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Federal USF Brief, In Re: FCC 11-161, No. 11-9900 (10th Cir.)

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Released: March 6, 2013

Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 1
FEDERAL RESPONDENTS UNCITED RESPONSE TO THE JOINT UNIVERSAL SERVICE FUND
PRINCIPAL BRIEF OF PETITIONERS
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

WILLIAM J. BAER
SEAN A. LEV
ASSISTANT ATTORNEY GENERAL
GENERAL COUNSEL


ROBERT B. NICHOLSON
PETER KARANJIA
ROBERT J. WIGGERS
DEPUTY GENERAL COUNSEL
ATTORNEYS


RICHARD K. WELCH
UNITED STATES
DEPUTY ASSOCIATE GENERAL COUNSEL
DEPARTMENT OF JUSTICE

WASHINGTON, D.C. 20530
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: 01019014108 Date Filed: 03/06/2013 Page: 2

TABLE OF CONTENTS


TABLE OF AUTHORITIES .......................................................................... iv 
GLOSSARY .................................................................................................... ix 
ISSUE PRESENTED ........................................................................................ 1 
INTRODUCTION AND SUMMARY OF ARGUMENT ............................... 1 
ARGUMENT .................................................................................................. 12 
I. 
THE FCC REASONABLY DETERMINED THAT THE
STATUTE AUTHORIZES THE UNIVERSAL SERVICE
REFORMS IN THE ORDER. ................................................................. 12 
A.  The FCC Reasonably Concluded That It Has Authority
Under Section 254 Of The Act To Condition Receipt Of
Federal Universal Service Subsidies On Deployment Of
Broadband-Capable Networks. ........................................................... 12 
B.  The FCC Reasonably Concluded That It May Condition
Federal Universal Service Subsidies On A Recipient’s
Compliance With Clearly Defined Public Interest
Obligations. ......................................................................................... 18 
1. 
The Order Does Not Fund Information Services Under
Section 254 Of The Act. .................................................................. 19 
2. 
The Broadband Public Interest Obligation Is A Lawful
Condition On Federal Universal Service Support. ......................... 20 
3. 
The Broadband Public Interest Obligation Does Not
Constitute Title II Common Carrier Regulation. ............................ 22 
C.  Petitioners’ Claim That The Order Violates Sections
254(e) And 214(e) Of The Act Is Not Ripe And Lacks
Merit. ................................................................................................... 24 
D.  The FCC Reasonably Ruled That It Also Has Authority
Under Section 706 Of The 1996 Act To Require
Recipients Of Federal Universal Service Support To
Deploy Broadband Networks And Services. ...................................... 27 
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II.  THE FCC REASONABLY ADOPTED A $4.5 BILLION
ANNUAL FUNDING TARGET. ............................................................ 31 
A.  The FCC’s Reasonable Predictive Judgment That The
Order Will Provide Sufficient Support Is Entitled To
Substantial Deference. ......................................................................... 33 
B.  Petitioners’ Takings Claim Is Not Ripe And Lacks Merit. ................. 38 
III.  THE FCC REASONABLY REFORMED SUPPORT
MECHANISMS FOR RATE-OF-RETURN CARRIERS
TO ELIMINATE WASTE AND INEFFICIENCY IN THE
PRIOR SYSTEM. .................................................................................... 39 
A.  The “Benchmarking Rule” Is Consistent With Section
254(b)(5) Of The Act And The FCC’s Other Rules. .......................... 40 
B.  The FCC Did Not Engage In Impermissible Retroactive
Rulemaking. ........................................................................................ 46 
IV.  PETITIONERS’ CHALLENGES TO THE FCC’S NEW
SUPPORT MECHANISMS FOR AREAS SERVED BY
PRICE CAP CARRIERS ARE NOT RIPE AND LACK
MERIT. .................................................................................................... 51 
V.  PETITIONERS’ VARIOUS CHALLENGES TO THE
OTHER REFORMS IN THE ORDER ARE WAIVED,
NOT RIPE, AND LACK MERIT. ........................................................... 54 
A.  The Order Lawfully And Reasonably Reduced Federal
Universal Service Subsidies In Areas With Artificially
Low End-User Rates. .......................................................................... 54 
B.  The Order Reasonably Eliminated Federal Universal
Service Support In Areas Served By An Unsubsidized
Competitor. .......................................................................................... 58 
C.  The New Competitive Bidding Mechanism For
Distributing One-Time Support To Wireless Carriers Is
Consistent With the Act. ..................................................................... 61 
D.  The Order Did Not Eliminate Federal Universal Service
Support For Remote Areas. ................................................................. 62 
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VI.  THE FCC GAVE ADEQUATE NOTICE AND
OPPORTUNITY TO COMMENT ON THE RULE
CHANGES IN THE ORDER. .................................................................. 63 
VII. THE FCC REASONABLY DECIDED TO ADDRESS
UNIVERSAL SERVICE CONTRIBUTIONS IN A
SEPARATE PROCEEDING. .................................................................. 66 
CONCLUSION ............................................................................................... 69 
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TABLE OF AUTHORITIES

CASES

 
Abbott Labs. v. Gardner, 387 U.S. 136 (1967) ............................................... 54
Ad Hoc Telecomms. User Comm. v. FCC, 572 F.3d
903 (D.C. Cir. 2009) .................................................................................... 28
Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608 (5th
Cir. 2000) .......................................... 8, 33, 35, 38, 39, 45, 47, 49, 50, 55, 59
Alto Eldorado P’ship v. County of Santa Fe, 634
F.3d 1170 (10th Cir. 2011) .......................................................................... 39
Ark Initiative v. U.S. Forest Serv., 660 F.3d 1256
(10th Cir. 2011) ........................................................................................... 57
AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366
(1999) .......................................................................................................... 31
Bechtel v. FCC, 957 F.2d 873 (D.C. Cir. 1992) .............................................. 50
Bowen v. Georgetown Univ. Hosp., 488 U.S. 204
(1988) (Scalia, J., concurring) ..................................................................... 48
Bowoto v. Chevron Corp., 621 F.3d 1116 (9th Cir.
2010) ............................................................................................................ 15
Cable & Wireless PLC v. FCC, 166 F.3d 1224
(D.C. Cir. 1999) .................................................................................... 10, 55
Cellco P’ship v. FCC, 700 F.3d 534 (D.C. Cir.
2012) ..................................................................................................... 24, 27
Cellnet Commc’ns, Inc. v. FCC, 149 F.3d 429 (6th
Cir. 1998) ..................................................................................................... 64
Cellular Telecomms. Indus. Ass’n v. FCC, 168 F.3d
1332 (D.C. Cir. 1999) .................................................................................. 55
Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir.
2010) ............................................................................................................ 29
DirecTV, Inc. v. FCC, 110 F.3d 816 (D.C. Cir.
1997) ............................................................................................................ 48
Duquesne Light Co. v. Barasch, 488 U.S. 299
(1989) .......................................................................................................... 39
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FCC v. Nat’l Citizens Comm. for Broad., 436 U.S.
775 (1978) ................................................................................................... 37
FCC v. Pottsville Broad. Co., 309 U.S. 134 (1940) ........................................ 67
FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944) ..................................... 39
FPC v. Texaco, 417 U.S. 380 (1974) .............................................................. 35
Franklin Savings Ass’n v. Dir., Office of Thrift
Supervision, 934 F.2d 1127 (10th Cir. 1991) .............................................. 37
Globalstar, Inc. v. FCC, 564 F.3d 476 (D.C. Cir.
2009) ............................................................................................................ 64
Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C.
Cir. 1977) ..................................................................................................... 35
Ill. Bell Tel. Co. v. FCC, 988 F.2d 1254 (D.C. Cir.
1993) ............................................................................................................ 39
In re Dawes, 652 F.3d 1236 (10th Cir. 2011) ................................................. 15
Landgraf v. USI Film Prods., Inc., 511 U.S. 244
(1994) .......................................................................................................... 47
Los Alamos Study Grp. v. U.S. Dept. of Energy, 692
F.3d 1057 (10th Cir. 2012) ............................................................. 25, 46, 63
Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d
1228 (10th Cir. 2004) .................................................................................. 31
Melcher v. FCC, 134 F.3d 1143 (D.C. Cir. 1998) .......................................... 60
NAB v. FCC, 740 F.2d 1190 (D.C. Cir. 1984) ................................................ 67
Nat’l Ass’n of Home Health Agencies v. Schweiker,
690 F.2d 932 (D.C. Cir. 1982) .................................................................... 30
Nat’l Cable & Telecomms. Ass’n v. Brand X
Internet Servs., 545 U.S. 967 (2005) .................................................... 31, 67
Nutraceutical Corp. v. Von Eschenbach, 459 F.3d
1033 (10th Cir. 2006) .................................................................................. 15
Nuvio Corp. v. FCC, 473 F.3d 302 (D.C. Cir. 2006) ......................... 26, 59, 64
Qwest Commc’ns Int’l, Inc. v. FCC, 240 F.3d 886
(10th Cir. 2001) ........................................................................ 25, 46, 54, 63
Qwest Commc’ns Int’l., Inc. v. FCC, 398 F.3d 1222
(10th Cir. 2005) ............................................................ 10, 16, 21, 31, 37, 56
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Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir.
2001) ..................................................................................... 2, 10, 13, 18, 56
Qwest Corp. v. FCC, 482 F.3d 471 (D.C. Cir. 2007) ..................................... 43
Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir.
2012) ............................................................................................................ 37
Rural Cellular Ass’n v. FCC, 588 F.3d 1099 (D.C.
Cir. 2009) ................................................ 7, 31, 33, 35, 37, 47, 50, 58, 59, 66
Rural Cellular Ass’n v. FCC, 685 F.3d 1083 (D.C.
Cir. 2012) .............................................................................................. 33, 35
Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215
(10th Cir. 2009) .............................................................................. 22, 43, 67
Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035
(10th Cir. 2011) .................................................................. 19, 42, 43, 46, 58
Sw. Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir.
1998) ............................................................................................................ 46
Tex. Office of Pub. Util. Counsel v. FCC, 183 F.3d
393 (5th Cir. 1999) ......................................................................... 21, 33, 39
United States v. Am. Libraries Ass’n, Inc., 539 U.S.
194 (2003) ................................................................................................... 21
Vt. Pub. Serv. Bd. v. FCC, 661 F.3d 54 (D.C. Cir.
2011) ............................................................................................... 35, 52, 57
Williamson County Reg’l Planning Comm’n v.
Hamilton Bank, 473 U.S. 172 (1985) ..................................................... 7, 39
WWC Holding Co. v. Sopkin, 488 F.3d 1262 (10th
Cir. 2007) ........................................................................................ 22, 23, 25

STATUTES

 
5 U.S.C. §553(b) .............................................................................................. 63
5 U.S.C. §553(b)(3) ......................................................................................... 63
47 U.S.C. §152(b)....................................................................................... 9, 55
47 U.S.C. §154(j) ............................................................................................ 67
47 U.S.C. §155(c)(1) ................................................................................ 43, 44
47 U.S.C. §201 et seq. ....................................................................................... 5
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47 U.S.C. §214(e) ......................................................................... 10, 15, 24, 61
47 U.S.C. §214(e)(1) ....................................................................................... 24
47 U.S.C. §214(e)(1)(A) .......................................................................... 26, 27
47 U.S.C. §214(e)(2) ............................................................................ 5, 25, 61
47 U.S.C. §214(e)(3) ....................................................................................... 60
47 U.S.C. §214(e)(6) .................................................................................. 5, 25
47 U.S.C. §254 .................................................................................................. 2
47 U.S.C. §254(b)............................................................... 3, 13, 15, 16, 20, 69
47 U.S.C. §254(b)(1) ................................................................................ 66, 68
47 U.S.C. §254(b)(1)-(3) ................................................................................. 22
47 U.S.C. §254(b)(2) .............................................................. 3, 4, 6, 13, 16, 30
47 U.S.C. §254(b)(2)-(3) ................................................................................. 20
47 U.S.C. §254(b)(3) ............................................................................ 3, 13, 37
47 U.S.C. §254(b)(4) ................................................................................ 66, 68
47 U.S.C. §254(c)(1) .......................................... 3, 4, 14, 15, 16, 18, 19, 20, 26
47 U.S.C. §254(d)............................................................................................ 69
47 U.S.C. §254(e) ................................................................. 3, 7, 20, 24, 33, 37
47 U.S.C. §332(c)(3) ....................................................................................... 56
47 U.S.C. §405(a) ............................................................... 7, 19, 42, 46, 58, 64
47 U.S.C. §1302 ................................................................................................ 6
47 U.S.C. §1302(b)............................................................................... 6, 27, 28

REGULATIONS

 
47 C.F.R. §0.291 ............................................................................................. 44
47 C.F.R. §0.291(e) .................................................................................. 43, 44
47 C.F.R. §54.313(a)-(b) ................................................................................. 21
47 C.F.R. §54.314(a)-(b) ................................................................................. 21
Connect America Fund; High Cost Universal
Service Support, 77 Fed. Reg. 30,411-01 (May
23, 2012) ...................................................................................................... 46
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Universal Service-Intercarrier Compensation
Transformation, 76 Fed. Reg. 49,401-01 (Aug.
10, 2011) ...................................................................................................... 65

ADMINISTRATIVE DECISIONS

 
Accipiter Communications, Inc., 28 FCC Rcd 391
(WCB 2013) ................................................................................................ 35
Allband Communications, 27 FCC Rcd 8310 (WCB
2012) ............................................................................................................ 35
Connect America Fund, 26 FCC Rcd 4554 (2011) ......................................... 21
Connect America Fund, 27 FCC Rcd 4235 (WCB
2012), aff’d in part and modified in part, Connect
America Fund
, 2013 WL 749737 (Feb. 26, 2013) ...................................... 42
Federal-State Joint Board on Universal Service, 16
FCC Rcd 11244 (2001) ............................................................................... 12
Federal-State Joint Board on Universal Service, 20
FCC Rcd 6371 (2005) ................................................................................. 25
High-Cost Universal Service Support, 23 FCC Rcd
8834 (2008), aff’d, Rural Cellular Ass'n v. FCC,
588 F.3d 1095 (D.C. Cir. 2009) .................................................................. 62
IP-Enabled Services, 20 FCC Rcd 10245 (2005),
aff’d sub nom. Nuvio Corp. v. FCC, 473 F.3d 302
(D.C. Cir. 2006) ........................................................................................... 26
Preserving the Open Internet, 25 FCC Rcd 17905
(2010), pet. for review pending, Verizon v. FCC,
D.C. Cir. No. 11-1355 ................................................................................. 30
Universal Service Contribution Methodology; A
National Broadband Plan for Our Future, 27
FCC Rcd 5357 (2012) ................................................................................. 67

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GLOSSARY

1996 Act
The Telecommunications Act of 1996
Act
The Communications Act of 1934
APA
The Administrative Procedure Act
ARC Access
Recovery
Charge
COLR
Carrier of Last Resort
ETC
Eligible Telecommunications Carrier
FCC Federal
Communications
Commission
FNPRM
Further Notice of Proposed Rulemaking
HCLS
High-Cost Loop Support
LEC Local
Exchange
Carrier
NPRM
Notice of Proposed Rulemaking
SNA
Safety Net Additive
USF
Universal Service Fund
VoIP
Voice over Internet Protocol
WCB Wireline
Competition
Bureau





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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 UNIVERSAL
SERVICE FUND
PRINCIPAL BRIEF OF PETITIONERS

ISSUE PRESENTED

Whether the Federal Communications Commission (“FCC”) lawfully
reformed its universal service rules to efficiently enhance access to broadband
in rural America.

INTRODUCTION AND SUMMARY OF ARGUMENT

The FCC, in the Order on review, took the necessary steps to
modernize its universal service program. Finding that “[n]etworks that
provide only voice service … are no longer adequate for the country’s
communication needs,” Order ¶2 (JA__), the FCC reoriented the federal
high-cost universal service program to support dual-use networks capable of

Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 12
providing voice as well as broadband service to all Americans. See FCC
Preliminary Br. 21-22.
Seeking to preserve the status quo, petitioners raise at least twelve
issues. Br. 1-3. They claim that the FCC lacked authority to reform its
universal service rules, violated various provisions of the Communications
Act of 1934 (“Act”), engaged in unreasoned decision-making in violation of
the Administrative Procedure Act (“APA”), and failed to follow proper
procedures. As explained below, these claims are baseless, and many are not
properly presented.
I. Petitioners broadly assert that the FCC lacked statutory authority to
enact universal service reform. Petitioners’ various challenges rest on the
assertion that Congress fenced off “information services” (see FCC
Preliminary Br. 8 n.6). – notably, broadband Internet access – from the
universal service program. Petitioners are wrong.
A. The FCC reasonably determined that section 254 of the Act, 47
U.S.C. §254, authorized the agency to provide federal universal service
support for broadband-capable networks.
The FCC has a “mandatory duty” to “base its universal [service]
policies on the principles listed in §254(b)” of the Act. Qwest Corp. v. FCC,
258 F.3d 1191, 1200 (10th Cir. 2001) (“Qwest I”). Among those principles
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are that “[a]ccess to advanced telecommunications and information services
should be provided in all regions of the Nation,” and that “[c]onsumers in all
regions of the Nation … should have access to telecommunications and
information services … that are reasonably comparable to those services
provided in urban areas” and at reasonably comparable rates. 47 U.S.C.
§254(b)(2), (3).
After evaluating the record evidence, the FCC found that the
achievement of the section 254(b) principles requires carriers to deploy
networks capable of providing consumers with access to both voice and
broadband services. The FCC concluded that it was authorized to advance
those principles by 47 U.S.C. §254(e), which requires recipients of support
from the federal universal service fund (“USF”) to “use that support only for
the provision, maintenance, and upgrading of facilities and services for which
the support is intended.” Because “facilities” and “services” are distinct
terms, the FCC reasoned that, through section 254, Congress granted the
agency authority to support the “telecommunications services” designated
under 47 U.S.C. §254(c)(1) and the facilities necessary to achieve the
principles in section 254(b). In fact, in the decade prior to the Order, the
FCC permitted (but did not require) the recipients of high-cost universal
service support to invest in “dual-use” facilities that provide voice as well as
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broadband services. Consistent with that long-standing policy, the FCC in
the Order conditioned a carrier’s receipt of federal universal service support
under section 254 on the deployment of a broadband-capable network. To
ensure that USF recipients use support for that purpose, the FCC further
required them to offer broadband service that meets certain basic performance
requirements.
1. Petitioners claim that the FCC lacks authority to fund broadband
facilities because, in their view, section 254(e)’s use of the phrase “for which
the support is intended” must be construed as referring to the
“telecommunications services” deemed eligible for support under section
254(c)(1). But the FCC reasonably interpreted that clause to refer to the
universal service principles in section 254(b) of the Act. This reading gives
full effect to section 254. Indeed, under petitioners’ reading, the FCC could
not achieve the mandatory principles in sections 254(b)(2) and (3) – which
include “[a]ccess to advanced telecommunications and information services
… in all regions of the Nation.” 47 U.S.C. §254(b)(2) (emphasis added).
The FCC was not required to adopt an interpretation of the statute that
disabled the agency from achieving the purposes Congress assigned to it.
Such a reading is not reasonable, much less mandated.
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2. To ensure that universal service support is being used to deploy
broadband facilities, the FCC further required USF recipients to provide
broadband Internet access service – a public interest obligation that was a
valid and necessary exercise of the agency’s judicially affirmed authority to
impose conditions on federal subsidies. Further, because the public interest
obligation is conditional (i.e., carriers need only provide broadband if they
voluntarily seek federal universal service support), it does not amount to
common carrier “regulation” under Title II of the Act, 47 U.S.C. §201 et seq.,
as petitioners allege.
3. While petitioners assert that the Order distributes universal service
support to entities that are not “telecommunications carriers” and provide no
“telecommunications services,” that claim will not be ripe for judicial review
unless and until a state commission (or the FCC) designates such an entity an
“eligible telecommunications carrier” (“ETC”). See 47 U.S.C. §214(e)(2),
(6). But even under petitioners’ theory, a provider of Voice over Internet
Protocol (“VoIP”), an “unclassified” service, could be eligible for such
support if it voluntarily offers VoIP as a “telecommunications service” – a
practice that the FCC has sanctioned in prior orders and that occurs in the
marketplace today.
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B. The FCC concluded that it has independent authority under section
706 of the Telecommunications Act of 1996 (“1996 Act”), 47 U.S.C. §1302,
to support broadband networks and services. That provision empowers the
FCC to “take immediate action to accelerate deployment of such capability
by removing barriers to infrastructure investment and by promoting
competition in the telecommunications market.” 47 U.S.C. §1302(b).
Evidence in the record showed that support for broadband helps achieve both
those statutory objectives. The FCC separately found that its exercise of
authority under section 706 helps fulfill the objectives in section 254(b),
notably the principle that “[a]ccess to advanced telecommunications and
information services should be provided in all regions of the Nation.” 47
U.S.C. §254(b)(2).
II. The FCC, for the first time, established an annual funding target for
the high-cost component of the USF. Relying on its predictive judgment, the
FCC found that setting the target at $4.5 billion annually would provide
sufficient support to ensure affordable and reasonably comparable voice and
broadband service.
Contrary to petitioners’ claims, the FCC carefully calibrated the impact
of universal service reform on incumbent local exchange carriers (“LECs”)
subject to rate-of-return regulation. It maintained high-cost support for those
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carriers at existing levels (about $2 billion annually), and required them to
extend facilities to customers only upon a reasonable request for service. The
FCC estimated that almost one-half of all rate-of-return carriers would see no
change or an increase in federal support, and of those expected to experience
a reduction, the majority would see reductions of fewer than 10 percent of
their annual subsidies. The FCC also provided a waiver process under which
carriers may receive exemptions from these reductions if they are able to
demonstrate that support reductions would imperil their financial viability
and threaten service to consumers. The availability of that waiver process
undercuts petitioners’ arguments that the Order (1) provides insufficient
support for purposes of sections 254(b)(5) and (e) of the Act, see Rural
Cellular Ass’n v. FCC, 588 F.3d 1099, 1104 (D.C. Cir. 2009) (“RCA I”); and
(2) effects an unconstitutional taking of property, see Williamson County
Reg’l Planning Comm’n v. Hamilton Bank, 473 U.S. 172, 194 (1985).
III. To eliminate waste and inefficiency in universal service support to
rate-of-return carriers, the FCC limited those carriers’ recovery of certain
capital and operating expenses. Petitioners have waived their various
challenges to this rule because they never presented them to the FCC. See 47
U.S.C. §405(a). The challenges lack merit in any event. Petitioners’ primary
complaint is that the new rule will produce unpredictable funding amounts,
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allegedly in violation of 47 U.S.C. §254(b)(5). But that provision of the Act
only requires predictable rules, not outcomes. See Alenco Commc’ns, Inc. v.
FCC, 201 F.3d 608, 622 (5th Cir. 2000). Moreover, it has always been the
case that carriers will not know how much support they will receive in future
periods, so the new rule adds no uncertainty to USF disbursements.
Separately, petitioners argue that the FCC engaged in impermissible
retroactive rulemaking. Not so. There is no “primary retroactivity” because
the Order only reduces universal service support prospectively. Even if the
Order were retroactive in effect (which it is not), there is no “secondary
retroactivity” because the FCC’s decision to amend its rules was reasonable
and thus lawful.
IV. The FCC also overhauled the support mechanisms for incumbent
LECs subject to price cap regulation. To spur broadband deployment, over
and above what price cap carriers had already planned, the FCC offered
additional high-cost support, on a one-time basis, to areas currently lacking
broadband service. Having adequately explained its decision to jump-start
broadband deployment in previously unserved areas rather than subsidize
service upgrades in areas that already have access to broadband, the FCC was
not required to separately respond to petitioners’ objections to that limitation.
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Nor was the FCC required to address petitioners’ arguments that using
an auction mechanism to eventually distribute subsidies to price cap carriers
will degrade service and disadvantage small telecommunications carriers.
The Order merely stated the FCC’s intention to use an auction mechanism.
In an attached Further Notice of Proposed Rulemaking (“FNPRM”), the FCC
sought comment on how best to design and implement it – including
comment on the issues of concern to petitioners. Until the FCC acts on the
FNPRM, petitioners’ claims that the mechanism will degrade service or harm
small carriers are not ripe.
V. Petitioners launch a scattershot attack on various other reforms
designed to more efficiently and cost-effectively support voice and broadband
with federal universal service funding. Many of these perfunctory and often
underdeveloped claims are waived or unripe; they all lack merit.
A. In response to record evidence showing that a number of USF
recipients charge artificially low rates, the FCC adopted a rule that reduces
federal subsidies to carriers with rates below a specified floor so as not to
burden consumers who ultimately make universal service contributions.
While petitioners complain that the new rule has the de facto effect of setting
local rates in violation of 47 U.S.C. §152(b), courts have made clear that an
incidental effect on rates does not mean that the FCC is “regulating” rates.
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See Cable & Wireless PLC v. FCC, 166 F.3d 1224, 1230 (D.C. Cir. 1999).
Moreover, FCC adoption of measures that encourage states to adjust local
rates is not only permissible, it is sometimes required to ensure that states
assist in implementing the universal service goals in section 254 of the Act.
See Qwest I, 258 F.3d at 1203-04; Qwest Commc’ns Int’l., Inc. v. FCC, 398
F.3d 1222, 1238 (10th Cir. 2005) (“Qwest II”).
B. The FCC also eliminated support in areas served by an
unsubsidized competitor. Petitioners predict that this will threaten customers,
because an unsubsidized competitor (unlike the incumbent LEC) has no legal
obligation to provide voice and broadband service. But the FCC reasonably
predicted that unsubsidized competitors would have business incentives to
maintain service in areas they serve today, and thus declined to fund
duplicative networks where market forces are already sufficient to ensure
consumer access to voice and broadband services. That sensible
determination is entitled to substantial deference.
C. To spur the deployment of mobile wireless services, the FCC
decided to use competitive bidding to distribute $300 million in one-time
high-cost support to wireless carriers in certain designated areas. Petitioners
argue that this mechanism usurps state commission authority under 47 U.S.C.
§214(e), but they conflate eligibility for subsidies with the right to receive
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subsidies. Nothing in the Order limited the states’ authority under section
214(e) to determine who is eligible for support, and where they are eligible
for support. Such state eligibility determinations are still a precondition to
receiving support, but no carrier is entitled to receive federal universal service
support simply by virtue of these state determinations.
D. The FCC decided to transition support for the most remote areas of
the nation to a newly created fund. The Order set aside $100 million
annually for that effort but sought comment on how to distribute support in
the attached FNPRM. Contrary to petitioners’ suggestion, until those
distribution rules are in place, extremely high-cost areas will continue to
receive support under existing mechanisms for price cap and rate-of-return
carriers. When the FCC creates the new Remote Areas Fund, petitioners
may, if they are aggrieved, challenge that new mechanism. Until then, their
claim is not ripe and, in any event, meritless.
VI. Petitioners complain that certain key provisions of the Order did
not comply with the notice-and-comment requirements of the APA. That
argument is not properly before the Court, because it was not first presented
to the FCC through a petition for reconsideration. It also lacks merit, because
the FCC sought comment on all of the challenged provisions.
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VII. Finally, the FCC reasonably decided to address in a separate
proceeding the issue of universal service contributions. This action was well
within the agency’s discretion to define the scope of its own proceedings and
to proceed incrementally.

ARGUMENT

I.

THE FCC REASONABLY DETERMINED THAT THE
STATUTE AUTHORIZES THE UNIVERSAL SERVICE
REFORMS IN THE ORDER.

A. The FCC Reasonably Concluded That It Has Authority

Under Section 254 Of The Act To Condition Receipt Of
Federal Universal Service Subsidies On Deployment Of
Broadband-Capable Networks.

“‘The public switched telephone network is not a single-use network.’”
Order n.70 (JA__) (quoting Federal-State Joint Board on Universal Service,
16 FCC Rcd 11244, 11322 (¶200) (2001) (“Rural Task Force Order”)).
Rather, “‘[m]odern network infrastructure can provide access not only to
voice services, but also to data, graphics, video, and other services.’” Id.
Thus, in the Rural Task Force Order, the FCC established the “no barriers”
policy. Order ¶¶64, 308 (JA__, __). For more than a decade, this policy
permitted (but did not require) recipients of federal high-cost universal
service support to invest in “dual-use” facilities that provide voice as well as
broadband Internet access services. Id.
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The FCC, in the Order, found that section 254(e) of the Act allowed it
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__); see also ¶308 (JA__). Petitioners now contend that the FCC
lacked authority to make that once-permissive policy mandatory. Br. 21-22.
The FCC properly rejected petitioners’ view in the Order, explaining
that “nothing in section 254 … requires [the agency] simply to provide
federal funds to carriers and hope that they will use such support to deploy
broadband facilities” as occurred under the “no barriers” policy. Order ¶65
(JA__). “To the contrary, [the FCC] ha[s] a ‘mandatory duty’ to adopt
universal service policies that advance the principles … in section 254(b), and
… the authority to ‘create some inducement’ to ensure that those principles
are achieved.” Id. (quoting Qwest I, 258 F.3d at 1200, 1204). Two of those
principles identify access to information services as an integral component of
universal service. See 47 U.S.C. §254(b)(2), (3). By conditioning support on
the deployment of a broadband-capable network, the Order lawfully sought
to “induce” the recipients of federal universal service subsidies to “advance”
the principles in section 254(b). In this regard, petitioners’ argument that the
section 254(b) principles are merely “aspirational language” (Br. 16) is
squarely foreclosed by Qwest I, 258 F.3d at 1200 (explaining that “[t]he plain
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text of the statute mandates that the FCC ‘shall’ base its universal policies on
the principles listed in § 254(b),” which “indicates a mandatory duty on the
FCC”); see also FCC Response to Wireless Carrier USF Principal Br. __.
Despite the FCC’s precedent authorizing support for broadband
facilities, petitioners contend that because the phrase “facilities and services”
in section 254(e) is modified by the clause “for which the support is
intended,” the FCC may only require USF recipients to deploy facilities that
are used to provide the “telecommunications services” deemed eligible for
support pursuant to section 254(c)(1). Br. 22-23. According to petitioners,
this prohibits the FCC from conditioning federal universal service support on
the deployment of broadband-capable networks.
As the FCC explained, however, “[b]y referring to ‘facilities’ and
‘services’ as distinct items for which federal universal service funds may be
used, … Congress 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 the types of facilities that will best
achieve the principles set forth in section 254(b).” Order ¶64 (JA__); see id.
¶308 (JA__). Limiting support to the facilities used to provide the section
254(c)(1) services, as petitioners argue the FCC must, would conflate
“services” with “facilities,” rendering the latter term “superfluous.” See
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Nutraceutical Corp. v. Von Eschenbach, 459 F.3d 1033, 1040 (10th Cir.
2006) (holding that because “[t]he rule against surplusage encourages courts
to give meaning to every word used in a statute to realize congressional
intent,” the district court erred by conflating “significant risk” with
“unreasonable risk” – “a distinct term”); see also Bowoto v. Chevron Corp.,
621 F.3d 1116, 1127 (9th Cir. 2010) (when a statute uses distinct terms, a
1
court “must … presume those terms have different meanings”).
The FCC thus reasonably interpreted the phrase “for which the support
is intended” in section 254(e) to reference the universal service principles in
section 254(b). Order ¶¶64, 308 (JA__). This reading properly gives full
effect to both section 254(b) and section 254(c)(1) of the Act. See In re
Dawes, 652 F.3d 1236, 1242 (10th Cir. 2011) (statutes should be construed so
that no part will be inoperative or superfluous). Petitioners’ narrow and
exclusive focus on “telecommunications services” ignores the FCC’s
obligation to achieve the section 254(b)(2) and (3) principles, which include

1 Petitioners incorrectly read the Order to define the “facilities” supported
by section 254(e) as limited to those used to provide only the
“telecommunications services” designated under section 254(c)(1). See Br.
22-23 (citing Order n.69 (JA__)). As the FCC explained, “Section 254(e) …
contemplates that carriers may receive federal support to enable the
deployment of broadband facilities used to provide supported
telecommunications services as well as other services.” Order ¶64 (JA__)
(emphasis added).
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“[a]ccess to advanced telecommunications and information services … in all
regions of the Nation.” 47 U.S.C. §254(b)(2) (emphasis added). The agency
cannot satisfy that obligation if section 254(c)(1) prohibits the FCC from
conditioning a recipient’s use of federal subsidies on the deployment of a
single network capable of supporting both telecommunications services and
information services. Indeed, the prior, permissive “no barriers” policy failed
to sufficiently achieve those objectives. See FCC Preliminary Br. 15. It
follows that petitioners’ interpretation of the statute is not reasonable – much
less mandated – because it would disable the FCC from achieving the explicit
statutory goals regarding information services.
Petitioners’ interpretation also ignores the FCC’s duty to “advance”
universal service. See 47 U.S.C. §254(b); Qwest II, 398 F.3d at 1236. Their
proposal to “limit[] federal support based on the regulatory classification of
the services offered … would exclude from the universal service program
providers who would otherwise be able to deploy broadband infrastructure to
consumers.” Order ¶72 (JA__). That infrastructure is used to provide new
services, such as VoIP, which are “viewed by consumers as substitutes for
traditional voice telephone services.” Id. ¶63 (JA__). Thus, requiring USF
recipients to deploy networks capable of providing voice and broadband
services “advances” universal service, whereas merely requiring recipients to
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deploy networks capable of providing traditional circuit-switched voice
services would only “preserve” the status quo.
If, as petitioners claim (Br. 22-23), the FCC may support facilities only
to the extent that they are used to provide telecommunications services, then
allowing ETCs to expend universal service subsidies to deploy facilities used
to provide broadband Internet access, even on a permissive basis, would have
violated the Act. Hence, under petitioners’ reading, the long-standing,
permissive “no barriers” policy, which petitioners themselves supported in
2
proceedings before the agency, would be unlawful. In conflict with their
legal position here, however, it is clear that petitioners do not oppose federal
universal service support that may be used for broadband deployment; rather,
they oppose federal support conditioned on broadband deployment. In other

2 See, e.g., Comments of the National Exchange Carrier Association, Inc.;
National Telecommunications Cooperative Association; Organization for the
Promotion and Advancement of Small Telecommunications Companies; and
Western Telecommunications Alliance, WC Docket 10-90 et al. at 64-65
(filed Apr. 18, 2011) (JA__-__) (encouraging the FCC to “recognize that the
current high-cost support mechanisms have enabled great success in
broadband deployment and adoption in R[ural] LEC study areas” and
specifically that “the ‘no barriers to advanced services’ policy … has allowed
R[ural] LECs to use USF support in a forward-looking manner to construct
multi-use networks that support both quality voice and broadband
offerings”); see also id. n.35 (JA__) (explaining that “there is no question that
support can be distributed for mixed-use plant that supports both Title I
broadband Internet access and Title II regulated telecommunications
services”).
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words, petitioners want subsidies without the obligation. But this Court has
already held that the FCC is not required to provide petitioners’ hoped for
3
“blank check.” See Qwest I, 258 F.3d at 1204.

B. The FCC Reasonably Concluded That It May Condition

Federal Universal Service Subsidies On A Recipient’s
Compliance With Clearly Defined Public Interest
Obligations.

Section 254(c)(1) of the Act defines “[u]niversal service” as “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.” Petitioners
argue that “the Commission [wa]s not … empowered to include” VoIP and
broadband Internet access “on the list of supported services” designated under
section 254(c)(1) because they are not “telecommunications services.” Br.
14. Petitioners, however, mischaracterize the Order, which provides
universal service support for (1) “voice telephony service” and (2)
broadband-capable networks. To ensure that support is being used for the
latter, the FCC further required USF recipients to provide broadband Internet
access service – a public interest obligation that was a valid and necessary

3 We address in section I.C., below, petitioners’ separate claim that the FCC
lacks authority to fund broadband-capable networks on the ground that the
Order does not require USF recipients to provide telecommunications
services. Br. 21-22.
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exercise of the agency’s judicially affirmed authority to impose funding
conditions.
1. The Order Does Not Fund Information Services Under

Section 254 Of The Act.

Pursuant to the Order, “voice telephony service” is the only supported
4
service for purposes of section 254(c)(1). Order ¶¶62, 80, 309 (JA__, __,
__). “To the extent [ETCs] offer traditional voice telephony services as
telecommunications services over traditional circuit-switched networks, [the
FCC’s] authority to provide support for such services is well-established.”
Id. ¶62 (JA__); see also 47 U.S.C. §254(c)(1).
Petitioners attack the Order’s inclusion of VoIP – an “unclassified
service” (i.e., a service that the FCC has not classified either as a
“telecommunications service” or an “information service”) – in the definition
of “voice telephony service.” Br. 13-15. As the FCC explained, however,
“[i]f interconnected VoIP services are telecommunications services,” the
agency can designate them as eligible for support pursuant to section

4 Petitioners claim that “the Order fails to discuss how its new ‘voice
telephony service’ definition takes … into account” any of the four factors
listed in section 254(c)(1). Br. 56. This claim is barred because petitioners
failed to raise it in the proceeding below or in a subsequent petition for
reconsideration of the Order. See Sorenson Commc’ns, Inc. v. FCC, 659
F.3d 1035, 1044 (10th Cir. 2011) (“Sorenson II”); 47 U.S.C. §405(a). In any
event, the Order did discuss these factors at length. See Order ¶¶61-65, 68-
69, 71-72, 76-81 (JA__-__, __-__, __-__, __-__).
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254(c)(1). Order ¶63 n.67 (JA__). Alternatively, if “interconnected VoIP
services are information services, [the FCC] ha[s] authority to support the
deployment of broadband networks used to provide such services” under
sections 254(b)(2)-(3) and (e). Id. In the latter circumstance, VoIP is not a
“telecommunications service” supported by section 254(c)(1); it is one of the
“other services” offered across “broadband facilities used to provide
supported telecommunications services.” Id. ¶64 (JA__).
2. The Broadband Public Interest Obligation Is A Lawful

Condition On Federal Universal Service Support.

Petitioners likewise fail to show that the FCC, acting under section
254, authorized federal universal service support for broadband Internet
access service itself. Br. 11-16. Indeed, the FCC expressly declined to “add
broadband to the list of supported services” under section 254(c)(1). Order
¶¶65, 309 & n.514 (JA__, __). Instead, it merely conditioned the receipt of
support on a carrier’s deployment of a broadband-capable network pursuant
to sections 254(b) and (e). Id. ¶65 (JA__).
Petitioners counter that the Order (at ¶86 (JA__)) had that effect when,
“[a]s a condition of receiving federal high-cost universal service support,” it
required funding recipients “to offer broadband service … that meets certain
basic performance requirements and to report regularly on associated
performance measures.” Br. 23-24. Petitioners’ argument ignores the fact
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that “[n]othing in section 254 prohibits the Commission from conditioning
the receipt of [universal service] support, and the Commission has imposed
conditions in the past.” Connect America Fund, 26 FCC Rcd 4554, 4581
(¶71 & n.103) (2011) (emphasis added) (JA__,__) (citing 47 C.F.R.
§§54.313(a)-(b), 54.314(a)-(b) (“NPRM”)); see also United States v. Am.
Libraries Ass’n, Inc., 539 U.S. 194, 211 (2003).
As the FCC explained, “[u]niversal service support is a public-private
partnership,” and carriers “that benefit from public investment in their
networks must be subject to clearly defined obligations associated with the
use of such funding.” Order ¶74 (JA__). Courts have recognized this
proposition in denying similar challenges to conditions on federal subsidies.
See Am. Libraries Ass’n, 539 U.S. at 211-13 (upholding the requirement that
public libraries use Internet filters as a condition on receipt of federal
universal service subsidies); Qwest II, 398 F.3d at 1238 (affirming the FCC’s
authority to condition universal service support on state commission
certification that local telephone rates are “reasonably comparable”); Tex.
Office of Pub. Util. Counsel v. FCC, 183 F.3d 393, 444 (5th Cir. 1999)
(“TOPUC”) (affirming the FCC’s authority to condition federal universal
service support on state-established discount rates for intrastate services
provided to schools, libraries, and rural health care providers). Absent the
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performance metrics and rate comparisons set forth in paragraphs 90-114 of
the Order (JA__-__), the FCC would have no means to ensure that federal
universal service subsidies are being used, as required by sections 254(b)(1)-
(3) of the Act, to deploy “in all regions of the Nation” networks capable of
providing affordable voice and broadband services that are reasonably
comparable – in terms of quality and rates – to voice and broadband services
5
in urban areas, see Order ¶¶87, 91, 106, 113 (JA__, __, __, __).
3. The Broadband Public Interest Obligation Does Not

Constitute Title II Common Carrier Regulation.

Petitioners separately argue that the broadband public interest
obligation “essentially forc[es]” USF recipients “to offer … information
service[s] as a common carrier service.” Br. 23. That claim is contrary to
this Court’s precedent in WWC Holding Co. v. Sopkin, 488 F.3d 1262, 1268,
1274 (10th Cir. 2007), which held that a state commission could condition a
wireless carrier’s ETC designation on compliance with some of the

5 Petitioners contend that the agency cannot confirm that the Order will
produce “reasonably comparable” broadband Internet access service because
the agency has never compared broadband rates and service quality between
urban and rural areas. Br. 33-34. The FCC directed its staff to gather the
data needed to make this determination. See Order ¶¶113, 1018 (JA__, __).
Because agencies may proceed incrementally, the FCC was not required to
complete this effort before adopting the Order. See, e.g., Sorenson
Commc’ns, Inc. v. FCC
, 567 F.3d 1215, 1222 (10th Cir. 2009) (“Sorenson
I
”).
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“consumer protection and operational standards” imposed on incumbent
LECs. As the Court explained, funding conditions commensurate with the
requirements imposed on common carriers do not amount to common carrier
“regulation,” because providers voluntarily assume the conditions in the first
instance and “retain[] the ability to opt out of [them] entirely by declining …
federal universal service subsidies.” Id. at 1274. Because the broadband
public interest obligation is conditional (i.e., carriers only have to provide
broadband service to a customer if they request federal subsidies), it does not
amount to “regulation” of any sort.
Moreover, the Order does “not extend[] the gamut of telephone
regulations” under Title II of the Act to broadband Internet access service; it
simply requires providers that “approach[] the [FCC] to receive federal
universal service subsidies” (id.) “to offer broadband service … that meets
certain basic performance requirements and to report regularly on associated
performance measures,” Order ¶86 (JA__). Petitioners have failed to
demonstrate that those modest requirements correspond to any, let alone all,
of the requirements that Title II imposes on common carriers. Br. 23. They
do not.
But even if that were not the case, “common carriage is not all or
nothing – there is a gray area in which although a given regulation might be
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applied to common carriers, the obligations imposed are not common carriage
per se.” Cellco P’ship v. FCC, 700 F.3d 534, 547 (D.C. Cir. 2012).
Accordingly, “the Commission’s determination” that the broadband public
interest obligation “does not confer common carrier status warrants
deference” from the Court. Id.

C. Petitioners’ Claim That The Order

Violates Sections
254(e) And 214(e) Of The Act Is Not Ripe And Lacks
Merit.

Petitioners further argue that the Order violates sections 254(e) and
214(e) of the Act because “it distributes USF support to entities that are not
telecommunications carriers and provide no telecommunications services.”
Br. 5, 17-18, 22. Petitioners’ claim should be dismissed because it is not ripe.
In any event, it is wrong.
1. Pursuant to section 254(e), only “eligible telecommunications
carriers,” i.e., those entities designated under section 214(e), “shall be eligible
to receive specific Federal universal service support.” 47 U.S.C. §254(e).
Section 214(e)(1), in turn, provides that “a common carrier designated as an
eligible telecommunications carrier … shall be eligible to receive universal
service support in accordance with section 254.” Id. §214(e)(1). “[T]he
states designate common carriers over which they have jurisdiction as ETCs,
and th[e] [FCC] designates common carriers as ETCs in those instances
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where the state lacks jurisdiction.” Order ¶570 (JA__); see 47 U.S.C.
§214(e)(2), (6).
The FCC, in the Order, reformed the larger framework for distributing
federal universal service subsidies; it did not find that any particular service
provider, or category of providers, would be eligible for support under this
new framework. Br. 18. ETC designation under sections 214(e)(2) and (6),
which is a pre-requisite for the receipt of federal subsidies, is an “inherently
local and fact-specific” process. WWC Holding Co., 488 F.3d at 1278;
Federal-State Joint Board on Universal Service, 20 FCC Rcd 6371, 6397
(¶61) (2005). For a “non-telecommunications carrier to use USF support for
unregulated information services” (Br. 18), a state commission (or, in limited
circumstances, the FCC) would first have to decide that the provider satisfies
the requirements of section 214(e)(1). Consequently, petitioners’ claim is not
ripe for judicial review, because it is contingent upon such future, fact-
specific decisions. See Los Alamos Study Grp. v. U.S. Dept. of Energy, 692
F.3d 1057, 1065 (10th Cir. 2012) (a claim is ripe where “the issues involved
are purely legal, … the agency’s action is final,” and the “action has or will
have an immediate impact on the petitioner” (internal quotation marks and
citation omitted)); see also Qwest Commc’ns Int’l, Inc. v. FCC, 240 F.3d 886,
894 (10th Cir. 2001).
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2. Petitioners’ claim also lacks merit. Petitioners mistakenly assert
that the Order “does not limit support to telecommunications carriers or
require that USF [support] be used for telecommunications services.” Br. 17.
Only “eligible telecommunications carriers” are eligible for subsidies under
section 254, however, and an ETC, by definition, is a “common carrier” that
“offer[s] the services that are supported by the Federal universal service
support mechanisms under section 254(c).” 47 U.S.C. §214(e)(1)(A).
Nowhere does the Order hold that an entity not designated as an ETC could
receive federal universal service support.
Further, the only service that the FCC has designated under section
254(c)(1) is “voice telephony service.” See, e.g., Order ¶¶62-63, 79 (JA__-
__, __). Petitioners assert that providing “voice telephony service” as VoIP
would violate the Act, because unlike circuit-switched voice service, VoIP
has not yet been designated a “telecommunications service.” Br. 17-18.
While VoIP service is unclassified, the FCC has acknowledged that a VoIP
provider can obtain the rights available to “telecommunications carriers”
under Title II of the Act if it voluntarily “holds itself out as a
telecommunications carrier and complies with appropriate federal and state
requirements.” IP-Enabled Services, 20 FCC Rcd 10245, 10268 (¶38 n.128)
(2005), aff’d sub nom. Nuvio Corp. v. FCC, 473 F.3d 302 (D.C. Cir. 2006).
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And in this proceeding, “some providers of facilities-based retail VoIP
services state[d] that they are providing those services on a common carrier
basis.” Order ¶1389 & n.2537 (JA__). Thus, at a minimum, a provider could
be eligible for ETC status under section 214(e)(1)(A) and universal service
support under section 254(e) if it voluntarily offered VoIP as a
“telecommunications service.”
Consequently, a “set of circumstances exists in which [the Order] can
be lawfully applied,” so petitioners’ facial challenge fails. Cellco P’ship, 700
6
F.3d at 549 (internal quotation marks and citations omitted).

D. The FCC Reasonably Ruled That It Also Has Authority

Under Section 706 Of The 1996 Act To Require
Recipients Of Federal Universal Service Support To
Deploy Broadband Networks And Services.

In section 706(b) of the 1996 Act, 47 U.S.C. §1302(b), Congress
instructed the FCC to “determine whether advanced telecommunications

6 The Order “rel[ied] on section 706(b) as an alternative basis to section
254 to the extent necessary to ensure that the federal universal service
program covers services and networks that could be used to offer information
services as well as telecommunications services.” Order ¶73 (JA__). While
the FCC noted that section 706 would also permit the agency to provide
universal service support to VoIP providers irrespective of the regulatory
classification of that service, id. ¶71 (JA__), the Order further provides that
“[c]arriers seeking federal support” under section 706(b) “must still comply
with the same universal service rules and obligations set forth in section 254
and 214.” Id. ¶73 (JA__). Hence, any funding recipient must still be an
ETC. In any event, because the FCC has not authorized support for VoIP
service under section 706, that issue is not presented here.
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capability is being deployed to all Americans in a reasonable and timely
fashion,” and if the agency 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.” Having found that broadband deployment
lagged, Order ¶70 (JA__), the FCC reasonably concluded that section 706(b)
empowered it to support broadband-capable networks, see id. ¶¶67-70 (JA__-
__).
Petitioners argue that the FCC lacked authority under section 706(b)
because “[t]here is no mention of expanding the USF to include support for
broadband information services” in that provision. Br. 26. While Congress
could have created an exhaustive and highly specific list of the authorities the
FCC could exercise to further the statutory goal set forth in section 706(b), it
instead delegated to the FCC broad authority to “take immediate action to
accelerate deployment of such capability by removing barriers to
infrastructure investment and by promoting competition in the
telecommunications market.” 47 U.S.C. §1302(b); see also Ad Hoc
Telecomms. User Comm. v. FCC, 572 F.3d 903, 906-07 (D.C. Cir. 2009)
(explaining that “[t]he general and generous phrasing of §706 means that the
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FCC possesses significant, albeit not unfettered, authority and discretion to
settle on the best regulatory or deregulatory approach to broadband”).
The FCC, in the Order (at ¶67 (JA__)), reasonably found that
“[p]roviding support for broadband networks helps achieve section 706(b)’s
objectives.” Support for broadband “promot[es] competition in the
telecommunications market” where “interconnected VoIP service is
increasingly used to replace [traditional] voice service.” Id. ¶68 (JA__)
(internal quotation marks omitted). Support for broadband also “eliminate[s]
a significant barrier to infrastructure investment.” Id. ¶67 (JA__). This is
because “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 in the absence of programs that provide additional
support.” Id. (internal quotation marks omitted). Those findings by the
expert agency as to a matter within its competence satisfy the requirements of
section 706(b).
Petitioners find no support in Comcast Corp. v. FCC, 600 F.3d 642
(D.C. Cir. 2010). See Br. 24. The D.C. Circuit in that decision found that a
prior FCC order stating that section 706(a) did not “constitute an independent
grant of authority” was “still binding” at that time because the agency “never
questioned [it], let alone overruled [it].” Comcast, 600 F.3d at 658-59. In a
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subsequent order, however, the FCC did just that. It held that if the prior
order could be interpreted as having declined to read section 706(a) as a grant
of authority, the FCC “reject[ed] that reading of the statute.” See Preserving
the Open Internet, 25 FCC Rcd 17905, 17969 n.370 (2010), pet. for review
pending, Verizon v. FCC, D.C. Cir. No. 11-1355.
Petitioners also attempt to manufacture a conflict between sections 254
and 706. Br. 27. As the FCC explained, “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.’” Order ¶72 (JA__)
(quoting 47 U.S.C. §254(b)(2)). It follows that the FCC’s “decision to
exercise authority under Section 706 does not undermine section 254’s
universal service principles”; rather, it “ensures their fulfillment.” Id. For the
same reason, petitioners’ argument that the “specific” section 254 controls the
more “general” section 706(b) is unpersuasive. Br. 27. There is no point in
“quibbl[ing] over which section is more specific,” where, as here, the
agency’s “interpretation … is reasonable” and “gives effect to both
provisions.” Nat’l Ass’n of Home Health Agencies v. Schweiker, 690 F.2d
932, 943 n.70 (D.C. Cir. 1982).
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* * *
As this Court has recognized, “the 1996 Act is not a model of clarity.”
Qwest II, 398 F.3d at 1235 (quoting AT&T Corp. v. Iowa Utils. Bd., 525 U.S.
366, 397 (1999)). Section 254, in particular, is ambiguous, RCA I, 588 F.3d
at 1101-02, and the FCC reasonably construed it to authorize the agency to
modernize universal service support so that it enhances the broadband access
that is critical to rural America. But “even if the agency’s reading differs
from what the court believes is the best statutory interpretation,” it is clearly
not precluded by the statute’s language or structure and therefore must be
affirmed under well-established principles of deference to agencies that
interpret the statutes they are entrusted to administer. Nat’l Cable &
Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005); see
Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d 1228, 1250 (10th Cir. 2004).

II.

THE FCC REASONABLY ADOPTED A $4.5 BILLION
ANNUAL FUNDING TARGET.

The FCC “[f]or the first time … establish[ed] a defined budget for the
high-cost component of the universal service fund.” Order ¶123 (JA__). It
did so to “ensure[] that individual consumers will not pay more in [universal
service] contributions due to the reforms” in the Order. Id. ¶124 (JA__). If
those reforms were “to significantly raise the end-user cost of services,” they
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“could undermine” the agency’s larger efforts “to promote broadband and
mobile deployment and adoption.” Id.
The FCC set the annual funding target at $4.5 billion – the estimated
amount of funding collected for the high-cost program in Fiscal Year 2011.
Order ¶125 (JA__). By “setting the budget at this year’s support levels,” the
FCC hoped to “minimize disruption and provide the greatest certainty and
predictability to all stakeholders.” Id. Of the $4.5 billion, the FCC allocated
$500 million for the Mobility Fund, $1.8 billion for areas served by price cap
carriers, and $2 billion for rate-of-return carriers. Id. ¶126 (JA__).
Although the FCC established a fixed budget, it adopted “a number of
safeguards … to ensure that carriers that warrant additional funding have the
opportunity to petition for such relief.” Order ¶126 (JA__); see also id.
¶¶539-44 (JA__-__) (establishing express waiver procedures). The FCC also
committed to “closely monitor” the budget going forward to “ensur[e] [it]
remains at appropriate levels to satisfy [the FCC’s] statutory mandates.” Id.
¶126 (JA__).
“[A] broad cross-section of interested stakeholders, including
consumer groups, state regulators, current recipients of funding, and those
that do not currently receive funding” supported the $4.5 billion annual
budget. Order ¶122 & n.192. (JA__, __).
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A. The FCC’s Reasonable Predictive Judgment That The

Order

Will Provide Sufficient Support Is Entitled To
Substantial Deference.

Sections 254(b)(5) and (e) of the Act require “sufficient” universal
service support. See 47 U.S.C. § 254(b)(5) and (e). “[W]hat constitutes
‘sufficient’ support” is inherently “ambiguous.” TOPUC, 183 F.3d at 425.
So long as “the FCC … offer[s] reasonable explanations of why it thinks the
funds will still be ‘sufficient’ to support high-cost areas,” the Court should
“defer to the agency’s judgment of what is ‘sufficient.’” Id.; see also id. at
426, 436-37; Alenco, 201 F.3d at 620-21; RCA I, 588 F.3d at 1103-04; Rural
Cellular Ass’n v. FCC, 685 F.3d 1083, 1094 (D.C. Cir. 2012) (“RCA II”).
Petitioners nevertheless contend that the FCC erred when it found that
“maintaining total funding for rate-of-return companies at approximately $2
billion per year” would ensure that support is “sufficient” to “sustain service
to consumers” and expand broadband. Order ¶195 (JA__). Petitioners’
overarching complaint is that the FCC “improperly limited its analysis to
whether, without reform, USF support would be excessive” without “also
consider[ing] whether too little support is being provided.” Br. 31.
Contrary to petitioners’ assertion, the Order expressly considered the
possibility of too little support, and it found that subsidies would not be
“insufficient” given its efforts to eliminate “long-standing inefficiencies and
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wasteful spending” in the FCC’s legacy funding mechanisms. Order ¶125
(JA__). The FCC expected that those cost savings would offset any increased
support to individual carriers to make additional investments to deploy
broadband. See id. ¶¶125, 285-92 (JA__, __-__).
Particularly relevant to petitioners’ objections, the FCC structured
reform to mitigate the financial impact on rate-of-return carriers. Under the
Order, “rate-of-return carriers will not necessarily be required to build out to
and serve the most expensive locations within their service area.” Order
¶207 (JA__). Instead, they are only obligated to offer broadband upon
“reasonable request.” Id. ¶¶206-07 (JA__-__). This “flexible approach” (id.
¶206 (JA__)) was specifically designed to protect rate-of-return carriers from
extending facilities where high-cost support was insufficient to make
deployment economically reasonable, see also id. ¶26 (JA__). The Order
also “exempted the most remote areas” from the new broadband service
obligations. Id. ¶533 (JA__). And the Order “provide[d] rate-of-return
carriers … access to a new explicit recovery mechanism,” which guarantees
“stable and certain revenues that the current intercarrier system can no longer
provide.” Id. ¶291 (JA__). In light of these factors, the FCC reasonably
predicted that its “incremental reforms will not endanger existing service to
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consumers” and will “minimally affect[]” rate-of-return carriers “that invest
and operate in a prudent manner.” Id. ¶289 (JA__).
Further, as a backstop to ensure sufficient support in individual cases
of hardship, the Order provides a waiver process for those carriers that can
demonstrate that “reductions in current support levels would threaten their
financial viability, imperiling service to consumers in the areas they serve.”
Order ¶¶539-44 (JA__-__). The agency has already granted two such
waivers. See Accipiter Communications, Inc., 28 FCC Rcd 391 (WCB 2013);
Allband Communications, 27 FCC Rcd 8310 (WCB 2012). Courts have
repeatedly held that it is reasonable for the agency to rely on a waiver process
7
to address any unforeseen shortfalls that might arise in specific instances.

7 See Vt. Pub. Serv. Bd. v. FCC, 661 F.3d 54, 65 (D.C. Cir. 2011) (finding a
waiver process provided a reasonable means to update stale line count data
used in a model for determining universal service support); RCA I, 588 F.3d
at 1104 (discussing, with approval, a waiver process used to provide certain
wireless carriers additional support should an interim cap render support
insufficient); RCA II, 685 F.3d at 1095 (same); Alenco, 201 F.3d at 622
(finding a single carrier’s reduced rate of return under an operating expenses
cap “at most … presents an anomaly that can be addressed by a request for a
waiver”). Petitioners never mention these cases, and instead rely on FPC v.
Texaco
, 417 U.S. 380, 399 (1974) and Home Box Office, Inc. v. FCC, 567
F.2d 9, 50-51 (D.C. Cir. 1977) – neither of which concern the FCC’s
universal service program – to argue that “a waiver” cannot “justify an
otherwise unreasonable rule.” Br. 32-33. Those cases are easily
distinguished on the ground that the FCC is not relying on the waiver process
to save an otherwise irrational rule; to the contrary, the rule is rational and the
waiver process addresses potential outlier cases.
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Petitioners nonetheless allege that the FCC “disregard[ed] the
substantial additional costs” to satisfy the broadband service condition in the
Order. Br. 32. Their only support for that claim is a 2010 study estimating
that many rate-of-return carriers provided broadband service at slower speeds
than those required by the Order. See id. Petitioners, however, make no
attempt to quantify the cost to upgrade their networks. The FCC had little
reason to think that the additional cost (if any) would be substantial given that
the Order’s “flexible approach” to broadband deployment “does not require
rate-of-return companies to extend service to customers absent … a
[reasonable] request.” Order ¶26 (JA__). Moreover, the Order provides
rate-of-return carriers, which serve “less than five percent of access lines in
the U.S.,” id., annual funding that totals nearly one-half of annual high-cost
support (i.e., approximately $2 billion of the $4.5 billion budget), id. ¶126
(JA__).
Nor is it true that the Order “ma[de] no effort to quantify whether the
resulting USF support can cover the [rate-of-return carriers’] ‘efficient’ cost
of providing voice service plus the added cost of satisfying the broadband
mandate.” Br. 32. The FCC’s analysis showed that 34 percent of rate-of-
return carriers would see no change in federal universal service support
receipts, and 12 percent would see an increase in support. Order ¶290
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(JA__). Of those rate-of-return carriers expected to experience a reduction,
most would see a reduction of fewer than 10 percent of their federal subsidies
annually. Id.
Qwest II, 398 F.3d 1222 (Br. 32), is not to the contrary. In that
decision, the Court directed the FCC, on remand, to provide “empirical
findings supporting [its] conclusion” that rates then in effect were
“reasonably comparable” for purposes of section 254(b)(3). Id. at 1237. The
FCC, in the Order at issue here, necessarily could not provide “empirical
support” that funding is currently “sufficient” to satisfy sections 254(b)(5)
and (e) because the reforms in the Order had not yet been implemented.
Thus, the agency appropriately relied on evidence in the record to support a
reasonable predictive judgment. See Order ¶123 (JA__). And “[w]here, as
here, the FCC must make predictive judgments about the effects of increasing
[or decreasing] subsidies, certainty is impossible.” RCA I, 588 F.3d at 1105;
see also FCC v. Nat’l Citizens Comm. for Broad., 436 U.S. 775, 813-14
(1978); Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012); Franklin
Savings Ass’n v. Dir., Office of Thrift Supervision, 934 F.2d 1127, 1146-47
(10th Cir. 1991).
Finally, petitioners complain that funding “cuts fall indiscriminately on
most high-cost carriers, untethered to evidence that any particular company’s
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support level was actually due to inefficiency rather than the intrinsically high
cost of serving particular areas.” Br. 32. That claim is demonstrably
incorrect. The reforms in the Order are “targeted at eliminating inefficiencies
and closing gaps in [the] system, not at making indiscriminate industry-wide
reductions.” Order ¶287 (JA__). For example, limitations on reimbursable
capital and operating costs (id. ¶¶215-20 (JA__-__)) and high-cost loop
support (id. ¶¶234-47 (JA__-__)), which are designed to encourage rate-of-
return carriers to operate more efficiently, are based on carrier-specific
analyses of costs and rates. In any event, “the agency [i]s well within its
discretion to impose” purely prophylactic cost controls “rather than to
undertake the more costly alternative of intensive auditing.” Alenco, 201
F.3d at 621.

B. Petitioners’ Takings Claim Is Not Ripe And Lacks Merit.

Petitioners speculate that the Order is an unconstitutional taking of
property. Br 42-45. At this point, however, petitioners’ unsubstantiated
takings claim is not ripe. The agency has made clear that if “any rate-of-
return carrier can effectively demonstrate that it needs additional support to
avoid constitutionally confiscatory rates, the Commission will consider a
waiver request for additional support.” Order ¶294 (JA__) (emphasis added);
see id. ¶¶539-44 (JA__). No takings claim is ripe until a party has invoked
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that process and been denied. See Williamson County, 473 U.S. at 194; Alto
Eldorado P’ship v. County of Santa Fe, 634 F.3d 1170, 1175-77 (10th Cir.
2011); TOPUC, 183 F.3d at 428-29; Alenco, 201 F.3d at 624.
A takings claim would fail, in any event. Carriers face a “heavy
burden” in proving confiscation as a result of rate regulation. FPC v. Hope
Natural Gas Co., 320 U.S. 591, 602 (1944). To be confiscatory, government-
regulated rates must be so low that they threaten a regulated entity’s
“financial integrity,” Ill. Bell Tel. Co. v. FCC, 988 F.2d 1254, 1263 (D.C. Cir.
1993), or “destroy the value” of the company’s property, Duquesne Light Co.
v. Barasch, 488 U.S. 299, 307 (1989). Petitioners made no such showing in
the record below (see Order ¶294 (JA__)) or in their brief. Thus, “[t]he mere
fact that, for many rural carriers, universal service support provides a large
share of the carriers’ revenues … is not enough to establish that the [Order]
constitute[s] a taking. The Fifth Amendment protects against takings; it does
not confer a constitutional right to government-subsidized profits.” Alenco,
201 F.3d at 624 (internal quotation marks and citation omitted).

III. THE FCC REASONABLY REFORMED SUPPORT

MECHANISMS FOR RATE-OF-RETURN CARRIERS TO
ELIMINATE WASTE AND INEFFICIENCY IN THE
PRIOR SYSTEM.

The FCC, in the Order, “implement[ed] a number of reforms to
eliminate waste and inefficiency and improve incentives for rational
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investment and operation by rate-of-return LECs.” Order ¶195 (JA__).
These reforms were long overdue. As the FCC explained, “[b]y providing an
opportunity for a stable 11.25 percent interstate return for rate-of-return
companies, regardless of the necessity or prudence of any given investment,
our current system imposes no practical limits on the type or extent of
network upgrades or investment.” Id. ¶287 (JA__). The consequence was
that the FCC “provide[d] universal service support to 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. The FCC predicted that the reforms in
the Order “will help ensure rate-of-return carriers retain the incentive and
ability to invest and operate modern networks capable of delivering
broadband as well as voice services, while eliminating unnecessary
spending.” Id. ¶288 (JA__); see id. ¶195 (JA__).

A. The “Benchmarking Rule” Is Consistent With Section

254(b)(5) Of The Act And The FCC’s Other Rules.
The Order adopted a new rule (the “benchmarking rule”) that uses
regression analysis to establish “benchmarks,” or caps, to limit the
reimbursable capital and operating expenses in the formula used to determine
high-cost loop support (“HCLS”) for rate-of-return carriers. Order ¶¶214,
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8
219 (JA__, __). The FCC’s prior rules did not provide rate-of-return carriers
an incentive to restrain costs. Id. ¶¶211, 219 (JA__-__). The new rule
addresses that problem by reducing subsidies to carriers with costs greater
than similarly situated companies and redistributing that support to other
carriers to promote broadband deployment. Id. ¶220 (JA__).
The FCC also sought additional public comment on a methodology to
implement this rule (the “benchmarking methodology”) in an attached
FNPRM. See Order ¶¶¶216, 1081-89 (JA__, __-__), App. H (JA__-__). The
FCC directed its staff (the Wireline Competition Bureau, or “WCB”) to
finalize the benchmarking methodology after considering the record compiled
in response to the FNPRM. Id. ¶217 (JA__). WCB completed that task in an
April 25, 2012, Order. See Connect America Fund, 27 FCC Rcd 4235 (WCB
2012) (“Benchmarking Order”), aff’d in part and modified in part, Connect

8 A local loop is the wire between a telephone company’s switch (i.e., a
device that routes telephone calls) and the subscriber’s home or office.
HCLS “helps offset the non-usage based costs associated with the local loop
in areas where the cost to provide voice service is relatively high compared to
the national average cost per line.” Order ¶216 n.347 (JA__).
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America Fund, 2013 WL 749737 (Feb. 26, 2013) (“Sixth Order on
9
Reconsideration”).
Petitioners contend that the FCC (1) violated its own rules when it
delegated implementation of the benchmarking rule to WCB; (2) provided
WCB “unbounded discretion” to devise the benchmarking methodology,
resulting in unpredictable support amounts in violation of section 254(b)(5)
of the Act; and (3) authorized WCB “to revise [that methodology] without
abiding by APA notice and comment procedures.” Br. 36-37. Petitioners did
not raise these contentions before the agency in a petition for reconsideration,
and so they are waived. See 47 U.S.C. §405(a).
“The filing of a reconsideration petition” with 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 Commission … has been afforded
no opportunity to pass.’” Sorenson II, 659 F.3d at 1044 (quoting 47 U.S.C.
§405(a)). “[E]ven 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 Commission before it may seek judicial

9 Petitioner NTCA asked this Court to stay implementation of the
Benchmarking Order, or in the alternative to issue a writ of mandamus
directing the FCC to rule on NTCA’s application for review of the Order.
This Court denied that request on August 13, 2012.
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review.” Qwest Corp. v. FCC, 482 F.3d 471, 474 (D.C. Cir. 2007) (internal
quotation marks and citation omitted). Petitioners did not do this.
Consequently, section 405 of the Act bars judicial review of petitioners’
claims. See Sorenson II, 659 F.3d at 1044, 1048 n.8; Sorenson I, 567 F.3d at
1227-28.
These arguments in any event lack merit because the delegation was
proper. Petitioners contend that the Order (at ¶217 (JA__)) violated 47
C.F.R. §0.291(e), which prohibits rulemaking by WCB, when it “delegate[d]
authority to [WCB] to adopt the initial [benchmarking] methodology, to
update it as it gains more experience and additional information, and to
update its regression analysis annually with new cost data.” Br. 37. But the
FCC, pursuant to the relevant statutory provision may “delegate any of its
functions” to staff by rule or order. See 47 U.S.C. §155(c)(1). The FCC
lawfully exercised that statutory power by explicitly delegating rulemaking
authority to WCB in this narrow context, notwithstanding any prior
limitations imposed on WCB’s general authority under the pre-existing
agency rules.
The delegation was also fully consistent with Rule 0.291. Pursuant to
that rule “[t]he Chief, Wireline Competition Bureau, is … delegated authority
to perform all functions of the Bureau” subject to certain “exceptions and
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limitations.” 47 C.F.R. §0.291. One of those limitations is that WCB
generally “shall not have authority to issue notices of proposed rulemaking,
notices of inquiry, or reports and orders arising from either of the foregoing.
Id. §0.291(e). Subsection (e), by its terms, only limits WCB’s general
authority under the rule; it in no way limits the full Commission’s authority
under the Act to “delegate any of its functions” to staff. 47 U.S.C.
§155(c)(1).
Nor does the delegation breach any statutory provisions. Specifically,
petitioners have not demonstrated that the benchmarking rule violates section
254(b)(5), which requires “predictable” universal service support
mechanisms. The Order imposed meaningful “substantive limitation[s]” on
WCB’s authority to develop and revise the benchmarking methodology,
undercutting petitioners’ claim that the “vague rule” will result in
“unpredictable changes” in HCLS. Br. 38; see Order ¶¶217-18 (JA__-__)
(directing WCB to use “statistical techniques,” setting forth a non-exhaustive
list of variables for WCB to consider, and directing WCB to publish an
updated list of “capped” values annually).
Moreover, contrary to the premise of petitioners’ argument, the FCC is
not required to guarantee carriers substantially the same universal service
support amounts “from year to year.” Br. 38. Petitioners have made clear
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(Br. 38, 46) that what they seek “is not merely predictable funding
mechanisms, but predictable market outcomes” – something to which the
Act does not entitle USF recipients, see Alenco, 201 F.3d at 622.
Beyond that, petitioners’ argument, even on its own terms, fails to
demonstrate that the rule adds uncertainty into HCLS disbursements. It has
always been the case that carriers do not know how much support they will
receive in future periods. As the Order (at ¶220 (JA__)) explained, “the fact
that an individual company will not know how the benchmark affects its
support levels until after investments are made is no different from the current
operation of high-cost loop support, in which a carrier receives support based
on where its own cost per loop falls relative to a national average that changes
from year to year.” The only difference is that under the prior rules, “carriers
that t[ook] prudent measures to cut costs” often “los[t] HCLS support to
carriers that significantly increase[d] their costs in a given year” (id. ¶219)
(JA__), whereas after the Order, rate-of-return carriers have an incentive to
avoid over-spending by “manag[ing] their costs to be in alignment with their
similarly situated peers.” Id. ¶221 (JA__).
Petitioners further claim that the Order “exacerbates unpredictability”
by allowing WCB “to change the [benchmarking] rule … without following
the notice and comment procedures required for proposed rule changes under
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the APA.” Br. 39. In fact, WCB followed the APA’s procedural
requirements in implementing the benchmarking rule. See 77 Fed. Reg.
30,411-01 (May 23, 2012). To the extent that a later WCB order does not
follow those rules, petitioners may challenge it then. Until then, their claim is
not ripe. See Qwest, 240 F.3d at 894; Los Alamos Study Grp., 692 F.3d at
10
1064-65; Sw. Bell Tel. Co. v. FCC, 153 F.3d 523, 556 (8th Cir. 1998).

B. The FCC Did Not Engage In Impermissible Retroactive

Rulemaking.

Petitioners argue that adoption of the benchmarking rule and
elimination of the safety net additive (or “SNA”) rule, which reduce their
federal universal service subsidies, constitute improper retroactive
rulemaking. See Br. 45-48. Their argument lacks merit.
The FCC’s actions are far removed from the classic (or “primary”)
retroactivity that occurs when governmental conduct “would impair rights a
party possessed when he acted, increase a party’s liability for past conduct, or
impose new duties with respect to transactions already completed.” Landgraf

10 Petitioners fleetingly claim that it was arbitrary and capricious for the
FCC to rely on only cost data for voice services when it updated the formula
used to limit the corporate operations expenses eligible for recovery through
HCLS. Br. 33 (citing Order ¶230 (JA__)). This argument was never
presented in the proceeding below or in a subsequent petition for
reconsideration of the Order; thus, it has been waived. See 47 U.S.C.
§405(a); Sorenson II, 659 F.3d at 1044, 1048 n.8.
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v. USI Film Prods., Inc., 511 U.S. 244, 280 (1994). This is because the
Order is entirely prospective: that is, it does not mandate the return of USF
disbursements already made but only reduces or eliminates federal subsidies
going forward.
Petitioners concede as much, but contend that the Order is retroactive
insofar as it precludes them from recovering expenses they incurred based on
the “reasonable expectation[]” that they would receive universal service
support. Br. 46. But a new rule is not retroactive “merely because it …
upsets expectations based in prior law.” Landgraf, 511 U.S. at 269.
Moreover, any expectations petitioners had that they would receive any
particular funding amounts in the future (or that prior methodologies would
be used to determine future subsidy disbursements) were not reasonable. As
the FCC explained, “Section 254 does not mandate the receipt of support by
any particular carrier.” Order ¶221 (JA__); see also id. ¶293 (JA__). The
courts agree. In rejecting a challenge to an earlier cap on HCLS, the Fifth
Circuit explained that “[t]he Act does not guarantee all local telephone
service providers a sufficient return on investment.” Alenco, 201 F.3d at 620.
Instead, “[t]he Act only promises universal service, and that is a goal that
requires sufficient funding of customers, not providers.” Id.; see RCA I, 588
F.3d at 1103.
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Petitioners alternatively contend that the Order is “arbitrary and
capricious” because it “alter[s] future regulation in a manner that makes
worthless substantial past investment incurred in reliance upon the prior
rule[s].” Br. 47 (citing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 220
(1988) (Scalia, J., concurring)). As set forth above, petitioners have not
demonstrated that the Order renders their past investments “worthless,” see
pp. 38-39, and a waiver process in the Order exempts carriers from support
reductions that would imperil their financial viability, see p. 35.
Significantly, the FCC has only received a handful of waiver petitioners to
date. Id. Even if petitioners had made that showing, however, there is no
presumption against such “secondary” retroactive effects, and a rule “may
nonetheless be sustained in spite of such retroactivity if it is reasonable.”
Bowen, 488 U.S. at 220 (1988) (Scalia, J., concurring); see also DirecTV, Inc.
v. FCC, 110 F.3d 816, 826 (D.C. Cir. 1997). The two rule changes
petitioners attack are reasonable and easily satisfy this standard.
In particular, the “benchmarking rule” (see pp. 40-46, above) limits the
reimbursable capital and operating expenses in the formula used to determine
HCLS for rate-of-return carriers. Petitioners contend that the rule is
unreasonable given the Order’s alleged failure to explain why certain costs
previously incurred by rate-of-return carriers are no longer compensable from
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the USF. See Br. 47-48. But the Order made clear that the benchmarking
rule was necessary to “discourage companies from over-spending relative to
their peers.” Order ¶220; see id. ¶¶211, 219 (JA__, __). Under the FCC’s
prior rules, rate-of-return carriers could have 100 percent of their loop costs
above a certain threshold reimbursed from the federal USF; thus, carriers that
took measures to control expenses could find themselves losing support to
carriers that increased costs. Id. ¶¶211, 219 (JA__, __). To accomplish its
cost-saving goal, the FCC reasonably declined to conduct costly and
burdensome audits of the more than 800 rate-of-return carriers, as demanded
by petitioners (see Br. 47-48), and instead adopted a general rule that
identifies carriers with costs that are significantly greater than their peers, see
Alenco, 201 F.3d 620-21.
The FCC adopted the SNA rule in 2001 to provide support to rural
incumbent LECs that made “additional significant investments” in their
networks. Order ¶248 (JA__). According to petitioners, “the Order made no
attempt to explain why a program intended to provide additional support for
carriers making substantial network upgrades should be terminated.” Br. 48.
But petitioners fail to mention that the Order “conclude[d] the safety net
additive is not designed effectively to encourage additional significant
investment in telecommunications plant.” Order ¶250 (JA__). Instead,
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“[t]he majority of incumbent LECs that currently are receiving the safety net
additive qualified in large part due to significant loss of lines, not because of
significant increases in investment, which is contrary to the intent of the
rule.” Id. ¶249 (JA__). Given that the rule had not worked as intended, the
FCC reasonably eliminated it. See Bechtel v. FCC, 957 F.2d 873, 881 (D.C.
Cir. 1992) (the FCC has a “duty to evaluate its policies over time to ascertain
whether they work – that is, whether they actually produce the benefits the
Commission originally predicted they would”).
The Order likewise “rejected” petitioners’ claim (see Br. 46, 48) that
carriers are entitled to SNA for investments made in 2010 and 2011 to satisfy
commitments made to other federal agencies under broadband stimulus
programs. Order ¶252 n.409 (JA__). As the Order noted, “since early 2010,
the Commission has given carriers ample notice that [it] intended to
undertake comprehensive universal service reform in the near term.” Id.;
NPRM, 26 FCC Rcd at 4620-21 (¶184) (JA__) (proposing to eliminate SNA);
Connect America Fund, 25 FCC Rcd 6657, 6677-78 (¶¶51-52) (2010) (JA__-
__) (proposing to eliminate new eligibility for SNA). More fundamentally,
carriers are never “entitled” to universal service support for future years and
could not properly rely upon it. See Alenco, 201 F.3d at 620; RCA I, 588 F.3d
at 1103.
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IV.

PETITIONERS’ CHALLENGES TO THE FCC’S NEW
SUPPORT MECHANISMS FOR AREAS SERVED BY
PRICE CAP CARRIERS ARE NOT RIPE AND LACK
MERIT.

In addition to reforming funding for rate-of-return carriers, the Order
overhauled the rules that distribute high-cost universal service support to
price cap carriers. “[M]ore than 83 percent of the unserved locations in the
nation are in price cap areas,” the FCC explained, “yet such areas currently
receive approximately 25 percent of high-cost support.” Order ¶158 (JA__).
“[T]o meet [its] universal service mandate to unserved consumers residing in
these communities,” the FCC “conclude[d] that increased support to areas
served by price cap carriers, coupled with rigorous, enforceable deployment
obligations, [wa]s warranted.” Id. ¶159 (JA__).
In Phase I of reform, which is still in effect, the FCC froze support for
price cap carriers at existing levels. See Order ¶128 (JA__). “In addition, to
spur the deployment of broadband in unserved areas,” the FCC “allocate[d]
up to $300 million in additional support to such carriers.” Id. In Phase II, the
FCC will almost double support to price cap carriers (from about $1 billion to
$1.8 billion annually). See id. ¶158 (JA__). The FCC will offer each price
cap carrier high-cost support in exchange for a commitment to offer (1) voice
service throughout its service territory and (2) broadband service to specific
areas within its service territory in a state. See id. ¶166 (JA__). A price cap
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carrier’s “right to [that] support will terminate after five years,” at which time
the FCC “expect[s] that support … will be awarded through a competitive
bidding process in which all eligible providers will be given an equal
opportunity to compete.” Id. ¶178 (JA__).
Petitioners contend that the FCC “failed to consider” their argument
that limiting Phase I incremental support to unserved areas is “arbitrary and
discriminatory” because “carriers in states with extensive broadband
development commitments … get nothing to upgrade what they have done.”
Br. 57. In fact, the Order acknowledged that “[c]arriers have been steadily
expanding their broadband footprints” and “expect[ed] such deployment will
continue.” Order ¶137 (JA__). The FCC then reasonably concluded that,
instead of subsidizing service upgrades in areas that already have access to
broadband, it could most effectively promote broadband deployment by
devoting Phase I funding to jump-starting broadband deployment in
previously unserved areas. See id.; see also Connect America Fund, 27 FCC
Rcd 4648, 4653 (¶15) (2012) (JA__). Petitioners may disagree with that
policy judgment, but because the FCC “adequately explained its decision,” its
action “was neither arbitrary nor capricious.” Vermont Public Service Board,
661 F.3d at 63.
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Petitioners also assert that the FCC “failed adequately to address
arguments” that using an auction to distribute subsidies to price cap carriers
in Phase II will result in inadequate service. Br. 49. This claim is not ripe for
judicial review, because the FCC did not “adopt[] an auction mechanism” for
price cap carriers in the Order. Br. 48. Rather, the agency merely sought
comment on how best to design and implement such a mechanism in the
attached FNPRM. See Order ¶¶1190-222 (JA__). The FCC addressed the
“arguments” that it allegedly “ignored” by seeking comment on them in that
FNPRM. Compare Br. 50 with Order ¶¶1203-07 (JA__-__) (seeking
comment on service quality standards); Br. 51 with Order ¶1213 (JA__)
(seeking comment on a bidding preference for small carriers).
Indeed, while petitioners purport to attack the FCC’s discussion of the
auction mechanism for price cap carriers, they rely (without
acknowledgement) on the agency’s discussion of a different auction
mechanism for wireless carriers. See Br. 48-51 (citing Order ¶¶311, 325-26
(JA__, __-__)). Unless the FCC adopts that specific mechanism for price cap
carriers, its discussion of that mechanism is not relevant. Petitioners also
seem to assume that the service quality standards applicable to price cap
carriers today will be the same service quality standards that apply to price
cap carriers under a competitive bidding mechanism. See Br. 50 (citing
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Order ¶¶90, 94, 96, 98 (JA__, __, __, __)). The FCC has not yet made that
determination. See Order ¶¶1203-07 (JA__-__).
Until the FCC adopts an auction mechanism based on the record
developed under the outstanding FNPRM, the Court will not be able to
determine whether the FCC adequately responded to petitioners’ arguments
that competitive bidding will degrade service and disadvantage small carriers.
See Qwest, 240 F.3d at 894. Likewise, there will be no “‘direct and
immediate impact’ upon [petitioners]” until the FCC issues an order adopting
a competitive bidding mechanism. Id. (quoting Abbott Labs. v. Gardner, 387
U.S. 136, 152 (1967)).

V.

PETITIONERS’ VARIOUS CHALLENGES TO THE
OTHER REFORMS IN THE ORDER

ARE WAIVED, NOT
RIPE, AND LACK MERIT.

A. The Order

Lawfully And Reasonably Reduced Federal

Universal Service Subsidies In Areas With Artificially
Low End-User Rates.

To avoid “plac[ing] an undue burden on the [USF] and consumers that
pay into it,” the Order “adopt[ed] a rule to limit high-cost support where end-
user rates do not meet a specified local rate floor” initially set at $10 per
month. Order ¶¶235; see ¶¶237, 239 (JA__; __, __). Evidence in the record
showed that “there are a number of carriers with local rates that are
significantly lower than rates that urban customers pay” – sometimes as low
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11
as $5 per month. Id. ¶235 (JA__). While section 254(b)(3) of the Act
requires “reasonably comparable” urban and rural rates, the FCC interpreted
that principle to “ensure” only “that rates in rural areas not be significantly
higher than in urban areas,” not to “subsidize[] artificially low local rates in
rural areas.” Id. “The agency’s broad discretion to provide sufficient
universal service funding includes the decision to impose cost controls to
avoid excessive expenditures that will detract from universal service.”
Alenco, 201 F.3d at 620-21.
Petitioners argue that “the de facto effect” of this rule is to “set[] local
rates,” in violation of 47 U.S.C. §152(b). Br. 41. Petitioners cite no judicial
authority for this assertion. Nor could they, because as courts have
recognized, the mere fact that an FCC rule might have an incidental effect on
rates does not mean that the FCC is “regulating” rates. See, e.g., Cable &
Wireless, 166 F.3d at 1230 (finding that even though “the practical effect of
the Order will be to reduce settlement rates charged by foreign carriers … the
Commission does not exceed its authority simply because a regulatory action
has extraterritorial consequences”); Cellular Telecomms. Indus. Ass’n v.
FCC, 168 F.3d 1332, 1336 (D.C. Cir. 1999) (upholding the FCC’s

11 By comparison, the national average local rate is $15.62 per month.
Order ¶236 (JA__).
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determination that a state commission’s imposition of universal service
contribution requirements on wireless carriers did not amount to “rate
regulation” preempted by 47 U.S.C. §332(c)(3), even though such
requirements “impact the rates charged to customers”). Accordingly, the
FCC’s rate floor for federal universal service support does not constitute local
rate-setting.
Moreover, under this Court’s precedent, adopting measures that
encourage states to adjust local rates is not only permissible; it is sometimes
required. That is because the agency “remains obligated to create some
inducement – a ‘carrot’ or a ‘stick,’ for example … – for the states to assist in
implementing the goals of universal service,” here avoiding excessive
universal service support caused by extraordinarily low local rates. Qwest I,
258 F.3d at 1204; see also Qwest II, 398 F.3d at 1238 (upholding the FCC’s
authority to withhold all universal service support from states that fail to
certify that rural rates within their boundaries are “reasonably comparable” to
urban rates). It follows that the FCC did not unlawfully interfere with state
regulation of local rates when it adopted the rate floor rule in the Order.
Petitioners separately contend that the rate floor rule is arbitrary and
capricious due to the FCC’s alleged “fail[ure] to give adequate consideration”
to comments in the record. Br. 42. Petitioners rely on a single comment (out
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of more than 650 formal comments and reply comments filed in this
proceeding) arguing that low rates in certain rural areas might be attributed to
small calling local areas. Under the theory sketched in this comment, urban
and rural services are not comparable because rural customers living in the
allegedly smaller calling local areas make fewer local calls but more long
distance calls than their urban counterparts. See id. (citing Comments of the
Missouri Small Company Telephone Group, WC Docket 10-90 at 10 (filed
Apr. 18, 2010) (JA__)). This comment, however, is “unsupported by any
data” showing that rural customers actually pay as much, or more, for
telecommunications services than their urban counterparts by incurring
greater long distance charges. Vermont Public Service Board, 661 F.3d at 63.
Thus, it is not a significant comment that warranted a response from the
agency. See Ark Initiative v. U.S. Forest Serv., 660 F.3d 1256, 1262 (10th
Cir. 2011).
Petitioners also contend that the FCC neglected to consider “the fact
that rate[s] may have been kept low by state funds.” Br. 42. This claim has
been waived because it was never presented to the FCC. See 47 U.S.C.
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12
§405(a); Sorenson II, 659 F.3d at 1044, 1048 n.8. Moreover, the argument
is unavailing: if state universal service funding keeps certain rural rates
artificially low, there is no reason to continue providing carriers federal
universal service funding to ensure that those rates are “reasonab[ly]
comparab[le]” to urban rates. Order ¶237 (JA__); see also RCA I, 588 F.3d
at 1102 (the FCC’s universal service policies must consider “not just
affordability for those benefitted, but fairness for those burdened”).

B. The Order

Reasonably Eliminated Federal Universal

Service Support In Areas Served By An Unsubsidized
Competitor.

The FCC, in the Order, found that “[p]roviding universal service
support in areas of the country where another voice and broadband provider is
offering high-quality service without government assistance is an inefficient
use of limited universal service funds.” Order ¶281 (JA__). As the FCC
explained, “USF support should be directed to areas where providers would
not deploy and maintain network facilities absent a USF subsidy, and not in
areas where unsubsidized facilities-based providers already are competing for
customers.” Id. (internal quotation marks omitted). The FCC thus “adopt[ed]

12 The comment cited by petitioners (Br. 42) raised a very different claim,
arguing that the rate floor “would penalize [the commenter] for complying
with [a] state law” prohibiting local rate increases. Comments of
Consolidated Communications Holdings, Inc., WC Docket No. 10-90 at 14
(filed Aug. 24, 2011) (JA__).
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a rule to eliminate universal service support where an unsubsidized
competitor – or a combination of unsubsidized competitors – offers voice and
broadband service throughout an incumbent carrier’s study area.” Id.; see id.
¶170 (JA__). The rule “reflects a reasonable balance between the
Commission’s mandate to ensure sufficient support for universal service and
the need to combat wasteful spending.” Alenco, 201 F.3d at 620; see RCA I,
588 F.3d at 1102.
Petitioners assert that “[t]he Order disregards evidence that the moment
the rural carrier loses its USF support … consumers are at risk,” because an
unsubsidized competitor (unlike the incumbent LEC) has only market
incentives, rather than an ongoing legal obligation, to continue providing
voice and broadband service in these areas. Br. 55; see id. at 54. The FCC,
however, made a very different predictive judgment: that an “unsubsidized
competitor” – which, by definition, is a facilities-based provider that is not
eligible for support yet serves the incumbent LEC’s entire geographic service
area (Order ¶¶281-83 (JA__-__)) – would have an incentive to recover its
investment by continuing to serve every possible customer. This was entirely
reasonable. See Nuvio Corp., 473 F.3d at 309 (“[p]redictions regarding the
actions of regulated entities are precisely the type of policy judgments that
courts routinely and quite correctly leave to administrative agencies”)
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(internal quotation marks and citation omitted); Melcher v. FCC, 134 F.3d
1143, 1152 (D.C. Cir. 1998) (deferring to the FCC’s predictive “judgments
13
about future market behavior”).
Moreover, under 47 U.S.C. §214(e)(3), the FCC and the state
commissions may compel a carrier to provide the supported universal
services “to an unserved community or any portion thereof,” subject to the
statutory obligations imposed on ETCs. Given its ability to address
petitioners’ speculative parade of horribles (should they ever arise), the FCC
is under no obligation to continue to distribute universal service support
inefficiently.
Finally, petitioners claim that it is unfair to retain carrier-of-last-resort
14
(“COLR”) obligations for incumbent LECs after they no longer receive
federal universal service support. See Br. 55. COLR requirements, however,
are imposed under state law and not by the FCC. See Order ¶¶15, 75 (JA__,

13 As we explain in our Response to the Additional USF Issues Principal
Brief of Petitioners at __, the FCC reasonably found that if an area is served
by a provider without federal subsidies, there is no need to provide high-cost
universal service support to any provider.
14 “[I]ncumbent LECs in many states are designated as the carriers of last
resort and thus have a preexisting obligation to ensure service to consumers
who request it.” Order ¶177 n.290 (JA__).
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__). Ultimately, it is the states’ responsibility to determine whether COLR
requirements are still warranted.

C. The New Competitive Bidding Mechanism For

Distributing One-Time Support To Wireless Carriers Is
Consistent With the Act.

Petitioners also contend (at Br. 39-40) that the Order violates section
214(e)(2) of the Act, which provides that a “State commission may, in the
case of an area served by a rural telephone company, and shall, in the case of
all other areas, designate more than one common carrier as an eligible
telecommunications carrier for a service area designated by the State
commission.” 47 U.S.C. §214(e)(2). According to petitioners, the Order
“usurps the role expressly reserved to the states” by “adopt[ing] various
competitive bidding mechanisms to distribute USF support” and “defin[ing]
the geographic service areas to be auctioned off.” Br. 39-40.
Petitioners’ argument fails because it conflates eligibility for subsidies
with the right to receive subsidies. While state commissions under section
214(e) of Act determine which carriers are eligible for support, and where
those carriers are eligible for support, a carrier is not entitled to receive
support merely by virtue of its ETC designation. See Order ¶¶73 & n.104,
389, 390 & n.662, 392 (JA__, __, __, __). As the FCC explained, “nothing in
the statute compels that every party eligible for support actually receive it.”
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Order ¶318 (JA__); see High-Cost Universal Service Support, 23 FCC Rcd
8834, 8847 (¶29) (2008), aff’d, RCA I, 588 F.3d 1095; FCC Response to
Wireless Carrier USF Principal Br. __. Because the Order only reformed the
distribution of high-cost universal service support, and left intact the state
commissions’ authority to designate ETCs and their service areas, there is no
section 214(e) violation.
Petitioners also mistakenly claim the Order created a “new conditional
[ETC] designation.” Br. 40 (citing Order ¶439 (JA__)). Rather, the Order
simply held that carriers that receive an ETC designation conditioned upon
receiving Mobility Fund support may participate in the Mobility Fund Phase I
auction. Order ¶¶391 n.665, 439 (JA__, __). Nothing in the Order compels
the state commission to grant such a conditional designation (though a state
commission is free to make such a grant).

D. The Order

Did Not Eliminate Federal Universal Service

Support For Remote Areas.

The FCC recognized that the cost of deploying terrestrial networks can
be extremely high in remote areas of the nation, and so it concluded that it
should eventually support such areas through a new fund. See Order ¶¶533-
38 (JA__-__). This remote areas fund is intended to help consumers “obtain
affordable broadband through alternative technology platforms such as
satellite and unlicensed wireless.” Id. ¶533 (JA__). The Order budgeted
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$100 million annually for the fund but sought comment “on the details of
distributing support” in an accompanying FNPRM. Id. ¶¶534, 1223-90
(JA__, __-__).
Petitioners seem to think the FCC eliminated universal service support
to remote areas pending enactment of those rules. See Br. 52-53. It did not.
Until the distribution rules are in place (see Order ¶167 (JA__)), extremely
high-cost areas will continue to receive support under existing mechanisms
for price cap and rate-of-return carriers, see id. ¶¶133 (JA__) (freezing
support for price-cap carriers), 195 (JA__) (maintaining support for rate-of-
return carriers). It follows that petitioners’ claim that the Order “denied”
support to extremely high-cost areas is incorrect and not ripe. See Qwest, 240
F.3d at 894-95; Los Alamos Study Group, 692 F.3d at 1064-65.

VI.

THE FCC GAVE ADEQUATE NOTICE AND
OPPORTUNITY TO COMMENT ON THE RULE
CHANGES IN THE ORDER

.
Petitioners complain that the FCC violated the notice-and-comment
requirements of the APA, 5 U.S.C. §553(b). See Br. 57-59. That provision
requires notice of “either the terms or substance of the proposed rule or a
description of the subjects and issues involved.” 5 U.S.C. §553(b)(3). “Since
the public is generally entitled to submit their views and relevant data on any
proposals, the notice must be sufficient to fairly apprise interested parties of
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the issues involved, but it need not specify every precise proposal which [the
agency] may ultimately adopt as a rule.” Nuvio Corp., 473 F.3d at 309-10
(internal quotation marks and citations omitted). Petitioners claim that “[k]ey
provisions in the Order were not part of the proposed rule.” Br. 57. This
argument is not properly before the Court, because it was not presented to the
FCC either before the FCC issued the Order or on reconsideration once the
agency allegedly acted without notice. See 47 U.S.C. §405(a); Globalstar,
Inc. v. FCC, 564 F.3d 476, 483-85 (D.C. Cir. 2009) (explaining that 47
U.S.C. §405(a) applies to claims of lack of APA notice and thus requires the
filing of a reconsideration petition as a precondition to obtaining judicial
review); Cellnet Commc’ns, Inc. v. FCC, 149 F.3d 429, 442-43 (6th Cir.
1998) (same). In any event, petitioners’ claims are baseless.
Petitioners broadly assert that the FCC failed to provide notice of the
new rules implementing the Access Recovery Charge (“ARC”) mechanism.
Br. 58. Not so. The FCC sought comment on those rules twice. In the
NPRM released on February 9, 2011, the FCC “s[ought] comment … on
possible recovery of reduced intercarrier compensation through a variety of
mechanisms, including through end-user charges such as modifications to the
interstate SLC cap.” NPRM ¶545 (JA__). Subsequently, in an August 3,
2011 Public Notice published in the Federal Register, the FCC sought
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comment on “the appropriate recovery mechanism for ICC reform, including
the ABC Plan’s … recovery proposals.” See Further Inquiry Into Certain
Issues in the Universal Service-Intercarrier Compensation Transformation
Proceeding, 26 FCC Rcd 11112, 11124 (2011) (“August 3, 2011, Public
Notice”) (JA__); 76 Fed. Reg. 49,401-01 (Aug. 10, 2011). The ARC, as
adopted in the Order, is largely modeled on the ABC Plan. Compare Order
¶¶850-53 (JA__-__) with Letter from Robert W. Quinn, AT&T, et al., WC
Docket 10-90 et al. at 11-13 (filed July 29, 2011) (“ABC Plan”) (JA__-__).
Likewise, the FCC twice proposed to adopt “a dual process for ICC
revenue recovery.” Br. 58-59; see NPRM ¶451 (JA__) (seeking “comment
on an incentive regulation framework for any intercarrier compensation
replacement funding that would be distributed through the CAF to carriers
that currently set their access charges based on a rate-of-return framework”);
August 3, 2011, Public Notice, 26 FCC Rcd at 11125-26 (JA__) (seeking
comment on separate recovery mechanisms for price cap and rate-of-return
carriers).
Petitioners further allege that the FCC, without notice, amended its
price cap rules to eliminate exogenous adjustments. Br. 58. The agency did
give notice, however. In the NPRM, it expressly “s[ought] comment
regarding whether there is any basis under the Commission’s price cap rules
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for concluding that an exogenous adjustment should not be permitted due to
the transitional reduction in [Interstate Access Support].” NPRM ¶235
(JA__).
Finally, the FCC sought comment on “an exclusive right of first
refusal” for price cap carriers in the August 3, 2011, Public Notice, 26 FCC
Rcd at 11114-15 (JA__-__). See Br. 59.

VII. THE FCC REASONABLY DECIDED TO ADDRESS

UNIVERSAL SERVICE CONTRIBUTIONS IN A
SEPARATE PROCEEDING.

The USF is financed through “assessments paid by interstate
telecommunications service providers.” RCA I, 588 F.3d at 1099. Fund
assessments paid by contributors are determined by applying a quarterly
“contribution factor” to the contributors’ interstate revenues. Id.
Contributors “almost always pass their contribution assessments through to
their customers.” Id.
Petitioners allege that the FCC erred by only addressing universal
service distributions and not also contributions in the Order. See Br. 34-36.
According to petitioners, the FCC’s failure to “widen[] the … base” against
which universal service contributions are assessed will render voice and
broadband services less affordable, and contributions inequitable, in violation
of 47 U.S.C. §254(b)(1) and (4), respectively. Id. at 34.
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As petitioners acknowledge, the FCC in a separate rulemaking docket
has “s[ought] comment on proposals to reform and modernize how Universal
Service Fund … contributions are assessed and recovered.” Br. 35; see
Universal Service Contribution Methodology; A National Broadband Plan
for Our Future, 27 FCC Rcd 5357, 5358 (2012); see also id. at 5389-92
(¶¶65-72) (requesting comment on extending USF assessments to broadband
Internet access service). Given the FCC’s well-established discretion under
47 U.S.C. §154(j) to define the scope of its own proceedings, the agency
acted properly in addressing universal service contributions elsewhere. See
FCC v. Pottsville Broad. Co., 309 U.S. 134, 138 (1940) (providing that
“subordinate questions of procedure,” including the “scope of the inquiry,”
are “explicitly and by implication left to the Commission’s own devising, so
long … as it observes the basic requirements designed for the protection of
private as well as public interest”).
The FCC’s decision to address contributions later is also entirely
consistent with precedent upholding the agency’s authority to act
incrementally. As this Court has found, “the FCC is not required to address
all problems ‘in one fell swoop,’ and may focus on problems depending on
their acuteness.” Sorenson I, 567 F.3d at 1222 (citing NAB v. FCC, 740 F.2d
1190, 1207 (D.C. Cir. 1984)); see also Brand X, 545 U.S. at 1002 (affirming
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the FCC’s decision to incrementally address the regulatory framework for
different categories of facilities-based information service providers).
In any event, petitioners’ arguments lack merit. Noting that
“telecommunications voice revenues are declining,” petitioners assert that
universal service contributions levied on consumers will increase and render
service less affordable, in violation of section 254(b)(1), “unless the
contribution base is widened.” Br. 34-35. But, if anything, the Order
promotes affordability by “[f]or the first time … establish[ing] a defined
budget for the high-cost component of the universal service fund.” Order
¶123 (JA__). Had the FCC not established a budget, (id. ¶125 (JA__)), ever-
growing demand for subsidies would have resulted in greater increases in the
USF contributions paid by consumers, over and above any increase resulting
from a decline in telecommunications revenues.
There is likewise no merit to petitioners’ argument that it is
“inequitable” under section 254(b)(4) to provide universal service support for
broadband, but not also assess USF contributions against broadband service
revenues. Br. 35. Nothing in section 254(b)(4) requires the recipients of
universal service support to also contribute to the USF. Indeed, distributions
and contributions are distinct: the former concerns which providers should
receive support (and how much) to preserve and advance universal service,
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see 47 U.S.C. §254(b), whereas the latter concerns which providers should be
required to help fund that effort, see id. §254(d). Thus, “there is always
likely to be a disparity between the contributions parties make to the USF and
the amounts that they receive from the USF.” Order ¶312 (JA__).

CONCLUSION

The petitions for review should be dismissed in part and otherwise
denied.
Respectfully
submitted,
WILLIAM J. BAER
SEAN A. LEV
ASSISTANT ATTORNEY GENERAL
GENERAL COUNSEL


ROBERT B. NICHOLSON
PETER KARANJIA
ROBERT J. WIGGERS
DEPUTY GENERAL COUNSEL
ATTORNEYS


RICHARD K. WELCH
UNITED STATES
DEPUTY ASSOCIATE GENERAL
DEPARTMENT OF JUSTICE
COUNSEL
WASHINGTON, D.C. 20530


/s/ Maureen K. Flood

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

FEDERAL COMMUNICATIONS
COMMISSION
WASHINGTON, D.C. 20554
(202) 418-1740
March 6, 2013
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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
Uncited Joint Universal Service Fund Principal Brief for Petitioners was certified
to be 13,190 words in length. Therefore, the FCC may file a response brief up to
15,168 words in length. This brief contains 14,726 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 March 6, 2013, and according to the program
is free of viruses.




/s/ Maureen K. Flood
Maureen K. Flood
Counsel


March 6, 2013









Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 81

CERTIFICATE OF SERVICE



I hereby certify that on March 6, 2013, I caused the foregoing Federal
Respondents’ Uncited Response to the Joint Universal Service Fund Principal
Brief of 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/ Maureen K. Flood
Maureen K. Flood
Counsel


March 6, 2013 

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