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

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Released: March 27, 2013
FEDERAL RESPONDENTS’ UNCITED RESPONSE TO THE WINDSTREAM PRINCIPAL BRIEF
Appellate Case: 11-9900 Document: 01019026310 Date Filed: 03/27/2013 Page: 1
IN THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
NO. 11-9900
IN RE: FCC 11-161
ON PETITIONS FOR REVIEW OF ORDERS 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
JOEL MARCUS
COUNSEL
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
(202) 418-1740

Appellate Case: 11-9900 Document: 01019026310 Date Filed: 03/27/2013 Page: 2

TABLE OF CONTENTS

Table Of Authorities ......................................................................................... ii
Glossary ........................................................................................................... iii
Issue Presented .................................................................................................. 1
Counterstatement ............................................................................................... 2
A.
Access Charges ...................................................................................... 2
B.
Voice Over Internet Protocol ................................................................ 5
C.
Application Of The Access Charge Regime To VoIP .......................... 6
D.
Access Charge Reform .......................................................................... 7
E.
The Prospective Access Charge Regime For VoIP Calls ..................... 8
F.
Extension Of Intrastate Origination Rates For Two Years ................. 10
Summary Of Argument ................................................................................... 15
Argument ......................................................................................................... 19
The FCC’s VoIP Originating Access Charge Rule Is The
Product Of Reasoned Decisionmaking. .......................................................... 19
A.
The FCC Reasonably Explained The Grounds For Its
VoIP Originating Access Charge Regime. .......................................... 19
1.
The FCC Made Clear That The Order Addressed Both
Originating And Terminating Charges. .......................................... 19
2.
The FCC Reasonably Explained The Policy Balance
Behind The VoIP Originating Access Charge Rule. ...................... 23
B.
The FCC Reasonably Declined To Provide A Dedicated
Revenue Recovery Mechanism. .......................................................... 29
Conclusion ....................................................................................................... 35
i

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TABLE OF AUTHORITIES

CASES

Colorado Interstate Gas Co. v. FERC, 791 F.2d 803
(10th Cir. 1986) ........................................................................................... 20
Consolidated Edison Co. v. FERC, 347 F.3d 964
(D.C. Cir. 2003) ........................................................................................... 34
Franklin Sav. Ass’n v. Director, Office of Thrift
Supervision, 934 F.2d 1127 (10th Cir. 1991) .............................................. 31
JEM Broadcasting Co., Inc. v. FCC, 22 F.3d 320
(D.C. Cir. 1994) ........................................................................................... 33
Melcher v. FCC, 134 F.3d 1143 (D.C. Cir. 1998) .......................................... 29
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto.
Ins. Co., 463 U.S. 29 (1983) ........................................................................ 23
Sorenson Communications, Inc. v. FCC, 659 F.3d
1035 (10th Cir. 2011) ..................................................................... 23, 29, 31

ADMINISTRATIVE DECISIONS

Developing a Unified Intercarrier Compensation
Regime, 16 FCC Rcd 9610 (2001) ................................................................ 6
Implementation of Sections 3(n) and 332 of the
Communications Act, 9 FCC Rcd 1411 (1994) ............................................. 5
Report to Congress, 11 FCC Rcd 11501 (1998) ............................................... 6

STATUTES

5 U.S.C. §551(4) .............................................................................................. 33

REGULATIONS

47 C.F.R. §9.3 ................................................................................................... 6
47 C.F.R. §20.15(c) ........................................................................................... 5
47 C.F.R. §51.913 .............................................................................. 11, 16, 22

OTHER AUTHORITIES

Comments of Windstream Communications, Inc.,
WC Docket 08-152 (Aug. 21, 2008) ........................................................... 25
ii

Appellate Case: 11-9900 Document: 01019026310 Date Filed: 03/27/2013 Page: 4

GLOSSARY

IP
Internet Protocol
IXC Interexchange
Carrier
LEC
Local Exchange Carrier
PSTN
Public Switched Telephone Network
TDM
Time Division Multiplexing
VoIP
Voice over Internet Protocol
iii

Appellate Case: 11-9900 Document: 01019026310 Date Filed: 03/27/2013 Page: 5
IN THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
NO. 11-9900
IN RE: FCC 11-161
ON PETITIONS FOR REVIEW OF ORDERS OF THE
FEDERAL COMMUNICATIONS COMMISSION
FEDERAL RESPONDENTS’ UNCITED RESPONSE TO
THE WINDSTREAM PRINCIPAL BRIEF

ISSUE PRESENTED

Access charges are fees collected by local telephone companies from
long-distance companies for originating or terminating long-distance calls.
Federal Communications Commission (“FCC”) rules traditionally have
allowed local companies to charge for originating and for terminating calls
placed on the legacy wireline telephone system. Until the orders on review,
however, the FCC had never addressed whether or how those rules applied to
calls that use a newer technology called Voice over Internet Protocol
(“VoIP”).
The orders on review, Connect America Fund, 26 FCC Rcd 17663
(2011) (“Order”) (JA____), and Second Order on Reconsideration, 27 FCC
Rcd 4648 (2012) (“Second Reconsideration Order”) (JA____), adopted (and

Appellate Case: 11-9900 Document: 01019026310 Date Filed: 03/27/2013 Page: 6
then amended) a transitional access charge regime for VoIP calls as part of
the agency’s comprehensive reform of the system of payments between
carriers. In the Order, the agency determined that, prospectively, local
telephone companies may charge the FCC-regulated interstate rate for
originating or terminating all long-distance VoIP calls, whether a call is inter-
or intrastate. On reconsideration, however, in order to provide carriers with a
measured transition away from access charges, the Second Reconsideration
Order established an interim rule that for two years allows local exchange
carriers to charge the state-established rate for originating intrastate long-
distance VoIP calls. After the two-year transition period expires, the rate for
originating an intrastate VoIP call will become the interstate rate.
The issue presented by Windstream’s petition is whether the FCC
engaged in reasoned decisionmaking when it established its transitional
originating access charge regime for intrastate long-distance VoIP calls.

COUNTERSTATEMENT

A. Access Charges

When a telephone user places a long-distance call using the traditional
wireline telephone system, the call travels from the facilities of the user’s
local telephone company, known as a local exchange carrier (“LEC”), to
those of the long-distance company, known as an interexchange carrier
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(“IXC”). The IXC then transports the call to the facilities of the recipient’s
LEC, which connects the call to the called party. The caller’s LEC may
impose on the IXC by tariff an “originating” “access charge,” and the
recipient’s LEC may impose a “terminating” access charge. See Connect
America Fund, 26 FCC Rcd 4554, 4702-4703 (2011) (“2011 NPRM”)
(JA____-____). The access charge regime is a legacy of the breakup of
AT&T and the introduction of competition into the long-distance
marketplace. Id. ¶¶496-498 (JA____-____); see also FCC Preliminary Br. 4-
5. Access charges are one part of the system of “intercarrier compensation”
that has governed payments for the exchange of telephone traffic between
1
carriers.
As explained below, in the orders at issue here, the FCC fundamentally
transformed the system of intercarrier compensation by determining that the
current framework ultimately will be replaced by a “bill-and-keep”
methodology in which each carrier “bills” its own subscriber and “keeps” the
revenue. See FCC Preliminary Br. 32-33. Reform of the system was driven
by the recognition that the existing access charge framework was deeply
flawed in several ways. First, it was “based on outdated concepts and a per-

1 Calls that are transferred between local carriers without the involvement
of an IXC have been governed by a system of “reciprocal compensation,”
which is also addressed in the orders on review but is not at issue here.
3

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minute rate structure from the 1980s.” 2011 NPRM ¶495 (JA____). Second,
payment for performing the same functions “var[ied] based on the type of
provider and where the call originated.” Id. Third, implicit subsidies in the
form of above-cost rates both “create[d] incentives to retain old voice
technologies” rather than invest in broadband facilities, and fostered
opportunities for “arbitrage” practices generating unfair profit from disparate
rate structures. Id.
Historically, access charges for interstate calls were subject to
regulation by the FCC, and access charges for intrastate calls were subject to
state regulation. See FCC Preliminary Br. 4-5. Federally regulated interstate
access rates typically have been lower than state-regulated intrastate rates.
2011 NPRM ¶54 (JA____). Because a LEC’s incremental cost of providing
originating or terminating access to its network is close to zero, Order ¶753
(JA____), high intrastate rates amount to a subsidy paid by long-distance
callers to local subscribers and their telephone company, keeping residential
rates in some cases as low as $8.00 per month, 2011 NPRM ¶54 (JA____).
The historical access charge regime that governed the traditional
telephone system (i.e., landline voice calls over legacy networks) did not
apply to more recent communication technologies. Since 1994, for instance,
cellular telephone companies have been barred from filing tariffs that compel
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IXCs to pay originating or terminating access charges for long-distance calls
placed from or completed on their networks. That is the case even though
they perform essentially the same originating and terminating functions as a
LEC. See Implementation of Sections 3(n) and 332 of the Communications
Act, 9 FCC Rcd 1411, 1479-1480 (1994); 47 C.F.R. §20.15(c). In the
absence of an individually negotiated contract with a long-distance carrier,
wireless carriers do not receive implicit subsidies but must recover any costs
of access from their own subscribers and not from other carriers – effectively
a “bill-and-keep” system. See Order ¶737 (JA____) (wireless carriers “have
long been operating pursuant to what are essentially bill-and-keep
arrangements”).

B. Voice Over Internet Protocol

Some companies have begun to provide telephone service using
broadband facilities of the same type used for Internet service. Newer
broadband-based telephone service uses a technology – “Internet Protocol” –
that works differently from traditional service. In traditional phone service,
signals are transmitted in a format known as “time division multiplexing” or
“TDM.” Broadband-based service, known as “Voice over Internet Protocol”
or “VoIP,” divides a telephone call into packets of data, which are transmitted
separately and then reassembled, a fundamentally different approach. See
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Report to Congress, 11 FCC Rcd 11501, 11532 ¶64 (1998) (describing
“packetized” Internet Protocol). A VoIP signal can be converted to or from
TDM format in order to exchange calls with the traditional telephone
network, which is known as the “public switched telephone network,” or
“PSTN.” See 47 C.F.R. §9.3. Thus, a call can originate as a VoIP call and
terminate as a TDM/PSTN call, or vice versa.

C. Application Of The Access Charge Regime To VoIP

Prior to the proceeding now before the Court, the FCC “ha[d] never
addressed whether interconnected VoIP is subject to intercarrier
compensation rules,” including the access charge regime, “and, if so, the
applicable rate for such traffic.” 2011 NPRM ¶608 (JA____-____). The
topic had, however, long been a subject of regulatory inquiry: as early as
2001, the agency had sought comment on whether intercarrier compensation
obligations should apply to calls that “originate or terminate on IP [Internet
Protocol] networks.” Id. ¶610 (JA____), citing Developing a Unified
Intercarrier Compensation Regime, 16 FCC Rcd 9610, 9629 (2001). Despite
considerable debate over the years, however, the agency had “declined to
explicitly address” compensation obligations “associated with VoIP traffic.”
2011 NPRM ¶610 (JA____).
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In the absence of governing rules, disputes increasingly arose among
carriers and VoIP providers, with some parties claiming that the same access
charge rules applied to VoIP as to traditional TDM traffic and others arguing
that no compensation was due at all. 2011 NPRM ¶610 (JA____). As part of
its comprehensive restructuring of the entire intercarrier compensation
regime, the FCC again sought comment on the appropriate compensation
framework for VoIP traffic, proposing various alternatives, including bill-
and-keep, VoIP-specific rates, or the same access charge rates applicable to
TDM calls. Id. ¶¶613-619 (JA____-____).

D. Access Charge Reform

In the orders on review, the FCC adopted a comprehensive plan “to
phase out regulated per-minute intercarrier compensation charges,” including
interstate and intrastate access charges, mostly over a multi-year transition
period. Order ¶736 (JA____). Ultimately, “a uniform national bill-and-keep
framework” will apply. Id. ¶34 (JA____).
For calls on the traditional telephone network currently subject to the
access charge regime, the phase-out of terminating access charges begins
immediately. All calls, inter- and intrastate, ultimately will be subject to the
same terminating charge, which will gradually be reduced until traffic is
exchanged under a bill-and-keep regime. See Order ¶801 & Fig. 9 (JA____-
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____). The FCC deferred action on originating access charges for calls
placed on the traditional telephone network pending the receipt of further
information, which the agency requested in a Further Notice of Proposed
Rulemaking. See id. ¶¶1298-1305 (JA____-____). The FCC ordered a faster
transition to bill-and-keep for local calls exchanged between LECs and
wireless telephone companies. Id. ¶¶995-1000 (JA____-____); see also FCC
Additional ICC Issues Br. 11-12, 27-35.
To mitigate the effect of its reforms on LEC revenues, the FCC created
a “transitional recovery mechanism” during the changeover to bill-and-keep.
Order ¶¶847-853 (JA____-____). In general, LECs like Windstream (so-
called “price cap” LECs) will be able to recover some of the difference in
revenue collected under the prior regime and the new regime through a
combination of remaining access charges, charges on end users, and (if
necessary) payments from the “Connect America Fund.” See generally FCC
Principal ICC Br. 45-47. That Fund was created as part of the Order’s
universal service reforms. See FCC Preliminary Br. 24-25.

E. The Prospective Access Charge Regime For VoIP Calls

Recognizing the unique issues presented by VoIP traffic, the agency
addressed VoIP calls in a separate section (¶¶933-975) of the Order, entitled
“Intercarrier Compensation For VoIP Traffic.” JA____-____. Resolving for
8

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the first time the question of payment obligations for VoIP calls, the FCC
established a prospective rule that LECs may tariff both terminating and
originating access charges for long-distance VoIP calls at the interstate
terminating access rate for traditional telephone calls. See Order ¶933
2
(JA____). That rate will decline over time, thus providing a “measured
transition” to bill-and-keep. Id. ¶935 (JA____); see id. ¶945 (JA____).
The VoIP access charge regime applies to “all VoIP-PSTN traffic,”
which the FCC defined as “traffic exchanged over PSTN facilities that
originates and/or terminates in IP format.” Order ¶¶940, 943 (JA____-____,
3
____) (internal quotation marks omitted) (emphasis added). The agency
expressly “decline[d] to adopt an asymmetric approach that would apply
VoIP-specific rates for only IP-originated or only IP-terminated traffic.” Id.
¶942 (JA____).
The FCC also declined to “immediately adopt a bill-and-keep
methodology” for VoIP calls. Order ¶952 (JA____). Instead, it favored an
incremental transition that “provid[es] certainty regarding the prospective

2 The FCC did not address access charges for VoIP calls “for any prior
periods,” Order n.1874 (JA____), but established only “a prospective
intercarrier compensation framework” for such traffic during the transition to
bill-and-keep. Id. ¶933 (JA____).
3 In this brief, we use the terms “VoIP call” or “VoIP traffic” to refer to
calls that are within that definition of VoIP-PSTN traffic.
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intercarrier compensation obligations for VoIP-PSTN traffic.” Id. ¶946
(JA____). Access charges for VoIP calls were set to fall gradually in tandem
with terminating access charges for traditional telephone calls.

F.

Extension Of Intrastate Origination Rates For Two
Years

Notwithstanding the FCC’s definition of VoIP-PSTN traffic as
including traffic that “originates and/or terminates in IP format” (Order ¶940
(JA____)), Windstream filed a petition for reconsideration with the FCC in
which it asked the agency to “clarify” that “the Order does not apply to, and
is not intended to displace, intrastate originating access rates for PSTN-
originated calls that are terminated over VoIP facilities.” Petition for
Reconsideration at 21 (JA____) (emphasis added). Alternatively,
Windstream asked that the FCC reconsider the issue if it construed the Order
to “limit originating access rates for intrastate PSTN-originated VoIP-PSTN
calls to interstate levels.” Id. at 27 (JA____). After receiving and
considering comment on Windstream’s petition, the FCC granted it in part.
Second Reconsideration Order ¶¶27-42 (JA____-____).
The agency first rejected Windstream’s claim that the Order did not
make clear whether the new regime applied to origination charges. The FCC
explained that, although it had deferred reform of origination charges for
traditional telephone traffic (i.e., voice calls transported over landline
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networks entirely in TDM format), it had “adopted a distinct … framework”
for the much newer category of VoIP traffic. Second Reconsideration Order
¶31 (JA____). “[T]he text [of the Order] and the implementing rule”
demonstrated that the VoIP framework applied to both terminating and
originating access charges. Id.; see also id. n.87 (JA____). For example, the
Order defined the key term “VoIP-PSTN Traffic” to mean “traffic exchanged
over PSTN facilities that originates and/or terminates in IP format,” Order
¶940 (JA____) (internal quotation marks omitted; emphasis added), and
specified that the VoIP access charge framework applies to all such traffic, id.
¶¶933, 943, 961 (JA____, ____, ____). The Rule similarly made the VoIP
access charge regime applicable to calls that are “exchanged between a local
exchange carrier and another telecommunications carrier in [TDM] format
that originates and/or terminates in IP format.” 47 C.F.R. §51.913 (JA____).
Windstream’s contrary argument rested on “discussion of originating access
charges in other contexts” – i.e., the legacy telephone network – unrelated to
the “permissible origination charges for toll VoIP traffic,” which had been
addressed in a section of the Order devoted exclusively to VoIP. Second
Reconsideration Order ¶31 (JA____).
The FCC also rejected Windstream’s contention that requiring a
uniform rate for all VoIP calls would amount to a “flash cut” to its originating
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access charge rate. That argument wrongly “assume[d]” that LECs already
“were receiving intrastate originating access for intrastate [long-distance]
VoIP traffic under the status quo prior to” the Order. Second
Reconsideration Order ¶32 (JA____-____). But the FCC had never, in fact,
previously resolved whether LECs had a right to receive access payments for
VoIP calls. See pages 6-7, supra. Moreover, the administrative record
showed that “compensation for VoIP traffic,” including originating traffic,
“was widely subject to dispute and varied outcomes.” Id. ¶32 & n.91
(JA____).
The FCC nevertheless granted Windstream’s petition for
reconsideration in part. New evidence in the record on reconsideration
showed that “there were fewer disputes and instances of non-payment or
under-payment of origination charges billed at intrastate originating access
rates for intrastate toll VoIP traffic than was the case for terminating charges
for such traffic.” Second Reconsideration Order ¶33 (JA____) (emphasis
added). LECs therefore were collecting some amount of originating access
charges for intrastate long-distance VoIP calls. Thus, if originating charges
were immediately capped at the interstate rate as directed in the Order, LECs
would “experience annual reductions in originating access revenues.” Id.
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The FCC accordingly “reconsider[ed] the balancing of policy interests
underlying the Order’s approach to VoIP.” Second Reconsideration Order
¶34 (JA____). Rather than switching the originating access rate for intrastate
calls directly to the (lower) interstate rate, the agency granted LECs
(including Windstream) a two-year transition window: until June 30, 2014,
they will be allowed to collect (higher) intrastate rates for originating access
charges for VoIP intrastate long-distance calls. After two years, the rate for
intrastate origination transitions to the rate for VoIP termination. Id. ¶35
(JA____).
The FCC explained that, in appropriately balancing the competing
policy issues, it should not unduly delay the transition toward bill-and-keep.
Second Reconsideration Order ¶35 (JA____). The agency’s fundamental
policy goal remained “mov[ing] away from the pre-existing, flawed …
regimes that have applied to traditional telephone service,” id., and any delay
in achieving that goal disserved the policies behind it. The FCC also
observed that subjecting VoIP-PSTN calls to an intrastate origination rate
rather than the lower interstate rate would undermine two core policy goals:
“moving away from reliance on [intercarrier compensation] revenues,” and
“encouraging a migration to all IP networks.” Second Reconsideration Order
¶35 (JA____). Indeed, the evidence showed that VoIP customers could end
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up paying higher rates to fund the intrastate rates on originating calls, which
would make the new technology less attractive. Id. ¶36 & nn.102-103
(JA____). Therefore, the agency determined, a strict limit on the use of
intrastate rates was “necessary to ensure that migration to IP services is
adequately promoted.” Id. ¶36 (JA____).
A limited two-year window, the agency determined, did not
unjustifiably delay that goal, while giving carriers “the opportunity to make
significant progress transitioning their business plans away from extensive
reliance” on access charges. Id. ¶36 (JA____). In short, the two-year
interim rule would give carriers sufficient opportunity to adjust to the new
regulatory framework, while ensuring that the ultimate objective of bill-and-
keep is reached within a reasonable period of time.
The FCC also explained that VoIP origination charges must be
considered “in the context of the … VoIP intercarrier compensation
framework” as a whole. Second Reconsideration Order ¶35 (JA____).
Overall, any loss of originating access revenue would be offset by increased
terminating access revenue. Id. Prior to the Order, the FCC had not
determined whether LECs could impose access charges on VoIP calls, and
many IXCs had refused to pay them, especially for terminating calls. Under
the new prospective rules, LECs like Windstream could expect “additional
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revenues for previously disputed” charges. Id. LECs would also “realize
savings associated with reduced litigation and disputes.” Id.
Windstream, alone among all local exchange carriers, now challenges
the new VoIP access charge regime.

SUMMARY OF ARGUMENT

In the orders on review, the FCC for the first time expressly permitted
LECs like Windstream prospectively to tariff access charges on VoIP calls,
and the agency allowed them to collect high intrastate originating access
charges on intrastate VoIP calls for two years. Despite having received those
substantial benefits, Windstream accuses the agency of imposing an
unexplained “flash cut” on intrastate VoIP access charges.
The agency reasonably explained all of its VoIP policy judgments. In
particular, rather than requiring interstate rates for VoIP originating access
charges immediately, the FCC allowed the use of higher intrastate rates for
two years as part of a measured transition, deferring achievement of critical
policy goals in order to ease the transition to bill-and-keep. The FCC
predicted (and Windstream does not contest) that the new benefits accorded
to LECs will largely offset the change in revenue. There accordingly has
been little or no cut at all, let alone a “flash cut.”
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1. Windstream’s repeated claims that the FCC did not intend the Order
to apply to originating access charges were properly rejected in paragraph 31
of the Second Reconsideration Order (JA____). The agency correctly
interpreted its own prior Order. The initial Order defined the key term
“VoIP-PSTN Traffic” to mean “traffic exchanged over PSTN facilities that
originates and/or terminates in IP format.” Order ¶940 (JA____). Every use
of that term throughout the VoIP section of the Order thus necessarily
referred to originating access. The agency specified that access charge
“rates” for all long-distance VoIP-PSTN traffic would be “equal to interstate
access rates,” id. ¶933, and it expressly rejected “an asymmetric approach
that would apply VoIP-specific rates for only IP-originated or only IP-
terminated traffic.” Id. ¶942 (JA____). Finally, the Rule promulgated by the
Order specifies that the transitional VoIP access charge regime applies to
calls that are “exchanged between a local exchange carrier and another
telecommunications carrier in [TDM] format that originates and/or terminates
in IP format.” 47 C.F.R. §51.913 (JA____).
Contrary to Windstream’s claim that the FCC failed to explain its new
access charge framework, the Order and the Second Reconsideration Order
articulated multiple reasons for limiting (after two years) intrastate access
rates for originating VoIP traffic to general interstate rate levels. The existing
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access charge system, with differential rates for similar services, was deeply
flawed, and it therefore made no sense to extend the outdated system into a
new area for any amount of time beyond that necessary to allow for a
measured transition to bill-and-keep. Rather, the central purpose of the entire
rulemaking proceeding was to eliminate the antiquated system in favor of a
symmetrical approach with uniform charges. Uniform rates avoid
marketplace distortions and arbitrage, and Windstream itself had asked the
agency to take steps to reduce arbitrage in originating access. Preservation of
high intrastate rates, by contrast, provides an incentive for carriers to retain
old TDM technology rather than switching to modern IP technologies, a
result that would undermine one of the FCC’s core policies. Those reasons
amply satisfy the agency’s burden of explanation.
Windstream is wrong in claiming that the FCC promised to defer
taking action on originating access charges in the context of VoIP calls. The
agency deferred consideration of legacy network origination charges, but it
addressed VoIP in a different section of the Order that applied only to VoIP.
The FCC correctly found that the “discussion of originating access charges in
other contexts do[es] not constrain the interpretation of permissible
origination charges for toll VoIP traffic.” Second Reconsideration Order ¶31
(JA____).
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Windstream fares no better in arguing that the FCC was obligated to
treat VoIP in lockstep with its treatment of legacy telephone calls. LECs had
long relied on an undisputed entitlement to collect tariffed access charges for
legacy network calls at established inter- or intrastate rates. The intercarrier
compensation obligations for VoIP, by contrast, had never been resolved by
the agency. The FCC therefore reasonably created a regime unique to VoIP.
2. For similar reasons, Windstream misses the mark in contending that
the FCC did not explain its refusal to adopt an explicit revenue recovery
mechanism in addition to the two-year extension on intrastate originating
rates granted to Windstream and other LECs. Unlike the legacy phone
system, replacement revenue was unnecessary in “the context of the
Commission’s overall VoIP intercarrier compensation framework.” Second
Reconsideration Order ¶35 (JA____). By virtue of the FCC’s explicit
recognition (for the first time) that VoIP calls would be prospectively subject
to access charges, the agency predicted that “most providers will receive …
additional revenues for previously disputed terminating VoIP calls and will
also realize savings associated with reduced litigation and disputes.” Id.
(emphasis added). Moreover, even if increased termination charges and
reduced litigation expenses do not recover all lost revenue, under the Second
Reconsideration Order LECs may impose intrastate originating charges at
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high intrastate rates for two years. The FCC reasonably predicted that those
measures, taken as a whole, will give LECs “the opportunity to make
significant progress transitioning their business plans away from extensive
reliance” on access charges. Id. ¶36 (JA____).

ARGUMENT

THE FCC’S VOIP ORIGINATING ACCESS

CHARGE RULE IS THE PRODUCT OF

REASONED DECISIONMAKING.

Windstream challenges the FCC’s VoIP originating access charge rule
on two main grounds: first, that the agency did not make clear that the Rule
applied to originating access at all and did not explain why it adopted the
Rule; and second, that the agency unreasonably did not provide a specific
revenue recovery mechanism to offset any reduction in originating intrastate
access rates. Those claims fail. The FCC fully explained both the coverage
of the VoIP Rule and why it did not adopt a specific revenue recovery
mechanism.

A. The FCC Reasonably Explained The Grounds For Its

VoIP Originating Access Charge Regime.

1.

The FCC Made Clear That The Order

Addressed Both
Originating And Terminating Charges.

Windstream repeatedly claims that the Order cannot reasonably be
read to apply to VoIP originating access charges at all. Br. 12-13, 14-15, 17-
18, 20, 21, 28. Reading the Order as expressing an intent to regulate VoIP
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originating charges, Windstream asserts, is simply a “linguistic possibilit[y]”
grounded in a single sentence, Br. 21, but otherwise unreflected in the Order.
The agency properly rejected that claim in the Second Reconsideration
Order, pointing out that “the text [of the Order] and the implementing rules
demonstrate that the intercarrier compensation framework for toll VoIP
traffic” applies to “both … origination and termination charges.” Second
Reconsideration Order ¶31 (JA____). That interpretation was sound and is
entitled to deference on review. See Colorado Interstate Gas Co. v. FERC,
791 F.2d 803, 810 (10th Cir. 1986).
First and foremost, the FCC defined the term “VoIP-PSTN traffic” –
the central subject of the VoIP section of the Order – to mean “traffic
exchanged over PSTN facilities that originates and/or terminates in IP
format.” Order ¶940 (JA____) (internal quotation marks omitted) (emphasis
added). That definition – and each use of it in the VoIP section of the Order
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– clearly encompasses the calls about which Windstream is concerned: those
4
that originate in TDM format and terminate in IP format.
After defining the traffic to which its VoIP framework would apply,
the agency then specified that access charges for all covered traffic would be
subject to the interstate rate. The agency not only stated that the new VoIP
compensation framework applied to “all VoIP-PSTN traffic,” without
qualification, id. ¶943 (JA____) (emphasis added), but declared further that
all long-distance VoIP traffic “will be subject to charges not more than
originating and terminating interstate access rates,” id. ¶961 (JA____); see id.
¶933 (“rates” for long-distance VoIP-PSTN traffic would be “equal to
interstate access rates”) (JA____). The FCC also expressly “decline[d] to
adopt an asymmetric approach that would apply VoIP-specific rates for only
IP-originated or only IP-terminated traffic.” Id. ¶942 (JA____). Not
grappling with originating charges would “perpetuate” and “expand”
opportunities for “artificial regulatory advantages” and arbitrage based on

4 The FCC adopted that definition directly from a proposal by Windstream
itself and other carriers. Order ¶940 (JA____), citing Joint Letter (JA____).
Moreover, in another proposal known as the “ABC Plan,” Windstream and
other carriers asked the FCC to classify all VoIP traffic as interstate, which
would have precluded using intrastate rates for originating traffic. Second
Reconsideration Order
n.88 (JA____). The ABC Plan also asked the FCC to
address arbitrage “involving both originating and terminating traffic.” ABC
Plan Att. 1 at 10 (JA____) (emphasis added).
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differential rates. Id. Thus, addressing “the prospective payment obligations
for VoIP traffic exchanged in TDM between a LEC and another carrier,” the
Order initially established that all calls would be subject to the same
interstate rate and that “all carriers originating and terminating VoIP calls will
be on equal footing,” id. ¶40 (JA____). See Second Reconsideration Order
n.87 (JA____).
If that were not enough, the language of the VoIP Rule adopted in the
Order, 47 C.F.R. §51.913, plainly applies to both originating and terminating
traffic. The Rule specifies that the VoIP access charge regime applies to calls
that are “exchanged between a local exchange carrier and another
telecommunications carrier in [TDM] format that originates and/or terminates
in IP format.” JA____. And it adds that a call “originates and/or terminates
in IP format if it originates from and/or terminates to an end-user customer of
a service that requires Internet protocol-compatible customer premises
equipment.” Id. The Rule makes all covered traffic “subject to a rate equal
to the relevant interstate access charges.” Id. That language, which was
promulgated in the Order, see id. Appendix A (JA____), necessarily applies
the interstate access charge rate to all calls that originate in TDM and
terminate in IP (and vice versa).
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Windstream mistakenly relies on footnote 1976 of the Order for the
proposition that the Commission deferred action on VoIP origination charges
to the further notice proceeding. Br. 21. But that footnote does not address
VoIP calls specifically; it discusses “section 251(b)(5) traffic” – i.e., all traffic
over which the FCC was asserting federal authority, which includes legacy
network traffic as well. JA____. The footnote neither undermines the
FCC’s interpretation of the Order as having addressed originating VoIP
charges nor overcomes unequivocal statements in the text of the Order itself
and the Rule that support the agency’s reading.
2.

The FCC Reasonably Explained The Policy Balance
Behind The VoIP Originating Access Charge Rule.

a. Windstream next contends that the FCC “provided no …
explanation for reducing intrastate VoIP originating access rates to interstate
levels.” Br. 20. That contention fails. In a section of the Order addressed
specifically to VoIP access charges, the FCC gave substantial reasons for
establishing (after the first two years) a uniform interstate rate for all VoIP
access charges. The FCC thus “explain[ed] why it has exercised its
discretion” as it did, Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 48 (1983), and that is all the law requires, Sorenson
Communications, Inc. v. FCC, 659 F.3d 1035, 1048 (10th Cir. 2011).
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First, the FCC explained that the central purposes of the intercarrier
compensation rulemaking proceeding were to eliminate the antiquated access
charge system and to end carrier reliance on the subsidies implicit in those
charges. See Order ¶948 (JA____). That policy applied with special force to
VoIP, a relatively new technology that the FCC had never previously
determined to be subject to the access charge regime. It therefore made no
sense to extend more than absolutely necessary a failed regulatory approach –
which the FCC was spending considerable effort to reform – into a new area.
Given the “known flaws of [the] existing … rules,” the FCC explained,
expanding “the pre-existing … regime that applies in the context of
traditional telephone service,” including differential inter- and intrastate rates,
would require the agency to “enunciate a policy rationale for expressly
imposing that regime on VoIP-PSTN traffic.” Id. But the agency could see
no good policy reason to extend the flawed regime further in light of “the
recognized need to move in a different direction.” Id. See also Second
Reconsideration Order ¶35 (allowing VoIP originating charges at intrastate
rates is “in tension with our overall policy goal of … moving away from
reliance on [access charge] revenues”) (JA____).
Second, the FCC explained that “addressing [VoIP] traffic …
comprehensively,” rather than engaging in piecemeal regulation of
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termination and origination charges, “helps guard against new forms of
arbitrage.” Order ¶941 (JA____). The agency determined that
“symmetrical” VoIP rules that apply equally to both originating and
terminating traffic “avoid[] the marketplace distortions that could arise from
an asymmetrical approach to compensation” in which different calls are
subject to different rates. Id. ¶948 (JA____); accord id. ¶942 (JA____).
Indeed, the ABC Plan, submitted by Windstream itself and other carriers, had
identified market problems and asked the FCC to take steps to prevent
arbitrage “involving both originating and terminating traffic.” ABC Plan
5
Att. 1 at 10 (JA____) (emphasis added). Agreeing with that suggestion, the
FCC recognized that addressing only terminating access charges and not
originating charges for VoIP traffic “would perpetuate and expand”
opportunities for arbitrage. Order ¶942 (JA____). See Second
Reconsideration Order ¶¶41-42 (JA____).
Third, the FCC explained that the preservation of implicit subsidies
through intrastate access rates would impede its policy of “encouraging a

5 Moreover, in comments submitted to the FCC in a related proceeding
involving access charges, Windstream recognized that because “[t]he same
local exchange network is used to both originate and terminate traffic, …
maintaining a disparity in originating and terminating rates does not make
economic sense.” Comments of Windstream Communications, Inc., WC
Docket 08-152 at 12 (Aug. 21, 2008) (available at http://apps.fcc.gov/ecfs/
document/view?id=6520041248).
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migration to all IP networks,” Second Reconsideration Order ¶35 (JA____),
because such rates “create incentives to retain old voice technologies” rather
than invest in new IP-based broadband technologies, 2011 NPRM ¶495
(JA____); see id. ¶506 (the current intercarrier compensation system is
“hindering progress to all IP networks”) (JA____).
b. Windstream claims that the FCC failed to “reconcile” its treatment
of VoIP originating access with its “repeated statements that any action on
originating access was being deferred.” Br. 22. But the FCC said no such
thing about VoIP traffic. The Order considered regulation of VoIP traffic in
a specific section – entitled “Intercarrier Compensation For VoIP Traffic” –
dedicated uniquely to VoIP. Order ¶¶933-975 (JA____-____). As the
agency explained when it rejected Windstream’s interpretation in the Second
Reconsideration Order, it would be incorrect to understand “statements in
other sections of the [Order] discussing … originating access … [to] imply
that” the agency took the same approach “to origination charges for VoIP
traffic.” Second Reconsideration Order ¶31 (JA____). Rather, “discussion
of originating access charges in other contexts [in the Order] do[es] not
constrain the interpretation of permissible origination charges for toll VoIP
traffic.” Id. Simply put, the FCC reasonably determined that the Order’s
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treatment of the legacy network does not apply automatically to VoIP, where,
as here, the agency has devoted a separate section of the Order to VoIP.
The FCC reasonably recognized that this relatively new technology
called for a different approach during the transition to the ultimate goal of
bill-and-keep for all traffic. Because the FCC had never resolved whether
VoIP was subject to the access charge regime, carriers could place less
reasonable reliance on the expectation of receiving VoIP-related revenue. Id.
n.84 (JA____). Indeed, Windstream itself suggested that the FCC “treat
VoIP traffic differently from non-VoIP traffic.” Comments of Windstream et
al. filed Aug. 24, 2011 at 35 (JA____). And, as noted above, the ABC Plan
to which Windstream subscribed recognized that arbitrage was a problem
with both originating and terminating VoIP access and asked the agency to
take countermeasures. ABC Plan Att. 1 at 10 (JA____).
Windstream also mistakenly argues that the agency’s refusal to defer
action on VoIP origination charges is arbitrary because, as the agency found
on reconsideration, originating access has been subject to fewer disputes
between carriers than terminating access. Br. 22-24. Reducing disputes was
an important reason to adopt rules governing VoIP traffic. But it was not the
only reason, and the FCC’s rationale for permitting access charges applied
equally to both termination and origination charges and did not turn solely on
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reducing disputes. The agency was also concerned about maintaining
symmetrical VoIP rate structures to avoid arbitrage, eliminating outmoded
regimes based on per-minute charges that no longer had any economic basis,
and preserving incentives for LECs to implement more modern broadband
facilities. See pages 3-4, 13, 23-25, supra.
In any event, in the Second Reconsideration Order, the FCC took full
account of new evidence by allowing LECs like Windstream to recover
originating access charges at intrastate rates on VoIP calls for two years in
order to forestall a sudden drop in revenue. That action required the agency
to “reconsider the balancing of policy interests,” Second Reconsideration
Order ¶34 (JA____) – i.e. to temporarily defer achievement of its policy
goals in order to ease the transition for some carriers. The agency thus
accommodated newly submitted evidence showing fewer disputes over
originating charges while at the same time preserving its overarching
framework for VoIP traffic.
In doing so, the FCC “provide[d] carriers with a measured transition
while balancing the [agency’s] other goals.” Second Reconsideration Order
n.94 (JA____); see Order ¶952 (JA____) (FCC’s approach “balances …
competing policy objectives”). That decision accommodated multiple
competing policies, including the need to avoid a sudden cut in carrier
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revenue while at the same time replacing an outdated regulatory regime as
soon as possible. The agency also determined that the two-year window
would give carriers “the opportunity to make significant progress
transitioning their business plans away from extensive reliance” on access
charges. Second Reconsideration Order ¶36 (JA____). In such
circumstances, “only the Commission may decide how much precedence
particular policies will be granted when several are implicated in a single
decision.” Melcher v. FCC, 134 F.3d 1143, 1154 (D.C. Cir. 1998) (internal
quotation marks omitted); see Sorenson, 659 F.3d at 1045 (FCC has
discretion to balance competing policy objectives).

B. The FCC Reasonably Declined To Provide A Dedicated

Revenue Recovery Mechanism.

Although the FCC allowed LECs like Windstream to recover some of
the revenue they will lose as terminating access charges on traditional
network calls are eliminated, Order ¶¶847-853 (JA____-____), it did not
create a similar direct recovery mechanism beyond the two-year extension on
intrastate rates for originating VoIP calls, Second Reconsideration Order ¶35
& n.97 (JA____). Windstream argues that the differential treatment was
“unaccompanied by any reason for that decision.” Br. 26.
In fact, the FCC discussed the issue and explained that explicit
replacement revenue was unnecessary in “the context of the Commission’s
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overall VoIP intercarrier compensation framework.” Second Reconsideration
Order ¶35 (JA____). Because the agency accorded LECs a prospective right
to payments for handling VoIP traffic, it predicted that “most providers will
receive … additional revenues for previously disputed terminating VoIP calls
and will also realize savings associated with reduced litigation and disputes.”
Id.
As discussed, prior to the Order, LECs had no recognized entitlement
to access charges for terminating VoIP calls (the FCC had not resolved the
matter). Thus, in many cases, LECs were unable to collect terminating
charges at all, and in many others they had to pay substantial legal fees to
collect anything. See Order ¶937 (JA____). Going forward, the new VoIP
terminating access regime largely solves those problems and thus should
bring LECs, as a whole, substantially more revenue and lower expenses in
connection with terminating VoIP calls. With that offsetting compensation in
place for any reduction in originating access charges, the agency explained
that it was “not necessary” to permit origination charges at intrastate rates
beyond the minimum time necessary to ensure a “measured transition” to
interstate rates. Second Reconsideration Order ¶35 (JA____).
That explanation defeats Windstream’s claim that the FCC failed to
explain its decision and fully satisfies the agency’s burden under the APA.
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See Sorenson, 659 F.3d at 1048. Windstream does not challenge the FCC’s
prediction that increases in terminating access revenue would make up for the
(eventual) fall in originating access revenue, and in this regard, the Court is
“particularly deferential when … reviewing an agency’s predictive
judgments, especially those within the agency’s field of discretion and
expertise.” Franklin Sav. Ass’n v. Director, Office of Thrift Supervision, 934
F.2d 1127, 1146 (10th Cir. 1991).
Moreover, Windstream’s argument rests on the unstated assumption
that the FCC was required to treat VoIP calls the same as it treated traditional
network calls. But as shown at pages 25-26 above, because the two types of
calls have not been subject to the same regulatory regime, carriers do not
have the same reliance interests in the revenue generated by those calls. The
agency accommodated carriers’ expectations in VoIP-related revenue by
giving carriers two years of breathing room at intrastate rates as an
“opportunity to make significant progress transitioning their business plans
away from extensive reliance on” access charges. Second Reconsideration
Order ¶35 (JA____). When adopting interim regimes such as the two-year
intrastate rate for VoIP origination charges, the FCC is entitled to “substantial
deference.” Sorenson, 659 F.3d at 1046.
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The predicted offset to reductions in originating access revenue also
refutes Windstream’s argument that the VoIP originating access Rule will
result in a “flash cut” that could threaten LECs’ ability to invest in their
networks. Br. 24-25. As we have explained above, much of the revenue lost
from the eventual reduction in VoIP originating access charges will be made
up elsewhere from terminating access charges and the savings from less
litigation over disputed access charges. Even if Windstream – which is the
only LEC that challenges the new VoIP regime – could show that it will
recover a lower proportion of its prior revenues than most carriers (a showing
it does not even attempt to make), the agency’s predictive judgment – which
6
applies to the local exchange industry as a whole – remains reasonable.
Equally important, under the Second Reconsideration Order, LECs
may impose intrastate originating access charges at high intrastate rates for
two years – which, the agency observed, is longer than the time allowed to

6 In addition, if Windstream could show that it will receive lower total
revenue than it did before the FCC’s decision, the FCC did not promise –
even with regard to the traditional network – that any recovery mechanism
would be “revenue neutral,” i.e., that it would compensate completely for any
lost revenue. Order ¶¶881, 924 (JA____, ____).
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7
impose such charges for intrastate termination rates. Id. n.104 (JA____). To
the degree there is any cut in total compensation, it cannot plausibly be
described as a “flash” cut.
Finally, Windstream complains that the FCC did not overturn the
Order’s imposition of interstate rates on originating access “for the six
months between the original Order and the … effective date” of the Second
Reconsideration Order. Br. 29. When it granted LECs like Windstream the
two-year right to impose intrastate originating access charges, the agency
altered a codified rule. See Second Reconsideration Order ¶52 & App. A
(JA____, ____). The FCC reasonably made that change in its rule
prospective-only in light of the Administrative Procedure Act. That statute
describes a “rule,” such as the change in origination rates, as having “future
effect.” 5 U.S.C. §551(4). See JEM Broadcasting Co., Inc. v. FCC, 22 F.3d
320, 325 (D.C. Cir. 1994) (“rules, by definition, must have prospective
application”). Indeed, where rates are concerned, the courts particularly

7 Moreover, because LECs “typically provide … long distance service
through an affiliate” in offering bundled service to customers, originating
access charges may not amount to “real” revenue, but only to the transfer of
money from one division of the company to another. The FCC thus has
questioned “whether the originating access revenues associated with … the
… LEC’s own long distance affiliate should be viewed as additional revenue
to the incumbent LEC.” Public Notice, 26 FCC Rcd 11112, 11126 n.55
(2011) (JA____); see also FCC Preliminary Br. 16.
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disfavor retroactive agency action. See Consolidated Edison Co. v. FERC,
347 F.3d 964, 969 (D.C. Cir. 2003) (regulator may not adjust current rates to
make up for over- or under-collection in a prior period).
The remainder of Windstream’s brief argues that the pending
rulemaking proceeding in which the FCC will address originating access
charges for the legacy network is insufficient to sustain the agency’s actions.
Br. 29-30. The argument is a red herring – the FCC did not justify its
regulatory choices for VoIP traffic by holding out the possibility of
addressing originating access charges in the pending rulemaking. Rather, the
agency’s policy determinations rest on the explanations set forth fully in the
orders on review.
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CONCLUSION

Windstream’s petition for review should be 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/ Joel Marcus
LAURENCE N. BOURNE
JAMES M. CARR
MAUREEN K. FLOOD
JOEL MARCUS
COUNSEL
FEDERAL COMMUNICATIONS
COMMISSION
WASHINGTON, D.C. 20554
(202) 418-1740
March 27, 2013
35

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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 Windstream Principal Brief was certified to be 6,993 words in length.
Therefore, the FCC may file a response brief up to 8,041 words in length. This
brief contains 6,880 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 26, 2013, and according to the program
is free of viruses.
/s/ Joel Marcus
Joel Marcus
Counsel
March 27, 2013

Appellate Case: 11-9900 Document: 01019026310 Date Filed: 03/27/2013 Page: 41

CERTIFICATE OF SERVICE

I hereby certify that on March 27, 2013, I caused the foregoing Federal
Respondents’ Uncited Response to the Windstream Principal Brief to be filed by
directing that a copy be delivered 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/ Joel Marcus
Joel Marcus
Counsel
March 27, 2013

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