¶ 926.
This process allows a carrier to show that the standard recovery mechanism is “legally
insufficient” and “threatens [the carrier’s] financial integrity or otherwise impedes [its]
ability to attract capital.” Id. at 723-25 ¶¶ 924-25. The FCC regards this process as a
48
sufficient safety valve to prevent rates from becoming confiscatory. See id. at 724 ¶ 924
& n.1834.
The recovery mechanism will phase out over time. See id. at 684-85 ¶ 851. As it
phases out, carriers will recover their network costs from end-users and the Universal
Service Fund. Id. at 403 ¶ 34. But carriers will remain able to seek additional support
through the FCC’s Total Cost and Earnings Review process. See id. at 684-85 ¶ 851, 724
¶ 924.
B. The Petitioners’ Challenges
The Petitioners raise two types of APA challenges to the FCC’s recovery
mechanism and final bill-and-keep framework. First, the Petitioners argue that the FCC
failed to apportion costs, as required in Smith v. Illinois Telephone Co., 282 U.S. 133
(1930). Joint Intercarrier Compensation Principal Br. of Pet’rs at 50-51 (July 17, 2013).
Second, the Petitioners challenge the sufficiency of the recovery mechanism for carriers
losing revenue under the reforms. Id. at 53-54, 56.
C. Standard of Review
In challenging the interim measures and final bill-and-keep framework, the
Petitioners focus on the reasonableness of the FCC’s actions; thus, we review these
challenges under the APA. Id.; see 5 U.S.C. § 706(2)(A). For this review, we consider
whether the FCC acted arbitrarily, capriciously, with an abuse of discretion, or otherwise
in violation of the law. Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1045 (10th Cir.
49
2011). The regulations are presumptively valid, and the Petitioners bear the burden of
proof. Id. at 1046. We will uphold the regulations if the FCC has “examine[d] the
relevant data and articulate[d] a satisfactory explanation for its action including a rational
connection between the facts found and the choice made.” Id. (quoting Motor Vehicle
Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Agency action is
arbitrary and capricious only if the agency:
has relied on factors which Congress has not intended it to consider,
entirely failed to consider an important aspect of the problem,
offered an explanation for its decision that runs counter to the
evidence before the agency, or is so implausible that it could not be
ascribed to a difference in view or the product of agency expertise.
Motor Vehicle Mfrs. Ass’n, 463 U.S. at 43.
In reviewing the regulations, we can consider only the rationale articulated by the
agency. Licon v. Ledezma, 638 F.3d 1303, 1308 (10th Cir. 2011). But “we will uphold a
decision of less than ideal clarity if the agency’s path may reasonably be discerned.”
Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974); Licon,
638 F.3d at 1308.
Our review under the “‘arbitrary and capricious’ standard is particularly deferential
in matters implicating predictive judgments and interim regulations.” Rural Cellular
Ass’n v. FCC, 588 F.3d 1095, 1105 (D.C. Cir. 2009); see Sorenson Commc’ns, Inc., 659
F.3d 1035, 1046 (10th Cir. 2011) (substantial deference is appropriate for interim
ratemaking); accord Alenco Commc’n, Inc. v. FCC, 201 F.3d 608, 616 (5th Cir. 2000)
50
(review of transitional regulations is “especially deferential”). When we review the
FCC’s predictive judgment on a matter within its expertise and discretion, “complete
factual support in the record . . . is not possible or required.” FCC v. Nat’l Citizens
Comm. for Broad., 436 U.S. 775, 814 (1978).
D. Consideration of the Apportionment Requirement in Smith
The Petitioners argue that the FCC failed to apportion the costs attributable to
interstate and intrastate traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at
50-51, 54 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 5 (July
31, 2013). This argument is rejected.
1. The Apportionment Requirement
The apportionment requirement originated in Smith v. Illinois Bell Telephone Co.,
282 U.S. 133 (1930). There, a state commission set intrastate rates; but the district court
invalidated the rate schedule, reasoning that the rates were too low to allow the carriers to
recover their costs. Id. at 142, 146. In determining the sufficiency of the rates, the state
regulator and the district court assumed that the carriers used all of their property for
intrastate service. Id. at 144-46. But the carriers also used their facilities for interstate
service. Id. at 146-47. The Supreme Court viewed the district court’s conclusion as
flawed because it had failed to account for interstate service. Id. at 150-51. To determine
whether the intrastate rates were high enough, the district court had to decide which of the
51
carrier’s properties were used for intrastate service; otherwise, the court could not know
how much the carrier had to recoup for the cost of that property. Id. at 150-51, 162.
Smith’s protection is narrow: A regulator may not impose confiscatory rates,
assuming that a regulator in another jurisdiction will exercise its unilateral independent
authority to allow a fair recovery. Id. at 148-49.
2. Application of Smith to the FCC’s Recovery Mechanism
The Petitioners contend that the FCC failed to apportion costs between the
intrastate and interstate jurisdictions. Joint Intercarrier Compensation Principal Br. of
Pet’rs at 50-51, 54 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at
5 (July 31, 2013). According to the Petitioners, the failure to apportion costs renders the
FCC’s recovery mechanism inadequate because it: (1) requires recovery of intrastate
revenues through the interstate jurisdiction, and (2) does not provide sufficient recovery
of costs. Joint Intercarrier Compensation Principal Br. of Pet’rs at 54 (July 17, 2013); see
Joint Intercarrier Compensation Reply Br. of Pet’rs at 6 n.6 (July 31, 2013) (challenging
the recovery of intrastate costs through interstate charges).
We disagree. Smith requires jurisdictional separation to ensure that the regulator
sets rates based on costs of service in the regulator’s jurisdiction. Smith, 28 U.S. at 148-
49. The problem in Smith was that the state regulator had jurisdiction only for intrastate
service, but was setting rates based on the cost of both intrastate and interstate service.
Id. at 150-51, 162.
52
Our circumstances differ because the FCC enjoys authority to: (1) set interstate
rates, and (2) regulate access traffic that is either interstate or intrastate. Because the FCC
obtained regulatory authority over intrastate traffic, it can affect intrastate rates through
regulation. The FCC’s regulatory authority over intrastate traffic supports flexibility in
our application of Smith. See Lone Star Gas Co. v. Texas, 304 U.S. 224, 241 (1938)
(distinguishing Smith from the case of a federal agency acting within its authority); MCI
Telecomms. Corp. v. FCC, 750 F.2d 135, 141 (D.C. Cir. 1984) (“Smith appears to be
based on the limits of state jurisdiction, rather than on constraints imposed on federal
agencies by the due process clause.”).
Smith does not require the apportionment to be exact, for it requires “only
reasonable measures.” Smith, 282 U.S. at 150. When the FCC acts on an interim basis to
transition to a new regulatory structure, Smith is flexible in requiring “reasonable
measures.” See Rural Tel. Coal. v. FCC, 838 F.2d 1307, 1315 (D.C. Cir. 1988) (holding
that a cost allocation constituted a reasonable measure under Smith as “part of a
transitional process, and ‘[i]nterim solutions may need to consider the past expectations
of parties and the unfairness of abruptly shifting policies’”); MCI Telecomms. Corp., 750
F.2d at 141 (rejecting MCI’s challenge because Smith “was not considering the
constitutionality of an interim ratemaking solution”). This flexibility is particularly
appropriate when the FCC implements: “(a) an interim ratemaking solution (b) justified
53
by a substantial policy objective.” ACS of Anchorage, Inc. v. FCC, 290 F.3d 403, 408
(D.C. Cir. 2002).
The FCC’s transition plan appropriately allows recovery of lost intrastate revenues
through a federal recovery mechanism. By funding shortfalls for intrastate services, the
FCC did not leave LECs to obtain recovery from another jurisdiction. The situation in
Smith was the opposite, and the FCC’s recovery mechanism is valid under any reasonable
interpretation of Smith. See id. at 409-10.
3. Waiver of the Challenge to the Access Recovery Charge
The National Association of State Utility Consumer Advocates challenges the
Access Recovery Charge on two grounds: (1) The FCC did not analyze its authority to
implement the charge; and (2) the FCC acted arbitrarily and capriciously by allowing
carriers to pass along state-specific costs to customers in other states. National
Association of State Utility Consumer Advocates Principal Br. at 5-6, 11-14 (July 12,
2013). But we cannot reach these issues because they were not properly raised before the
FCC. See 47 U.S.C. § 405(a); Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215, 1227-28
(10th Cir. 2009).
The National Association contends that these issues were raised in the petition for
reconsideration filed by the Public Service Commission for the District of Columbia.
National Association of State Utility Consumer Advocates Reply Br. at 1 (July 31, 2013)
(citing 6 Rawle at 4046-53). It is true that the National Association’s second challenge was
54
raised in the D.C. Commission’s petition for reconsideration. 6 Rawle at 4049. But this
petition had not been decided when the present action began. See National Association of
State Utility Consumer Advocates Reply Br. at 2 (July 31, 2013).6 Thus, the National
Association cannot avoid waiver based on the D.C. Commission’s presentation of a
similar challenge. See Petroleum Commc’ns, Inc. v. FCC, 22 F.3d 1164, 1170-71 (D.C.
Cir. 1994).
4. Recovery of Interstate Costs through End-User Rates and
Universal Service Support
In their reply, the Petitioners challenge the FCC’s ultimate bill-and-keep
framework on grounds that it will require interstate cost recovery through local end-user
rates once the federal recovery mechanism phases out. Joint Intercarrier Compensation
Reply Br. of Pet’rs at 5-6 (July 31, 2013). According to the Petitioners, local end-user
rates are subject to the intrastate jurisdiction and cannot be used for interstate cost
recovery. Id.
This argument does not fit our facts. Bill-and-keep allows carriers to recover their
interstate costs not only from end-users, but also from the Universal Service Fund. See 2
6
The parties have not advised us of an eventual decision on the D.C. Commission’s
petition for reconsideration. But even if the FCC has eventually decided the petition for
reconsideration, the present challenge would have been premature. See TeleSTAR, Inc. v.
FCC, 888 F.2d 132, 134 (D.C. Cir. 1989) (per curiam) (“We hold . . . that when a petition
for review is filed before the challenged action is final and thus ripe for review,
subsequent action by the agency on a motion for reconsideration does not ripen the
petition for review or secure appellate jurisdiction.”); see also Council Tree Commc’ns,
Inc. v. FCC, 503 F.3d 284, 287 (3d Cir. 2007) (stating that because a petition for
reconsideration remained pending when the petition for review was filed, as well as the
time of the court’s eventual decision, the petition for review was “incurably premature”).
55
Rawle at 403 ¶ 34, 648-49 ¶ 775 n.1408. The FCC concluded that these sources can provide
carriers with a sufficient return without shifting the burden to another jurisdiction. Id. at
723-24 ¶ 924. This conclusion involved a reasonable predictive judgment.
Even if the prediction had been unwise, however, the FCC has not required
carriers to recover federal costs based on rates outside of the FCC’s jurisdiction. Thus,
we reject the Petitioners’ Smith challenge based on recovery of costs through local end-
user rates.
E. Challenges Involving the Adequacy of the Recovery Mechanism
The Petitioners also contend that the FCC arbitrarily and capriciously failed to
allow carriers to recover a fair return. Joint Intercarrier Compensation Principal Br. of
Pet’rs at 53-54, 56-57 (July 17, 2013). According to the Petitioners, the eligible recovery
declines precipitously at 5% per year, the recovery mechanism will not allow carriers to
recover even this amount, and the recovery mechanism will eventually disappear. Id.
With these limitations, the Petitioners argue that the FCC has capped other intercarrier
compensation rates and limited financial support. Id. With less revenue and inadequate
financial support, the Petitioners contend that future rates will be too low. Id. at 56. The
Court rejects the Petitioners’ argument as a facial challenge; as an as-applied challenge,
the issue is not ripe.
The facial challenge fails because the FCC’s Order will not necessarily lead to
confiscatory rates. The FCC has concluded that the telecommunications industry is
56
transitioning to IP networks, the bill-and-keep regime will advance that transition, and the
FCC’s funding mechanism will phase out at a slower rate than the baseline. 2 Rawle at 631
¶ 736, 707-08 ¶ 894. With these developments, the FCC could consider existing trends in
the marketplace and alternative opportunities for carriers to generate revenue.
With landline revenues in steady decline, the FCC concluded that its recovery
mechanism would fairly represent what carriers would have earned without the reforms.
Id. at 724 ¶ 924.
The FCC considered not only the downward trends in the market, but also other
opportunities for carriers to generate revenue. It is true that bill-and-keep will end
intercarrier compensation for transport and termination of switched access. Id. at 640
¶ 756. But the FCC reasoned that LECs can continue to collect compensation from other
carriers and that the reforms would improve productivity and decrease costs. Id. at 725-
26 ¶ 928. For example, incumbent LECs could continue to collect compensation for
originating access and dedicated transport. Id. With continuation of these charges, the
FCC projected gains in productivity and decreases in expenses. Id. at 726-27 ¶¶ 929-30.
The FCC’s reasoning does not suffer any facial flaws, and we reject the Petitioners’ facial
challenge.
We also decline to entertain the as-applied challenge because it is not ripe. When
a carrier faces an insufficient return, it can seek greater support under the Total Cost and
Earnings Review Process. Id. at 723-26 ¶¶ 924-28. Until this process is invoked, the as-
57
applied challenge is premature. If the FCC imposes confiscatory rates, carriers could then
bring as-applied challenges. See Verizon Commc’n, Inc. v. FCC, 535 U.S. 467, 526-27,
528 n.39 (2002).
IV. Procedural Irregularities in the Rulemaking Process
The Petitioners also challenge the Order on due-process grounds.
A. The FCC Proceedings
The FCC issued the Order after four formal notices and a lengthy rulemaking
process. In re Universal Serv. Reform Mobility Fund, 25 FCC Rcd. 14716 (2010); In re
Connect America Fund, 26 FCC Rcd. 4554 (2011); Further Inquiry into Tribal Issues
Relating to Establishment of a Mobility Fund, 26 FCC Rcd. 5997 (2011); Further Inquiry
Into Certain Issues in the Universal Serv.-Intercarrier Compensation Transformation
Proceeding, 26 FCC Rcd. 11112 (2011). Through that process, the FCC obtained
hundreds of comments and thousands of ex parte submissions. See 2 Rawle at 398 ¶ 12,
1029-45.
In ultimately determining how to proceed, the FCC relied on a plan (called the
“ABC Plan”) proposed by six price-cap carriers in response to the FCC’s 2011 notice.
See, e.g., id. at 445-46 ¶ 142. The FCC’s final notice requested additional comment on
the ABC Plan. 1 Rawle at 290. For this plan, the FCC provided a three-week notice and
comment period, followed by a 13-day reply period. See id. at 290, 378.
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The FCC rulemaking proceedings were “permit-but-disclose” proceedings. Id. at
26-27 ¶ 65; see 47 C.F.R. § 1.1200(a). In these proceedings, “ex parte presentations to
Commission decision-making personnel are permissible but subject to certain disclosure
requirements.” 47 C.F.R. § 1.1200; see EchoStar Satellite LLC v. FCC, 457 F.3d 31, 39
(D.C. Cir. 2006). Thus, following ex parte presentations, the proponents must place
copies of all written ex parte presentations in the record and file written summaries of all
data and arguments presented in oral ex parte presentations. See 47 C.F.R.
§ 1.1206(b)(1)-(2). These rules also provide for submission of confidential information,
FCC notice of ex parte presentations it has received, and a sunshine period starting
immediately before the FCC votes (when only limited written responses to ex partes are
permitted). Id.
In following its ex parte rules, the FCC obtained hundreds of ex parte submissions
between the close of the final comment period and the “blackout” date. 6 Rawle at 3754-71.
As allowed under the FCC’s rules, many of these submissions were confidential and
others had to sign confidentiality agreements to access unredacted versions. To promote
transparency, the FCC placed three lists (referring to more than 110 publicly available
sources) and a mobile service competition analysis into the rulemaking record after the
close of the comment period. See id. at 3847-53, 3918-21, 3947-61.
In the Order, the FCC not only promulgated rules, but also addressed pending
petitions. 2 Rawle at 757 ¶ 975.
59
B. The Petitioners’ Arguments
The Petitioners raise seven constitutional challenges to the FCC’s order. Six
involve denial of due process from the FCC’s procedure. These challenges involve: (1)
the number and timing of the ex parte submissions, (2) the consideration of specific ex
partes, (3) the FCC’s placement of documents in the rulemaking record after close of the
comment period, (4) the FCC’s commingling of adjudicatory and rulemaking
proceedings, (5) the inadequacy of the notice issued on August 3, 2011, and (6) the
brevity of the final comment schedule. Joint Intercarrier Compensation Principal Br. of
Pet’rs at 58-62 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-
33 (July 31, 2013). The Petitioners’ seventh challenge is that the FCC improperly
commandeered state commissions. Joint Intercarrier Compensation Principal Br. of
Pet’rs at 62-63 (July 17, 2013).
1. The Waiver Issue
Before addressing the seven challenges, we must decide whether we can entertain
some of the arguments raised in the Petitioners’ reply. The FCC moves to strike some of
these arguments, asserting that the Petitioners had omitted them in the opening brief.
Mot. to Strike Args. in the Joint Intercarrier Compensation Reply Br. of Pet’rs (Sept. 30,
2013). The Petitioners contend that in their reply brief, they simply elaborated on the
due-process arguments raised in their opening brief or responded to the FCC’s arguments.
60
Joint Pet’r Resp. to FCC Mot. to Strike Args. from the Joint Intercarrier Compensation
Reply Br. at 1 (Oct. 15, 2013).
Generally, “[a]rguments inadequately briefed in the opening brief are waived.”
Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998). To enforce this
requirement, we have granted motions to strike arguments that are raised for the first time
in a reply brief. E.g., M.D. Mark, Inc. v. Kerr-McGee Corp., 565 F.3d 753, 768 n.7 (10th
Cir. 2009).
Waiver is based on Federal Rule of Appellate Procedure 28(a)(8)(A), which
requires a party to include its arguments and reasons, with supporting citations to the
record.
In their reply, the Petitioners have referred to documents not mentioned in the
opening brief and raised more specific objections to the FCC’s rulemaking procedure.
Compare Joint Intercarrier Compensation Principal Br. of Pet’rs at 58-62 (July 17, 2013),
with Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013). But the
new references do not justify an order striking the reply.
2. The FCC’s Motion to Strike
In their opening brief, the Petitioners mount a general challenge to the FCC’s
rulemaking procedure. Joint Intercarrier Compensation Principal Br. of Pet’rs at 61 (July
17, 2013). But the Petitioners’ reply brief can be read in two ways: (1) The Petitioners
continue to mount a general cumulative challenge to the FCC’s rulemaking procedure and
61
have included more specific record citations as general examples to illustrate their
broader argument; or (2) the Petitioners continue to mount a cumulative challenge, but
also intend to rely on the citations identified for the first time in the reply brief. See Joint
Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013). The first reading
involves permissible elaboration on the opening brief. The second reading would involve
a violation of Rule 28(a)(8)(A). Instead of striking the reply, we read it narrowly, with
citation of the materials only to illustrate the general cumulative challenge advanced in
the opening brief.
C. Our Review of the Constitutional Challenges
The Petitioners’ procedural challenges stem from the constitutional right to due
process, which requires notice and a fair opportunity to be heard. See Fuentes v. Shevin,
407 U.S. 67, 80 (1972). The APA adds more specific requirements. For example, an
agency must provide notice of the proposed rulemaking and allow interested persons “an
opportunity to participate in the rulemaking through submission of written data, views, or
arguments with or without opportunity for oral presentation.” 5 U.S.C. § 553(b)-(c).
“‘Absent constitutional constraints or extremely compelling circumstances the
administrative agencies should be free to fashion their own rules of procedure and
methods of inquiry permitting them to discharge their multitudinous duties.’” Phillips
Petroleum Co. v. EPA, 803 F.2d 545, 559 (10th Cir. 1986) (quoting Vt. Yankee Nuclear
Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 543 (1978)). “Congress
62
intended that the discretion of the agencies and not that of the courts be exercised in
determining when extra procedural devices should be employed.” Wyoming v. Dep’t of
Agric., 661 F.3d 1209, 1239 (10th Cir. 2011). Therefore, the agencies enjoy discretion to
establish the procedures they utilize to make substantive judgments. See id.
D. The Petitioners’ Due Process Challenges
The Petitioners identify six types of errors that cumulatively resulted in a denial of
due process. Joint Intercarrier Compensation Principal Br. of Pet’rs at 58-62 (July 17,
2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013).
1. General Challenges to the Ex Partes
The Petitioners initially focus on the hundreds of ex partes with the FCC. Joint
Intercarrier Compensation Principal Br. of Pet’rs at 59-61 (July 17, 2013). According to
the Petitioners, the ex parte filings multiplied just before the blackout date and the FCC
frequently allowed access only upon the signing of a confidentiality agreement. Id. at 60.
The Petitioners note that eight of the ex partes had been posted only three days before the
FCC adopted the Order. Joint Intercarrier Compensation Reply Br. of Pet’rs at 30 (July
31, 2013). For these ex partes, the Petitioners contend that interested parties were unable
to respond before the blackout period began. Joint Intercarrier Compensation Principal
Br. of Pet’rs at 61 (July 17, 2013).
Ex parte contacts were proper, for they “are the bread and butter of the process of
administration and are completely appropriate so long as they do not frustrate judicial
63
review or raise serious questions of fairness.” Home Box Office, Inc. v. FCC, 567 F.2d 9,
57 (D.C. Cir. 1977) (per curiam).
The administrative proceedings involved continuous responses to the FCC’s
notices and to other responses. Ultimately, however, the proceedings had to end. When
they did, many parties could legitimately contend that they needed more time to reply to
others’ responses. The only alternative, however, would have been to keep the comment
period alive forever.
The APA ensures an opportunity to comment on the notice of proposed
rulemaking, but not to reply to the rulemaking record. See Am. Mining Cong. v.
Marshall, 671 F.2d 1251, 1262 (10th Cir. 1982) (stating that the APA provides a right to
comment on proposed rulemaking, but not “the rulemaking record”). In light of this
limitation under the APA, we cannot impose additional requirements under the guise of
due process. See Vt. Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435
U.S. 519, 524-25 (1979).
The Petitioners have not shown a failure to comply with the APA or even reliance
on any of the disputed ex partes. Am. Mining Cong., 671 F.2d at 1261; see Sierra Club v.
Costle, 657 F.2d 298, 398-99 (D.C. Cir. 1981) (“The decisive point, however, is that EDF
itself has failed to show us any particular document or documents to which it lacked an
opportunity to respond, and which also were vital to EPA’s support for the rule.”). As a
result, we reject the general challenges to the ex partes.
64
2. Ex Parte Challenges Based on Specific Documents
In their reply brief, the Petitioners point to four ex partes to support their due
process challenge: (1) an October 20, 2011, Verizon ex parte filing that addresses Access
Recovery Charges, (2) an October 18, 2011, Verizon ex parte concerning regulation of
Voice-Over-the-Internet (“VoIP”), (3) an October 21, 2011, Verizon ex parte that
addresses VoIP preemption, and (4) an October 19, 2011, AT&T ex parte that addresses
VoIP jurisdiction. 6 Rawle at 3980-81, 3929, 3938-45, 4005; Joint Intercarrier Compensation
Reply Br. of Pet’rs at 31-32 & nn.33-34 (July 31, 2013).7
In their opening brief, the Petitioners did not address the ex partes of October 18,
October 19, or October 21; thus, the Petitioners have waived any argument based
specifically on these documents. See Harman v. Pollock, 446 F.3d 1069, 1082 n.1 (10th
Cir. 2006) (per curiam).8 Because the Petitioners raised the October 20, 2011, Verizon ex
parte in their opening brief, we will analyze it here. See Joint Intercarrier Compensation
Principal Br. of Pet’rs at 60-61 (July 17, 2013).
In its ex parte on October 20, 2011, Verizon discussed the Access Recovery
Charge on end-users. See 6 Rawle at 3980-81. And, in a meeting with the FCC’s general
7
In their opening brief, the Petitioners also referred to five AT&T contacts as
examples of ex partes. Joint Intercarrier Compensation Principal Br. of Pet’rs at 60 (July
17, 2013). But the Petitioners did not specifically rely on these documents; thus, we have
considered them in our general discussion and do not specifically address them here.
8
We have considered these documents as general examples of ex parte contacts.
We will also consider them as general examples of subjects covered in pending
adjudicatory petitions discussed in these proceedings.
65
counsel, Verizon discussed the Access Recovery Charge and its implementation at the
holding-company level. See id. at 3980. The Petitioners contend in their reply that: (1)
the FCC did not sufficiently inform them in the notice about implementation at the
holding company level, and (2) Verizon unfairly obtained knowledge about this matter
prior to circulation of the Order. Joint Intercarrier Compensation Reply Br. of Pet’rs at
31 (July 31, 2013); see Joint Intercarrier Compensation Principal Br. of Pet’rs at 60-61
(July 17, 2013).
We reject these arguments. The ABC Plan involved application of the Access
Recovery Charge at the holding-company level; and in the notice on August 3, 2011, the
FCC specifically asked for comments on this provision. 5 Rawle at 3000-01; 1 R. at 302.
3. The FCC’s Placement of Documents in the Rulemaking Record
The Petitioners also complain that the FCC placed over 110 documents into the
rulemaking record after the close of the comment period. Joint Intercarrier Compensation
Principal Br. of Pet’rs at 59-60 (July 17, 2013) (citing 6 Rawle at 3847-53, 3918-21, 3947-
61). The FCC’s handling of these documents did not result in a denial of due process.
Ordinarily, agencies should not add information to the rulemaking record after the
close of the comment period. See Small Refiner Lead Phase-Down Task Force v. U.S.
EPA, 705 F.2d 506, 540-41 (D.C. Cir. 1983). But the APA “does not require that every
bit of background information used by an administrative agency be published for public
comment.” Am. Mining Cong. v. Marshall, 671 F.2d 1251, 1262 (10th Cir. 1982). And
66
agencies need not submit “additional fact gathering [that] merely supplements
information in the rulemaking record by checking or confirming prior assessments
without changing methodology, by confirming or corroborating data in the rulemaking
record, or by internally generating information using a methodology disclosed in the
rulemaking record” to further notice and comment. Chamber of Commerce of U.S. v.
SEC, 443 F.3d 890, 900 (D.C. Cir. 2006).
The Petitioners do not explain the significance of the additional documents or tie
them to any of the disputed provisions in the Order; thus, we reject the Petitioners’
procedural challenge based on late insertion of these documents into the record. See Am.
Mining Cong., 671 F.2d at 1261.
4. The FCC’s Decision to Rule on Pending Petitions
The FCC found that its conclusions had “effectively address[ed], in whole or in
part, certain pending petitions” and granted or denied several petitions. 2 Rawle at 757 ¶ 975.
The Petitioners claim, without citation, that the FCC improperly commingled rulemaking
and adjudicatory proceedings. Joint Intercarrier Compensation Principal Br. of Pet’rs at
59 (July 17, 2013). We reject the argument.
Commingling of functions is permitted when the proceeding involved rulemaking.
See AT&T v. FCC, 449 F.2d 439, 454-55 (2d Cir. 1971). And the FCC’s proceeding
involved rulemaking even if the new rules had the effect of deciding others’ petitions.
67
The incidental disposition of those petitions did not convert the rulemaking proceeding
into an adjudication, and there was no violation of due process or the APA.
5. Adequacy of the August 3, 2011, Notice
In their reply, the Petitioners argue that the notice on August 3, 2011, was
inadequate. Joint Intercarrier Compensation Reply Br. of Pet’rs at 28 (July 31, 2013).
This argument was waived because it was omitted in the Petitioners’ opening brief. See
Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998).
In the opening brief, the Petitioners made vague references to the sufficiency of the
notice. See Joint Intercarrier Compensation Principal Br. of Pet’rs at 58 (July 17, 2013)
(“Courts vacate APA rulemakings that fail to substantially comply with the requirement
for public participation or which provide no meaningful opportunity for comment.”); id.
at 61 (“Courts have previously vacated FCC rulemakings where there was no realistic
notice or opportunity to be heard.”). But these references would not have alerted the FCC
or the Court to a challenge based on the sufficiency of the August 3 notice. As a result,
we decline to consider the Petitioners’ new argument in their reply about the sufficiency
of the August 3 notice.
6. Length of the Comment Period
In their reply brief, the Petitioners also challenge the length of the FCC’s comment
period. Joint Intercarrier Compensation Reply Br. of Pet’rs at 28-29 (July 31, 2013).
68
Because the Petitioners did not present this argument in their opening brief, the issue is
waived. See Adler, 144 F.3d at 679.
7. Cumulative Challenge
The Petitioners have not shown that any part of the FCC’s procedure was
erroneous; thus, we reject the Petitioners’ cumulative challenge. See Sorenson Commc’ns
v. FCC, 659 F.3d 1035, 1046 (10th Cir. 2011) (applying a presumption of validity to the
FCC’s actions).
E. “Commandeering” of State Commissions
The Petitioners also contend that the FCC has commandeered state commissions
by: (1) requiring them to regulate according to new federal standards under § 252, and
(2) shifting cost recovery to the states. Joint Intercarrier Compensation Principal Br. of
Pet’rs at 62-63 (July 17, 2013). We disagree.
Generally, the federal government unlawfully conscripts states when they must
involuntarily enact or administer a federal regulatory program. See Printz v. United
States, 521 U.S. 898, 932 (1997); New York v. United States, 505 U.S. 144, 176 (1992).
The same may be true when the federal government provides a state with funding to
implement a program and later “surpris[es] participating States with post-acceptance or
‘retroactive conditions.’” Nat’l Fed’n of Indep. Bus. v. Sebelius, __ U.S. __, 132 S. Ct.
2566, 2606 (2012). But “[w]here federal regulation of private activity is within the scope
of the Commerce Clause, [the Court has] recognized the ability of Congress to offer
69
States the choice of regulating that activity according to federal standards or having state
law pre-empted by federal regulation.” New York, 505 U.S. at 173-74.
That is the case here, for states are not required to regulate under § 252. Instead,
the federal government has undertaken regulation of matters previously regulated by the
states. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 n.6 (1999). The federal
government’s creation of a federal regulatory scheme does not conscript the state
commissions to do anything, and we reject the Petitioners’ argument. See Cellular Phone
Taskforce v. FCC, 205 F.3d 82, 96-97 (2d Cir. 2000) (rejecting a similar challenge under
47 U.S.C. § 332(c)(7)(B)(iv)).
The Petitioners also contend that the FCC has assumed responsibility for cost
recovery as a means of coercing state commissions. Joint Intercarrier Compensation
Principal Br. of Pet’rs at 62-63 (July 17, 2013). For this contention, the Petitioners rely
on National Federation of Independent Business v. Sebelius, __ U.S. __, 132 S. Ct. 2566
(2012). That case involved federal funding to the states so they could implement a
federal program. See Nat’l Fed’n of Indep. Bus., 132 S. Ct. at 2605-06. Here, the federal
government has assumed responsibility for financial support to third parties—not
states—so the FCC can implement a federal program. National Federation of
Independent Business is inapplicable, and the FCC has not coerced state commissions.
70
V. Individual Challenges to the Order
In addition to the broad challenges to the FCC’s regulation of access traffic,
adoption of a bill-and-keep regime, and procedural fairness, individual parties and groups
challenge specific aspects of the reforms. We reject these challenges.
A. Rural Independent Competitive Alliance’s Challenge to the FCC’s
Limitation on Funding Support for Rural Competitive LECs
The FCC authorized financial support to incumbent LECs (but not competitive
LECs), through the Universal Service Fund. 2 Rawle at 688 ¶ 853, 691-93 ¶¶ 862, 864. This
difference is challenged by the Rural Independent Competitive Alliance. Additional
Intercarrier Compensation Issues Principal Br. (Pet’rs) at 10-19 (July 11, 2013). We
reject the challenge.
The arbitrary-and-capricious standard requires an agency to “provide an adequate
explanation to justify treating similarly situated parties differently.” Comcast Corp. v.
FCC, 526 F.3d 763, 769 (D.C. Cir. 2008). The FCC justified the disparity on two
grounds: (1) CLECS, unlike ILECs, can freely raise rates on end-users without
regulatory constraints; and (2) CLECs, unlike ILECs, “typically can elect whether to enter
a service area and/or to serve particular classes of customers (such as residential
customers) depending upon whether it is profitable to do so without subsidy.” 2 Rawle at
691-92 ¶ 864. Because these justifications show that ILECs have a greater need than
CLECs for additional financial support, the FCC would seem to have “articulate[d] a
satisfactory explanation for its action [that] includ[es] a rational connection between the
71
facts found and the choice made.” Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035,
1045 (10th Cir. 2011) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 43 (1983)).
The Rural Independent Competitive Alliance disagrees, contending that the FCC’s
explanations are implausible and false. Additional Intercarrier Compensation Issues
Principal Br. (Pet’rs) at 10-19 (July 11, 2013).
The FCC relies primarily on its second rationale: Competitive LECs have greater
freedom to choose where and how to provide service; thus, they have less need for
financial support than incumbent LECs. Federal Resp’ts’ Final Resp. to Pet’rs’
Additional Intercarrier Compensation Issues Principal Br. at 16-20 (July 29, 2013) (citing
2 Rawle at 693 ¶ 864 & n.1675). This explanation was rational. Because most incumbent
LECs are carriers of last resort, they must ordinarily serve their assigned areas even when
it is no longer profitable. See Stuart Buck, Telric v. Universal Service: A Takings
Violation, 56 Fed. Comms. L.J. 1, 46 (2003) (“[M]any (if not all) ILECs are designated as
‘carriers of last resort’ under various state laws, which means that they are generally not
allowed to (1) refuse local phone service to any customer in any area in which they
operate, or (2) discontinue service in an area where there is no other carrier.”). The FCC
reasonably regarded competitive LECs as more flexible. 2 Rawle at 692-93 ¶ 864. Without
status as carriers-of-last-resort, many competitive LECs can choose which customers to
serve and freely leave the region.
72
The Alliance points to a previous FCC order, where it stated that CLECs lack
lower-cost urban operations that urban ILECs can use to subsidize rural service.
Additional Intercarrier Compensation Issues Principal Br. (Pet’rs) at 15-16 (July 11,
2013) (citing In re Access Charge Reform, 16 FCC Rcd. 9923, 9950 ¶ 65 (2001)).
According to the Petitioners, this statement shows that rural CLECs cannot “pick and
choose to retain their most profitable customers.” Id. In the prior order, however, the
FCC did not question the CLECs’ greater opportunity to select customers or restrict
service. See In re Access Charge Reform, 16 FCC Rcd. at 9950 ¶¶ 65-66.
It is true, as the Alliance argues, that some competitive LECs have committed to
serve entire regions. Additional Intercarrier Compensation Issues Principal Br. (Pet’rs) at
15 (July 11, 2013). Notwithstanding these commitments, the FCC could reasonably rely
on the flexibility available to competitive LECs and the relative lack of flexibility for
incumbents. See 2 Rawle at 692-93 ¶ 864. Unlike ILECs, CLECs made a rational economic
decision to enter the market and serve specific customers and areas. Id. at 692-93 ¶ 864-
65.
The Alliance argues that once CLECs built their networks, they developed reliance
interests that could not be ignored by the FCC. Additional Intercarrier Compensation
Issues Principal Br. (Pet’rs) at 17-18 (July 11, 2013). It surely would have been arbitrary
and capricious if the FCC had disregarded the CLECs’ reliance interests. See FCC v. Fox
Television Stations, Inc., 556 U.S. 502, 515 (2009). But the FCC did no such thing.
73
Instead, the FCC set out to balance the need for a recovery mechanism against the need to
avoid undue burdens on those carriers contributing to the Universal Service Fund. See 2
Rawle at 690 ¶ 859. In balancing these needs, the FCC made an empirical judgment that
“competitive LECs . . . [had] not built out their networks subject to [carrier-of-last-resort]
obligations requiring the provision of service when no other provider [would] do so.” Id.
at 692-93 ¶ 864.
This empirical judgment may be debatable. But we must defer to the FCC in its
empirical judgment on an issue involving its institutional expertise. See Metro Broad.,
Inc. v. FCC, 497 U.S. 547, 570 (1990) (deferring to the FCC in its determination of an
empirical nexus). When the FCC drew on this empirical judgment, it did not ignore the
CLECs’ reliance interests; instead, the FCC concluded that these interests did not trump
other competing considerations. See Qwest Corp. v. FCC, 689 F.3d 1214, 1227-31 (10th
Cir. 2012) (upholding the FCC’s denial of a forbearance petition, based on a change in
approval that involved “moving of the goalpost,” because the change was adequately
explained).
The Alliance contends that this deference will undermine the FCC’s own objective
of broadening the array of services in rural areas. Additional Intercarrier Compensation
Issues Principal Br. (Pet’rs) at 18-19 (July 11, 2013). According to the Alliance, CLECs
deserve support because they are more likely than ILECs to deploy advanced
telecommunications services in rural areas. Id. (citing In re Access Charge Reform, 16
74
FCC Rcd. 9923, 9950 ¶ 65 (2001)). But the FCC has broad discretion to balance
competing policy goals, including the control of transition costs. See Sorenson v.
Commc’ns v. FCC, 659 F.3d 1035, 1045 (10th Cir. 2011); see also Rural Cellular Ass’n
v. FCC, 588 F.3d 1095, 1108 (D.C. Cir. 2009) (the FCC “has broad discretion” to balance
the objectives in funding universal service). The FCC acted reasonably in balancing the
need to carefully oversee the Universal Service Fund with the goal of extending service in
rural areas.
B. The Challenge by National Telecommunications Cooperative
Association, U.S. TelePacific Corporation, and North County
Communications Corporation to the Transition of CMRS-LEC Traffic
to Bill-and-Keep
The FCC decided to immediately implement bill-and-keep as the default reciprocal
compensation methodology for CMRS-LEC (cellphone-landline) traffic. 2 Rawle at 761-62
¶ 988. On reconsideration, the FCC extended the transition for six months for local
CMRS-LEC traffic subject to an interconnection agreement. Id. at 1145-46 ¶ 7.
National Telecommunications Cooperative Association, U.S. TelePacific
Corporation, and North County Communications Corporation challenge these decisions
as arbitrary and capricious. Additional Intercarrier Compensation Issues Principal Br.
(Pet’rs) at 20-21 (July 11, 2013). According to these petitioners, the FCC applied
different standards to similar situations, implementing a flash-cut for CMRS-LEC traffic
while professing to avoid flash cuts. Id. at 20-21 (quoting 2 Rawle at 663 ¶ 802). We
conclude that the FCC’s time-table satisfies the APA.
75
The FCC decided to immediately institute bill-and-keep for CMRS-LEC traffic,
giving two reasons: (1) Evidence showed that arbitrage schemes were more problematic
for CMRS-LEC traffic than local LEC-LEC traffic; and (2) an immediate shift for
CMRS-LEC traffic would be less disruptive than it would have been for other types of
traffic. 2 Rawle at 764-65 ¶¶ 995-96 & n.2099.
The FCC downplayed concerns about disruption for three reasons.
First, CMRS providers and CLECs had only recently developed arrangements for
reciprocal compensation. Id. at 765 ¶ 996. Without a longer history of these
arrangements, CLECs “had no basis for reliance on such a methodology in their business
models.” Id.
Second, without an interconnection agreement, ILECs do not receive reciprocal
compensation. Id. at 765-66 ¶ 997. And, the FCC found that most large ILECs with such
an agreement had “already adopted $0.0007 or less as their reciprocal compensation rate.”
Id. at 766 ¶ 997.
Third, the FCC found that ILECs with interconnection agreements might have
more time to adjust to bill-and-keep because the FCC was not abrogating existing
agreements. Id. at 767 ¶ 1000.
For these reasons, the FCC concluded that an immediate transition to bill-and-keep
for CMRS-LEC traffic would not be too disruptive or “overburden[] the universal service
76
fund.” Id. The FCC’s rationale was internally consistent, facially reasonable, and
supported by the evidence. As a result, the FCC’s explanation sufficed under the APA.
C. Core Communications, Inc. and North County Communications
Corporation’s Challenge to the FCC’s New Regulations on Access
Stimulation
In the Order, the FCC addressed an interim arbitrage scheme known as “access
stimulation.” Id. at 601-17 ¶¶ 656-701. Access stimulation occurs when an LEC with
high access charges enters into an arrangement with a provider of high call-volume
operations, such as chat lines, adult-entertainment calls, or free conference calls. Id. at
601 ¶ 656. The arrangement “inflates or stimulates the access minutes terminated to the
LEC, and the LEC then shares a portion of the increased access revenues . . . with the
‘free’ service provider.” Id. Because an IXC cannot pass along these higher access costs
to the customers making these more expensive calls, the IXC must recover these extra
costs from all of its customers. Id. at 602 ¶ 663.
This scheme works because LECs entering “traffic-inflating revenue-sharing
agreements” need not reduce their access rates “to reflect their increased volume of
minutes.” Id. at 601 ¶ 657. According to the FCC, these LECs experience a “jump in
revenues and thus inflated profits that almost uniformly make the LEC’s interstate
switched access rates unjust and unreasonable under section 201(b) of the Act.” Id.
The FCC defined “access stimulation” in the Order. Id. at 604 ¶ 667. “Access
stimulation” occurs when an “LEC has entered into an access revenue sharing agreement”
77
and “the LEC either has had a three-to-one interstate terminating-to-originating traffic
ratio in a calendar month, or has had a greater than 100 percent increase in interstate
originating and/or terminating switched access MOU in a month compared to the same
month in the preceding year.” Id. at 604 ¶ 677.
Petitioners Core Communications, Inc. and North County Communications
Corporation challenge two aspects of the rules: (1) The FCC allowed access-stimulating
ILECs, but not access-stimulating CLECs, to utilize procedures allowing retariffs of
charges for terminating access; and (2) the FCC required access-stimulating CLECs to
benchmark to the price-cap LEC with the lowest terminating access rates in the state.
Additional Intercarrier Compensation Issues Principal Br. (Pet’rs) at 31-36 (July 11,
2013). The Petitioners challenge both provisions as arbitrary and capricious under the
APA. Id. These challenges are rejected.
1. The FCC’s Refusal to Allow CLECs to Use ILEC Ratemaking
Procedures
The Petitioners challenge the refusal to allow access-stimulating CLECs to set
rates above the FCC’s chosen benchmark. Id. at 31. According to the Petitioners, the
FCC did not explain its refusal to allow “CLECs to have the same option as ILECs to rely
upon the § 61.38 rules to demonstrate actual costs and demand in the rate-of-return
territories in which they provide switched access.” Id. We disagree.
The issue involves a regulation in place before the recent reforms: 47 C.F.R.
§ 61.38. This regulation called for incumbent LECs to file tariffs supported by cost-of-
78
service data. See Aeronautical Radio, Inc. v. FCC, 642 F.2d 1221, 1234 (D.C. Cir. 1980).
Because these tariffs have supplied benchmarks for CLECs,9 they have not ordinarily had
to submit cost data.
Core and North County contend that for access stimulation, the remedy is harsher
for CLECs than ILECs. ILECs can obtain relief from rate adjustments by submitting cost
studies under 47 C.F.R. § 61.38; CLECs cannot. Additional Intercarrier Compensation
Issues Principal Br. (Pet’rs) at 31-32 (July 11, 2013). According to Core and North
County, the FCC failed to explain the disparity. Id. We disagree.
The FCC explained its rationale in the Order: Determining the reasonableness of
CLEC pricing has proven impractical. 2 Rawle at 614-15 ¶ 694. Thus, the FCC “has
specifically disclaimed reliance on cost to set competitive LEC access rates.” In re
Access Charge Reform: PrairieWave Telecomms., Inc., 23 FCC Rcd. 2556, 2560 ¶ 13
(2008).
This rationale is neither arbitrary nor capricious. The FCC previously noted the
advantages of setting CLEC rates through benchmarking rather than the submission of
cost data:
[A] benchmark provides a bright line rule that permits a simple
determination of whether a CLEC’s access rates are just and
reasonable. Such a bright line approach is particularly desirable
given the current legal and practical difficulties involved with
comparing CLEC rates to any objective standard of
“reasonableness.”
9
See In re Access Charge Reform, 16 FCC Red. 9923, 9943-45 (2001).
79
In re Access Charge Reform, 16 FCC Rcd. 9923, 9939 ¶ 41 (2001).
Core and North County do not address the historical differences between the
pricing of ILECs and CLECs. Instead, Core and North County argue that CLECs should
have the opportunity to support relief through cost data under 47 C.F.R. § 61.38. The
FCC feared that this option would create difficulty in assessing the reasonableness of
CLEC rates. 3 Rawle at 1933 (cited at 2 Rawle at 614 n.1172).
The FCC addressed a similar issue six years ago when confronted with a waiver
petition by a CLEC (PrairieWave Telecommunications, Inc.), which submitted extensive
cost data and requested an opportunity to charge based on its own costs rather than a
benchmark tied to ILEC rates. See In re Access Charge Reform: PrairieWave
Telecomms., Inc., 23 FCC Rcd. 2556, 2556 ¶ 1 (2008). Like Core and North County,
PrairieWave discounted the burden because it had been the only CLEC to seek a waiver.
See id. at 2560-61 ¶ 13. The FCC explained that if it were to accept PrairieWave’s cost
data, “every competitive LEC” would request a waiver. Id. And with this flood of data,
the FCC would need to alter CLEC rates from a “straightforward comparison” to an
“administratively difficult cost study analysis.” Id. at 2561 ¶ 14; see also In re Access
Charge Reform, 16 FCC Rcd. 9923, 9939 ¶ 41 (2001) (stating that a benchmarking
approach provides a simple way to determine the reasonableness of a CLEC’s access
rates and avoids the “legal and practical difficulties involved with comparing CLEC rates
to any objective standard of ‘reasonableness’”).
80
The FCC’s explanation here was similar. For example, the FCC cited comments
from one LEC that had acknowledged the “legal and practical difficulties involved with
comparing CLEC rates to any objective standard of reasonableness.” 2 Rawle at 614 n.1172
(citing 3 Rawle at 1933).
Core and North County downplay the burden in preparing the cost data, but do not
address the FCC’s concern about how the data would be utilized. The FCC rationally
concluded that the cost data would prove useful only if the agency were to abandon its
benchmarking approach for CLEC rates and face the legal and practical difficulties of
setting CLEC rates based on an objective standard of reasonableness. Core and North
County do not present any reason for the FCC to reverse course in this manner, and we
are left without any reason to question the FCC’s decision. Thus, its refusal to open the
§ 61.38 procedures, allowing submission of cost data for rate-setting, is neither arbitrary
nor capricious.
2. The FCC’s Requirement for Access-Stimulating CLECs to
Benchmark to the Price-Cap LEC with the State’s Lowest
Access Rates
The FCC not only declined to allow CLECs to use the § 61.38 procedures, but also
required access-stimulating CLECs to benchmark their switched-access rates to the state’s
price-cap LEC with the lowest access charges. Id. at 612-13 ¶ 689. According to the
Petitioners, this benchmark was arbitrary and capricious because: (1) it applies to CLECs
81
statewide, and (2) the FCC lacked evidentiary support for its decision. Additional
Intercarrier Compensation Issues Principal Br. (Pet’rs) at 32-36 (July 11, 2013).
Core and North County initially argue that it was irrational to tie the benchmark to
a price-cap LEC’s statewide rates when the CLEC was stimulating access in only a small
part of the state. Id. at 32-33. The FCC took a different view. It reasoned that when a
CLEC artificially increases traffic, its volumes resemble those of the price-cap LEC in the
state. 2 Rawle at 612-13 ¶ 689. Thus, the FCC concluded that for CLECs improperly
stimulating traffic, rates should be tied to the state’s price-cap LEC. Id.
Core and North County regard this explanation as “irrational” because the CLEC
may not even be operating in territories served by rate-of-return LECs. Additional
Intercarrier Compensation Issues Principal Br. (Pet’rs) at 33 (July 11, 2013). This
argument ignores the FCC’s view that the pertinent comparator is the state’s price-cap
LEC, not the smaller rate-of-return carriers. The FCC’s view may be debatable, but it is
neither arbitrary nor capricious.
Core and North County also question the evidentiary basis for the FCC to use
price-cap LECs, rather than rate-of-return LECs. Id. at 34-35. The Petitioners contend
that the FCC grounded its benchmarking decision on a finding that the “access
stimulating LEC’s traffic volumes are more like those of the price cap LEC in the state,
and it is therefore appropriate and reasonable for the access stimulating LEC to
benchmark to the price cap LEC.” Id. at 34 (citing 2 Rawle at 612-13 ¶ 689).
82
The FCC’s conclusion has some evidentiary support. See 3 Rawle at 1536 (AT&T’s
evidentiary submission, showing that rural traffic-stimulating CLECs are terminating
three to five times as many minutes as the largest ILECs in Iowa, Minnesota, and South
Dakota). This evidence suggests that traffic-stimulating CLECs do not operationally
resemble the ILECs they benchmark. See id. at 1538 (AT&T’s submission, showing that
traffic-stimulating CLECs “clearly are not in the same business as NECA Band 8 ICOs”).
Based on this evidence, the FCC’s decision was reasonable. The FCC chose to
require benchmarks of access-stimulating CLECs to price-cap LECs based on evidence
that their volumes were comparable. This decision was reasonable, and we reject the
APA challenge by Core and North County.
D. AT&T, Inc.’s Challenge to the FCC’s Decision to Allow VoIP-LEC
Partnerships to Collect Intercarrier Compensation Charges for
Services Performed by the VoIP Partner
AT&T challenges one aspect of the new rules: the opportunity for VoIP-LEC
partnerships to charge intercarrier compensation during the transition to bill-and-keep.
AT&T Principal Br. at 16-23 (July 16, 2013). This challenge is rejected.
LECs have partnered with VoIP providers and wireless carriers (like AT&T).
Eventually, when bill-and-keep is fully implemented, LECs in these partnerships will be
unable to impose any access charges. But during the transition period, LECs can impose
access charges, though they will be phased downward. AT&T’s challenge focuses on
differences between the rules pertaining to LEC-VoIP partnerships and LEC-wireless
83
partnerships. During the transition period, LECs can impose access charges for functions
performed by VoIP partners. See 2 Rawle at 753-54 ¶ 970. But LECs that partner with
wireless providers (like AT&T) cannot charge for functions performed by the wireless
partner. Id. at 753 n.2024.10
AT&T argues that it was arbitrary and capricious to deny the same opportunities to
LECs that partner with wireless providers. AT&T Principal Br. at 18-23 (July 16, 2013).
According to AT&T, the FCC failed to: (1) adequately explain its decision to give VoIP
providers an advantage over wireless providers, and (2) address the concern over
competitive equality. Id. at 16. We disagree, concluding that the FCC adequately
responded to AT&T’s objection. This explanation was two-fold: (1) The ability of VoIP
providers to charge for access would promote development of IP networks; and (2) VoIP
providers partnered with LECs to interconnect, and wireless providers voluntarily
partnered with LECs to avoid FCC regulation. 2 Rawle at 752 ¶ 968, 753 n.2024.
As discussed in Chief Judge Briscoe’s separate opinion, Congress set out in the
1996 Act to promote the development of IP networks. See, e.g., In re LAN Tamers, Inc.,
329 F.3d 204, 206 (1st Cir. 2003) (explaining that universal service includes high-speed
10
AT&T is inconsistent in its argument. It sometimes focuses on the CLEC’s ability
to tariff for work done by VoIP providers; other times, AT&T addresses the ability to
receive intercarrier compensation for this work. This distinction matters because the
ability to obtain intercarrier compensation is separate from the ability to use a tariff to do
so. In re Sprint PCS, 17 FCC Rcd. 13192, 13196 (2002). The rule preventing CLECs
from tariffing for work done by their CMRS partners is based on the absence of an
independent right to intercarrier compensation. See In re Access Charge Reform, 19 FCC
Rcd. 9108, 9116 (2004).
84
internet access). Unlike conventional wireless service, VoIP service depends on IP
facilities. See, e.g., In re Universal Serv. Contribution Methodology, 21 FCC Rcd. 7518,
7526 ¶ 15 (2006). To promote development of IP networks, the FCC attempted to
support VoIP providers because they were developing these networks. See 2 Rawle at 752
¶ 968.
This strategy was at least reasonable. Any decision would have created an
asymmetry between VoIP providers and either wireless providers or LECs. The FCC
could reasonably have concluded that a contrary decision would have slowed IP
deployment and undercut the FCC’s stated goal of encouraging the deployment of IP
networks.
The FCC relied not only on the goal of promoting IP deployment, but also on the
need for wireless providers to partner with LECs. Id. at 753 n.2024. As the FCC
explained, VoIPs frequently partner with LECs to interconnect with the network, while
wireless providers frequently partner with LECs to avoid FCC regulations. Id. at 753-54
¶ 970, 753 n.2024. Until the FCC issued the Order, it had not determined the intercarrier
compensation obligations for VoIP traffic. Federal Resp’ts’ Final Resp. to the AT&T
Principal Br. at 14 (July 29, 2013) (quoting Notice of Proposed Rulemaking ¶ 610, Supp.
R. at 192). In contrast, the FCC had long prohibited wireless carriers from collecting
access charges through CLEC partners. 2 Rawle at 753 ¶ 970 n.2024. These differences
between LEC-VoIP partnerships and wireless-LEC partnerships provided a reasonable
85
foundation for the FCC’s distinction in the interim rules. See id. The FCC did not act
arbitrarily or capriciously when it allowed access charges for functions provided by VoIP
providers in partnership with LECs, but not for functions performed by wireless providers
in partnership with LECs.
AT&T argues that the FCC’s explanation did not address the complaint about a
“market-distorting competitive bias” in favor of VoIP providers. AT&T Principal Br. at
18 (July 16, 2013). Prior to entry of the Order, however, AT&T had complained only that
it would be arbitrary to treat wireless providers differently than VoIP providers. 6 Rawle at
3987 (AT&T’s argument that the FCC’s proposed rule would “arbitrarily tilt the
regulatory playing field”); id. at 3989-90 (AT&T’s argument that there “could be no
rationale for such an arbitrary distinction, which would represent nothing more than a
flagrant instance of competition-distorting regulatory favoritism”). Because the FCC
presented sound regulatory reasons for treating VoIP providers differently than wireless
carriers, it adequately responded to AT&T’s allegation that it was arbitrarily favoring
VoIP providers.
E. Voice on the Net Coalition, Inc.’s Challenges to the FCC’s No-Blocking
Obligation
To avoid high access charges, some long-distance carriers began to block long-
distance calls that terminated with certain LECs. Establishing Just & Reasonable Rates
for Local Exchange Carriers, 22 FCC Rcd. 11629, 11629 ¶ 1 (2007). The FCC attempted
to stop this practice, reiterating its general prohibition on “call blocking.” Id. In the
86
Order, the FCC also extended this prohibition to interconnected VoIP or one-way VoIP
service providers obtaining intercarrier compensation. 2 Rawle at 756 ¶ 974. The FCC
feared that VoIP providers, like the long-distance companies, could have incentives to
block calls to avoid high access charges. See id.
Voice on the Net challenges this prohibition on three grounds: (1) The FCC gave
inadequate notice that it was considering a “no-blocking” obligation; (2) the FCC failed
to adequately explain its decision; and (3) the FCC lacked statutory authority to impose
the no-blocking obligation on information services. Voice on the Net Coalition, Inc.
Principal Br. at 9-19 (July 15, 2013). The first challenge is invalid because the FCC’s
notice was sufficient. The other two challenges were waived.
1. The Waiver Test
We would ordinarily decline to entertain any of the present arguments because
they were not raised in the FCC’s rulemaking proceedings or in a petition for rehearing.
“The filing of a reconsideration petition to the Commission is ‘a condition precedent to
judicial review . . . where the party seeking such review . . . relies on questions of fact or
law upon which the Commission . . . has been afforded no opportunity to pass.’”
Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1044 (10th Cir. 2011) (quoting 47
U.S.C. § 405(a)).
Voice on the Net has not drawn our attention to a petition for reconsideration; thus,
“we must determine whether the FCC was otherwise given an opportunity to pass on
87
[these] issue[s].” Id. This opportunity existed only if one of the commenters had
developed the issue in the administrative proceedings. See Sorenson Commc’ns, Inc. v.
FCC, 567 F.3d 1215, 1227-28 (10th Cir. 2009) (holding that the issue was waived
because the petitioner failed to raise in the FCC proceedings the “basis” for the present
legal challenge).
The D.C. Circuit Court of Appeals has adopted a straightforward test for waiver
under § 405. “The pith of the test is this: ‘the argument made to the Commission’ must
‘necessarily implicate[]’ the argument made to us.” Sprint Nextel Corp. v. FCC, 524 F.3d
253, 257 (D.C. Cir. 2008) (quoting Time Warner Entm’t Co. v. FCC, 144 F.3d 75, 80
(D.C. Cir. 1998)). This test reflects a practical method of applying § 405, and we adopt
the test for our circuit. Like the D.C. Circuit, we apply the test by distinguishing between
procedural and substantive challenges. See Time Warner Entm’t Co., 144 F.3d at 80.
When the challenge involves only a “technical or procedural mistake,” the party must
have raised the same claim to the FCC. Id. at 81. But if a petitioner makes a substantive
challenge, such as one involving FCC policy, we determine whether the FCC would
necessarily have viewed the question as part of the case. See New England Pub.
Commc’ns Council, Inc. v. FCC, 334 F.3d 69, 79 (D.C. Cir. 2003).
We apply this test to each of Voice on the Net’s arguments to determine if the
argument was preserved in the FCC proceeding.
88
2. Challenge to the Notice
According to Voice on the Net, the FCC failed to provide adequate notice and an
opportunity to comment on the no-blocking obligation on one-way VoIP providers.
Voice on the Net Coalition, Inc. Principal Br. at 9-13 (July 15, 2013). Because this
challenge is procedural, rather than substantive, we address whether Voice on the Net
raised the same challenge in the FCC proceeding. See Time Warner Entm’t Co., 144 F.3d
at 81.
Voice on the Net contends that the issue was preserved in a VoIP White Paper
presented to the FCC. Voice on the Net Coalition, Inc. Reply Br. at 1 (July 31, 2013).
We disagree except for the narrow contention that the FCC failed to define “‘one-way’
VoIP services.” See id. at 10.
The VoIP White Paper discussed potential FCC rate regulation on one-way VoIP,
but not the challenged no-blocking obligation on one-way VoIP providers:
The FCC . . . has not undertaken the pre-requisites under the [APA]
necessary to impose rate regulation on “one-way” VoIP. The term
“one-way interconnected VoIP” is not defined by the Act or in the
Commission’s rules. Neither has the FCC provided a proposed
definition of the term, or provided notice, explanation or justification
of the proposed regulation.
6 Rawle at 3830. The White Paper also stated in a footnote, without mentioning a no-
blocking obligation, that “[n]otice must be ‘sufficient to fairly apprise interested parties of
all significant subjects and issues involved.’” Id. at 3830 n.32 (quoting Am. Iron & Steel
Inst. v. EPA, 568 F.2d 284, 291 (3d Cir. 1977)).
89
Voice on the Net acknowledges that rate regulation is not the same as a no-
blocking obligation. Voice on the Net Coalition, Inc. Reply Br. at 2 (July 31, 2013). But
Voice on the Net points to the FCC’s assertion of a close connection between intercarrier
compensation and a no-blocking obligation. Id. Because the two issues are closely
related, Voice on the Net contends that the challenge to rate regulation on one-way VoIP
service necessarily implicated the present challenge. Id.
This contention fails. In opposing rate regulation on one-way VoIP, Voice on the
Net did not provide the FCC with a fair opportunity to pass on a separate, narrower no-
blocking obligation. For example, if parties were to allege that the FCC failed to notice
the transition to bill-and-keep, they would not preserve a much narrower claim that the
FCC failed to adequately notice the Access Recovery Charge. Though the two are
related, a general challenge does not necessarily implicate a more specific one. See Sprint
Nextel Corp. v. FCC, 524 F.3d 253, 257 (D.C. Cir. 2007).
The VoIP White Paper did preserve a potential challenge to the FCC’s use of the
term “one-way interconnected VoIP.” See 6 Rawle at 3830. But the FCC explained in its
notice that one-way interconnected VoIP constituted VoIP service that “allow[s] users to
terminate calls to the [Public Switched Telephone Network], but not receive calls from
the PSTN, or vice versa.” 1 Rawle at 365 n.57. Because the FCC defined “one-way
interconnected VoIP” in the notice, we reject the challenge.
90
3. Challenge to the Adequacy of the Explanation
Voice on the Net also invokes the APA in challenging the sufficiency of the FCC’s
explanation for no-blocking rules. Voice on the Net Coalition, Inc. Principal Br. at 13-15
(July 15, 2013). Because this challenge is procedural, rather than substantive, we
examine whether the same issue was raised in the administrative proceeding. See Time
Warner Entm’t Co., 144 F.3d at 81.
According to Voice on the Net, its argument on the no-blocking rules was
preserved in the VoIP White Paper. Voice on the Net Coalition, Inc. Reply Br. at 2 (July
31, 2013). But the VoIP White Paper did not address the sufficiency of the explanation
for the no-blocking rules on one-way VoIP providers; thus, this challenge has been
waived.
4. Challenge to the FCC’s Ancillary Jurisdiction
Voice on the Net also challenges the FCC’s ancillary jurisdiction. Voice on the
Net Coalition, Inc. Principal Br. at 15-19 (July 15, 2013). This challenge involves FCC’s
policy; thus, “we ask whether a reasonable Commission necessarily would have seen the
question raised before us as part of the case presented to it.” Time Warner Entm’t Co.,
144 F.3d at 81. The question would have constituted part of the case as long as it had
been presented by one of the parties. See EchoStar Satellite, LLC v. FCC, 704 F.3d 992,
996 (D.C. Cir. 2013).
91
According to Voice on the Net, the FCC’s ancillary jurisdiction was challenged in
the VoIP White Paper and a letter on October 18, 2011. Voice on the Net Coalition, Inc.
Reply Br. at 1 (July 31, 2013). These documents contain arguments that: (1) VoIP
services were “likely to be information services and may even [have been] software
applications or online offerings wholly outside of the Commission’s jurisdiction,” (2) the
FCC could not “avoid obvious limitations in its ability to regulate services outside of its
primary jurisdiction, including information services and other online services and
applications,” and (3) VoIP did not involve “Title II telecommunications services,” but
were “information services, outside of the scope of Section 201 Title II rate regulation.”
6 Rawle at 3830, 3935-36. These arguments did not cover the FCC’s ancillary authority.
Voice on the Net also urges a futility exception. Voice on the Net Coalition, Inc.
Reply Br. at 3-4 (July 31, 2013). No such exception exists, and the Supreme Court stated
in Booth v. Churner that it would not “read futility or other exceptions into statutory
exhaustion requirements where Congress has provided otherwise.” Booth v. Churner,
532 U.S. 731, 741 n.6 (2001). Because § 405(a) involves a statutory exhaustion
requirement, we are not free to recognize a futility exception. See Fones4All Corp. v.
FCC, 550 F.3d 811, 818 (9th Cir. 2008) (holding that futility does not excuse exhaustion
because it is specifically required in § 405). In the absence of a futility exception, we
conclude that Voice on the Net has waived its substantive challenges.
92
F. Transcom Enhanced Services, Inc.’s Challenges to the FCC’s Intra-
MTA Rule, Provisions on Call-Identification, and Blocking of Calls
Petitioner Transcom calls itself “an enhanced service provider.” 6 Rawle at 3855. As
an enhanced service provider, Transcom regards itself as an end-user rather than a
telecommunications carrier. Id. at 3965. Because Transcom views itself as an end-user
rather than a telecommunications carrier, it argues that it can never be in the middle of a
telecommunication for intercarrier compensation purposes and cannot be regulated as a
common carrier. Transcom Principal Br. at 21-22 (July 12, 2013).
Based on this characterization, Transcom challenges three aspects of the FCC’s
Order: (1) the FCC’s interpretation of its intraMTA rule governing reciprocal
compensation between wireless providers and LECs; (2) the FCC’s ancillary jurisdiction
to impose call-identifying rules on non-carriers who do not originate or terminate traffic;
and (3) the validity of the FCC’s no-blocking rules on VoIP providers. Id. at 39-40, 45-
48. We reject each argument. Transcom is not the called party, and Transcom has not
preserved its second and third challenges.
1. Transcom’s Challenge to the FCC’s IntraMTA Rule
Transcom initially challenges the FCC’s clarification of its “IntraMTA rule.” This
rule addresses calls between an LEC and a wireless provider that originate and terminate
in the same “Major Trading Area.” These calls are characterized as local and are subject
to reciprocal compensation. 2 Rawle at 768 ¶ 1003; 47 C.F.R. 51.701(b)(2).
93
This characterization was addressed in the FCC proceedings by a wireless carrier,
Halo Wireless. See 2 Rawle at 768-69 ¶ 1005; 6 Rawle at 3926-28. Halo asserted that it had
provided “‘Common Carrier Wireless Exchange Service to [Enhanced Service Providers]
and Enterprise Customers.’” Id. at 3975. According to Halo, its traffic originated at the
base station where its customers (enhanced service providers like Transcom) connected
wirelessly. See 2 Rawle at 768 ¶ 1005. Halo would then deliver its traffic to the terminating
LEC and characterize its traffic as local (or “intraMTA”). See id.
Multiple parties presented evidence that Halo’s traffic did not originate on a local
wireless line. See id. These parties stated that Halo’s traffic originated as access traffic
and progressed to Halo’s enhanced service providers, who then handed off the call to
Halo to deliver to the terminating LEC. Id. This process is illustrated in Diagram 9,
which shows a typical long-distance call from Oklahoma City to Denver:
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Halo’s “customer” (the enhanced service provider) is not the party who was calling
or being called. Nonetheless, Halo argued that its traffic was not subject to access
charges because the enhanced service provider terminated each long-distance call and
originated a new local wireless call. See id. at 769 ¶ 1006. In response, the FCC clarified
that for purposes of the intraMTA rule, the “re-origination of a call over a wireless link in
the middle of a call path [did] not convert a wireline-originated call into a [wireless]-
originated call for reciprocal compensation.” Id. For the intraMTA rule, the FCC ignores
the presence of an enhanced service provider, such as Transcom, in the middle of a call;
instead, the FCC looks to the calling party’s location in relation to the called party. See
id.
This conclusion requires Halo (as a common carrier) to pay access charges;
however, the FCC has not addressed Transcom’s status as an end-user or common carrier.
Though its status was not addressed, Transcom argues that it can no longer enjoy the
benefits of being an “end user.” Transcom Principal Br. at 11, 26-30 (July 12, 2013).
According to Transcom, calls terminate and originate with enhanced service
providers. Id. at 21. Under this view, even when the enhanced service provider is in the
middle of a communication, the call terminates; when the call leaves the enhanced service
provider, a new call has begun. See id.
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For this characterization, Transcom misreads two cases and overlooks the FCC’s
prior determination that a call “terminates” only when the call reaches the called party.
Id. at 33-34; Transcom Reply Br. at 12-13 (July 30, 2013).
Transcom relies on Atlantic Bell Telephone Companies v. Federal
Communications Commission, 206 F.3d 1 (D.C. Cir. 2000), and Worldcom, Inc. v.
Federal Communications Commission, 288 F.3d 429 (D.C. Cir. 2002), two cases
involving dial-up internet Id. at 44.
In Atlantic Bell Telephone Companies, the D.C. Circuit Court of Appeals vacated
an FCC order that excluded internet service providers from the reach of 47 U.S.C.
§ 251(b)(5). Atl. Bell Tel. Cos., 206 F.3d at 5, 8. The FCC had found that calls to internet
service providers were not considered “local” because they usually involved further
communications with out-of-state websites. See id at 5. The court rejected this “end-to-
end” analysis because it ignored the FCC regulation defining “termination” as “the
switching of traffic that is subject to section 251(b)(5) at the terminating carrier’s end
office switch (or equivalent facility) and delivery of that traffic from that switch to the
called party’s premises.” See id. at 6. Applying this regulation, the court concluded that
calls terminated when they reached the internet service providers; thus, the internet
service providers were “clearly the ‘called part[ies].’” Id.
Transcom has not explained how it meets the FCC’s regulatory definition of
“termination,” rendering Atlantic Bell Telephone Companies inapplicable. In addition to
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this lack of explanation, Transcom has not pointed to any authority making its purported
position as an enhanced service provider or an end-user relevant to the FCC’s
interpretation of the intraMTA rule.
Atlantic Bell Telephone Companies presented a different situation because
Transcom is not the called party. Dial-up providers are treated differently because they
are the parties being called. See In re Core Commc’ns, Inc., 455 F.3d 267, 271 (D.C. Cir.
2006) (“Under the dial-up method, a consumer uses a line provided by a local exchange
carrier . . . to dial the local telephone number of an Internet service provider.”). Because
Transcom is not the called party, calls do not terminate with it; and the FCC reasonably
interpreted its intraMTA rule.
2. Transcom’s Challenge to the Call-Identifying Rules
Transcom also challenges the FCC’s caller-identification rules. In the Order, the
FCC prohibited “intermediate providers” from altering “path signaling information
identifying the telephone number, or billing number, if different, of the calling party that
is received with a call.” 47 C.F.R. § 64.1601(a)(2); see 2 Rawle at 624-25 ¶¶ 719-20. The
FCC defined an “intermediate provider” as “any entity that carries or processes traffic
that traverses or will traverse the PSTN at any point insofar as that entity neither
originates nor terminates that traffic.” 47 C.F.R. § 64.1600(f); 2 Rawle at 624 ¶ 720.
Because this regulation regulates non-carriers, the FCC concedes it lacks Title II
authority. Federal Resp’ts’ Final Resp. to the Transcom Principal Br. at 21 (July 24,
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2013). Transcom contends that this regulation also exceeds the FCC’s ancillary
jurisdiction. Transcom Principal Br. at 46-47 (July 12, 2013).
We do not reach the jurisdictional challenge because Transcom failed to preserve it
in the administrative proceeding. See 47 U.S.C. § 405(a). In its response brief, the FCC
contended that Transcom had waived its jurisdictional argument. Federal Resp’ts’ Final
Resp. to the Transcom Principal Br. at 21 (July 24, 2013). Transcom responded, without
explanation, by citing over 100 pages in the record. Transcom Reply Br. at 23 (July 30,
2013). These citations are not helpful.
Of the cited material, only two footnotes and four pages are potentially relevant.
See 3 Rawle at 1220, 1222 n.30, 1325-26, 1478-79 n.5, 1834. Two of the pages state only
that information services are outside the FCC’s Title II authority. Id. at 1220, 1834. The
other pages discuss policy reasons weighing against regulation of information services
under Title I. Id. at 1325-26. And one footnote states generally that “the FCC lacks
‘blanket’ Title I authority to regulate non-telecommunications industries.” Id. at 1478-79
n.5.
The other footnote broadly challenges ancillary jurisdiction for a much broader
rule: one requiring information service providers to transmit call identification data “even
if the communications never touch the PSTN and even if the ‘phone number’ is not used
for that communication.” Id. at 1222 n.30. The FCC rule applies only to calls that
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traverse the PSTN; as a result, we have no reason to address the FCC’s ancillary authority
over calls that do not traverse the PSTN. See 2 Rawle at 755-56 ¶¶ 973-74.
Transcom has failed to identify a single place, amid the 100+ pages cited, in which
it alerted the FCC to its jurisdictional attack on the call-identifying rules. Accordingly,
this challenge has been waived.
3. Transcom’s Challenge to the FCC’s No-Blocking Rules
Like Voice on the Net, Transcom challenges the FCC’s no-blocking rules for VoIP
providers. Transcom Principal Br. at 48-49 (July 12, 2013). In addressing Voice on the
Net’s argument, we held that this challenge is waived because this challenge was not
presented in the administrative proceeding. For the same reason, we conclude that
Transcom has waived this challenge. See 47 U.S.C. § 405(a).
G. Windstream Corporation and Windstream Communications, Inc.’s
Challenges to Origination Charges
Windstream Corporation and Windstream Communications, Inc., which operate a
price-cap LEC, challenge the FCC’s treatment of originating access charges for VoIP
traffic. Windstream Principal Br. at 20-32 (July 17, 2013). This challenge is rejected.
In the Order, the FCC immediately set the default access rates for interstate and
intrastate toll VoIP traffic “equal to [the] interstate rates applicable to non-VoIP traffic.”
2 Rawle at 735 ¶ 944. Thus, charges for VoIP traffic would be capped at interstate rates for
origination and termination. Id. at 746-47 ¶ 961. The FCC added that it would allow
VoIP originating access charges at interstate rates on a transitional basis, “subject to the
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phase-down and elimination of those charges pursuant to a transition to be specified.” Id.
at 746 n.1976. The caps allegedly hurt Windstream because access charges are generally
higher for intrastate calls than for interstate calls. See id. at 656-57 ¶ 791, 663 n.1508.
Because the Order largely focused on charges for terminating access, Windstream
asked the FCC to “clarify ‘that the Order [did] not apply to, and [was] not intended to
displace, intrastate originating access rates for PSTN-originated calls that [were]
terminated over VoIP facilities.’” Windstream Principal Br. at 13 (July 17, 2013)
(quoting 6 Rawle at 4076).
In response, the FCC modified its VoIP rules in a second reconsideration order. 2
Rawle at 1162 ¶ 30. There the FCC acknowledged that Windstream had presented evidence
undermining the initial assumption that all VoIP intercarrier compensation, including
originating access charges for TDM format originated traffic, had been “widely subject to
dispute and varied outcomes.” Id. at 1163-65 ¶¶ 32-34. Based on the new evidence, the
FCC allowed LECs to resume charging intrastate originating access rates for VoIP calls
for two years. Id. at 1165-66 ¶ 35. Although originating VoIP intrastate access charges
would be capped at interstate levels after two years, the FCC did not allow use of its
recovery mechanism to recoup lost revenue. See id. at 1165 ¶ 35 n.97.
Windstream invokes the APA to challenge this treatment of intrastate VoIP
originating access charges on four grounds: (1) The FCC failed in the initial order to
provide a reasoned explanation for reducing origination charges for VoIP traffic; (2) the
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FCC acted irrationally in treating VoIP originating access differently than originating
access for traditional landline service; (3) the FCC failed to provide funding support; and
(4) the FCC acted arbitrarily and capriciously in failing to grant relief for the initial six-
month period preceding the Second Reconsideration Order. Windstream Principal Br. at
20-32 (July 17, 2013); Windstream Reply Br. at 15 (July 31, 2013). We reject these
arguments.
1. Windstream’s Challenge to the FCC’s Explanation in the
Original Order
Windstream contends that in the original order, the FCC failed to explain the
decision to “flash-cut[] intrastate VoIP originating access rates to much-lower interstate
rates.” Windstream Principal Br. at 20 (July 17, 2013). According to Windstream, the
FCC did not clearly reduce VoIP originating access charges because the discussion
involved only terminating access. Id. at 21-22.
We reject Windstream’s characterization of the original order. There the FCC
stated that it would reduce intrastate VoIP originating access charges to the same level as
interstate rates. In the Order, the FCC: (1) defined “VoIP-PSTN traffic” to cover “traffic
exchanged over PSTN facilities that originates and/or terminates in IP format,” and (2)
stated that “VoIP-PSTN traffic” would be “subject to charges not more than originating
and terminating interstate access rates.” 2 Rawle at 732-33 ¶ 940, 746-47 ¶ 961.11 This
11
Windstream argues that footnote 1976 undermines this reading of the Order.
Windstream Principal Br. at 21 (July 17, 2013). We disagree. Though footnote 1976
appears in the VoIP section of the Order, it generally discusses originating access charges
under 47 U.S.C. § 251(b)(5) and the anticipated reforms involving originating access.
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language is clear even though the FCC elsewhere focused on terminating access charges.
The FCC’s VoIP framework applied to the origination of access VoIP traffic.
The FCC also explained its decision to cap VoIP intrastate originating access
charges at interstate rates. In the Order, the FCC established (for the first time) an
entitlement to originating and terminating access charges for VoIP traffic during the
transition to bill-and-keep. Id. at 729 ¶ 933.
When the FCC issued its initial order, it had little reason to believe that billing
disputes were more prevalent for termination than for origination. Thus, termination and
origination were subjected to the same rules. See id. at 730-32 ¶¶ 937-39. After the
Order was issued, Windstream presented evidence that disputes were less frequent for
origination than for termination. Id. at 1164 ¶ 33. This evidence prompted the FCC to
modify its order, and we must now review the FCC’s explanation for the new version. Id.
at 1164-66 ¶¶ 34-35.
2. Windstream’s Challenge to the FCC’s Explanation for the New
Rule
Windstream contends that the FCC failed to explain its decision to treat originating
access VoIP traffic differently than traditional originating access traffic. Windstream
Principal Br. at 22-24 (July 17, 2013). In the Second Reconsideration Order, the FCC
determined that “there were fewer disputes and instances of non-payment or under-
payment of origination charges billed at intrastate originating access rates for intrastate
See 2 Rawle at 746 n.1976.
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toll VoIP traffic than was the case for terminating charges for such traffic.” 2 Rawle at 1164
¶ 33. Arguing that this acknowledgment applies equally to originating access charges for
traditional service, Windstream contends that the FCC failed to explain why it was
treating intrastate originating access differently in VoIP and traditional service.
Windstream Principal Br. at 24 (July 17, 2013). We reject this contention.
The FCC explained that in the overarching transition to bill-and-keep for all
traffic, originating access charges need not be treated the same for traditional service and
VoIP service. 2 Rawle at 1162-63 ¶ 31. In the initial order, the FCC pointed out that it was
adopting “a distinct prospective intercarrier compensation framework for VoIP traffic
based on its findings specific to that traffic.” Id. But before entry of the original order,
the FCC had not extended access charges to VoIP traffic; thus, carriers had less reason to
rely on continuing revenue for VoIP intercarrier compensation. See id. at 1162 ¶ 31 &
n.84. Without this reliance interest, the FCC thought LECs should have to justify
extension of the intercarrier compensation regime for VoIP traffic during the transition.
See id.
In the Second Reconsideration Order, the FCC credited evidence that carriers were
actually receiving originating access charges for VoIP traffic. Id. at 1164 ¶ 33. Whether
entitled to the access charges or not, carriers were collecting these charges on VoIP
traffic; and with this reality, the FCC gave carriers two years to charge the higher
origination rates for intrastate access on VoIP traffic. See id. at 1165-66 ¶ 35.
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In doing so, the FCC was careful to address originating VoIP access traffic in the
context of its transitional VoIP intercarrier compensation regime. See id. In the context
of the FCC’s transition to bill-and-keep for all traffic, this decision was not arbitrary and
capricious. See Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1046 (10th Cir. 2011)
(stating that special deference is given to transitional measures).
3. Windstream’s Challenge to the FCC’s Failure to Provide
Funding Support
Windstream also challenges the FCC’s refusal to provide funding support for
reductions in intrastate originating VoIP access charges, calling the refusal arbitrary and
capricious. Windstream Principal Br. at 25-29 (July 17, 2013). This challenge is
rejected.
In other parts of the Order, the FCC: (1) emphasized its “commitment to a gradual
transition” to bill-and-keep and rejection of flash-cuts, and (2) adopted a funding
mechanism for traditional terminating access charges because “[p]redictable recovery
during the intercarrier compensation reform transition [was] particularly important to
ensure that carriers ‘[could] maintain/enhance their networks while still offering service
to end-users at reasonable rates.’” 2 Rawle at 695 ¶ 870, 689-90 ¶ 858, 704 ¶ 890. And, the
FCC decided not to reduce traditional originating access charges until it could “further
evaluate the timing, transition, and possible need for a recovery mechanism.” Id. at 632
¶ 739. With these statements, Windstream argues that the FCC failed to explain its
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refusal to adopt a recovery mechanism for the reduction in intrastate originating VoIP
access charges. Windstream Principal Br. at 25-29 (July 17, 2013). We disagree.
The FCC provided carriers with a two-year transition period before lowering
intrastate VoIP originating access charges to interstate levels. 2 Rawle at 1165-66 ¶ 35. With
this step, the FCC explained that reduction in intrastate originating VoIP access charges
would not require replacement revenue in the context of “the Commission’s overall VoIP
intercarrier compensation framework.” Id. The FCC predicted that under its VoIP
intercarrier compensation framework, “most providers [would] receive, either via
negotiated agreements or via tariffed charges, additional revenues for previously disputed
terminating VoIP calls and [would] also realize savings associated with reduced litigation
and disputes.” Id. In light of these benefits, the FCC found that “indefinitely permitting
origination charges at the level of intrastate access for prospective intrastate toll VoIP
traffic [was] not necessary to ensure a measured transition.” Id. Thus, in capping VoIP
intrastate originating access charges without a separate recovery mechanism, the FCC
reasoned that carriers would obtain sufficient revenue. Id.
This explanation sufficed under the APA. In transitioning the industry to bill-and-
keep for all traffic, the FCC could reasonably conclude that the interim measures would
ease many of the burdens on LECs. As recognized above, we give substantial deference
to interim regulations and transitional measures. See Sorenson Commc’ns, Inc., 659 F.3d
at 1046. And we are “particularly deferential when [we] review[] an agency’s predictive
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judgments, especially those within the agency’s field of discretion and expertise.”
Franklin Sav. Ass’n v. Dir., Office of Thrift Supervision, 934 F.2d 1127, 1146 (10th Cir.
1991).
We apply these principles in reviewing the FCC’s prediction that carriers would
obtain sufficient revenue for terminating access to offset losses in revenue for originating
VoIP access. Windstream criticizes this prediction on four grounds: (1) The FCC did not
address the absence of a recovery mechanism for intrastate VoIP originating access
charges; (2) the FCC failed to support its assertion that carriers would receive sufficient
revenue in the overall context of the VoIP intercarrier compensation framework; (3) a
flash cut would occur at the end of the two-year transition period; and (4) the FCC was
inconsistent in establishing a recovery mechanism for the loss of access charges for
terminating VoIP, but not originating VoIP access. Windstream Reply Br. at 10-15 (July
31, 2013). We reject each argument.
The FCC found that a recovery mechanism was unnecessary for intrastate VoIP
originating access charges. See 2 Rawle at 1165-66 ¶ 35. The FCC explained its approach to
“the transition of origination charges for intrastate toll VoIP traffic in the context of the
Commission’s overall VoIP intercarrier compensation framework.” Id. The FCC
predicted that most providers would receive “additional revenues for previously disputed
terminating VoIP calls” and save in litigation costs. Id. These predictions led the FCC to
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conclude that a recovery mechanism was not necessary to prevent undue disruption from
reduced charges for the origination of intrastate calls. See id.
We also reject Windstream’s argument (presented in its reply brief)12 that
intercarrier compensation would be inadequate. This argument was omitted in
Windstream’s opening brief; thus, the argument has been waived. Adler v. Wal-Mart
Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998).
Windstream characterizes the two-year transition period as an unwarranted “flash
cut.” Windstream Principal Br. at 19-24 (July 17, 2013). But the FCC applied its
institutional expertise in concluding that carriers could adjust their business models
before dropping rates. We again have little reason to question the FCC’s predictive
judgment based on Windstream’s characterization of the two-year period as a “flash cut.”
In addition, Windstream argues that the FCC acted inconsistently by creating a
recovery mechanism for reductions in access charges for termination, but not origination.
Windstream Reply Br. at 14-15 (July 31, 2013). The FCC acknowledged the difference,
but explained it. See 2 Rawle at 1165-66 ¶ 35. This explanation was based on the disputed
nature of termination charges for VoIP providers. See id. By resolving these disputes in
favor of VoIP providers, the FCC reasoned that access charges for termination access
could be used to offset reduction in revenue for origination access. Id. With greater
overall termination charges for VoIP carriers, the FCC could reasonably decline to offer a
recovery mechanism for losses in origination charges.
12
Windstream Reply Br. at 11-12 (July 31, 2013).
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As Windstream points out, the FCC provided different treatment for origination-
and termination-charges; but the FCC explained the difference. This explanation might
have been debatable, but it was neither arbitrary nor capricious. As a result, we defer to
the FCC in applying its institutional expertise when it declined to provide a separate
recovery mechanism for lost revenue in originating access.
4. Windstream’s Challenge to the Initial Period of Six Months
Windstream argues that the FCC should have ordered carriers to pay higher
originating access rates retroactively for the six-month period between the initial order
and the second reconsideration order. Windstream Principal Br. at 29-32 (July 17, 2013).
Even if the FCC could require retroactive payment of higher rates, the FCC could have
chosen to make the higher rates prospective (rather than retroactive). See Mountain
Solutions, Ltd. v. FCC, 197 F.3d 512, 520 (D.C. Cir. 1999). And Windstream did not ask
the FCC to exercise this discretion in the petition for rehearing. 6 Rawle at 4076-84. Because
the FCC would have had no obligation to consider the issue sua sponte, we decline to
disturb the Order on this ground.
VI. Conclusion
We deny all of the petitions for review involving the FCC’s regulations regarding
intercarrier compensation. In addition, we deny the FCC’s Motion to Strike New
Arguments in the Joint Intercarrier Compensation Reply Brief of Petitioners.
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