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Allband Pet. for Reh'g - In re: FCC 11-161 (10th Cir.)

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Released: July 8, 2014
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Appellate Case: 11-9900 Document: 01019274932 Date Filed: 07/07/2014 Page: 1

IN THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

______________

No. 11-9900

______________

Consolidated Case Nos. 11-9581, 11-9585, 11-9586, 11-9587, 11-9588, 11-9589,

11-9590, 11-9591, 11-9592, 11-9594, 11-9595, 11-9596, 11-9597, 12-9500, 12-

9510, 12-9511, 12-9513, 12-9514, 12-9517, 12-9520, 12-9521, 12-9522, 12-9523,

12-9524, 12-9528, 12-9530, 12-9531, 12-9532, 12-9533, 12-9534, 12-9575

IN RE: FCC 11-161

______________

ON PETITION FOR REVIEW OF AN ORDER OF THE

FEDERAL COMMUNICATIONS COMMISSION

______________

PETITION FOR REHEARING EN BANC OF

ALLBAND COMMUNICATIONS COOPERATIVE

AS TO ISSUES RAISED IN ADDITIONAL

UNIVERSAL SERVICE FUND ISSUES BRIEFS

Allband Communications Cooperative

By its counsel:

Don L. Keskey (P23003)

Public Law Resource Center PLLC

University Office Place

333 Albert Avenue, Suite 425

East Lansing, MI 48823

Telephone: (517) 999-7572

E-mail: donkeskey@publiclawresourcecenter.com

Dated: July 7, 2014

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CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure and 10th

Circuit Rule 26.1, Petitioner Allband Communications Cooperative (Allband)

discloses that the following listed persons, associations of persons firms,

partnerships, corporations (including parent corporations) or other entities (i) have

a financial interest in the subject matter in controversy or in a party to the

proceeding, or (ii) have a non-financial interest in that subject matter or in a party

that could be substantially affected by the outcome of this proceeding:

1.

Petitioner Allband is incorporated as a non-profit corporation in the

State of Michigan, organized as a consumer cooperative under Chapter 11 of

Michigan's Non-Profit Corporation Act, 1982 PA 162. Allband's principal place of

business comprises portions of four counties in Northeast Michigan. Allband's

business address is 7251 Cemetery Road, Curran, MI 48728. Allband is owned by

its customers as a member-owned cooperative.

2.

Petitioner Allband wholly owns a separate subsidiary, Allband

Multimedia LLC, which was formed as a limited liability company under

Michigan law for the purpose of providing certain advanced broadband

communication services. The address of Allband Multimedia LLC is 7251

Cemetery Road, Curran, MI 48728.

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3.

If additional parties become known during the course of this case,

Petitioner Allband will amend this disclosure to bring such additional names to the

attention of the Court.

4.

To the Petitioner's knowledge, and from Petitioner Allband’s

perspective or interests, there is no other publicly owned corporation, affiliate, or

party that has a financial interest in the outcome of this litigation.

Respectfully submitted,

/s/ Don L. Keskey

Don L. Keskey (P23003)

Attorney for Appellant Allband Communications

Cooperative

Public Law Resource Center PLLC

University Office Place

333 Albert Avenue, Suite 425

East Lansing, MI 48823

Telephone: (517) 999-7572

Dated: July 7, 2014

E-mail: donkeskey@publiclawresourcecenter.com

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TABLE OF CONTENTS

CORPORATE DISCLOSURE STATEMENT ......................................................... i

TABLE OF CONTENTS......................................................................................... iii

TABLE OF AUTHORITIES ................................................................................... iv

RULE 35(B) STATEMENT......................................................................................1

STATEMENT OF FACTS ........................................................................................3

A. ALLBAND’S FORMATION BASED UPON THE 1996

AMENDMENTS TO THE ACT...........................................................3

B. THE FCC’S RULEMAKING ORDER ................................................6

C. ALLBAND’S FCC WAIVER, STAY, AND REVIEW

PETITIONS...........................................................................................7

ARGUMENT.............................................................................................................8

A. THE PANEL DECISION IGNORES ALLBAND’S

ARGUMENT AND CITED U.S. SUPREME COURT

PRECEDENT CONCERNING THE UNLAWFUL

RETROACTIVE APPLICATION OF THE FCC ORDER

TO ALLBAND......................................................................................8

B. THE PANEL DECISION IGNORES ALLBAND’S

ARGUMENTS THAT THE FCC ORDER AS APPLIED

TO ALLBAND VIOLATES CONSTITUTIONAL DUE

PROCESS PRINCIPLES, BOTH AS A CONFISCATORY

TAKING AND AS AN UNNOTICED AND

UNFORESEEN RETROACTIVE REVERSAL OF

AGENCY USF DECISIONS AND PROGRAMS .............................11

C. THE PANEL DECISION IGNORES ALLBAND’S

ARGUMENTS THAT THE FCC ORDER IS CONTRARY

TO THE GOALS, OBJECTIVES AND PURPOSES OF

CONGRESS AS INCORPORATED IN THE 1996

AMENDMENTS.................................................................................16

D. THE PANEL DECISION IGNORES THE ARBITRARY

AND CAPRICIOUS NATURE OF THE FCC ORDER....................18

CONCLUSION AND RELIEF................................................................................20

CERTIFICATE OF COMPLIANCE WITH CONSISTENCY, TYPE-

VOLUME, TYPEFACE, TYPE STYLE, PRIVACY REDACTION

AND VIRUS SCAN REQUIREMENTS ..................................................................1

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TABLE OF AUTHORITIES

Cases

Bluefield Waterworks & Improvement Co. v. Public Service Comm’n of

West Virginia,

262 U.S. 679; 42 S. Ct. 675; 67 L. Ed. 1176 (1923), .........................................12

Bowen v Georgetown University Hospital,

488 U.S. 204; 109 S. Ct. 468; 102 L. Ed. 2d 493 (1988) ...................................10

Covington & Lexington Tpk. Rd. Co. v. Sandford,

164 U.S. 578; 17 S. Ct. 198; 41 L. Ed. 560 (1896) ............................................12

Federal Communications Commission, et al. v. Fox Television Stations,

Inc.,

___ U.S. ___; 132 S. Ct. 2307; 183 L. Ed. 2d 234 (2012) .......................... 11, 13

In the Matter of Allband Communications Cooperative Petition for Waiver

of Certain High-Cost Universal Service Rules,

Federal Communications Commission WC Docket No. 10-90, Order

Adopted and Released July 25, 2012....................................................................8

In the Matter of Allband Communications Cooperative Petition for Waiver

of Sections 69.2(hh) and 69.601 of the Commission’s Rules,

FCC WC Docket No. 05-174...............................................................................4

Landgraf v USI Film Products, et al,

511 U.S. 244; 114 S. Ct. 1483; 128 L. Ed. 2d 229 (1994) .................................10

Lucas v. South Carolina Coastal Council, 505 U.S. 1003; 112 S. Ct. 2886;

120 L. Ed. 2d 798 (1992)....................................................................................12

Mobil Oil Exploration v U.S.,

530 U.S. 604; 120 S. Ct. 2423; 147 L. Ed. 2d 528 (2000) ...................................9

Motor Vehicle Mfrs. Ass’n of the United States, Inc. v. State Farm Mut.

Auto. Ins. Co.,

463 U.S. 29; 103 S. Ct. 2856; 77 L. Ed. 2d 443 (1983) .....................................19

Pennsylvania Coal Co v. Mahon,

260 U.S. 393; 43 S. Ct. 158; 67 L. Ed. 2d 322 (1922) .......................................12

Resolution Trust Corp. v. Federal Savings and Loan Ins. Corp.,

25 F.3d 1493 (C.A. 10 (N.M.) 1994)....................................................................9

Schneidewind v ANR Pipeline Company,

485 U.S. 293; 108 S. Ct. 1145; 99 L. Ed. 2d 316 (1988) ...................................16

iv

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Stone v. Farmers’ Loan and Trust Co,

116 U.S. 307; 6 S. Ct. 1191; 29 L. Ed. 636 (1886) ............................................12

United States v Winstar Corp,

518 U.S. 839; 116 S. Ct. 2432, 135 L. Ed. 2d 964 (1996) .................... 1, 8, 9, 10

Statutes

5 U.S.C. § 706(2)(A)................................................................................................18

Federal Communications Act,

47 U.S.C. § 151, et al............................................................................................3

Other Authorities

U.S. Const, art. I, § 9, c1. 3......................................................................................10

U.S. Const. art. I, § 10. cl. 1.....................................................................................10

Rules

10th Circuit Rule 26.1................................................................................................ i

FRAP 26.1.................................................................................................................. i

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RULE 35(B) STATEMENT

Pursuant to F. R. App. P. 35(b), counsel for Petitioner/Appellant Allband

Communications Cooperative (Allband) states that En Banc Rehearing is

warranted because this appeal involves a questions of exceptional importance.

Allband is a communications cooperative owned by its customers that was created

pursuant to (and after) passage by Congress of the 1996 Amendments to the FCC

Act, and subsequent state and federal regulatory orders applicable to Allband, upon

which all of its plant investment was designed, constructed, and became

operational with federal loans granted by the Rural Utility Service of the U.S.

Department of Agriculture (RUS). The FCC Order herein, if not reversed as

applied to Allband, and absent any discretionary action by the FCC, will result in

the financial destruction of Allband and of its RUS loans, and cessation of the vital

communications services provided in portions of four counties in Michigan that

were unserved and unassigned areas prior to Allband’s creation.

En Banc Rehearing is also warranted because the panel’s decision

overlooked a major issue raised by Allband, buttressed by the U.S. Supreme Court

decision in United States v Winstar Corp, 518 U.S. 839 (1996), and other authority

cited by Allband, that the United States and its agencies may not retroactively

reverse statutory or agency orders or regulations upon which entities have relied to

their detriment.

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The panel’s decision also erroneously rejects Allband’s claims that the FCC

Order, as applied to Allband, is also unconstitutional under substantive and

procedural Due Process principles, is contrary to the plain language, purposes,

objectives, and intent of Congress under the 1996 Amendments to the FCC Act,

and is arbitrary and capricious under the Administrative Procedures Act.

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STATEMENT OF FACTS

A. ALLBAND’S FORMATION BASED UPON THE 1996

AMENDMENTS TO THE ACT

Due to adoption of the 1996 Amendments to the Federal Communications

Act, 47 U.S.C. § 151, et al, and the Universal Service Fund (USF), and regulatory

approvals of the Federal Communications Commission (FCC) and the Michigan

Public Service Commission (MPSC), and loan approvals by the RUS, and

investment of funds and resources locally, Allband now serves sizeable portions of

four counties in northeast Michigan that never had telecommunications service

before the advent of Allband.

In 2000, due to refusals to serve the area by established incumbent carriers,

the local affected residents began researching the formation of a communications

cooperative based upon the adoption of the 1996 Act and the USF. This research

effort was assisted by a grant provided by Michigan State University.

On November 3, 2003, Allband filed its Articles of Incorporation.

On July 29, 2004, Allband filed a loan application with the RUS.

On December 2, 2004, the MPSC in Case U-14200 granted Allband a

permanent license to provide service in the then-unserved/unassigned geographical

area.

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On August 11, 2005, the FCC granted Allband’s waiver of certain FCC’s

rules to allow Allband to be treated as an Incumbent Local Exchange Carrier

(ILEC) for NECA (National Exchange Carriers Association) pooling and USF

purposes.1 The FCC’s 2005 Order recognized that Allband’s provision of services

to the unserved/unassigned areas would be costly on a per-line basis, but would be

consistent with the 1996 Act. The FCC’s 2005 Order, paragraph 19, specifically

concluded that “[b]ased on the record… these waivers are in the public interest

because they will facilitate the ability of Allband to serve previously unserved

areas.”

On August 18, 2005, the RUS granted a loan for $8 Million to fund

construction of Allband’s network.2

On October 19, 2005, Allband started construction.

On November 10, 2005, the MPSC in Case No. U-14659 granted Eligible

Telecommunications Carrier (ETC) status to Allband for purposes of Section

214(e) of the 1996 federal Act.

On November 30, 2006, Allband activated its first member customer.

1 FCC Order In the Matter of Allband Communications Cooperative Petition for

Waiver of Sections 69.2(hh) and 69.601 of the Commission’s Rules in WC Docket

No. 05-174, released August 11, 2005 (Allband Order).

2 USDA Rural Development Loan (RUS) Borrower MI-570-A.

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In December 2006, based upon FCC waivers, Allband, as an ILEC, began

receiving USF Interim Common Line Support and Local Switching Support, which

allowed Allband to minimize administrative expenses and maintain reasonable

access rates.

In January 2008, Allband began receiving USF High Cost Loop Support to

support a substantial portion of the ongoing high cost of its network facilities and

service while maintaining reasonable local exchange rates.

Allband’s advanced fiber-to-the-home infrastructure provides services such

as traditional telephone service, free calling features, long distance, broadband,

high-speed internet, and other advanced services. Allband as an ILEC also

undertakes important public interest duties to provide emergency connections

including 911 services in an area that lacked traditional telephones and cellular

service.

Allband requires the previously established and expected “sufficient and

predictable” USF revenues to (a) maintain affordable customer rates and services

that are comparable to those provided in urban areas, (b) provide and maintain

quality service, and (c) to meet its RUS debt obligations associated with its plant

investment and network.

Imposition of the Order’s per-line caps to Allband would have a catastrophic

and immediate impact upon Allband. The federal USF revenues comprise a

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significant percentage of Allband’s total revenues. The Order’s $3,000 per-line

annual cap would reduce Allband’s regulated revenues by 55 percent, and would

immediately render Allband unable to provide service and to meet its loan

obligations to the RUS.

B.

THE FCC’S RULEMAKING ORDER

In 2010, the FCC issued its Notice of Proposed Rulemaking (NPRM)

proposing in part changes to the USF, and providing for the filing of comments.

The NPRM (paragraph 10) stated the Commission’s objectives to: “modernize

USF and ICC for Broadband”, further USF “fiscal responsibility”, reduce waste

and inefficiency, require “accountability” from companies receiving support, and

to “transition to market-driven and incentive-based policies that encourage

technologies and services.” The Commission's NPRM (paragraph 80) also

proposed “four specific priorities for the federal universal service high-cost

program” - to “preserve and advance voice service” . . . “to ensure universal

deployment of modern networks capable of supporting necessary broadband

applications as well as voice service” . . to “ensure that rates for broadband service

are reasonably comparable in all regions of the nation” . . . and . . .“to limit the

contribution burden on households.”

On April 18, 2011, Allband submitted formal comments in the NPRM

consistent with its later agency and Court positions and requesting that any rules,

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such as the per-line USF cap, be given prospective (or grandfathered), not

retroactive, application to existing plant investment and debt obligations.

At odds with the NPRM’s statement of objectives, the FCC on November

18, 2011, issued its voluminous Order, with attachments, that included no mention

of Allband’s issues, and adopted a uniform $250 per line monthly cap on USF

reimbursements, without any exception, except for a complicated waiver process,

thereby imposing said caps retroactively to Allband.

C. ALLBAND’S FCC WAIVER, STAY, AND REVIEW

PETITIONS

On February 3, 2012, Allband submitted a Petition for Waiver of the FCC

order, with substantial information, establishing the adverse effect and irreparable

harm that the per-line cap would impose on Allband, and the legal grounds

supporting a waiver.

On April 30, 2012, Allband filed with the FCC a Request to Expedite its

ruling on Allband’s Waiver Petition.

On June 27, 2012, Allband filed with the FCC a Petition for Stay, along with

substantial supporting attachments, seeking a stay of the FCC Order.

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On July 25, 2012, the FCC issued an Order providing Allband a limited

three-year waiver of the per-line caps, finding that Allband was a well-run, lean,

and efficient operation.3

On August 24, 2012, Allband filed with the FCC an Application for Review

of the FCC’s July 25, 2012, Waiver Order, which remains pending.

ARGUMENT

A.

THE PANEL DECISION IGNORES ALLBAND’S

ARGUMENT AND CITED U.S. SUPREME COURT

PRECEDENT CONCERNING THE UNLAWFUL

RETROACTIVE APPLICATION OF THE FCC ORDER TO

ALLBAND

Allband asserted to the panel that the Order effects an unlawful and

unreasonable regulatory reversal analogous to that rejected by the United States

Supreme Court in United States v Winstar Corporation, 518 U.S. 839 (1996). Yet

the panel ignored this primary Allband argument and Winstar precedent.

In Winstar, the Federal Home Loan Board promulgated rules to encourage

investors in good standing to take over ailing banking thrifts by counting goodwill

as an asset, with a premise the rules would not change. However, Congress

subsequently forbid such thrifts from using goodwill credits for required reserves --

a retroactive reversal of policy that rendered the Appellant (Winstar) insolvent.

3 In the Matter of Allband Communications Cooperative Petition for Waiver of

Certain High-Cost Universal Service Rules, FCC Communications Commission,

WC Docket No. 10-90, Order Adopted and Released July 25, 2012.

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The Court in Winstar ruled such Congressional action constituted a breach of

contract permitting awards of damages to Winstar and other thrifts that had

contracted with the FHLB to take over ailing thrifts, and that suffered damages or

harm from Congress' regulatory change.

The outcome in Winstar is in concert with the Restatement of Contracts and

the Restatement (Second) of Contracts, as applied by the U.S. Supreme Court in a

subsequent case. If the “Government … did break … an important contractual

promise thereby ‘substantially impair[ing] the value of the contract’ to the

companies … than … the Government must give the companies their money

back.” Mobil Oil Exploration v U.S., 530 U.S. 604; 120 S. Ct. 2423 (2000).

This Circuit may have anticipated Winstar when it ruled: “[I]f within … [a]

legislative mandate Congress provides the agency with discretion in enforcement

because of Congress’ awareness that prior agreements would be abrogated by an

abrupt change in the law, the agency may properly be held in breach of any

agreements which could have been honored by the exercise of the discretion

afforded them by Congress.” Resolution Trust Corp. v. Federal Savings and Loan

Ins. Corp., 25 F.3d 1493, 1501 (C.A. 10 (N.M.) 1994).

Similar to Winstar, Allband entered into loan contracts with the RUS, in

reliance upon the premise that Commission regulatory rules and orders governing

Allband and the USF under the 1996 Act would not be retroactively changed,

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particularly where all parties knew that the ongoing USF revenues constituted an

absolute prerequisite to repay the loan. Allband also proceeded to construct a

modern versatile network, and to operate same, consistent with this reliance.

Allband, supported by Winstar, Resolution Trust Corp. and Mobil, supra.

asserts its contracts with RUS need not contain promises to refrain from regulatory

change in order to establish a breach of contract action against the federal

government. Similar to Winstar, Allband also asserts that, based upon contract,

estoppel and fairness considerations, the FCC should have refrained from reversing

or disregarding its previous regulatory orders and decisions, and should not have

applied its Order retroactively to Allband.4 The FCC had a clear, less intrusive

option, to apply its per-line caps to investments and loans incurred on a prospective

(post-Order) basis, which alternative would have been fully consistent with the

stated goals and objectives of the NPRM and Order.

4 The U.S. Supreme Court has reiterated the presumption against retroactive

legislation in other cases (e.g. Landgraf v USI Film Products, et al, 511 U.S. 244,

265 (1994); Bowen v Georgetown University Hospital, 488 U.S. 204 (1988)). The

Constitution also includes several provisions that prohibit or otherwise restrict

retroactive law-making and agency action (e.g. the Ex Post Facto Clause (Art. I, §

9, c1. 3); the Contracts Clause (Art. I, § 10. cl. 1); the Bills of Attainder Clauses

(Art. I, § 9, c1. 3, and § 10, c1. 1); and the Due Process and Takings Clauses of the

Fifth Amendment.

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B.

THE PANEL DECISION IGNORES ALLBAND’S

ARGUMENTS THAT THE FCC ORDER AS APPLIED TO

ALLBAND VIOLATES CONSTITUTIONAL DUE

PROCESS PRINCIPLES, BOTH AS A CONFISCATORY

TAKING AND AS AN UNNOTICED AND UNFORESEEN

RETROACTIVE REVERSAL OF AGENCY USF

DECISIONS AND PROGRAMS

The panel decision in Part IV(B)(4) erroneously states that Allband’s Due

Process argument (that the Order imposes a retroactive reversal of Commission

orders and USF program commitments upon which Allband relied) cites to a single

case, Federal Communications Commission, et al. v. Fox Television Stations, Inc.,

132 S. Ct. 2307 (2012), and that the panel’s… “own independent review of that

case persuades us it is inapposite.”5

The panel misconstrues Allband’s Due Process claims. Allband’s portion of

the November 6, 2012 Consolidated Additional Universal Service Fund Issues

Principal Brief (pp 33-34, 38) asserted:

The Order is also unconstitutional as applied to Allband under

the Fifth Amendment Due Process clause, as 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. The

Order limits USF reimbursements relied upon by Allband to

undertake long-term capital investments capital investments and

service obligations, and to cover expenses and to repay RUS loans.

By ignoring these circumstances, the Commission as a ratemaking

agency has acted contrary to the venerable precedent of the United

States Supreme Court in Bluefield Waterworks & Improvement Co. v.

Public Service Comm’n of West Virginia, 262 U.S. 679, 692-693; 42

5 The separate issue concerning the FCC’s benchmarking rules are now moot as the

FCC dispensed with these rules in a June 2014 Order.

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S. Ct. 675 (1923), requiring regulatory action to provide a return… “to

assure confidence in the financial soundness of the utility and… to

maintain and support its credit and enable it to raise the money

necessary for the proper discharge of its public duties…” The Order is

likewise contrary to Federal Power Commission v. Hope Natural Gas

Company, 320 US 591 (1944), wherein the Court held that the

“return… should be sufficient to assure confidence in the financial

integrity of the enterprise, so as to maintain its credit and to attract

capital.”

Allband’s Brief also cited additional authority, including Pennsylvania Coal

Co v. Mahon, 260 U.S. 393, 415 (1922); Stone v. Farmers’ Loan and Trust Co,

116 U.S. 307, 331 (1886); see also, Covington & Lexington Tpk. Rd. Co. v.

Sandford, 164 U.S. 578, 597 (1896); and Lucas v. South Carolina Coastal Council,

505 U.S. 1003, 1015 (1992).

The panel decision (p 135) admits later that Allband cited the Bluefield

Waterworks case (ignoring the rest), but then states, without regulatory agency or

judicial precedent, that:

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.

The panel cites no facts or legal basis for concluding that Allband is not a public

utility. Allband is comprehensively regulated by the MPSC, the FCC (and by the

RUS and NECA). As an ILEC and ETC, Allband is subject to enhanced duties,

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obligations and oversight as compared to non-ILEC carriers or information

providers. Allband must provide emergency 911 and certain mandatory services in

its service area.

The panel without explanation or authority also suggests that the Order is

“not reasonably comparable to a rate-setting Order issued by a state utility

commission.” Yet, Allband is subject to state rate and tariff regulation. Also, the

retroactive reduction of the per-line USF reimbursement as applied to Allband

constitutes a form of rate decision by the FCC, as it has a direct nexus to Allband’s

rates. In other words, the per-line caps, if imposed, would force Allband either to

raise its per-line rates astronomically high so as to cause massive customer

defection, a result contrary to universal service and the Congressional mandate that

Allband’s rates be comparable to rates in urban areas.

The panel’s reference to a “public utility” also appears distractive. Due

Process principles apply universally, not just to public utilities.

The panel’s reference to the FCC’s waiver process is also misguided. The

required filings to seek a waiver comprise a very expensive process, which detracts

greatly from Allband’s resources to provide service. Also, there is no requirement

or guarantee that the FCC will grant another waiver. This is why the U.S. Supreme

Court’s precedent in Fox Television has analogous relevance here. The Court in

Fox found that the existence of a waiver does not satisfy the need for adequate

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notice of long term regulation (“…due process protection… does not leave

[regulated] parties… at the mercy of noblesse oblige”). Fox holds that clarity in

regulation and notice of changed interpretation is essential to Fifth Amendment

Due Process protections. The Fox Court also found that “reputational injury”

provided further reason for granting relief from the FCC Order, a harm that also

exists here with Allband.

Even more than in Fox, Allband could never have foreseen when it relied

upon the 1996 Act, the USF program, and ensuing state and federal approval

orders, that its entire efforts and investment would soon be subject to a retroactive

regulatory change that would defeat Allband. No notice of a retroactive regulatory

reversal occurred either.

The panel’s decision (p 134) also erroneously suggests that the NPRM

notice and opportunity to comment satisfies Due Process concerns. The hollow act

of providing notice and comment in the FCC’s NPRM in 2010-2011 is not the

substantive due process notice justifying a reversal of the previous regulatory

approvals upon which Allband relied in good faith to its detriment.

The panel decision (pp 136-137) states that Allband failed to flesh out its

estoppel claims (another concept supporting Allband’s Due Process arguments).6

6 The panel decision also criticizes the lack of briefing on Allband’s issues without

fairly acknowledging that the consolidated process mandated by the Court severely

limited Allband’s briefing arguments to very few words.

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The panel ignores Allband’s assertions in the June 12, 2013 brief (pp 17-18),

replying directly to the FCC’s Brief, that:

Allband readily meets the cited criteria for estoppel under the cases

cited, Tsosie v. U.S., 452 F.3d 1161, 1166 (10th Cir. 2006), and Wade

Pediatrics v. Dept of Health and Human Services, 567 F.3d 1202,

1203 (10th Cir. 2009). Through Allband’s active participation in the

rulemaking process, and Allband’s numerous filings over several

years, the FCC clearly knew of Allband’s (and RUS’s) reliance on the

USF revenues to secure the RUS loans. Allband (and the RUS) also

could never have foreseen the Order or its unreasonable result. By its

Order, the FCC has undertaken “affirmative misconduct” by

unnecessarily and punitively targeting Allband, instead of fashioning

an order (or issuing a waiver order) to avoid unlawful adverse impacts

upon Allband.

The Order comprises a form of “invitational error.” Allband was induced to

undertake substantial commitments based upon the 1996 Act, prior FCC Orders,

RUS loan approvals, and promised USF revenues, followed by the 2011 Order’s

action to punish Allband for relying on the regulatory scheme by a post-hoc

retroactive reduction of the promised funds needed to support the investment

already incurred under the promised structure. This constitutes an egregious

violation of both substantive and procedural Due Process principles.

15

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C.

THE PANEL DECISION IGNORES ALLBAND’S

ARGUMENTS THAT THE FCC ORDER IS CONTRARY

TO THE GOALS, OBJECTIVES AND PURPOSES OF

CONGRESS AS INCORPORATED IN THE 1996

AMENDMENTS

The Commission’s application of the per-line cap to Allband violates of the

plain language, and the goals, objectives, and purposes of the 1996 Act.7 The 1996

Act governs the FCC’s jurisdiction, authority, and discretion, and establishes

specific mandates (e.g., Section 254(b)’s policies “for the preservation and

advancement of universal service;” Section 254(b)(1)’s mandate that “Quality

services should be available at just, reasonable, and affordable rates;" Section

254(b)(2)’s mandate that “Access to advanced telecommunications and

information services should be provided in all regions of the Nation"). Section

254(b)(3) also provides:

(C) 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.

Section 254(b)(5) requires that “There should be specific, predictable and

sufficient Federal and State mechanisms to preserve and advance universal

7 Statutes must be interpreted in accordance with the goals, objectives, and intent

of Congress. Schneidewind v ANR Pipeline Company, 485 U.S. 293; 108 S. Ct.

1145 (1988).

16

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service." Section 254(d) provides for contributions by carriers “to the specific,

predictable, and sufficient mechanisms established by the Commission to preserve

and advance universal service.” Section 254(e) provides that universal service

support to ETC providers “should be explicit and sufficient to achieve the purposes

of this section.” Section 254(g) provides in part that certain rates charged by

providers “to subscribers in rural and high cost areas shall be no higher than the

rates charged by each such provider to its subscribers in urban areas.” Section

254(h)(1)(A) provides for similar rate comparability. Section 254(i) provides that

“The Commission and the States should ensure that universal service is available at

rates that are just, reasonable, and affordable.”

Allband has met these statutory goals, objectives and mandates of the 1996

Act. Allband has also placed full reliance on various orders or directives of the

FCC, the MPSC, and the RUS, among other agencies.

In contrast, the per-line USF cap applied to Allband violates the plain

language, and the goals, objectives, and intent of Congress as stated above. The

Order has been applied retroactively to Allband, thereby ignoring the continued

USF funds necessary to support already incurred investment and RUS-approved

loans. Allband’s past investment is presently promoting and advancing universal

service objectives. The Order disregards the reality that the FCC’s reforms and

17

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policies could be fully achieved without destroying Allband and its taxpayer

funded RUS loans8

The panel’s decision notes Allband’s reference to these statutory arguments,

but then does not address them. This is despite the FCC Order’s failure to explain

how the across-the-board (“one size fits all”) per-line caps comport with the

Congressional mandates noted earlier.

D.

THE PANEL DECISION IGNORES THE ARBITRARY

AND CAPRICIOUS NATURE OF THE FCC ORDER

The FCC Order is also arbitrary and capricious, in violation of the

Administrative Procedures Act, 5 U.S.C. § 706(2)(A), in part for the reasons

articulated by the dissenting opinion.

The dissenting opinion properly dissents from Part IV(A)(2) of the panel’s

decision and correctly finds that “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” (p 163).9

8 The destruction of Allband and its loans has virtually no impact upon the USF

and the surcharges collected nationwide to fund the USF. The amount of

Allband’s receipts from the ratepayer supported USF, much of which goes to

paying the taxpayer-supplied RUS loans, is infinitesimal compared to the total

annual USF budget.

9 Allband’s April 18, 2011 Comments in the NPRM (p 24) advocated that “the

Universal Service Fund needs to be increased to bridge the urban/rural divide, and

not reduced or made subject to uneconomic short-term requirements.”

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The FCC Order is also arbitrary and capricious by failing to assert or have

any rational basis for determining and mandating an across-the-board $250 per line

per month cap for USF reimbursement. The does not consider differences in costs

or circumstances of carriers. The cap appears to favor large long-time incumbent

carriers with dense secure urban markets, to the disadvantage of small rural

entities, particularly new entities like Allband owning new, advanced,

undepreciated networks. The cap serves to target the latter, and fails to recognize

these differentiating factors.

The Order also fails to recognize that, unlike many other carriers, Allband as

an ILEC and ETC is assigned public service responsibilities not assigned to other

carriers.

The FCC Order is arbitrary and capricious in retroactively reversing its

previous orders, and those of the MPSC and the RUS, upon which Allband and its

customer/members, and the public itself, relied in committing to the financial

obligations of Allband’s RUS loans, and in expending the resources to provide

network services in the unserved areas now served by Allband. The Order failed to

provide adequate rational reasoning for this regulatory reversal applied to Allband,

contrary to the standards of Motor Vehicle Mfrs. Ass’n of the United States, Inc. v.

State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983).

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CONCLUSION AND RELIEF

For the reasons stated, Allband requests this Honorable Court to reverse the

FCC Order as applied to Allband, and to provide such additional and consistent

relief as the Court deems lawful and reasonable.

Respectfully submitted,

/s/ Don L. Keskey

Don L. Keskey (P23003)

Attorney for Appellant Allband Communications

Cooperative

Public Law Resource Center PLLC

University Office Place

333 Albert Avenue, Suite 425

East Lansing, MI 48823

Telephone: (517) 999-7572

Dated: July 7, 2014

E-mail: donkeskey@publiclawresourcecenter.com

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CERTIFICATE OF COMPLIANCE WITH CONSISTENCY, TYPE-

VOLUME, TYPEFACE, TYPE STYLE, PRIVACY REDACTION AND

VIRUS SCAN REQUIREMENTS

I, Don L. Keskey, hereby certify that:

1.

The hard copies to be submitted to the Court within two business days

are exact copies of the version submitted electronically.

2.

This brief complies with the volume limitations in Fed. R. App. P.

40(b) and the Order Governing Rehearing Procedures, and the Court’s January 15,

2014 Order, because it contains 4,165 words (including footnotes) as calculated by

the Microsoft Word “Word Count” utility.

3.

This filing complies with the typeface requirements of Fed. R. App. P.

32(a)(5) and 10th Cir. R. 32(a) and the type style requirements of Fed. R. App. P.

32(a)(6) because this filing has been prepared in a proportionally spaced typeface

using Microsoft Word, 14 point Times New Roman font.

4.

No privacy redactions were required in this document.

5.

A virus scan of the PDF version of the attached documents, which are

being submitted in this case via the Court’s EM/ECF filing system, has been

performed. The documents have been scanned with AVG Anti-virus software

1

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from servers at our service provider, Madeira Data Center, which were last updated

July 2, 2014 at 5:15 a.m., and according to the program, the file is free of viruses.

Respectfully submitted,

/s/ Don L. Keskey

Don L. Keskey (P23003)

Attorney for Appellant Allband Communications

Cooperative

Public Law Resource Center PLLC

University Office Place

333 Albert Avenue, Suite 425

East Lansing, MI 48823

Telephone: (517) 999-7572

Dated: July 7, 2014

E-mail: donkeskey@publiclawresourcecenter.com

2

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IN THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

______________

No. 11-9900

______________

Consolidated Case Nos. 11-9581, 11-9585, 11-9586, 11-9587, 11-9588, 11-9589,

11-9590, 11-9591, 11-9592, 11-9594, 11-9595, 11-9596, 11-9597, 12-9500, 12-

9510, 12-9511, 12-9513, 12-9514, 12-9517, 12-9520, 12-9521, 12-9522, 12-9523,

12-9524, 12-9528, 12-9530, 12-9531, 12-9532, 12-9533, 12-9534, 12-9575

IN RE: FCC 11-161

______________

ON PETITION FOR REVIEW OF AN ORDER OF THE

FEDERAL COMMUNICATIONS COMMISSION

______________

PETITION FOR REHEARING EN BANC OF

ALLBAND COMMUNICATIONS COOPERATIVE

AS TO ISSUES RAISED IN ADDITIONAL

UNIVERSAL SERVICE FUND ISSUES BRIEFS

ATTACHMENT 1

TO

PETITION FOR REHEARING EN BANC OF

ALLBAND COMMUNICATIONS COOPERATIVE

AS TO ISSUES RAISED IN ADDITIONAL

UNIVERSAL SERVICE FUND ISSUES BRIEFS

July 7, 2014

image30-00.jpg612x792

FILED

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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:

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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.

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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.

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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.

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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.

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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.

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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,

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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.

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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

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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

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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

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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

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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.

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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

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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

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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).

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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).

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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.

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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.

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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

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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

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[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

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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.

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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

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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.

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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.

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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

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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

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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,

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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

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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

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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).

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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

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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

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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

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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

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[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

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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

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“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.

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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,

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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

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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

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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

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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

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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

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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

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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

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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.

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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).

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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

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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-

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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.

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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).

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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

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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

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(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).

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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)

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“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.

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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

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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.”).

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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

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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

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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.

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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.

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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

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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

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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).

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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.

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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.

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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

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