GTE Service Corp. v. Federal Communications Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 4, 2000 Decided July 14, 2000
No. 97-1538
GTE Service Corporation and
Micronesian Telecommunications Corporation,
Petitioners
v.
Federal Communications Commission and
United States of America,
Respondents
MCI Communications Corporation, et al.,
Intervenors
Consolidated with
99-1045, 99-1046
On Petitions for Review of an Order of the
Federal Communications Commission
Daniel E. Troy and Howard J. Symons argued the cause
for petitioners. With them on the briefs were Gail L. Polivy,
R. Michael Senkowski, Michael F. Altschul, Michelle M.
Mundt. David A. Gross, James D. Ellis, Robert M. Lynch,
Michael J. Zpevak, William B. Barfield, M. Robert Suther-
land, L. Andrew Tollin, Michael Deuel Sullivan, Luisa L.
Lancetti, S. Mark Tuller an Matthew B. Pachman. M.
Edward Whelan and Theodore C. Whitehouse entered ap-
pearances.
John Edward Ingle, Deputy Associate General Counsel,
Federal Communications Commission, argued the cause for
respondents. With him on the brief were Christopher J.
Wright, General Counsel, Laurel R. Bergold, Counsel, Joel I.
Klein, Assistant Attorney General, U.S. Department of Jus-
tice, Robert B. Nicholson, and Robert J. Wiggers, Attorneys.
Adam D. Hirsh, Attorney, entered an appearance.
John W. Katz, Veronica M. Ahern, Herbert E. Marks and
Thomas K. Crowe were on the brief for intervenors.
Before: Williams, Ginsburg, and Sentelle, Circuit Judges.
Opinion for the Court by Circuit Judge Ginsburg.
Ginsburg, Circuit Judge: Several parties petition for re-
view of four orders by the Federal Communications Commis-
sion implementing the rate integration requirement of
s 254(g) of the Communications Act of 1934, as amended by
the Telecommunications Act of 1996, 47 U.S.C. s 254(g). The
petitioners challenge two determinations made by the Com-
mission: (1) That a telecommunications provider is required
to integrate its rates across all commonly owned or controlled
affiliates that provide interstate interexchange services; and
(2) that the requirement of rate integration applies to provid-
ers of Commercial Mobile Radio Service (CMRS), that is,
wireless technologies such as cellular and PCS.
We hold first that the Commission's interpretation of
s 254(g) as requiring rate integration across affiliates is
reasonable and second that the Commission erred in conclud-
ing the plain text of s 254(g) required it to apply the rate
integration requirement to providers of CMRS. We there-
fore vacate the order in relevant part and remand this matter
to the Commission for further consideration whether, as an
exercise of its delegated authority, s 254(g) should be applied
to providers of CMRS.
I. Background
Prior to 1972 rates for interstate long distance telecommu-
nications services to and from non-contiguous domestic loca-
tions such as Alaska, Hawaii, and Puerto Rico were much
higher than rates for the same services within the contiguous
48 states. In effect, providers of long distance services
treated those locations as foreign for the purpose of setting
long distance rates. See Establishment of Domestic
Communications-Satellite Facilities by Non-Governmental
Entities, 35 F.C.C.2d 844, 856 p 35 (1972) (Domsat II Order).
The Commission became concerned that this disparate treat-
ment "inhibited the free flow of communications between the
contiguous states and [non-contiguous domestic] points to the
disadvantage of all of our citizens." Id. The Commission
also recognized that the use of satellites, the cost of which is
insensitive to distance, was making it economically feasible to
serve non-contiguous locations at rates comparable to those
offered in the contiguous 48 states. See id.In 1972, therefore, the Commission initiated a policy of
"rate integration": Telecommunications carriers serving Alas-
ka, Hawaii, and Puerto Rico (and later the U.S. Virgin
Islands) were required, as a condition of their licenses to use
new domestic satellites, to submit a plan that would "give
maximum effect to the elimination of overall distance as a
major cost factor and ... integrate these three United States
points into the uniform mileage rate pattern that now obtains
for the contiguous states." Id. at 857 p 37. Thus AT&T was
required to develop a tariff that would integrate the rates it
charged for interstate long distance service to Alaska, Hawaii,
and Puerto Rico into the domestic rate pattern applicable in
the contiguous 48 states. See Integration of Rates, 61
F.C.C.2d 380, 392 (1976) (1976 Rate Integration Order).
Rate integration would thus ensure "service between the
contiguous states and ... noncontiguous points[ ] at rates
that are equivalent to those prevailing for comparable dis-
tances in the contiguous 48 states." Integration of Rates, 9
F.C.C.R. 2197, 2198 n.2 (1993).
A. Rate Integration under the Telecommunications Act
of 1996
The Commission adopted its policy of rate integration as an
exercise of its broad authority under the Communications Act
to regulate carriers for the public convenience and necessity.
See 47 U.S.C. s 214; Domsat II Order, 35 F.C.C.2d at 856
p 35. In the Telecommunications Act of 1996, Pub. L. No.
104-104, 110 Stat. 56 (1996), the Congress put rate inte-
gration upon a statutory footing by adding s 254(g) to the
Communications Act of 1934:
Within 6 months after February 8, 1996, the Commission
shall adopt rules to require ... that a provider of
interstate interexchange telecommunications services
shall provide such services to its subscribers in each
State at rates no higher than the rates charged to its
subscribers in any other State.
Although perhaps not obvious on its face, the parties agree
that s 254(g) means what the Conference Report says it
means:
New section 254(g) is intended to incorporate the polic[y]
of ... rate integration of interexchange services....
The conferees intend the Commission's rules ... to
incorporate the policies contained in the Commission's
proceeding entitled "Integration of Rates and Services
for the Provision of Communications by Authorized Com-
mon Carriers between the United States Mainland and
the Offshore Points of Hawaii, Alaska and Puerto
Rico/Virgin Islands" (61 FCC2d 380 (1976)).
H.R. Conf. Rep. No. 104-458, at 132 (1996).
B. The Commission's Orders
The Commission promulgated rules requiring rate inte-
gration under s 254(g) in a series of four orders: (1) Imple-
mentation of Section 254(g) of the Communications Act of
1934, as Amended, Report & Order, 11 F.C.C.R. 9564 (1996)
(Integration Order); (2) First Memorandum Opinion and
Order on Reconsideration, 12 F.C.C.R. 11812 (1997) (First
Reconsideration Order); (3) Order, 12 F.C.C.R. 15739 (1997)
(Stay Order); and (4) Memorandum Opinion & Order, 14
F.C.C.R. 391 (1998) (Second Reconsideration Order). The
petitioners now challenge two determinations made in the
course of those orders.
1. Rate Integration Across Affiliates
In the Integration Order the Commission announced with-
out elaboration that it read the term "provider of interstate
interexchange telecommunications services" in s 254(g) to
include "parent companies that, through affiliates, provide
service in more than one state." 11 F.C.C.R. at 9598 p 69.
Upon reconsideration at the instance of GTE and U.S.
West, Inc., the Commission explained that the statute was
ambiguous on the specific issue whether for purposes of
rate integration a "provider of interstate interexchange tele-
communications services" includes commonly owned or con-
trolled affiliates of the provider. First Reconsideration Or-
der, 12 F.C.C.R. at 11819 p 14. Because an interexchange
carrier could circumvent rate integration by providing inter-
state long distance service to each non-contiguous location
through a separate subsidiary, the Commission concluded
that requiring rate integration among affiliates was most
consonant with the purpose of the statute. See id. p 15.
Under the resulting rule, for example, the GTE affiliate that
provides long distance service only in the Commonwealth of
the Northern Mariana Islands is required to integrate its
rates with those of all other GTE affiliates providing long
distance service anywhere in the contiguous 48 states or in
other non-contiguous domestic locations.
2. Rate Integration by CMRS Providers
Prior to enactment of the 1996 Telecommunications Act,
the Commission had required only wireline carriers, and not
providers of CMRS, to integrate their rates. In the Inte-
gration Order the agency gave no indication that it believed
s 254(g) either required or authorized a change in this state
of affairs. In the First Reconsideration Order, however, the
Commission stated, again without elaborating, that CMRS
providers were required by s 254(g) to integrate the rates for
their interstate interexchange services. 12 F.C.C.R. at 11821
p 18. Several parties petitioned the Commission to reconsid-
er and stay enforcement of that determination.* In the
Second Reconsideration Order the Commission explained its
rationale for requiring CMRS providers to integrate their
rates: Section 254(g) by its terms applies to providers of
interstate interexchange service without making an exception
for CMRS. 14 F.C.C.R. at 396 p 10.
Because CMRS does not use wireline exchanges, its cover-
age by s 254(g) raised the following question for the Commis-
sion: Which interstate CMRS are "interexchange" services?
Noting that the Communications Act defines "telephone ex-
change service" as "service within a telephone exchange, or
... comparable service provided through a system of
switches, transmission equipment, or other facilities," 47
U.S.C. s 153(47), the Commission determined that CMRS
within a "major trading area" (MTA) was "comparable" to
wireline "service within a telephone exchange," 14 F.C.C.R. at
401 p 23; therefore, CMRS between MTAs was comparable
to "interexchange" wireline service, and interstate, inter-MTA
CMRS was subject to rate integration.
II. Analysis
The petitioners seek review of the rules requiring rate
integration among affiliates and the application of rate inte-
gration to providers of CMRS. Both challenges turn upon
__________
* The Commission, without expressing any doubt that s 254(g)
applies to CMRS providers, stayed application of the rule requiring
CMRS providers to integrate their rates across affiliates pending
further consideration whether such integration would produce anti-
competitive effects owing to the prevalence of cross-ownership and
joint ventures in the CMRS industry. See Stay Order, 12 F.C.C.R.
at 15746 p 14.
the Commission's interpretation of the phrase "provider of
interstate interexchange telecommunications services" in
s 254(g). Because the Congress committed administration of
the Communications Act to the Commission, we review the
petitioners' challenges to the Commission's interpretation of
s 254(g) using the two-step analysis of Chevron U.S.A., Inc.
v. NRDC, 467 U.S. 837 (1984). Under Chevron step one, we
ask "whether Congress has directly spoken to the precise
question at issue." If so, then we "must give effect to the
unambiguously expressed intent of Congress." If not, then
under Chevron step two we will defer to the agency's inter-
pretation of the Act if it is reasonable in light of the text, the
structure, and the purpose of the Act. See id. at 842-43.
A. Rate Integration Across Affiliates
The petitioners make two arguments for the proposition
that the Congress in s 254(g) unambiguously directed the
Commission to prescribe rate integration only with respect to
each individual provider of telecommunications services and
not with respect to all commonly owned or controlled affili-
ates. They first argue that because "provider" means simply
"one that provides," the Congress could not have meant the
phrase "provider of interstate interexchange telecommunica-
tions services" to include parent companies, which are not
licensed to and do not provide telecommunications services.
Further, because holding companies are not "providers," they
"may not be used as conduits through which rate integration
requirements are imposed on commonly owned affiliates."
Both parts of petitioners' argument miss the mark. First,
the Commission no longer interprets "provider of interstate
interexchange telecommunications services" to include parent
companies that are not themselves carriers: In the First
Reconsideration Order the Commission, responding to this
very argument, narrowed its cross-affiliate rule to apply only
to "affiliated carriers"--thereby excluding any parent compa-
ny that is not itself a carrier. 12 F.C.C.R. at 11819 p 16.
And as to the petitioners' derivative claim that the Commis-
sion cannot regulate commonly owned affiliates except by
impermissibly regulating parent companies as "conduits," the
petitioners provide no legal support for this ipse dixit. Nor
does the Commission either purport or need to regulate the
parent--as a conduit or otherwise--when it requires two or
more carriers under common control to coordinate their
activities.
The petitioners' second argument turns upon the Congress
having expressly extended regulatory obligations to the "affil-
iates" of a carrier in other sections of the Act; by not
similarly including the word "affiliates" in s 254(g), we are
told, the Congress unambiguously (albeit implicitly) limited
the scope of the integration requirement to the rates charged
by individual providers of telecommunications services. The
petitioners make a substantial point: In 1996 the Congress
added "affiliate" as a defined term in the Communications
Act, see 47 U.S.C. s 153(1), and then used that term in 15
sections of the Act, see 47 U.S.C. ss 222, 224, 228, 251, 260,
271-275, 541, 543, 548, 572, and 573. In many of those
sections the Congress specifically extended a regulatory pro-
hibition or obligation from the individual carrier to the carri-
er's affiliates. See, e.g., 47 U.S.C. s 572 ("No local exchange
carrier or any affiliate of such carrier ... [may acquire] more
than a 10 percent financial interest, or any management
interest, in any cable operator providing cable service within
the [LEC's] telephone service area").
If the Congress had written s 254(g) upon a blank slate,
announcing an entirely new requirement that rates to non-
contiguous points be integrated, then the absence of "affili-
ates" from the text of s 254(g), coupled with its inclusion in
so many other sections, might be strong textual evidence that
the Congress spoke directly to this issue. See, e.g., Alabama
Power Co. v. FERC, 160 F.3d 7, 14 (D.C. Cir. 1998). Section
254(g) does not, however, announce a new policy; the legisla-
tive history makes clear that the Congress intended s 254(g)
to carry forward by regulation the Commission's preexisting
policy requiring rate integration. See H.R. Conf. Rep. No.
104-458, at 132 (1996). An undisputed aspect of that policy is
that AT & T was required to integrate its rates across all its
affiliated providers. The parties dispute whether other carri-
ers were required to integrate rates across affiliates but,
regardless of the answer to that question, it is clear that the
Commission under its preexisting policy could and in the case
of AT&T did mandate integration across affiliates. Against
that backdrop, the omission of the word "affiliates" in a
statute intended to perpetuate existing Commission policy
cannot be read to preclude for the first time integration
across affiliates; the most the omission tells us is that the
Congress did not specifically require the Commission to order
rate integration across affiliates. We agree with the Commis-
sion, therefore, that s 254(g) is ambiguous on the precise
issue whether affiliates may be included within the phrase
"provider of interstate interexchange telecommunications ser-
vices."
Turning to Chevron step two, the petitioners argue that the
Commission's interpretation is unreasonable because it con-
flicts with two of the purposes of the 1996 Act, namely, "to
promote competition and reduce regulation." Pub. L. No.
104-104, 110 Stat. 56, 56 (1996) (preamble), and with one of
the goals of rate integration, namely, the expansion of tele-
communications services offered to non-contiguous domestic
locations, see Domsat II Order, 35 F.C.C.2d at 856 p 35. The
petitioners illustrate their point with the following (not very)
hypothetical situation: A carrier provides interstate interex-
change service through separate affiliates in the highly com-
petitive mainland market and in a high-cost domestic over-
seas market (such as Guam, which cannot be served by
domestic satellites because of its distance from the continen-
tal United States). If rates must be integrated across those
affiliates then, according to the petitioners, the carrier must
either charge above-market rates on the mainland, and there-
fore become noncompetitive, or charge below-market rates in
the overseas location, and therefore lose money on every call.
Faced with this Hobson's choice, the carrier will want to sell
its overseas affiliate, presumably to a new owner with no
other operations subject to the rate integration requirement.
The problem with the petitioners' argument--passing over
the Commission's factual rejoinder that the carrier would not
lose money on every call--is that the central purpose of rate
integration, namely, ensuring "service between the contiguous
states and ... noncontiguous points[ ] at rates that are
equivalent to those prevailing for comparable distances in the
contiguous 48 states," Integration of Rates, 9 F.C.C.R. 2197,
2198 n.2 (1993), by its nature does nothing to reduce regula-
tion or to promote competition. The real question raised by
this argument, therefore, is not whether integration across
affiliates is regulatory and anti-competitive but whether it is
unreasonable in light of the underlying goal of rate inte-
gration (pace the preamble to the 1996 Act), namely, equal-
ized rates to non-contiguous locations. Viewed thus at the
margin, the petitioners' hypothetical scenario actually demon-
strates the reasonableness of the Commission's interpreta-
tion: If the Commission did not read affiliates into the term
"provider" in s 254(g), then the petitioners' hypothetical car-
rier would charge higher rates in the non-contiguous market
(through one affiliate) than it charges on the mainland
(through the other affiliate), and there would be no rate
integration of non-contiguous markets at all. We therefore
agree with the Commission that interpreting "provider of
interstate interexchange telecommunications services" to en-
compass commonly owned or controlled affiliates is reason-
able in light of the text and the regulatory purpose of
s 254(g).
Finally, the petitioners challenge the Commission's decision
as inconsistent and therefore arbitrary and capricious. Even
if interpreting "provider" to include affiliates is permissible,
the petitioners claim, the Commission has interpreted "pro-
vider" in three inconsistent ways: (1) for wireline carriers,
"provider" means a provider and all commonly owned or
controlled affiliates; (2) for providers of CMRS, as to which
the Commission has stayed the requirement of affiliate inte-
gration, "provider" will likely be interpreted to mean a pro-
vider and all affiliates not jointly owned by competing provid-
ers; and (3) for the purpose of "geographic rate averaging"--
another policy prescribed in s 254(g)--the Commission has
"implicitly" excluded affiliates from the scope of the term
"provider."
We reject this challenge for two reasons. First, as the
Commission notes, it has to date given but a single interpre-
tation to the term "provider" in s 254(g). For the purpose of
rate integration, "provider" includes affiliates of both wireline
and CMRS providers; the Stay Order did not alter this
interpretation, and the Commission may yet adhere to it.
And in a separate order not under review here, the Commis-
sion gave the same interpretation for the purpose of geo-
graphic rate averaging. See Motion of AT&T Corp. to be
Reclassified as a Non-Dominant Carrier, 12 F.C.C.R. 20787,
20804 p 31 (1997). Second, even if the Commission ultimately
does interpret "provider" differently with respect to wireline
service and CMRS, that would not necessarily be arbitrary
and capricious. The Commission might reasonably conclude
that requiring integration among affiliates better advances
the purposes of the Congress with respect to wireline service
than it does with respect to CMRS, depending upon the
competitive structure of the markets in which the two ser-
vices are offered. On the record presently before us, there-
fore, we see no infirmity in the Commission's actions, and we
deny the petition to review the requirement of integration
across affiliates.
B. Rate Integration by CMRS Providers
The Commission held that the phrase "provider of inter-
state interexchange telecommunications services" in s 254(g)
"unambiguously applies to the interstate, interexchange ser-
vices offered by CMRS providers. If Congress had intended
to exempt CMRS providers, it presumably would have done
so expressly as it did in other sections of the Act." Second
Reconsideration Order, 14 F.C.C.R. at 396 p 10. In an
unusually direct confrontation under Chevron step one, the
petitioners maintain not that the statute is ambiguous but
that it unambiguously means the opposite of what the Com-
mission says it means. For our part, we cannot agree with
either the Commission or the petitioners that the Congress
spoke unambiguously on the precise issue that divides them.
The Commission's secondary assertion that the Congress
would have expressly exempted CMRS from s 254(g) had it
so intended is undermined by the Conference Report indicat-
ing that the Congress meant s 254(g) to incorporate the
Commission's preexisting rate integration policy, see H.R.
Conf. Rep. No. 104-458, at 132 (1996), which the Commission
had never before applied to CMRS. As Commissioner Powell
wrote in dissent, "when it is undisputed that CMRS providers
were not subject to the Commission's pre-1996 Act rate
integration policy, and where Congress seems to say it is
merely incorporating that policy, why would we expect to find
an explicit and unambiguous indication to exclude them?"
Dissenting Statement of Commissioner Michael K. Powell,
1999 WL 38420 (Jan. 28, 1999).
This leaves the Commission's primary assertion that the
term "interexchange telecommunications service," which is
not defined in the Communications Act, "on its face unambig-
uously" makes CMRS subject to rate integration under
s 254(g). The Commission starts out in the hole: Because
CMRS does not use exchanges, it is by no means obvious that
the Congress, when it used a phrase in which the word
"interexchange" is an essential term, was referring to CMRS.
True, the Congress provided a functional definition of "tele-
phone exchange service," including not just "service within a
telephone exchange" but also "comparable service provided
through ... other facilities," 47 U.S.C. s 153(47); therefore,
the Commission may characterize as "exchange service" even
services that, like CMRS, do not use exchanges. That the
Congress may have extended to providers of CMRS various
statutory obligations attaching to "exchange service" does
not, however, demonstrate that the Congress, in using the
word "interexchange," must have extended the requirement
of rate integration to providers of CMRS. The Commission
might decide, as an exercise of its delegated authority to
interpret ambiguities in the Act, that the phrase "interex-
change telecommunications service" in s 254(g) is best read
in a manner analogous to the express definition of "exchange
service," that is, as applying not only to wireline interex-
change service but also to CMRS that the Commission deter-
mines is "comparable"; but that interpretation is certainly
not compelled by the "unambiguous" text of the statute.
As for the petitioners' Chevron step one arguments, they
first claim that the Congress's use of the word "interex-
change"--which they say has no relevance to CMRS--demon-
strates that s 254(g) must apply only to wireline providers.
As we just explained, however, the functional definition of
"telephone exchange service" in 47 U.S.C. s 153(47) demon-
strates that the Congress has authorized the Commission to
characterize as "exchange service" even services that do not
use exchanges. Therefore it is not clear that the Congress
was referring only to wireline service when it used the word
"interexchange." The petitioners' second claim is that by
stating in the legislative history that s 254(g) was intended to
codify the Commission's preexisting policy, which did not
apply to providers of CMRS, the Congress clearly and unam-
biguously excluded providers of CMRS from the coverage of
s 254(g). We think this reads too much into both the Com-
mission's policy and the legislative history. The Commission
had never either applied or declined to apply the policy to
providers of CMRS. There is no reason to believe that prior
to the 1996 Act the Commission was in any way precluded
from extending its policy to providers of CMRS, and the
Congress, in stating that it was incorporating the Commis-
sion's preexisting policy into s 254(g), gave no indication that
it meant to freeze rate integration as it then was and to
prohibit any further development or extension of the policy.
The petitioners further argue that application of s 254(g) to
providers of CMRS "would be inconsistent with the deregula-
tory intent" of 47 U.S.C. s 332(c) (authorizing Commission to
exempt CMRS from some regulations), the definition of "tele-
phone toll service" in 47 U.S.C. s 153(48), and the pro-
consumer purpose of the 1996 Telecommunications Act over-
all. However probative these arguments may be in determin-
ing whether the Commission's interpretation of s 254(g) is
reasonable, they do not rise to the level of demonstrating that
the Congress has spoken directly to this precise issue.
In light of the text and legislative history of s 254(g), then,
it is unclear whether CMRS is included in the phrase "inter-
exchange telecommunications service": the Congress may
have been referring only to wireline interexchange service, or
it may also have meant to include "comparable" CMRS. At
this juncture we would ordinarily proceed to step two and
consider whether the Commission's interpretation of the stat-
ute is reasonable. In this case, however, the Commission
never exercised its discretionary authority to interpret the
statute, as the Second Reconsideration Order makes clear;
because it believed that the plain text of s 254(g) subjected
providers of CMRS to the requirement of rate integration,
the Commission did not go on to show why, even if it is not
the only possible interpretation of the statute, it is nonethe-
less a reasonable interpretation of the statute. 14 F.C.C.R.
at 396 p p 10, 11, 18.
Thus the Commission "act[ed] pursuant to an erroneous
view of law and, as a consequence, fail[ed] to exercise the
discretion delegated to it by Congress." Prill v. NLRB, 755
F.2d 941, 942 (D.C. Cir. 1985); see also FCC v. RCA Commu-
nications Inc., 346 U.S. 86, 95-96 (1953). Because the Com-
mission might well exclude CMRS from coverage under
s 254(g) as an exercise of its discretion, we must remand this
matter for the Commission to make that determination in the
first instance. See SEC v. Chenery Corp., 318 U.S. 80, 88
(1943); Prill, 755 F.2d at 956-57.*
III. Conclusion
The petition for review is denied insofar as it challenges the
Commission's requirement that carriers integrate their inter-
state long distance rates with those of all commonly owned or
controlled affiliates in both contiguous and non-contiguous
domestic locations. The petition is granted insofar as it
challenges the Commission's requirement that providers of
CMRS likewise integrate their rates. The orders under
review are vacated in relevant part and this matter is re-
manded to the Commission for further consideration.
So ordered.
__________
* In view of this disposition, we do not address the petitioners'
alternative claim that if s 254(g) applies to providers of CMRS then
the Commission is required by 47 U.S.C. s 160 to forbear from
enforcement of the requirement.