Skip Navigation

Federal Communications Commission

English Display Options

Commission Document

FCC Response to Preliminary Brief - In Re: FCC 11-161 (10th Cir.)

Download Options

Released: February 6, 2013

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 1

IN THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT

NO. 11-9900

IN RE: FCC 11-161

ON PETITIONS FOR REVIEW OF AN ORDER OF THE
FEDERAL COMMUNICATIONS COMMISSION

FEDERAL RESPONDENTS’ UNCITED RESPONSE TO THE
JOINT PRELIMINARY BRIEF OF THE PETITIONERS


SEAN A. LEV
GENERAL COUNSEL

PETER KARANJIA
DEPUTY GENERAL COUNSEL

RICHARD K. WELCH
DEPUTY ASSOCIATE GENERAL COUNSEL

LAURENCE N. BOURNE
JAMES M. CARR
MAUREEN K. FLOOD
COUNSEL

FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
(202) 418-1740


Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 2

TABLE OF CONTENTS


Table Of Authorities......................................................................................... ii
Statement Of Related Cases ............................................................................ vi
Glossary.......................................................................................................... vii
Issues Presented.................................................................................................1
Counterstatement Of Facts ................................................................................3
A. The Origins Of The FCC’s Universal Service Policy...........................3
B. The Telecommunications Act Of 1996: A New
Regulatory Paradigm.............................................................................6
1.
Universal Service Under The 1996 Act ............................................7
2.
Intercarrier Compensation Under The 1996 Act ............................11
3.
Section 706 ......................................................................................12
C. Universal Service And Intercarrier Compensation In The
New Millennium: Two Dysfunctional Regulatory
Regimes In Need Of Reform...............................................................13
D. The Order On Review .........................................................................20
1.
Universal Service Reform ...............................................................21
2.
Intercarrier Compensation Reform .................................................31
Standards Of Review.......................................................................................37
i

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 3

TABLE OF AUTHORITIES

CASES


Ad Hoc Telecomms. Users Comm. v. FCC, 572 F.3d
903 (D.C. Cir. 2009)............................................................................. 13, 38
Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608 (5th
Cir. 2000).......................................................................................................3
AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366
(1999) ............................................................................................. 4, 6, 7, 33
Auer v. Robbins, 519 U.S. 452 (1997) ............................................................38
Chevron USA, Inc. v. Natural Res. Def. Council,
467 U.S. 837 (1984) ....................................................................................37
City of Arlington v. FCC, S. Ct. No. 11-1545
(argued Jan. 16, 2013) .................................................................................38
Cordero Mining LLC v. Sec’y of Labor ex rel.
Clapp, 699 F.3d 1232 (10th Cir. 2012) .......................................................39
Dickinson v. Zurko, 527 U.S. 150 (1999) .......................................................39
FCC v. Fox Television Stations, Inc., 556 U.S. 502
(2009) ................................................................................................... 38, 39
Lorenzo v. Mukasey, 508 F.3d 1278 (10th Cir.
2007)............................................................................................................40
Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S.
355 (1986) .....................................................................................................6
Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d
1228 (10th Cir. 2004) ..................................................................................38
Maryland v. United States, 460 U.S. 1001 (1983) ............................................4
Minnesota Pub. Utils. Comm’n v. FCC, 483 F.3d
570 (8th Cir. 2007) ......................................................................................14
Morris v. NRC, 598 F.3d 677 (10th Cir. 2010) ...............................................38
Nat’l Ass’n of Regulatory Util. Comm’rs v. FCC,
737 F.2d 1095 (D.C. Cir. 1984) ....................................................................5
Nat’l Ass’n of State Util. Consumer Advocates v.
FCC, 372 F.3d 454 (D.C. Cir. 2004).............................................................5
ii

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 4
Nat’l Cable & Telecomms. Ass’n v. Brand X
Internet Servs., 545 U.S. 967 (2005)................................................ 8, 23, 37
Nat’l Rural Telecom Ass’n v. FCC, 988 F.2d 174
(D.C. Cir. 1993)...........................................................................................10
Qwest Commc’ns Int’l, Inc. v. FCC, 398 F.3d 1222
(10th Cir. 2005) .............................................................................................9
Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir.
2001)........................................................................................... 3, 6, 7, 9, 22
Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir.
2012)............................................................................................... 18, 38, 39
Rivera-Barrientos v. Holder, 666 F.3d 641 (10th
Cir. 2012).....................................................................................................37
Rural Cellular Ass’n v. FCC, 588 F.3d 1095 (D.C.
Cir. 2009).............................................................................................. 11, 31
Rural Cellular Ass’n v. FCC, 685 F.3d 1083 (D.C.
Cir. 2012).......................................................................................................7
Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215
(10th Cir. 2009) ...........................................................................................39
Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035
(10th Cir. 2011) .................................................................................... 37, 39
Southern Utah Wilderness Alliance v. Office of
Surface Mining Reclamation & Enforcement, 620
F.3d 1227 (10th Cir. 2010)..........................................................................38
Sw. Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir.
1998)..............................................................................................................5
Texas Office of Pub. Util. Counsel v. FCC, 183 F.3d
393 (5th Cir. 1999) ............................................................................... 4, 7, 9
Time Warner Telecom, Inc. v. FCC, 507 F.3d 205
(3d Cir. 2007) ..............................................................................................23
United States v. American Tel. & Tel. Co., 552 F.
Supp. 131 (D.D.C. 1982), aff’d sub nom.
Maryland v. United States
, 460 U.S. 1001 (1983) ........................................4
Verizon Commc’ns Inc. v. FCC, 535 U.S. 467
(2002) ............................................................................................................4
iii

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 5
Vermont Pub. Serv. Bd. v. FCC, 661 F.3d 54 (D.C.
Cir. 2011).....................................................................................................10

ADMINISTRATIVE DECISIONS


Access Charge Reform, 12 FCC Rcd 15982 (1997),
aff’d, Sw. Bell Tel. Co. v. FCC, 153 F.3d 523 (8th
Cir. 1998).......................................................................................................5
Connect America Fund, 27 FCC Rcd 14566 (2012).......................................25
Developing a Unified Intercarrier Compensation
Regime, 20 FCC Rcd 4685 (2005) ....................................................... 16, 17
Federal-State Joint Board on Universal Service, 12
FCC Rcd 8776 (1997), aff’d in part and rev’d in
part
, Texas Office of Pub. Util. Counsel v. FCC,
183 F.3d 393 (5th Cir. 1999).........................................................................9
Joint Statement on Broadband, 25 FCC Rcd 3420
(2010) ..........................................................................................................20
Petition of Qwest Corp. for Forbearance, 25 FCC
Rcd 8622 (2010), aff’d, Qwest Corp. v. FCC, 689
F.3d 1214 (10th Cir. 2012)..........................................................................18
Public Notice, Mobility Fund Phase I Auction
Closes, 27 FCC Rcd 12031 (2012)..............................................................30

STATUTES AND REGULATIONS


American Recovery and Reinvestment Act of 2009,
Pub. L. No. 111-5, §6001(k)(2), 123 Stat. 115,
516 ...............................................................................................................20
Telecommunications Act of 1996, Pub. L. No. 104-
104, 110 Stat. 56............................................................................................6
Telecomunications Act of 1996, §706(c)(1), 110
Stat. 153 .......................................................................................................12
5 U.S.C. §706(2)(A) ........................................................................................38
47 U.S.C. §151 ..................................................................................................3
47 U.S.C. §152(b)..............................................................................................6
47 U.S.C. §153(24)............................................................................................8
47 U.S.C. §153(50)............................................................................................8
iv

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 6
47 U.S.C. §153(53)............................................................................................8
47 U.S.C. §201(b)............................................................................................33
47 U.S.C. §251(b)(5)................................................................................ 11, 34
47 U.S.C. §251(g)..................................................................................... 11, 34
47 U.S.C. §252(d)(2)(B) .................................................................................35
47 U.S.C. §254(b)..............................................................................................8
47 U.S.C. §254(b)(1).........................................................................................8
47 U.S.C. §254(b)(2).................................................................................. 8, 23
47 U.S.C. §254(b)(3).................................................................................. 8, 23
47 U.S.C. §254(b)(4).........................................................................................8
47 U.S.C. §254(b)(5).........................................................................................7
47 U.S.C. §254(b)(6).........................................................................................8
47 U.S.C. §254(b)(7).........................................................................................9
47 U.S.C. §254(c)(1) .........................................................................................9
47 U.S.C. §254(e)............................................................................................23
47 U.S.C. §1302(a)..........................................................................................13
47 U.S.C. §1302(b)................................................................................... 13, 24
47 U.S.C. §1302(d)(1).....................................................................................12

OTHERS


JONATHAN E. NUECHTERLEIN ET AL., DIGITAL
CROSSROADS: AMERICAN TELECOMMUNICATIONS
POLICY IN THE INTERNET AGE (2005) ..........................................................18
PETER W. HUBER ET AL., FEDERAL
TELECOMMUNICATIONS LAW §2.1.1 (2d ed. 1999) .......................................4
STUART M. BENJAMIN ET AL.,
TELECOMMUNICATIONS LAW AND POLICY §15.3.1
(2d ed. 2006)..................................................................................................4



v

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 7

STATEMENT OF RELATED CASES

There are no prior appeals. A case now pending before the Ninth
Circuit – Ronan Tel. Co. v. FCC, 9th Cir. No. 05-71995 – involves a
challenge to a previous order that was issued in one of the administrative
proceedings that led to the order on review in this case.
vi

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 8

GLOSSARY

APA Administrative Procedure Act
ARC Access Recovery Charge; federally

tariffed end user charge designed to

recover some revenues reduced as a

result of the FCC’s intercarrier

compensation reform
CAF Connect America Fund; a new

mechanism for distributing federal

universal service subsidies
FCC Federal Communications Commission
IP Internet Protocol; protocol for routing

VoIP and Internet traffic within and

among communications networks
IXC Interexchange Carrier; provider of

long-distance telephone service
LEC Local Exchange Carrier; provider of

local wireline telephone service
1996 Act Telecommunications Act of 1996
VoIP Voice over Internet Protocol; technology

for delivering voice telephone service

over the Internet or other networks using

Internet Protocol

vii

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 9
IN THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT

NO. 11-9900

IN RE: FCC 11-161

ON PETITIONS FOR REVIEW OF AN ORDER OF
THE FEDERAL COMMUNICATIONS COMMISSION

FEDERAL RESPONDENTS’ UNCITED RESPONSE TO THE
JOINT PRELIMINARY BRIEF OF THE PETITIONERS

ISSUES PRESENTED

Through its “universal service” rules, the Federal Communications
Commission (“FCC”) for decades has sought to make affordable telephone
service available nationwide by subsidizing service in less populous areas,
where costs are high. Similarly, through its “intercarrier compensation”
rules, the FCC has implicitly subsidized local phone service by authorizing
local phone companies to collect certain charges from long-distance carriers.
When the FCC originally adopted those rules, consumers principally
communicated with each other through voice calls made over legacy wireline
networks owned by companies with state-approved local monopolies. Much
has changed since then. In 1996, Congress passed legislation designed to
open local telecommunications markets to competition. And with the

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 10
emergence of wireless and Internet-based voice services, wireline service is
no longer the sole means of voice telephony. More significantly, Americans
today increasingly use broadband Internet services to engage in non-voice
communications (via texting, e-mail, or social networking websites like
Facebook). Broadband communication services, which provide consumers
with high-speed Internet access and high-capacity video and data retrieval
capabilities, have “become crucial to our nation’s economic development and
civic life.” Connect America Fund, 26 FCC Rcd 4554, 4558 ¶3 (2011)
(“2011 NPRM”) (JA____, ____).
In light of these fundamental changes, the FCC concluded that its
antiquated universal service and intercarrier compensation systems – which
focused on traditional voice service – no longer serve the evolving
communications needs of 21st century America. The FCC accordingly
initiated a rulemaking to determine how it should reorient its rules to support
the provision of broadband. After providing public notice, receiving
hundreds of comments from interested parties, and reviewing the voluminous
administrative record, the FCC substantially reformed and modernized its
universal service and intercarrier compensation rules. Connect America
Fund, 26 FCC Rcd 17663 (2011) (“Order”) (JA____).
2

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 11
Petitioners challenge those rules on multiple grounds, contending that
they violate the Communications Act, the Administrative Procedure Act
(“APA”), and the Constitution.

COUNTERSTATEMENT OF FACTS

A. The Origins Of The FCC’s Universal Service Policy

“Universal service” – the availability of affordable, reliable telephone
service throughout the nation – “has been a fundamental goal of federal
telecommunications regulation since the passage of the Communications Act
of 1934.” Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608, 614 (5th Cir. 2000).
Section 1 of the Act, which created the Federal Communications
Commission, directs the agency to “make available, so far as possible, to all
the people of the United States, … a rapid, efficient, Nation-wide, and world-
wide wire and radio communication service with adequate facilities at
reasonable charges.” 47 U.S.C. §151. To fulfill this universal service
mandate, the FCC historically has adopted policies designed to subsidize
local phone service in remote and sparsely populated areas, where the cost of
providing service is high. See Qwest Corp. v. FCC, 258 F.3d 1191, 1195-96
(10th Cir. 2001) (“Qwest I”).
For most of the 20th century, local phone service was regulated as a
natural monopoly: “States typically granted an exclusive franchise in each
3

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 12
local service area to a local exchange carrier (LEC).” AT&T Corp. v. Iowa
Utils. Bd., 525 U.S. 366, 371 (1999). This regulatory framework enabled
state and federal regulators to support universal service through “a large
1
number of implicit cross-subsidies,” which “involve[d] the manipulation of
2
rates for some customers to subsidize more affordable rates for others.”
“Urban users subsidize[d] rural ones, business subscribers subsidize[d]
residential, and long-distance service subsidize[d] local.” PETER W. HUBER
ET AL., FEDERAL TELECOMMUNICATIONS LAW §2.1.1, at 84 (2d ed. 1999); see
also Verizon Commc’ns Inc. v. FCC, 535 U.S. 467, 480 (2002).
After an antitrust consent decree led to the divestiture of AT&T (the
3
nation’s largest phone company) in the early 1980s, the FCC implicitly
subsidized universal service through a system of intercarrier compensation
known as interstate “access charges.” Under this regime, interexchange
carriers (“IXCs”) – providers of long-distance service such as MCI and
AT&T – compensated LECs for originating and terminating interstate long-
distance calls. See generally Nat’l Ass’n of Regulatory Util. Comm’rs v.

1 STUART M. BENJAMIN ET AL., TELECOMMUNICATIONS LAW AND POLICY
§15.3.1, at 763 (2d ed. 2006).
2 Texas Office of Pub. Util. Counsel v. FCC, 183 F.3d 393, 406 (5th Cir.
1999) (“TOPUC”).
3 See United States v. American Tel. & Tel. Co., 552 F. Supp. 131 (D.D.C.
1982), aff’d sub nom. Maryland v. United States, 460 U.S. 1001 (1983).
4

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 13
FCC, 737 F.2d 1095 (D.C. Cir. 1984). For example, when an MCI subscriber
placed a call from Dallas to Denver, MCI paid interstate access charges to the
originating LEC (the caller’s local carrier) in Dallas and to the terminating
LEC (the LEC serving the call recipient) in Denver. By recovering a portion
of their network costs from the IXC, the originating and terminating LECs
did not need to recover those costs from their own customers. This allowed
LECs to keep local rates artificially low. “The implicit subsidies inherent in”
interstate access charges “helped to assure access to affordable [local]
telecommunication service in rural areas.” Nat’l Ass’n of State Util.
Consumer Advocates v. FCC, 372 F.3d 454, 457 (D.C. Cir. 2004).
Similarly, state regulators maintained low rates for local phone service
by setting high intrastate access rates, which IXCs paid to LECs for
originating and terminating intrastate long-distance calls (e.g., calls from
Durango to Denver). Access Charge Reform, 12 FCC Rcd 15982, 15988 ¶11
(1997), aff’d, Sw. Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998).
Thus, “universal service policies and intercarrier compensation policies
worked in tandem to enable companies to provide affordable local phone
service to residential consumers.” 2011 NPRM ¶45 (JA____).
5

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 14

B. The Telecommunications Act Of 1996: A New

Regulatory Paradigm

Even after the breakup of AT&T, consumers typically had only one
choice for local phone service: the state-designated LEC that served their
area. With the Telecommunications Act of 1996, Pub. L. No. 104-104, 110
Stat. 56 (“1996 Act”), Congress “ended the longstanding regime of state-
4
sanctioned monopolies” by amending the Communications Act “to introduce
5
competition to local telephone markets.” Under the 1996 Act, “States may
no longer enforce laws that impede competition, and incumbent LECs are
subject to a host of duties intended to facilitate market entry.” AT&T, 525
U.S. at 371.
To accomplish its objectives, the 1996 Act fundamentally altered the
traditional division of federal and state regulatory responsibilities.
Historically, FCC jurisdiction over domestic telecommunications generally
was limited to interstate matters; state commissions regulated intrastate
telephone service. See 47 U.S.C. §152(b); Louisiana Pub. Serv. Comm’n v.
FCC, 476 U.S. 355 (1986). “[B]y extending the Communications Act into
local competition,” Congress “removed a significant area from the States’
exclusive control.” AT&T, 525 U.S. at 381 n.8. “With regard to the matters

4 AT&T, 525 U.S. at 371.
5 Qwest I, 258 F.3d at 1196.
6

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 15
addressed by the 1996 Act,” Congress “has taken the regulation of local
telecommunications competition away from the States,” id. at 378 n.6, and
has “explicitly … given rulemaking authority” to the FCC, id. at 381 n.7.
1. Universal Service Under The 1996 Act
Congress recognized that its decision to open local telephone markets
to competition would unravel the intricate web of implicit subsidies that had
long supported universal service. Such “implicit subsidies are suited to a
monopoly environment, but become difficult to sustain as competition
increases.” Qwest I, 258 F.3d at 1196. “In a competitive environment, a
carrier that tries to subsidize below-cost rates to rural customers with above-
cost rates to urban customers is vulnerable to a competitor that offers at-cost
rates to urban customers.” TOPUC, 183 F.3d at 406.
To ensure universal service in a competitive marketplace, Congress
“directed the Commission to replace the system of implicit subsidies with
explicit ones.” Rural Cellular Ass’n v. FCC, 685 F.3d 1083, 1085 (D.C. Cir.
2012) (“RCA II”). Under section 254 of the Communications Act (a
provision added by the 1996 Act), the FCC must establish “specific,
predictable and sufficient” funding “mechanisms to preserve and advance
universal service.” 47 U.S.C. §254(b)(5).
7

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 16
This mandate to create new funding mechanisms is one of six
“principles” on which the FCC must “base [its] policies for the preservation
and advancement of universal service.” 47 U.S.C. §254(b). The other five
principles are:
 the availability of quality services at affordable rates, 47
U.S.C. §254(b)(1);
 nationwide access to “advanced telecommunications and
6
information services,” id. §254(b)(2);
 nationwide access to telecommunications and
information services that are “reasonably comparable” in
quality and price to services provided in urban areas, id.
§254(b)(3);
 “equitable and nondiscriminatory” contributions by all
providers of telecommunications service “to the
preservation and advancement of universal service,” id.
§254(b)(4); and
 access to advanced telecommunications services for
schools, libraries, and health care providers, id.
§254(b)(6).

6 The Communications Act differentiates between “telecommunications
service” and “information service.” See 47 U.S.C. §153(53) (defining
“telecommunications service”); id. §153(24) (defining “information
service”); see also id. §153(50) (defining “telecommunications”).
Telecommunications service, which involves the transmission of information
without change in form or content, is regulated on a common carrier basis
under Title II of the Act. Information service, which gives users the
capability to alter or process information via telecommunications, is not
subject to Title II regulation. It falls within the FCC’s Title I jurisdiction.
See Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967
(2005) (“Brand X”).
8

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 17
Section 254(b) also authorizes the FCC to adopt additional universal service
principles that are “consistent with this [Act]” if the FCC determines that
such principles are “necessary and appropriate for the protection of the public
interest.” Id. §254(b)(7).
Given the breadth and variety of the principles listed in section 254(b),
this Court has concluded that while “the FCC must base its policies on [those]
principles,” it “may exercise its discretion to balance the principles against
one another when they conflict,” and “any particular principle can be trumped
in the appropriate case.” Qwest Commc’ns Int’l, Inc. v. FCC, 398 F.3d 1222,
1234 (10th Cir. 2005) (“Qwest II”) (quoting Qwest I, 258 F.3d at 1200).
Section 254 defines “universal service” as “an evolving level of
telecommunications services that the [FCC] shall establish periodically under
this section, taking into account advances in telecommunications and
information technologies and services.” 47 U.S.C. §254(c)(1). When the
FCC first issued rules implementing section 254 in 1997, it designated certain
voice telephone services (e.g., voice grade access to the public switched
network, long-distance service, and directory assistance) as the services
supported by federal universal service subsidies. Federal-State Joint Board
on Universal Service, 12 FCC Rcd 8776, 8809-22 ¶¶61-82 (1997), aff’d in
part and rev’d in part, TOPUC, 183 F.3d 393.
9

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 18
The FCC also established four separate universal service funds: low-
income support; rural health care support; schools and libraries support; and
“high-cost support” – the fund at issue in this case – “which supports the
provision of services in high-cost areas.” Vermont Pub. Serv. Bd. v. FCC,
661 F.3d 54, 56-57 (D.C. Cir. 2011). “The high-cost support fund is by far”
the “most expensive.” Id. at 57.
The FCC used different formulas to calculate the amount of high-cost
support for different categories of carriers that serve both rural and non-rural
areas. It employed a forward-looking cost model to determine the level of
support for “non-rural” LECs (i.e., the largest incumbent LECs, including the
former Bell operating companies, which are generally subject to “price cap”
7
regulation). 2011 NPRM ¶51 (JA____). By contrast, for rural LECs
(generally smaller incumbent LECs that operate under rate-of-return
regulation), the agency based universal service payments on each carrier’s
8
historical costs. Id. ¶52 (JA____). Finally, for administrative ease, the FCC

7 Under price cap regulation, the FCC “sets a maximum price,” and carriers
must set their rates “at or below the cap.” Nat’l Rural Telecom Ass’n v. FCC,
988 F.2d 174, 178 (D.C. Cir. 1993).
8 Under rate-of-return regulation, which “is based directly on cost,” rural
LECs “can charge rates no higher than necessary to obtain sufficient revenue
to cover their costs and achieve a fair return on equity.” Nat’l Rural Telecom
Ass’n
, 988 F.2d at 177-78 (internal quotation marks omitted).
10

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 19
adopted an “identical support” rule, under which wireless carriers and new
wireline entrants into local markets received universal service support “for
each line based not on their own costs, but rather on the same per-line
support” received by the incumbent LEC “in the relevant service area.”
Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1099 (D.C. Cir. 2009) (“RCA
I”).
2. Intercarrier Compensation Under The 1996 Act
The 1996 Act significantly expanded the scope of federal regulation of
intercarrier compensation. Congress for the first time imposed on LECs a
“duty to establish reciprocal compensation arrangements for the transport and
termination of telecommunications.” 47 U.S.C. §251(b)(5). All LECs
(whether incumbents or new entrants into local markets) are subject to this
duty.
At the same time that Congress created this “reciprocal compensation”
duty, it expressly preserved LECs’ existing exchange access “obligations
(including the receipt of compensation)” until those obligations “are
explicitly superseded by regulations prescribed by the Commission.” 47
U.S.C. §251(g). Thus, for a transitional period, the 1996 Act maintained the
pre-existing system of access charges that IXCs paid to LECs to originate and
terminate long-distance calls.
11

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 20
Different per-minute rates applied to interstate access, intrastate access,
and traffic subject to federal reciprocal compensation rules. Therefore, the
amount of intercarrier compensation for a particular call depended on where
the call began and ended. If a call crossed “state lines,” it incurred “interstate
access” charges, which were “regulated by the [FCC].” 2011 NPRM ¶53
(JA____). If a call came from “within the state” but outside the local calling
area, “intrastate access” rates applied; they were “governed by state law” and
were “typically higher than interstate rates.” Id. And if a call stayed within a
local area, it was subject to “reciprocal compensation” charges, which were
“either negotiated by the parties” or “set by states” using a methodology
prescribed by the FCC. Id.
3. Section 706
Anticipating technological innovation, the 1996 Act also sought to
promote the spread of “advanced telecommunications capability” – “high-
speed, switched, broadband telecommunications capability that enables users
to originate and receive high-quality voice, data, graphics, and video
telecommunications using any technology.” 1996 Act, §706(c)(1), 110 Stat.
153 (codified in 2008 at 47 U.S.C. §1302(d)(1)). Congress sought to ensure
that Americans everywhere would have access to broadband services.
Consequently, section 706(a) of the 1996 Act directs the FCC and state
12

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 21
regulators to “encourage the deployment on a reasonable and timely basis of
advanced telecommunications capability to all Americans” by using
“regulating methods that remove barriers to infrastructure investment.” 47
U.S.C. §1302(a). Section 706(b) provides that if advanced
telecommunications capability is not being deployed to all Americans in a
reasonable and timely fashion, the FCC “shall take immediate action to
accelerate deployment.” Id. §1302(b). Given the “generous phrasing” of
section 706, “the FCC possesses significant, albeit not unfettered, authority
and discretion to settle on the best regulatory or deregulatory approach to
broadband.” Ad Hoc Telecomms. Users Comm. v. FCC, 572 F.3d 903, 906-
07 (D.C. Cir. 2009).

C. Universal Service And Intercarrier Compensation In

The New Millennium: Two Dysfunctional Regulatory
Regimes In Need Of Reform

In the decade and a half since the 1996 Act took effect, “the
communications landscape has changed dramatically.” 2011 NPRM ¶8
(JA____). With the explosive growth of the Internet, demand for broadband
services has surged. Broadband Internet access revenues grew “from $13.1
billion in 2003 to $36.7 billion in 2009.” Id. (JA____-____). And a growing
number of consumers are purchasing Voice over Internet Protocol (“VoIP”)
service – the phone service typically offered by cable companies, Vonage,
13

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 22
9
and Skype. Interconnected VoIP subscriptions “increased by 22 percent”
between 2008 and 2009. Id. (JA____).
While the communications marketplace was undergoing rapid change,
the universal service and intercarrier compensation systems – which had been
“designed for 20th century networks and market dynamics,” 2011 NPRM ¶8
(JA____) – remained largely static during the first decade of the 21st century.
Those regulatory regimes became more inadequate and inefficient with each
passing year because they were “directed at telephone service, not
broadband.” Id. ¶6 (JA____).
1. In 2011, federal universal service subsidies “still primarily
support[ed] voice” telephony. 2011 NPRM ¶6 (JA____). By then, however,
older circuit-switched “networks that provide[d] only voice service” were “no
longer adequate for the country’s communication needs.” Id. ¶2 (JA____).
Broadband deployment has “become crucial to our nation’s economic
development and civic life.” Id. ¶3 (JA____). “Businesses need broadband
to start and grow; adults need broadband to find jobs; children need
broadband to learn…. Broadband also helps lower the costs and improve the
quality of health care.” Id.

9 VoIP uses “‘packet-switching’ to transmit a voice communication over a
broadband … connection … in small digital packets.” Minnesota Pub. Utils.
Comm’n v. FCC
, 483 F.3d 570, 574 (8th Cir. 2007).
14

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 23
The “distance-conquering benefits of broadband” are especially
important to “America’s more remote small towns, rural and insular areas,
and Tribal lands.” 2011 NPRM ¶3 (JA____). Yet in 2010, “as many as 24
million Americans” – one out of every thirteen – “live[d] in areas where there
[was] no access to any broadband network.” Id. ¶5 (JA____). These
“unserved areas” could be found in all 50 states. Id. (JA____).
The FCC’s existing universal service program was ill-suited to close
these gaps in broadband coverage. The agency had tried to stimulate
broadband deployment by adopting a policy of “no barriers to advanced
services,” under which recipients of federal universal service funding were
permitted (but not required) to use the subsidies “to upgrade their facilities to
modern networks.” 2011 NPRM ¶52 (JA____). While this policy “enabled
some rural telephone companies to deploy broadband-capable lines,” the
FCC’s indirect method of supporting broadband left “many rural areas” with
“insufficient support for broadband.” Id. ¶6 (JA____).
2. The intercarrier compensation system likewise failed to keep pace
with changes in technology and market conditions. The compensation LECs
received under that system was based on “voice minutes” provided over
legacy networks. 2011 NPRM ¶6 (JA____). But with “the rise of new modes
of communications,” id. ¶495 (JA___) – including VoIP, texting, e-mail, and
15

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 24
wireless telephony – compensable wireline telephone minutes “plummeted
from 567 billion in 2000 to 316 billion in 2008.” Id. ¶8 (JA____). As a
result, incumbent LECs’ intercarrier compensation revenues had “become
dangerously unstable, impeding investment.” Order ¶9 (JA____); see also id.
Figures 10, 11 (JA____, ____).
Simply put, the 20th century framework for intercarrier compensation
no longer made sense in the modern communications market. A system that
based compensation on minutes of use could not accommodate 21st century
modes of communication, which are largely provided over Internet Protocol
(“IP”) facilities, because “payments for the exchange of IP traffic are not
based on per-minute charges, but … on charges for the amount of bandwidth
consumed per month.” 2011 NPRM ¶505 (JA____) (internal quotation marks
omitted).
An access charge regime that assumed the existence of “separate long-
distance and local telephone companies,” 2011 NPRM ¶6 (JA____), became
outdated after carriers began offering bundled packages of local, long-
distance, and other services, “blur[ring] traditional … distinctions among
various types of services and service providers.” Developing a Unified
Intercarrier Compensation Regime, 20 FCC Rcd 4685, 4696 ¶21 (2005).
And a system where the type and amount of compensation depended on a
16

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 25
call’s point of origin struggled to incorporate wireless and IP-based services
that “are not tied to a geographic location.” Id. at 4696 ¶22.
Moreover, the existing system of intercarrier compensation impeded
innovation by “rewarding carriers for maintaining outdated infrastructure
rather than migrating to” advanced IP-based facilities. 2011 NPRM ¶6
(JA____). Due to “uncertainty about whether or what intercarrier
compensation payments are required for VoIP traffic,” id. ¶507 (JA____), the
FCC’s rules “create[d] the perverse incentive” for carriers “to maintain and
invest in legacy” networks to ensure the continued collection of intercarrier
compensation. Id. ¶506 (JA____).
3. The universal service and intercarrier compensation regimes were
not only becoming obsolete; they were wasteful and counterproductive. “In
many areas of the country,” the FCC was “provid[ing] more support than
necessary” to achieve the goal of universal service, “subsidiz[ing] a
competitor to a voice and broadband provider that [was] offering service
without government assistance, or support[ing] several voice networks in a
single area.” 2011 NPRM ¶7 (JA____). “[S]ome companies with fewer than
500 lines” were receiving “between $8,000 [and] over $23,000 per year per
line” in universal service funding, “which translates into subsidies for local
17

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 26
phone service ranging from roughly $700 to nearly $2,000 per line per
month.” Id. ¶210 (JA____).
4. Similarly, the intercarrier compensation system was riddled with
inefficiencies. The intercarrier compensation rate for a particular call
depended on numerous factors that were largely unrelated to the incremental
costs of connecting the call – not only “where the call begins and ends,” but
also the “types of carriers … involved” and “the type of traffic” (e.g., wireline
voice, wireless voice, data). 2011 NPRM ¶502 (JA____). While “the
Commission’s rules allow[ed] wireline carriers to recover some costs from
other carriers” through intercarrier compensation, “wireless carriers generally
10
[had to] recover all costs from their end users.” And protracted disputes
arose over intercarrier compensation for VoIP calls because the FCC had not
clarified “the intercarrier compensation obligations associated with VoIP
traffic.” 2011 NPRM ¶610 (JA____-____).
This “incoherent patchwork” of intercarrier compensation schemes
produced severe “competitive distortion.” JONATHAN E. NUECHTERLEIN ET
AL., DIGITAL CROSSROADS: AMERICAN TELECOMMUNICATIONS POLICY IN THE
INTERNET AGE 293 (2005). Most intercarrier compensation rates were “set

10 Petition of Qwest Corp. for Forbearance, 25 FCC Rcd 8622, 8681-82
n.339 (2010), aff’d, Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012)
(“Qwest Phoenix”).
18

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 27
above incremental cost.” 2011 NPRM ¶495 (JA____). Consequently,
traditional wireline phone companies effectively “receive[d] implicit
subsidies from [their] competitors” through intercarrier compensation, while
many of those competitors “largely compete[d] without the benefit of such
subsidies.” Order ¶9 (JA____). Under this inequitable scheme, “hundreds of
millions of Americans” paid more than they should for wireless and long-
distance service “in the form of hidden, inefficient charges.” Id.
This competitive distortion was exacerbated by the fact that “the
majority of states have not comprehensively reformed intrastate access
charges.” 2011 NPRM ¶54 (JA____). As a result, intrastate access charges
“far exceed[ed] interstate charges” in most states. Id. (JA____). While
interstate access rates averaged 2 cents (or less) per minute, intrastate access
rates exceeded 10 cents per minute in some states (with South Dakota’s per-
11
minute rate surpassing 13 cents).
To make matters worse, the intercarrier compensation rules provided
ample opportunities for arbitrage. Some carriers sought to increase the
intercarrier compensation payments they received by “artificially inflat[ing]
their traffic volumes” (a practice called “access stimulation”). 2011 NPRM

11 See Letter from Joe Douglas, NECA, to Marlene Dortch, FCC, December
29, 2010, Attachment (JA____).
19

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 28
¶7 (JA____). Others tried to avoid intercarrier charges by concealing the
source of voice traffic (a practice dubbed “phantom traffic”). Id. “Practices
like these and the disputes surrounding them cost [consumers] hundreds of
millions of dollars annually.” Id.
In sum, there was widespread consensus that the FCC’s universal
service and intercarrier compensation rules were broken and needed to be
updated to account for technological advances and new market conditions.

D. The Order On Review

Recognizing the need to bridge the gaps in broadband coverage
throughout the nation, Congress in 2009 directed the FCC to develop a
National Broadband Plan “to ensure that all people of the United States have
access to broadband capability.” American Recovery and Reinvestment Act
of 2009, Pub. L. No. 111-5, §6001(k)(2), 123 Stat. 115, 516, . The FCC
understood that it could not ensure universal access to broadband unless it
“comprehensively reformed” its universal service and intercarrier
compensation systems “to increase accountability and efficiency, encourage
targeted investment in broadband infrastructure, and emphasize the
importance of broadband to the future of these programs.” Joint Statement on
Broadband, 25 FCC Rcd 3420, 3421 (2010).
20

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 29
In order to accomplish this reform, the FCC solicited public comment
12
on a wide range of proposed rule changes. Hundreds of interested parties
submitted comments. After reviewing this voluminous administrative record,
the FCC in November 2011 issued the Order that is the subject of this
litigation. In the Order, the FCC fundamentally revised its universal service
and intercarrier compensation rules in an effort to ensure that they will serve
the nation’s modern communications needs more efficiently and cost-
effectively. Order ¶¶17-42 (JA____-____).
1. Universal Service Reform
The FCC took several steps to modernize its universal service program
by reorienting it to support dual-use networks capable of providing both voice
and broadband services. First, exercising its authority under 47 U.S.C.
§254(b)(7), the agency adopted an additional principle on which to base its
universal service policies: “Support for Advanced Services – Universal
service support should be directed where possible to networks that provide
advanced services, as well as voice services.” Order ¶¶43-45 (JA____-____).

12 See Connect America Fund, 25 FCC 6657 (2010) (JA____); 2011 NPRM
¶¶55-689 (JA____-____); Public Notice, Further Inquiry into Certain Issues
in the Universal Service-Intercarrier Compensation Transformation
Proceeding
, 26 FCC Rcd 11112 (2011) (JA____).
21

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 30
Second, pursuant to 47 U.S.C. §254(c)(1), the FCC redefined the
services supported by federal universal service funding to encompass all
“voice telephony service,” including VoIP. Order ¶¶77-81 (JA____-____).
Finally, the FCC required that, as a condition of receiving universal
service support, carriers must deploy networks capable of providing “modern
broadband” services “as well as voice telephony services.” Order ¶65
(JA____). To ensure that support is being used to deploy such dual-use
networks, the agency prescribed new public interest obligations under which
recipients of universal service funding must offer voice and broadband
services that meet certain performance standards. Id. ¶¶86-108 (JA____-
____).
The FCC explained that it had authority to promote ubiquitous access
to broadband under section 254. Order ¶¶61-65 (JA____-____). It noted that
in Qwest I, this Court concluded that the FCC not only has “a ‘mandatory
duty’ to adopt universal service policies that advance the principles outlined
in section 254(b),” but also has “the authority to ‘create some inducement’ to
ensure that those principles are achieved.” Id. ¶65 (JA____) (quoting Qwest
I, 258 F.3d at 1200, 1204). Two of those principles identify access to
“information services” (including broadband) as an integral component of
22

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 31
13
universal service. Id. (citing 47 U.S.C. §254(b)(2), (b)(3)). To create an
inducement to achieve those principles and the “advanced services” principle
it adopted under section 254(b)(7), the agency required recipients of universal
service support to “invest in and deploy networks capable of providing
consumers with access to modern broadband capabilities, as well as voice
telephony services.” Id.
In this regard, the FCC found that it had authority “to support not only
voice telephony service but also the facilities over which it is offered.” Order
¶64 (JA____). Section 254(e) states that recipients of 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) (emphasis added). Noting that section 254(e) “refer[s] to
‘facilities’ and ‘services’ as distinct items for which federal universal service
funds may be used,” the FCC reasoned that “Congress granted the [agency]
the flexibility … to encourage the deployment of the types of facilities that
will best achieve the principles set forth in section 254(b).” Order ¶64
(JA____).

13 The FCC has classified broadband Internet access as an information
service. See Brand X, 545 U.S. at 975-79; Time Warner Telecom, Inc. v.
FCC
, 507 F.3d 205 (3d Cir. 2007).
23

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 32
The FCC explained that this reading of the statute is consistent with the
agency’s longstanding recognition that “[t]he public switched telephone
network is not a single-use network.” Id. n.70 (JA____) (internal quotation
marks omitted). Previously, the agency had adopted a “no barriers” policy,
which permitted (but did not require) recipients of universal service support
to invest in facilities that could provide broadband service as well as voice
service. Id. ¶64 (JA____). The FCC concluded that it had authority under
sections 254(b) and (e) “to go beyond the ‘no barriers’ policy” to “require
carriers receiving federal universal service support to invest in modern
broadband-capable networks.” Id. ¶65 (JA____).
The FCC also concluded that section 706 of the 1996 Act
independently authorized the agency to fund the deployment of broadband
networks in order “to ‘remov[e] barriers to infrastructure investment’ and
‘promot[e] competition in the telecommunications market.’” Order ¶66
(JA____) (quoting 47 U.S.C. §1302(b)).
To help achieve its goal of stimulating broadband deployment, the FCC
created the Connect America Fund (“CAF”). Order ¶¶115-120 (JA____). It
contemplated that the CAF would ultimately replace the existing mechanisms
for federal high-cost universal service support after a transitional period of
several years. In the meantime, the FCC established an annual budget of no
24

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 33
more than $4.5 billion for high-cost support (including legacy programs and
CAF subsidies). Id. ¶¶125-126 (JA____-____). It based this budget on
funding estimates that reflected the agency’s “predictive judgment as to how
best to allocate limited resources.” Id. ¶123 (JA____).
The FCC also adopted new rules for distributing universal service
support to price cap carriers, rate-of-return carriers, mobile wireless carriers,
and carriers serving the nation’s most remote areas.
Price Cap Carriers. More than 83 percent of Americans who lack
access to fixed (i.e., non-mobile) broadband service live in areas served by
carriers subject to price cap regulation. Order ¶127 (JA____). Yet “such
areas currently receive approximately 25 percent of high-cost support.” Id.
¶158 (JA____). To address this disparity, the FCC planned to disburse CAF
support to price cap carriers in two phases. During Phase I (in 2012), the
agency supplemented existing high-cost support by making available to price
cap carriers $300 million in CAF funding to jump-start broadband
deployment in areas that are unserved by any broadband provider. Id. ¶¶132-
14
155 (JA____-____).

14 Participation in Phase I was optional. Price cap carriers accepted roughly
$115 million in Phase I support. The FCC currently is considering several
proposals to distribute the remaining $185 million of Phase I funding. See
Connect America Fund
, 27 FCC Rcd 14566 (2012).
25

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 34
For Phase II, the agency budgeted $1.8 billion in annual CAF support
for price cap carriers for a five-year term. Order ¶¶156-193 (JA____-____).
The FCC will use a new forward-looking cost model to set Phase II support
levels for specific carriers. Id. ¶¶181-193 (JA____-____). Any price cap
carrier that accepts Phase II CAF funding for a particular state must make a
five-year commitment to offer broadband service that meets FCC-prescribed
performance standards in every location where it receives CAF support. Id.
¶¶171-178 (JA____-____). In areas where the incumbent price cap carrier
declines a state-level service commitment, the FCC will use a competitive
bidding mechanism to distribute Phase II support. Id. ¶179 (JA____). That
mechanism is in the process of being developed.
Rate-of-Return Carriers. Under rate-of-return regulation, carriers
obtained “a stable 11.25 percent interstate return … regardless of the
necessity or prudence of any given investment.” Order ¶287 (JA____).
Historically, the FCC’s universal service program subsidized “both a well-run
company operating as efficiently as possible, and a company with high costs
due to imprudent investment decisions, unwarranted corporate overhead, or
an inefficient operating structure.” Id.
While the FCC decided to continue supporting rate-of-return carriers
“under the legacy universal service system in the near-term,” Order ¶286
26

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 35
(JA____), it acted “to eliminate waste and inefficiency” by adopting “a
number of reforms” to “improve incentives for rational investment and
operation by rate-of-return LECs.” Id. ¶195 (JA____). Among other things,
the agency: (1) placed limits on reimbursable capital and operating expenses
for rate-of-return carriers whose costs are significantly higher than similarly
situated companies, id. ¶¶210-226 (JA____-____); (2) capped recovery of
corporate operations expense, id. ¶¶227-233 (JA____-____); and (3) imposed
a per-line cap on monthly high-cost support, id. ¶¶272-279 (JA____-____).
These reforms were designed to set the stage for a transition to “a more
incentive-based form of regulation” under which rate-of-return carriers will
receive “new CAF support.” Id. ¶204 (JA____).
In addition, for both price cap and rate-of-return carriers, the agency:
(1) phased out high-cost support in areas where an unsubsidized competitor
(or a combination of unsubsidized competitors) offers voice and broadband
service throughout the incumbent carrier’s service area, id. ¶¶170, 280-284
(JA____, ____-____); and (2) reduced support for areas with “artificially
low” end-user rates that fall below a specified “rate floor,” id. ¶¶234-247
(JA____-____).
Based on data in the record, the FCC concluded that these “incremental
reforms will not endanger existing service to consumers.” Order ¶289
27

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 36
(JA____). Areas served by rate-of-return carriers will continue to receive up
to $2 billion in annual universal service payments. Id. ¶286 (JA____).
According to the FCC’s projections, nearly half of the rate-of-return carriers
will see no change (or even a slight increase) in support, and most of the
others will experience reductions of less than 10 percent. Id. ¶290
15
(JA____). In the event that any carrier can demonstrate that the universal
service reforms will threaten its “financial viability, imperiling service to
consumers,” the FCC will grant a waiver “exempting the carrier from some or
all of those reforms.” Id. ¶539 (JA____).
To cushion the impact of those reforms, the FCC imposed less
burdensome broadband service obligations on rate-of-return carriers. It
decided that those carriers – which typically are much smaller than price cap
carriers – “should be provided greater flexibility” to roll out broadband
facilities gradually “in response to consumer demand.” Order ¶206
(JA____). Rate-of-return carriers that receive universal service support under
the new rules are not required to “deploy broadband-capable facilities to all
locations within their service territory.” Id. They need only “deploy

15 The FCC further noted that rate-of-return carriers will also receive
“funding through the CAF created to address access charge reform.” Order
¶207 (JA____); see id. ¶¶917-920 (JA____-____).
28

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 37
broadband to [a] requesting customer within a reasonable amount of time”
after “receipt of a reasonable request for service.” Id. ¶208 (JA____).
Wireless Carriers. In response to the increasing prevalence of mobile
services, the FCC created the CAF Mobility Fund, “the first universal service
mechanism dedicated to ensuring availability of mobile broadband networks
in areas where a private-sector business case is lacking.” Order ¶28
(JA____). Although existing high-cost support will be phased out during a
transition period, wireless carriers will be eligible for Mobility Fund support
reserved for mobile services. Id. ¶¶29, 512-532 (JA____, ____-____).
During the transition period, the FCC will allocate Mobility Fund
support in two stages. Phase I of the Mobility Fund will provide one-time
support of up to $300 million to jump-start deployment of mobile broadband
networks in unserved areas. Order ¶¶28, 301-478 (JA____, ____-____). In
addition, “a separate and complementary one-time Tribal Mobility Fund
Phase I” will “award up to $50 million in additional universal service funding
to Tribal lands to accelerate mobile voice and broadband availability in these
remote and underserved areas.” Id. ¶28 (JA___); see also id. ¶¶481-488
(JA____-____). Phase II of the Mobility Fund “will provide up to $500
million per year in ongoing support,” including “ongoing support to Tribal
29

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 38
areas of up to $100 million per year.” Id. ¶28 (JA____); see also id. ¶¶493-
497 (JA____-____).
The FCC planned to distribute Mobility Fund Phase I subsidies through
a nationwide “reverse auction,” under which funding will be awarded to the
carriers that offer to provide the most service for the least amount of support.
Order ¶¶321-329 (JA____-____). The winning bidders must offer both voice
and broadband service. Id. ¶¶358-368 (JA____-____). They “will be
required to deploy 4G service [i.e., the latest generation of mobile broadband
technology] within three years, or 3G service within two years.” Id. ¶28
16
(JA____).
The FCC eliminated the “identical support” rule, which previously
governed the distribution of universal service support to competitive carriers
(predominantly wireless providers). Order ¶¶498-511 (JA____-____).
Under that rule, competitive carriers received the same amount of support as
the incumbent LEC, whether or not their costs were the same. The FCC
found that the identical support rule “makes little sense” because it generates

16 The FCC conducted the Mobility Fund Phase I auction on September 27,
2012. It awarded $300 million to extend mobile service to up to 83,494 road
miles across the country. Public Notice, Mobility Fund Phase I Auction
Closes
, 27 FCC Rcd 12031 (2012).
30

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 39
“support levels” that “bear no relation to the efficient cost of providing
17
mobile voice service in a particular geography.” Id. ¶504 (JA____).
Remote Areas. Recognizing that the cost of deploying networks can be
extremely high in remote areas, the FCC concluded that it should eventually
support such areas through a separate, newly created fund. To that end, the
agency established a separate budget for CAF support “in the most remote
areas of the nation.” Order ¶533 (JA____). Exercising its “predictive
judgment,” the FCC concluded that “a budget of at least $100 million per
year is likely to make a significant difference in ensuring meaningful
broadband access in the most difficult-to-serve areas.” Id. ¶534 (JA____).
The agency “expect[ed] to revisit this decision over time,” “adjust[ing]
support levels as appropriate.” Id. ¶538 (JA____). It also “exempted the
most remote areas, including fewer than 1 percent of all American homes,”
from the “broadband service obligations that otherwise apply to CAF
recipients.” Id. ¶533 (JA____-____).
2. Intercarrier Compensation Reform
As a first step in reforming its intercarrier compensation system, the
FCC promulgated new rules designed to curb two wasteful arbitrage practices

17 The FCC reached a similar conclusion in 2008 when it imposed an
interim cap on funding under the identical support rule. The D.C. Circuit
upheld the interim cap. RCA I, 588 F.3d at 1100-08.
31

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 40
that harm consumers: access stimulation and phantom traffic. Order ¶¶33,
656-735 (JA____, ____-____).
The FCC also adopted a comprehensive plan “to phase out regulated
per-minute intercarrier compensation charges” over a multi-year transition
period. Order ¶736 (JA____). Ultimately, “a uniform national bill-and-keep
framework” – in which a carrier “bills” its own subscriber and “keeps” the
revenue – will apply to “all telecommunications traffic exchanged with a
LEC.” Id. ¶34 (JA___). Under this framework, service providers will
recover the costs of their networks from their own subscribers (and, where
necessary, the CAF) rather than from other carriers. “In this respect, bill-and-
keep helps fulfill” the 1996 Act’s directive that the FCC “should make
support explicit rather than implicit.” Id. ¶747 (JA____).
The FCC found that bill-and-keep “has significant policy advantages”
over other approaches to compensation. Order ¶738 (JA____). By
“eliminating the existing opaque implicit subsidy system under which
consumers pay” billions of dollars “to support other carriers’ network costs,”
a bill-and-keep methodology “will ensure that consumers pay only for
services that they choose and receive.” Id.; see also id. ¶¶748-751 (JA____-
____). Such a methodology allocates costs more efficiently than the existing
intercarrier compensation system by ensuring that the initiator and recipient
32

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 41
of a phone call “split the cost of the call.” Id. ¶744 (JA____). Bill-and-keep
“also imposes fewer regulatory burdens” and “reduces arbitrage and
competitive distortions” by “eliminating carriers’ ability to shift network
costs to competitors and their customers.” Id. ¶738 (JA____). “Wireless
providers have long been operating pursuant to what are essentially bill-and-
keep arrangements, and this framework has proven to be successful for that
industry.” Id. ¶737 (JA____). Furthermore, a bill-and-keep framework “will
promote the nation’s transition to [broadband] networks” because it reduces
incentives for carriers to maintain legacy equipment to receive intercarrier
compensation revenues. Id. ¶655 (JA____).
The FCC determined that it had authority to implement bill-and-keep
as the default framework for all telecommunications traffic exchanged with
LECs. Order ¶¶760-781 (JA____-____). Section 201(b) of the
Communications Act empowers the FCC to “prescribe such rules and
regulations as may be necessary in the public interest to carry out the
provisions of this [Act].” 47 U.S.C. §201(b); see also AT&T, 525 U.S. at
378. The FCC concluded that section 201(b) authorized it “to regulate the
default compensation arrangement applicable to traffic subject to section
251(b)(5).” Order ¶770 (JA____).
33

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 42
Section 251(b)(5) imposes on all LECs the “duty to establish reciprocal
compensation arrangements for the transport and termination of
telecommunications.” 47 U.S.C. §251(b)(5). The FCC construed this
provision to apply to all telecommunications traffic of any geographic scope,
including intrastate access traffic. Order ¶¶761-768 (JA____-____). Section
251(g) provides that the “restrictions and obligations” of the traditional
access charge regime will remain in effect “until ... explicitly superseded by
regulations prescribed by the [FCC].” 47 U.S.C. §251(g). In the Order, the
FCC “explicitly supersede[d] the traditional access charge regime” by opting
to “regulate terminating access traffic in accordance with the section
251(b)(5) framework.” Order ¶764 (JA____).
The FCC rejected the argument that “bill-and-keep intrudes on states’
rate-setting authority” under 47 U.S.C. §252(d)(2) “by effectively setting a
18
compensation rate of zero.” Order ¶773 (JA____). The agency pointed out
that “the pricing standard in section 252(d)” does not even apply to access
traffic, which constitutes “most of the traffic” affected by the new rules. Id.
¶774 (JA____). Moreover, the FCC observed, “[s]ection 252(d)(2)(B) makes
clear that ‘arrangements that waive mutual recovery (such as bill-and-keep

18 Section 252(d)(2) establishes a pricing standard that state commissions
apply in arbitrations for purposes of assessing incumbent LECs’ compliance
with section 251(b)(5).
34

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 43
arrangements)’ are consistent with section 252(d)’s pricing standard.” Id.
¶775 (JA____) (quoting 47 U.S.C. §252(d)(2)(B)).
The FCC found that a gradual transition to bill-and-keep generally was
warranted to minimize disruption to consumers and service providers. When
the new rules took effect, rates for terminating access and reciprocal
compensation were capped at existing levels, and certain rates began the
transition to bill-and-keep. This transition will take six years for price cap
carriers and nine years for rate-of-return carriers. Order ¶¶798-805 (JA____-
19
____).
The FCC also clarified the intercarrier compensation obligations that
apply prospectively to VoIP and wireless traffic. Order ¶¶933-1008
(JA____-____). In response to the “significant and growing problem of
traffic stimulation and regulatory arbitrage” associated with wireless traffic,

19 The transition to bill-and-keep for originating access and other rate
elements has not yet been established. The FCC sought further comment on
how to implement that transition. In the meantime, it has capped all
originating access charges for price cap carriers and interstate originating
access charges for rate-of-return carriers. Order ¶¶739, 800-801 (JA____,
____-____).
35

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 44
id. ¶995 (JA____), the FCC ordered an immediate transition to bill-and-keep
20
for wireless traffic exchanged with LECs. Id. ¶¶995-1000 (JA____-____).
In addition, the FCC created a mechanism that enables incumbent
LECs to recover some of the intercarrier compensation revenues that are
reduced as a result of the new rules. Order ¶¶847-853 (JA____-____).
Under this mechanism, price cap incumbents and rate-of-return incumbents
use different formulas to calculate the revenue they are eligible to recover.
Id. ¶¶867-904 (JA___-___). Carriers can recover that revenue by assessing
an Access Recovery Charge (“ARC”) on their end users (subject to certain
restrictions to ensure that rates remain affordable). Id. ¶¶906-916 (JA____-
____). If the ARC is insufficient to yield all of the revenue they are eligible
to recover, carriers can recover the remainder through CAF support. Id.
¶¶917-920 (JA____-____).
The FCC noted that “[a]bsent reform,” LECs would “face an
increasingly unpredictable revenue stream” from intercarrier compensation,
“which will only get worse as demand for traditional telephone service
continues to decline.” Order ¶848 (JA____). The agency found that its new

20 On reconsideration, the FCC postponed the transition to bill-and-keep for
some wireless traffic until July 1, 2012. Connect America Fund, 26 FCC Rcd
17633, 17636-37 ¶7 (2011) (JA____, ____-____).
36

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 45
recovery mechanism would “provide carriers with significantly more revenue
certainty than the status quo.” Id. ¶39 (JA____).

STANDARDS OF REVIEW

Review of the FCC’s interpretation of the statutes it administers is
governed by Chevron USA, Inc. v. Natural Res. Def. Council, 467 U.S. 837
(1984). Under Chevron, if “Congress has directly spoken to the precise
question at issue,” the Court “must give effect to the unambiguously
expressed intent of Congress.” Id. at 842-43. But “if the statute is silent or
ambiguous,” the Court must decide whether the agency has adopted “a
permissible construction of the statute.” Id. at 843; see also Sorenson
Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1042 (10th Cir. 2011) (“Sorenson
II”). If the implementing agency’s reading of an ambiguous statute is
reasonable, “Chevron requires that [the Court] accept this construction, ‘even
if the agency’s reading differs from what the [Court] believes is the best
statutory interpretation.’” Rivera-Barrientos v. Holder, 666 F.3d 641, 645
(10th Cir. 2012) (quoting Brand X, 545 U.S. at 980). This Court applies the
Chevron framework to an agency’s interpretation of its own statutory
37

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 46
authority. See Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d 1228, 1250
21
(10th Cir. 2004).
The Court must also defer to the FCC’s reading of its own orders and
regulations unless the agency’s interpretation is plainly erroneous or
inconsistent with them. Auer v. Robbins, 519 U.S. 452, 461 (1997); Southern
Utah Wilderness Alliance v. Office of Surface Mining Reclamation &
Enforcement, 620 F.3d 1227, 1236 (10th Cir. 2010); Morris v. NRC, 598 F.3d
677, 684 (10th Cir. 2010).
In evaluating petitioners’ APA claims, the Court must assess whether
the challenged FCC action was “arbitrary, capricious, an abuse of discretion,
or otherwise not in accordance with law.” 5 U.S.C. §706(2)(A). Under this
“‘narrow’ standard of review,” courts “require only that the [FCC] ‘examine
the relevant data and articulate a satisfactory explanation for its action.’”
Qwest Phoenix, 689 F.3d at 1224 (quoting FCC v. Fox Television Stations,
Inc., 556 U.S. 502, 513 (2009)). Review under this standard is “particularly
deferential in matters” that “implicate competing policy choices” and
“predictive market judgments.” Ad Hoc, 572 F.3d at 908. “An agency’s
action is entitled to a presumption of validity, and the burden is upon the

21 The Supreme Court recently heard argument in a case that presents this
issue. City of Arlington v. FCC, S. Ct. No. 11-1545 (argued Jan. 16, 2013).
38

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 47
petitioner to establish the action is arbitrary or capricious.” Sorenson II, 659
F.3d at 1046 (quoting Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215, 1221
(10th Cir. 2009) (“Sorenson I”)).
Judicial review of FCC action under the APA “is no more searching”
where (as here) the agency’s decision “represents a change in policy.” Qwest
Phoenix, 689 F.3d at 1224. “[I]t suffices that the new policy is permissible
under the statute, [and] that there are good reasons for it….” Id. at 1225
(quoting Fox Television, 556 U.S. at 515).
When an agency’s reasoning is “bound up with a record-based factual
conclusion,” a reviewing court must “determine whether [the agency’s
conclusion] is supported by ‘substantial evidence.’” Dickinson v. Zurko, 527
U.S. 150, 164 (1999). “Substantial evidence is that which a reasonable mind
might accept as adequate to support the conclusion reached by the [agency].”
Cordero Mining LLC v. Sec’y of Labor ex rel. Clapp, 699 F.3d 1232, 1236
(10th Cir. 2012) (internal quotation marks omitted). “Under this deferential
standard of review, [a court] may not displace the agency’s choice between
two fairly conflicting views, even though the court would justifiably have
made a different choice had the matter been before it de novo.” Id. (internal
quotation marks omitted).
39

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 48
The Court reviews constitutional claims de novo. Lorenzo v. Mukasey,
508 F.3d 1278, 1282 (10th Cir. 2007).
Respectfully
submitted,

SEAN A. LEV
GENERAL COUNSEL

PETER KARANJIA
DEPUTY GENERAL COUNSEL

RICHARD K. WELCH
DEPUTY ASSOCIATE GENERAL
COUNSEL

/s/ James M. Carr

LAURENCE N. BOURNE
JAMES M. CARR
MAUREEN K. FLOOD
COUNSEL

FEDERAL COMMUNICATIONS
COMMISSION
WASHINGTON, D.C. 20554
(202) 418-1740
February 6, 2013
40

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 49

CERTIFICATE OF COMPLIANCE

Certificate of Compliance With Type-Volume Limitations, Typeface

Requirements, Type Style Requirements, Privacy Redaction

Requirements, and Virus Scan


1.
This brief complies with the type-volume limitation of the Second
Briefing Order. It does not exceed 15% of the size of the brief to which it is
responding. The Joint Preliminary Brief of the Petitioners was certified to be
6,748 words in length. Therefore, the FCC may file a response brief up to
7,760 words in length. This brief contains 7,745 words, excluding the parts of
the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2.
This brief 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 2010 in 14-point Times New Roman
font.

3.
All required privacy redactions have been made.

4.
This brief was scanned for viruses with Symantec Endpoint Protection,
version 11.0.7200.1147, updated on February 6, 2013, and according to the
program is free of viruses.




/s/ James M. Carr
James M. Carr
Counsel

February 6, 2013

Appellate Case: 11-9900 Document: 01018997696 Date Filed: 02/06/2013 Page: 50

CERTIFICATE OF SERVICE


I hereby certify that on February 6, 2013, I caused the foregoing
Federal Respondents’ Uncited Response to the Joint Preliminary Brief of the
Petitioners to be filed by delivering a copy to the Court via e-mail at
FCC_briefs_only@ca10.uscourts.gov. I further certify that the foregoing
document will be furnished by the Court through (ECF) electronic service to
all parties in this case through a registered CM/ECF user. This document will
be available for viewing and downloading on the CM/ECF system.




/s/ James M. Carr
James M. Carr
Counsel

February 6, 2013

Note: We are currently transitioning our documents into web compatible formats for easier reading. We have done our best to supply this content to you in a presentable form, but there may be some formatting issues while we improve the technology. The original version of the document is available as a PDF, Word Document, or as plain text.

close
FCC

You are leaving the FCC website

You are about to leave the FCC website and visit a third-party, non-governmental website that the FCC does not maintain or control. The FCC does not endorse any product or service, and is not responsible for, nor can it guarantee the validity or timeliness of the content on the page you are about to visit. Additionally, the privacy policies of this third-party page may differ from those of the FCC.