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

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Released: July 8, 2014
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Appellate Case: 11-9900 Document: 01019274057 Date Filed: 07/07/2014 Page: 1

IN THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

____________

NO. 11-9900

____________

IN RE: FCC 11-161

____________

ON PETITIONS FOR REVIEW OF AN ORDER OF THE

FEDERAL COMMUNICATIONS COMMISSION

____________

PETITION FOR REHEARING EN BANC AS TO ISSUES RAISED IN TRANSCOM

PRINCIPAL BRIEF

Transcom Enhanced Services, Inc.

By Its Counsel

Steven H. Thomas

W. Scott McCollough

McGuire, Craddock & Strother, P.C.

McCollough Henry, P.C.

2501 North Harwood, Suite 1800

1250 South Capital of

Dallas, TX 75201

Texas Highway Bldg. 2-235

Tel: 214-954-6800

West Lake Hills, TX 78746

sthomas@mcslaw.com

Tel: 512-888-1112

wsmc@dotlaw.biz

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Appellate Case: 11-9900 Document: 01019274057 Date Filed: 07/07/2014 Page: 2

Table of Contents

Table of Contents ............................................................................ i

Table of Authorities ........................................................................ ii

I. Rule 35(b) Statement.............................................................. 1

II. Travel of the Case................................................................... 3

A. Relevant Facts................................................................ 3

B. FCC Proceeding.............................................................. 3

C. Panel Decision ............................................................... 6

III. Argument............................................................................... 7

A. Overview of En Banc Rehearing Issues ........................... 7

B.

Rehearing Point 1: The panel decision overlooked

several review points expressly raised and extensively

discussed in Transcom’s Principal Brief ............................... 10

C.

Rehearing Point 2: The panel decision

misapprehends and misapplies 47 U.S.C. §405, and is

inconsistent with the D.C. Circuit precedent the panel

adopts for purposes of this Circuit. ...................................... 15

D.

Rehearing Point 3: The panel decision overlooks and

misapprehends the legal issues pertaining to Transcom’s

challenge to the FCC’s interpretation of the “intraMTA

rule”; the result conflicts with applicable decisions by

this Circuit and the U.S. Supreme Court.............................. 20

IV. Conclusion and Prayer ......................................................... 26

Certificate of Compliance.............................................................. 27

Certificate of Service..................................................................... 28

Addenda

Cover Page

Addendum I: Opinion On “Issues Involving Intercarrier

Compensation” (May 23, 2014)

Addendum II: Judgment (May 23, 2014)

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TABLE OF AUTHORITIES

CASES

Bell Atlantic Telephone Companies v. FCC, 206 F.3d 1 (D.C.

Cir. 2000)............................................................................... 22, 23

EchoStar Satellite, LLC v. FCC, 704 F.3d 992 (D.C. Cir. 2013). 15, 17

FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) .............. 24

Nat'l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545

U.S. 967 (2005) ............................................................................ 20

New England Pub. Commc’ns Council, Inc. v. FCC, 334 F.3d 69

(D.C. Cir. 2003) ............................................................................ 15

Office of Communications of United Church of Christ v. FCC,

465 F.2d 519 (D.C. Cir., 1972) ..................................................... 17

Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir., 2012) ............. 24, 25

Sprint Nextel Corp. v. FCC, 524 F.3d 253 (D.C. Cir. 2008) ............. 15

Time Warner Entm’t Co. v. FCC, 144 F.3d 75 (D.C. Cir. 1998) . 15, 16

Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014) ........................ 18, 20

Worldcom, Inc. v. FCC, 288 F.3d 429 (D.C. Cir. 2002) ............. 22, 23

STATUTES

47 U.S.C. §153(16) ................................................................... 3, 22

47 U.S.C. §153(20) ..................................................... 13, 21, 21, 22

47 U.S.C. §153(52) ................................................................... 3, 22

47 U.S.C. §153(54) ................................................................. 13, 22

47 U.S.C. §153(55) ....................................................................... 13

47 U.S.C. §251(b)(5) ..................................................................... 22

47 U.S.C. §252(d)(2) ..................................................................... 23

47 U.S.C. §405 ..............................................1, 8, 15, 16, 17, 18, 19

RULES

Fed. R. App. P. 35 .......................................................................... 1

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Fed. R. App. P. 35(b)(1)(B)............................................................... 1

Fed. R. App. P. Rule 40(a)(2)........................................................... 1

10th Cir. R. 35.1(A) .................................................................... 1, 2

10th Cir. R. 35.2 ............................................................................ 1

10th Cir. R. 40.1(A) ........................................................................ 1

REGULATIONS

47 C.F.R. §20.11 .......................................................................... 22

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I. RULE 35(b) STATEMENT

Transcom Enhanced Services, Inc. (Transcom) seeks en banc

and panel rehearing of the panel decision on “Issues Involving

Intercarrier Compensation” raised in the Transcom Principal Brief.1

Rehearing under Fed. R. App. P. Rule 40(a)(2)/10th Cir. R. 40.1(A)

and en banc rehearing under Fed. R. App. P. 35/10th Cir. R. 35.2

are both appropriate and necessary.

Rehearing in general is required because the panel decision

overlooked–and therefore failed to consider or dispose–several

issues directly and expressly raised in Transcom’s Principal Brief.

The panel decision erroneously held certain issues were not

preserved for review under 47 U.S.C. §405. The panel decision

misapprehended several issues of law on the points the panel

decision did address.

En banc review is appropriate. The panel decision conflicts

with decisions of the Supreme Court and this Court. Fed. R. App. P.

35(b)(1)(B)/10th Cir. R. 35.1(A). Further, the panel decision

1 The panel issued two opinions on review of an FCC order. One

opinion addressed “Universal Service” and the other concerned

“Intercarrier Compensation.” Transcom’s review points all fell within

the “Intercarrier Compensation” portion of these consolidated

petitions for review.

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conflicts with decisions by other courts of appeals, including

decisions by the D. C. Circuit the panel decision on page 88 adopts

and approves for purposes of this Circuit.

The FCC Order mandates a fundamental restructuring of the

communications marketplace, materially changes the regulations

applicable to participants in that market, and will determine the

prices consumers pay for communications services for years to

come. The FCC changed several prior interpretations of the Act,

reclassified important traffic types, and imposed new common

carrier obligations on previously unregulated non-carriers. These

changes so “disrupt the market” that FCC felt the need to

transition-phase some (but not all) to partially ameliorate their

impact. Panel decision, p. 8. This was a major action involving a

primary economic sector for our country. Thus the case is of

exceptional public importance, and en banc review is indicated

under Fed. R. App. P. R.35(b)(1)(B)/10th Cir. R. 35.1(A).

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II. TRAVEL OF THE CASE

A.

Relevant Facts

Transcom is an “Internet” based communications-intensive

private business that provides enhanced/information services to its

wholesale customers. Transcom does not deal with retail customers.

[JA 3156-3158, 3855-3908, 3926-3927, 3963-3964.] Transcom

uses CPE that connects to the telephone exchange service that

Transcom buys from CMRS and LEC exchange carriers to originate

and terminate calls. [JA 3855, 3858-3859, 3883, 3926-3927.]

Transcom has never held itself out as a carrier and does not

offer or provide telecommunications or telecommunications service.

[Id.] Rather, Transcom is an ESP and an end-user of

telecommunications services on the PSTN. Transcom’s equipment is

“end-user” “customer premises equipment” (“CPE”) as defined by 47

U.S.C. §153(16), not “carrier” “telecommunications equipment” as

defined by 47 U.S.C. §153(52). [JA 3154, 3157, 3158].

B.

FCC Proceeding

Transcom’s involvement in the proceeding below began when

certain ILECs began filing comments and ex parte submissions

complaining about ICC-related disputes with Halo Wireless, Inc.

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(“Halo”), one of Transcom’s exchange carrier vendors. [JA at 1861-

1863, 1880-1881, 1883, 2948-2953, 3915-3917.] Those

submissions also attacked Transcom’s regulatory status and the

classification of Transcom’s traffic, and alleged that Halo and

Transcom were engaging in improper call signaling practices. [Id.]

The ILECs contended that Transcom should be subject to common

carrier regulation. [Id.]

Halo and Transcom entered the case and responded to the

ILECs’ contentions and assertions, through reply comments and ex

parte meetings and filings. [JA at 2092-2104, 3149-3162, 3854-

3912, 3926-3928, 3962-3968.]

The Order explicitly referred to Halo and its submissions,2 but

referred to Transcom only as a “high volume” “ESP” customer of

Halo.3 The Order repeated the ILECs’ allegations regarding Halo’s

handling of Transcom’s traffic.4 FCC did not dispute that Transcom

is an ESP and end-user rather than a carrier, and failed to address

Transcom’s contentions that since it was an end-user and employed

2 Order ¶¶848, 979, 1003-1006 (and associated notes).

3 ¶¶1005-1006.

4 ¶¶709, 712-714, 720 (and associated notes), n.1203.

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CPE rather than telecommunications equipment the Act prohibits

exchange access levies when Transcom purchases telephone

exchange service from either an LEC or a CMRS.

The Order’s “Halo” ruling did not address or distinguish prior

Commission decisions approving CMRS-based telephone exchange

service to ESPs, including those that provide “VoIP,” yet it sub

silentio overturned these decisions and functionally banned them.

FCC also addressed the situation where ESPs like Transcom

purchase service from wireline LECs. FCC held ESPs provide “toll

services” and buy “access.5 FCC also held that ESPs are

“intermediate” points instead of end-points for certain purposes.6

The Order held FCC could use “ancillary authority” to subject ESPs

like Transcom to common-carrier intercarrier compensation, call

identifying, and no-blocking obligations.7

5 ¶¶945, 956-958. FCC improperly used different and non-statutory

definitions for “access” and “toll” that encompass traffic types the

statutory definitions exclude. Transcom Principal Brief, pp. 10, 15-

19, 23-27, 30-35.

6 ¶¶717, 720.

7 ¶¶709, 712-14, 720, 848, 979, 1003-1006 and associated notes;

see also n.1203.

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C.

Panel Decision

Transcom’s “challenges” were addressed on panel decision pp.

93-99. The panel’s summary of issues says that

Transcom challenges three aspects of the FCC’s

Order: (1) the FCC’s interpretation of its intraMTA rule

governing reciprocal compensation between wireless

providers and LECs; (2) the FCC’s ancillary jurisdiction to

impose call-identifying rules on non-carriers who do not

originate or terminate traffic; and (3) the validity of the

FCC’s no-blocking rules on VoIP providers. Id. at 39-40,

45-48. We reject each argument. Transcom is not the

called party, and Transcom has not preserved its second

and third challenges.

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III. ARGUMENT

A.

Overview of En Banc Rehearing Issues.

Transcom seeks en banc rehearing to correct omissions and

errors in the panel decision. Transcom has claimed at every level

that unless and until the FCC finds that Transcom is a common

carrier then Transcom is and must be an end-user and its

equipment is CPE, not telecommunications equipment. Transcom

has claimed at every level that these statutory classifications are

determinative with regard to the FCC’s permitted scope of

regulation under the Act, and how traffic can be treated for

compensation purposes (e.g. “access” or “non-access”), yet neither

the FCC nor the panel ever addressed these points.

Transcom deserves a direct ruling on its statutory

interpretation point that traffic associated with a non-carrier end-

user’s purchase of telephone exchange service cannot be assessed

exchange access, given that neither the end-user nor the exchange

carrier is providing telephone toll. Transcom deserves a direct ruling

on its legal contention that end-user CPE is a termination point as

a matter of law and cannot be an intermediate point for

compensation purposes.

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The panel clearly overlooked several points that Transcom

directly and expressly raised and addressed in its Principal Brief.

The overlooked issues were separate from, and in addition to, those

that the panel did resolve through merits or exhaustion analysis.

On these overlooked issues there is no finding of waiver or failure to

preserve, yet there was also no merits determination. The panel was

required to, but did not, address or resolve them.

The panel held that Transcom “waived” or failed to preserve”

the right to review two points that concerned the FCC’s

promulgation of “Call Identifying” and “No-Blocking” rules insofar

as they extended to entities that are not Title II common carriers.

Id., pp. 97-99. Transcom seeks review of the panel’s holding that

review is precluded on these points. The FCC actually addressed

the issue in the challenged Order so the exhaustion requirement in

47 U.S.C. §405 was satisfied. The D.C. Circuit precedent adopted by

the panel for use in this Circuit so emphasizes.

The panel decision did make a partial merits ruling on

Transcom’s review points related to the “IntraMTA rule.” Panel

decision, pp. 93-97. Transcom seeks review of the merits

determinations because they conflict with decisions by this Court

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and the Supreme Court. Transcom also requests that the Court

address the remaining Transcom “intraMTA” points that the panel

decision did not resolve.

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B.

Rehearing Point 1: The panel decision overlooked several

review points expressly raised and extensively discussed

in Transcom’s Principal Brief.

Transcom’s Principal Brief had two major headings under

which its individual legal points were presented. Section I had three

discrete points laid out in Parts I.A.-I.C, which appeared in

Principal Brief pp. 12-23. Section II had six primary points (Parts

II.A.-II.F) argued in Principal Brief pp. 27-49. Parts II.B. and II.F.

each included two sub-points that further segregated and

substantiated the error Transcom was bringing to the Court’s

attention.

The panel decision found waiver or failure to preserve for Part

II.F.1 and II.F.2, and only partially resolved the substantive merits

of Transcom’s challenge to the FCC’s “intraMTA rule” in Parts II.D.

and E.8 The panel decision implicitly rejected some but not all of the

arguments in Part I.B. for wireless service, by holding that calls do

not terminate with Transcom for purposes of the “intraMTA rule,”

but the panel did not address this issue in the context of “wireline”

8 Transcom will explain how the panel decision did not fully resolve

the “intraMTA rule” challenge below.

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service–even though on pages 85-86 the panel decision holds that

the FCC can (and did) treat “wireline VoIP” differently from wireless.

The panel did not rule on Transcom’s contention that

imposing exchange access charges on Transcom’s traffic violates the

Communications Act even if Transcom is an “intermediate” point

rather than a termination point for “wireless” or “wireline.”

Transcom Principal Brief pp. 20-21.9 The panel did not address or

dispose any of Transcom’s review points contesting the FCC’s

determinations for “wireline” traffic, when Transcom purchases

telephone exchange service from an LEC rather than a CMRS

provider. For example, Transcom’s Principal Brief on pages 30-36

(under Parts II.B. and II.C.) clearly spoke to the situation where

Transcom purchases telephone exchange service from a LEC rather

9 “This is so even if the call started out somewhere else before it got

to the end-user CPE, which then sent the call back out.” “This was

always the case even though from an end-to-end perspective the

ESP is ‘in the middle’ of a communication, as the gateway between

participants.” The characterization of Transcom’s position on panel

decision page 93 is not correct.

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than a CMRS, by noting that Transcom’s traffic was “between two

LECs.”10

The panel did not discuss Transcom’s challenge to the FCC’s

holding that the FCC violated the statutory bright-line distinction

between carriers and end-users (Parts I.A, I.C., II.A), and the related

argument that the statutes says that end-user CPE is an end-point

where calls originate and terminate for compensation purposes

(Part I.B). The panel overlooked Transcom’s argument that the FCC

illegally imposed common carrier status on Transcom for purposes

of intercarrier compensation (Part II.A., B. and C.),11 and regulated

end-users in ways not allowed by the Act. Id.

The panel did not dispose Transcom’s statutory argument that

enhanced/information service providers do not provide telephone

10 See especially Transcom Principal Brief p. 33 (“This cryptic

comment cannot justify an attempt to ‘carve out’ traffic that is

between two LECs.”)

11 The panel decision holds on page 90 that “rate regulation is not

the same as a no-blocking obligation.” FCC did not assert waiver

and the panel did not find that Transcom failed to preserve the

common carrier challenge as it relates to compensation (rate

regulation). Thus the waiver holdings in panel decision pp. 97-99 do

not apply to these issues.

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toll service and therefore do not receive exchange access,12 so

exchange access cannot apply as a matter of law. (Part II.B.2. and

II.C.) In particular, the panel did not address Transcom’s argument

that the Act does not permit a requirement that Transcom’s LEC

vendors pay exchange access charges to other carriers for

Transcom’s traffic, since neither Transcom nor its exchange service

vendor are providing “telephone toll” as defined in §153(55).

Transcom Principal Br. pp. 30-36.

Telephone toll is by definition a telecommunications service.

Since Transcom is not a carrier it cannot be a provider of telephone

toll as a matter of law. “Telephone exchange service” is separately

defined in §153(54), and is not the same as “telephone toll.” When

an exchange carrier provides telephone exchange service to an end-

user it is not providing telephone toll. Exchange access charges are

not allowed under the unambiguous terms of the Act.

The panel had an extraordinary number of issues on its plate,

so one can understand why some were “overlooked.” Transcom,

12 Section 153(20) defines “exchange access” and makes clear that

exchange access applies only to “telephone toll services.”

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however, has a right to a ruling on its properly-preserved points at

this level, so rehearing is necessary.

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C.

Rehearing Point 2: The panel decision misapprehends and

misapplies 47 U.S.C. §405, and is inconsistent with the

D.C. Circuit precedent the panel adopts for purposes of

this Circuit.

The panel decision holds that Transcom “waived” and/or

“failed to preserve” any challenge to the FCC’s extension of its new

“Call-Identifying” and “No-Blocking” rules to non-carriers. This

ruling was based on an interpretation of the “exhaustion”

requirement in 47 U.S.C. §405(a). Panel decision, pp. 98-99.

Panel decision page 99 notes its exhaustion decision as to

Transcom is the same as that for VON on No-Blocking. The panel

decision on the VON No-Blocking issue expressly relies on a test

used in the D.C. Circuit, and adopts it for this Circuit. Panel

Decision page 88, citing EchoStar Satellite, LLC v. FCC, 704 F.3d

992 (D.C. Cir. 2013); Sprint Nextel Corp. v. FCC, 524 F.3d 253 (D.C.

Cir. 2008); Time Warner Entm’t Co. v. FCC, 144 F.3d 75 (D.C. Cir.

1998) and New England Pub. Commc’ns Council, Inc. v. FCC, 334

F.3d 69 (D.C. Cir. 2003). But the panel decision misapplies those

cases, because they recognize that §405 is satisfied when the FCC

actually addresses the issue even if no party raises it below.

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The panel decision exclusively considers exhaustion in terms

of whether a party sufficiently “raised” the issue. Panel decision, pp.

87-88. Transcom continues to assert that the record citations it and

VON supplied showed that the issue was raised by a party, but that

question is ultimately irrelevant.

Section 405 reflects Congress’ desire that the FCC have an

“opportunity to pass” on an issue before judicial review can occur.

See §405(a)(2). But an individual party is not always required to

specifically raise the issue. Even if no party raised the issue, §405 is

satisfied if the Commission nonetheless expressly addressed and

ruled on the question. In this case the FCC obviously did have an

“opportunity to pass” because it seized the opportunity and ruled

on the matter.

Although we have said that [47 U.S.C. §405(a)] codifies

the normal exhaustion doctrine, the text does not refer to

the necessity of a party raising an argument before the

Commission–as does the typical exhaustion statute–but

only that the Commission have an “opportunity to pass”

on a question of fact or law raised in the petition.

Time Warner Entm’t, 144 F.3d at 79 (internal citations omitted).

On its face, §405, commands only that the Commission

be afforded the opportunity to pass on issues. There is no

requirement that this opportunity be afforded in any

particular manner, or by any particular party. Thus to

allow the Church to seek review of issues raised by the

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majority and challenged by the dissenters complies with

both §405’s requirements and its objectives.

Office of Communications of United Church of Christ v. FCC, 465

F.2d 519, 523-524 (D.C. Cir., 1972).

The Order’s discussion of the FCC’s authority satisfies us

that §405’s requirements have been met. See Order ¶¶45-

47, 55-57, 18 FCC Rcd. at 20905 ¶10. … Even if no other

party brought the matter to the agency’s attention, the

FCC’s independent contemplation of the issue satisfies

§405’s mandate.

Echostar, 704 F.3d at 996 (emphasis added).

The Order directly held FCC could impose its “Call-Identifying”

and “No-Blocking” rules on non-carriers under Title I. Order ¶718

and note 1232; ¶974 and note 2043. The Order discussed its

reasoning and specifically ruled that the Commission could impose

these very rules on non-carriers using Title I “ancillary authority.”13

Transcom’s Principal Brief Parts II.F.I. and II challenged ancillary

jurisdiction (authority) under Title I. The brief rebutted the portions

of the Order where the FCC’s discussion on this precise issue was

contained. Transcom contended the FCC was wrong when it held it

13 The FCC held that extension of these rules to non-carriers under

Title I was necessary in order to have “effective performance” of its

Title II oversight over carriers. Transcom Principal Brief Parts II.F.I.

and II. challenged that conclusion.

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could use ancillary authority as a means to impose common carrier

duties on non-carriers. Transcom Principal Brief, pp. 46-48.14

The FCC’s Response to Transcom’s brief on pp. 21-24, 26 cited

to the Order’s discussion, and a similar argument appears in the

FCC’s VON brief pp. 11, 17, 19. The issue joined here was exactly

the same as what FCC ruled on below. The panel was surely aware

that the FCC actually passed on the issue because petitioners and

respondent all pointed to the relevant parts of the Order where the

FCC addressed it.

The FCC’s “independent contemplation of the issues” raised by

Transcom on review “satisfies §405’s mandate.” Echostar, supra.

The Commission necessarily saw the question as part of the case,

since it analyzed and ruled on that question. Time Warner, supra.

Panel decision page 91 relied on Time Warner and EchoStar yet the

panel’s exhaustion holding is inconsistent with those cases and the

D.C. Circuit test the panel adopts for use in this Circuit.

14 Briefing and argument concluded before the D.C. Circuit issued

Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014). Transcom submitted

a Rule 28(j) letter advising of Verizon’s impact on the question

whether the FCC could use ancillary authority to impose common

carrier compensation, call-signaling and no-blocking duties on non-

carriers. Doc. 01019189162, Filed Jan. 21, 2014.

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The panel misapprehended the exhaustion requirement in

§405, as interpreted by the very cases the panel adopted for use in

this Circuit. The issue is properly before the Court. Rehearing is

necessary, and then there must be a ruling on the merits of

Transcom’s points II.F.1. and 2 challenging the FCC’s jurisdiction

and authority to apply its common carrier “Call-Identifying” and

“No-Blocking” rules to non-common carriers.

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D.

Rehearing Point 3: The panel decision overlooks and

misapprehends the legal issues pertaining to Transcom’s

challenge to the FCC’s interpretation of the “intraMTA

rule”; the result conflicts with applicable decisions by this

Circuit and the U.S. Supreme Court.

Panel decision page 95 notes that the FCC’s interpretation of

the intraMTA rule “ignores” Transcom’s presence “in the middle of

the call” and affirms that approach. This is error. Transcom’s

presence and attributes cannot be “ignored” when Transcom’s

rights, duties, obligations and status are being determined.

Common sense, and the Act, dictate that a party’s rights, duties

and obligations necessarily turn on that party’s legal classification,

based on the legal definition of the functions being performed and

the service being offered by that entity. If an entity is providing

“information service” rather than “telecommunications service” then

the FCC cannot impose common carrier obligations on that entity.

Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S.

967, 986-999 (2005); Verizon v. FCC, 740 F.3d 623. The panel

decision to “ignore” Transcom when assessing how Transcom is to

be treated is inconsistent with the Supreme Court’s Brand X

holding that a party’s regulatory classification as a carrier or

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information service provider is determinative of the party’s rights,

duties and obligations.

The panel also affirms the Commission’s revival of the “end-to-

end” theory for compensation purposes that was rejected by the

D.C. Circuit in Bell Atlantic Telephone Companies v. FCC, 206 F.3d

1 (D.C. Cir. 2000), and Worldcom, Inc. v. FCC, 288 F.3d 429 (D.C.

Cir. 2002). The panel distinguishes these two cases on two principal

grounds, on pages 95-97. First, they “involv[ed] “dial-up internet.”

Second, the panel claims that Transcom is “not the called party.”

The panel erred in the analysis it did conduct and failed to fully

address all of Transcom’s arguments. Even if, arguendo, the

analysis that was done is correct so far as it goes–with the result

that Transcom is not the “called party”–the panel erred by stopping

there and then going on to reach the conclusion on page 95 that

“this conclusion requires Halo (as a common carrier) to pay access

charges.”

First, the panel did not explain how the Act permits the

imposition of exchange access charges on Transcom’s traffic. The

Worldcom court noted that 47 U.S.C. §153(20) says that “exchange

access” can be levied only on “telephone toll” traffic. This

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observation is not limited to “dialup.” Neither Halo nor Transcom

were providing “telephone toll.” Halo was not serving any IXC,

including the one depicted on the diagram appearing on decision

page 94.15 Halo was providing “telephone exchange service” to

Transcom.16 Although the D.C. Circuit in Bell Atlantic and Worldcom

instructed FCC to explain, to this day neither the FCC nor the panel

has addressed the question of whether the Act can be read to allow

exchange access charge levies against an entity that is not

providing telephone toll.

Transcom is an end-user and is not a carrier. End-users use

“CPE” while carriers employ “telecommunications equipment.”

Compare 47 U.S.C. §153(16) with §153(52). The statutory definition

for CPE unambiguously states that CPE is an end-point where calls

“terminate” whereas the definition of “telecommunications

equipment” does not. Sections 153(16), 153(20), 153(54), 251(b)(5)

15 That picture is incorrect in any event, because it does not include

a representation of Transcom’s customer, which is not the IXC that

is pictured and stands between the IXC and Transcom. See

Transcom Reply Brief page 18.

16 The FCC admitted that this was so on page 19 of its Transcom

Brief. The panel failed to comprehend the mandatory legal

consequence of FCC’s admission even though Transcom pointed it

out on Transcom Response Brief page 10.

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and 252(d)(2) refer to a “termination” but do not include a “called

party” condition.

Neither the FCC nor the panel ever addressed Transcom’s

statutory interpretation points, which Transcom has presented and

preserved from the beginning.

The panel also misinterpreted the Order. FCC held that the

calls in issue are not intraMTA for purposes of 47 C.F.R. §20.11.

FCC held that Halo was not the “originating carrier” but it did not

hold that Halo is subject to access charges. See Order ¶¶1006.17

Instead, FCC characterized Halo’s service to Transcom as

“transiting.”18 Order ¶1311 later held that “transiting” is “non-

access.” So while it is true the FCC held that the traffic in issue is

not “intraMTA” it also held it is non-access, which means that

17 The FCC also did not hold that Transcom is subject to access

charges in the wireless “MTA rule” discussion. A different part of the

Order (¶¶956-958)–which was focused on wireline traffic–held that

“VoIP” is subject to exchange access. As explained above, Transcom

challenged that part of the Order but the panel overlooked those

points of error.

18 “Where a provider is merely providing a transiting service, it is

well established that a transiting carrier is not considered the

originating carrier for purposes of the reciprocal compensation

rules.”

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Halo is not subject to access charges under the FCC’s own

interpretation of its rules.

The panel failed to fully engage on all the issues, and by

skipping over several it incorrectly leaped to the wrong conclusion

and purported to affirm an FCC finding that was never in fact

made.

The panel did not in any manner deal with Transcom’s

showing that the FCC’s intraMTA holding was an unexplained

course-reversal from its prior actions encouraging wireless

companies to support VoIP providers and treating VoIP providers as

both wireless end-users and a termination point. Transcom Principal

Brief pp. 36-42. The FCC never justified–in the Order or in briefing–

the abrupt course-reversal in treatment of CMRS-provided

telephone exchange services to VoIP providers.

The Administrative Procedure Act’s requirement of reasoned

decision-making demands that an agency acknowledge and explain

the reasons for a changed interpretation. See FCC v. Fox Television

Stations, Inc., 556 U.S. 502, 514-517 (2009) [and cases cited

therein]; Qwest Corp. v. FCC, 689 F.3d 1214, 1224-1225 (10th Cir.,

2012). Transcom had “reliance interests” at stake (Transcom

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Principal Brief p. 40). The FCC (and now the panel) “brush[ed]

aside” this issue. The panel failed to follow binding precedent of the

Supreme Court and this Court when it did not “require the

Commission to offer a ‘reasoned explanation . . . for disregarding

facts and circumstances that underlay or were engendered by the

prior policy.’” Qwest Corp., 689 F.3d at 1225. Binding precedent

dictated that the panel remand for an explanation since the FCC

failed to even acknowledge that it was abandoning prior policy.

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IV. CONCLUSION AND PRAYER

The panel decision overlooked several separate and distinct

Transcom points of error. Section 405 does not prevent review. The

panel decision merits rulings are contrary to binding precedent

from this Circuit and the Supreme Court.

The Court should grant rehearing and then hold unlawful and

vacate the Order.

Respectfully submitted,

/s/ W. Scott McCollough

W. SCOTT MCCOLLOUGH

Texas Bar No. 13434100

MCCOLLOUGH|HENRY PC

1250 S. Capital of Texas Hwy.,

Bldg. 2-235

West Lake Hills, TX 78746

Phone: 512.888.1112

Fax: 512.692.2522

wsmc@dotlaw.biz

Attorneys for Transcom Enhanced

Services, Inc.

July 7, 2014

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CERTIFICATE OF COMPLIANCE WITH CONSISTENCY, TYPE-

VOLUME, TYPEFACE, TYPE STYLE, PRIVACY REDACTION AND

VIRUS SCAN REQUIREMENTS

1.

The hard copies to be submitted to the Court within two

business days are exact copies of the version submitted

electronically.

2.

This filing complies with the volume limitations in Fed. R.

App. P. 40(b) and the Order Governing Rehearing Procedures

because it contains 4,163 words (including footnotes) as calculated

by the Microsoft Word “Word Count” utility.

3.

This filing complies with the typeface requirements of

Fed. R. App. P. 32 and 10th Cir. R. 32 and the type style

requirements of Fed. R. App. P. 32 because this filing has been

prepared in a proportionally spaced typeface using Microsoft Word

2010 in 14-point Bookman Old Style font.

4.

All required privacy redactions have been made.

5.

The electronic filing was scanned for viruses with

Kaspersky Endpoint Security, updated on July 7, 2014, and

according to the program is free of viruses.

/s/ W. Scott McCollough

July 7, 2014

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CERTIFICATE OF SERVICE

I hereby certify that on July 7, 2014 I caused the foregoing

document to be filed through (ECF), leading to electronic service to

all parties in this case that are registered CM/ECF users.

/s/ W. Scott McCollough

July 7, 2014

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ADDENDA COVER PAGE (10th CIR. R. 35.2(B))

Addendum I: Opinion On “Issues Involving Intercarrier

Compensation” (May 23, 2014)

Addendum II: Judgment (May 23, 2014)

image34-00.jpg612x792

FILED

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United States Court of Appeals

Tenth Circuit

May 23, 2014

PUBLISH

Elisabeth A. Shumaker

Clerk of Court

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

DIRECT COMMUNICATIONS CEDAR

VALLEY, LLC, a Utah limited liability

company; TOTAH COMMUNICATIONS,

11-9900

INC., an Oklahoma corporation; H & B

COMMUNICATIONS, INC., a Kansas

Corporation; THE MOUNDRIDGE

Consolidated Case Nos.:

TELEPHONE COMPANY OF

11-9581, 11-9585, 11-9586, 11-9587,

MOUNDRIDGE, a Kansas business

11-9588, 11-9589, 11-9590, 11-9591, 11-

organization; PIONEER TELEPHONE

9592, 11-9594, 11-9595, 11-9596, 11-

ASSOCIATION, INC., a Kansas

9597, 12-9500, 12-9510, 12-9511, 12-

corporation; TWIN VALLEY

9513, 12-9514, 12-9517, 12-9520, 12-

TELEPHONE, INC., a Kansas corporation;

9521, 12-9522, 12-9523, 12-9524, 12-

PINE TELEPHONE COMPANY, INC., an

9528, 12-9530, 12-9531, 12-9532, 12-

Oklahoma corporation; PENNSYLVANIA

9533, 12-9534, 12-9575

PUBLIC UTILITY COMMISSION;

CHOCTAW TELEPHONE COMPANY;

CORE COMMUNICATIONS, INC.;

NATIONAL ASSOCIATION OF STATE

UTILITY CONSUMER ADVOCATES;

NATIONAL TELECOMMUNICATIONS

COOPERATIVE ASSOCIATION;

CELLULAR SOUTH, INC.; AT&T, INC.;

HALO WIRELESS, INC.; THE VOICE

ON THE NET COALITION, INC.;

PUBLIC UTILITIES COMMISSION OF

OHIO; TW TELECOM INC.; VERMONT

PUBLIC SERVICE BOARD; THE STATE

CORPORATION COMMISSION OF THE

STATE OF KANSAS; CENTURYLINK

INC.; GILA RIVER INDIAN

COMMUNITY; GILA RIVER

TELECOMMUNICATIONS, INC.;

ALLBAND COMMUNICATIONS

COOPERATIVE; NORTH COUNTY

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COMMUNICATIONS CORPORATION;

UNITED STATES CELLULAR

CORPORATION; PR WIRELESS, INC.;

DOCOMO PACIFIC, INC.; NEX-TECH

WIRELESS, LLC; CELLULAR

NETWORK PARTNERSHIP, A LIMITED

PARTNERSHIP; U.S. TELEPACIFIC

CORP.; CONSOLIDATED

COMMUNICATIONS HOLDINGS, INC.;

NATIONAL ASSOCIATION OF

REGULATORY UTILITY

COMMISSIONERS; RURAL

TELEPHONE SERVICE COMPANY,

INC.; ADAK EAGLE ENTERPRISES

LLC; ADAMS TELEPHONE

COOPERATIVE; ALENCO

COMMUNICATIONS, INC.;

ARLINGTON TELEPHONE COMPANY;

BAY SPRINGS TELEPHONE

COMPANY, INC.; BIG BEND

TELEPHONE COMPANY, INC.; THE

BLAIR TELEPHONE COMPANY;

BLOUNTSVILLE TELEPHONE LLC;

BLUE VALLEY

TELECOMMUNICATIONS, INC.;

BLUFFTON TELEPHONE COMPANY,

INC.; BPM, INC., d/b/a Noxapater

Telephone Company; BRANTLEY

TELEPHONE COMPANY, INC.;

BRAZORIA TELEPHONE COMPANY;

BRINDLEE MOUNTAIN TELEPHONE

LLC; BRUCE TELEPHONE COMPANY;

BUGS ISLAND TELEPHONE

COOPERATIVE; CAMERON

TELEPHONE COMPANY, LLC;

CHARITON VALLEY TELEPHONE

CORPORATION; CHEQUAMEGON

COMMUNICATIONS COOPERATIVE,

INC.; CHICKAMAUGA TELEPHONE

CORPORATION; CHICKASAW

TELEPHONE COMPANY; CHIPPEWA

COUNTY TELEPHONE COMPANY;

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CLEAR LAKE INDEPENDENT

TELEPHONE COMPANY; COMSOUTH

TELECOMMUNICATIONS, INC.;

COPPER VALLEY TELEPHONE

COOPERATIVE; CORDOVA

TELEPHONE COOPERATIVE;

CROCKETT TELEPHONE COMPANY,

INC.; DARIEN TELEPHONE

COMPANY; DEERFIELD FARMERS'

TELEPHONE COMPANY; DELTA

TELEPHONE COMPANY, INC.; EAST

ASCENSION TELEPHONE COMPANY,

LLC; EASTERN NEBRASKA

TELEPHONE COMPANY; EASTEX

TELEPHONE COOP., INC.; EGYPTIAN

TELEPHONE COOPERATIVE

ASSOCIATION; ELIZABETH

TELEPHONE COMPANY, LLC;

ELLIJAY TELEPHONE COMPANY;

FARMERS TELEPHONE

COOPERATIVE, INC.; FLATROCK

TELEPHONE COOP., INC.; FRANKLIN

TELEPHONE COMPANY, INC.;

FULTON TELEPHONE COMPANY,

INC.; GLENWOOD TELEPHONE

COMPANY; GRANBY TELEPHONE

LLC; HART TELEPHONE COMPANY;

HIAWATHA TELEPHONE COMPANY;

HOLWAY TELEPHONE COMPANY;

HOME TELEPHONE COMPANY (ST.

JACOB, ILL.); HOME TELEPHONE

COMPANY (MONCKS CORNER, SC);

HOPPER TELECOMMUNICATIONS

COMPANY, INC.; HORRY TELEPHONE

COOPERATIVE, INC.; INTERIOR

TELEPHONE COMPANY; KAPLAN

TELEPHONE COMPANY, INC.; KLM

TELEPHONE COMPANY; CITY OF

KETCHIKAN, ALASKA, d/b/a KPU

Telecommunications; LACKAWAXEN

TELECOMMUNICATIONS SERVICES,

INC.; LAFOURCHE TELEPHONE

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COMPANY, LLC; LA HARPE

TELEPHONE COMPANY, INC.;

LAKESIDE TELEPHONE COMPANY;

LINCOLNVILLE TELEPHONE

COMPANY; LORETTO TELEPHONE

COMPANY, INC.; MADISON

TELEPHONE COMPANY;

MATANUSKA TELEPHONE

ASSOCIATION, INC.; MCDONOUGH

TELEPHONE COOP., INC.; MGW

TELEPHONE COMPANY, INC.; MID

CENTURY TELEPHONE COOP., INC.;

MIDWAY TELEPHONE COMPANY;

MID-MAINE TELECOM LLC; MOUND

BAYOU TELEPHONE &

COMMUNICATIONS, INC.;

MOUNDVILLE TELEPHONE

COMPANY, INC.; MUKLUK

TELEPHONE COMPANY, INC.;

NATIONAL TELEPHONE OF

ALABAMA, INC.; ONTONAGON

COUNTY TELEPHONE COMPANY;

OTELCO MID-MISSOURI LLC;

OTELCO TELEPHONE LLC;

PANHANDLE TELEPHONE

COOPERATIVE, INC.; PEMBROKE

TELEPHONE COMPANY, INC.;

PEOPLE'S TELEPHONE COMPANY;

PEOPLES TELEPHONE COMPANY;

PIEDMONT RURAL TELEPHONE

COOPERATIVE, INC.; PINE BELT

TELEPHONE COMPANY; PINE TREE

TELEPHONE LLC; PIONEER

TELEPHONE COOPERATIVE, INC.;

POKA LAMBRO TELEPHONE

COOPERATIVE, INC.; PUBLIC

SERVICE TELEPHONE COMPANY;

RINGGOLD TELEPHONE COMPANY;

ROANOKE TELEPHONE COMPANY,

INC.; ROCK'S COUNTY TELEPHONE;

SACO RIVER TELEPHONE LLC;

SANDHILL TELEPHONE

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COOPERATIVE, INC.; SHOREHAM

TELEPHONE LLC; THE SISKIYOU

TELEPHONE COMPANY; SLEDGE

TELEPHONE COMPANY; SOUTH

CANAAN TELEPHONE COMPANY;

SOUTH CENTRAL TELEPHONE

ASSOCIATION; STAR TELEPHONE

COMPANY, INC.; STAYTON

COOPERATIVE TELEPHONE

COMPANY; THE NORTH-EASTERN

PENNSYLVANIA TELEPHONE

COMPANY; TIDEWATER TELECOM,

INC.; TOHONO O'ODHAM UTILITY

AUTHORITY; UNITEL, INC.; WAR

TELEPHONE LLC; WEST CAROLINA

RURAL TELEPHONE COOPERATIVE,

INC.; WEST TENNESSEE TELEPHONE

COMPANY, INC.; WEST WISCONSIN

TELCOM COOPERATIVE, INC.;

WIGGINS TELEPHONE ASSOCIATION;

WINNEBAGO COOPERATIVE

TELECOM ASSOCIATION; YUKON

TELEPHONE CO., INC.; ARIZONA

CORPORATION COMMISSION;

WINDSTREAM CORPORATION;

WINDSTREAM COMMUNICATIONS,

INC.,

Petitioners,

v.

FEDERAL COMMUNICATIONS

COMMISSION; UNITED STATES OF

AMERICA,

Respondents,

and

SPRINT NEXTEL CORPORATION;

LEVEL 3 COMMUNICATIONS, LLC;

CENTURYLINK, INC.; CONNECTICUT

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PUBLIC UTILITIES REGULATORY

AUTHORITY; INDEPENDENT

TELEPHONE &

TELECOMMUNICATIONS ALLIANCE;

ORGANIZATION FOR THE

PROTECTION AND ADVANCEMENT

OF SMALL TELEPHONE COMPANIES,

a/k/a ORGANIZATION FOR THE

PROMOTION AND ADVANCEMENT

OF SMALL TELECOMMUNICATIONS

COMPANIES (OPASTCO); WESTERN

TELECOMMUNICATIONS ALLIANCE;

NATIOINAL EXCHANGE CARRIER

ASSOCIATION, INC.; ARLINGTON

TELEPHONE COMPANY; THE BLAIR

TELEPHONE COMPANY; CAMBRIDGE

TELEPHONE COMPANY; CLARKS

TELECOMMUNICATIONS CO.;

CONSOLIDATED TELEPHONE

COMPANY; CONSOLIDATED TELCO,

INC.; CONSOLIDATED TELCOM, INC.;

THE CURTIS TELEPHONE COMPANY;

EASTERN NEBRASKA TELEPHONE

COMPANY; GREAT PLAINS

COMMUNICATIONS, INC.; K. & M.

TELEPHONE COMPANY, INC.;

NEBRASKA CENTRAL TELEPHONE

COMPANY; NORTHEAST NEBRASKA

TELEPHONE COMPANY; ROCK

COUNTY TELEPHONE COMPANY;

THREE RIVER TELCO; RCA - The

Competitive Carriers Association; RURAL

TELECOMMUNICATIONS GROUP,

INC.; CENTRAL TEXAS TELEPHONE

COOPERATIVE, INC.; VENTURE

COMMUNICATIONS COOPERATIVE,

INC.; ALPINE COMMUNICATIONS,

LC; EMERY TELCOM; PENASCO

VALLEY TELEPHONE COOPERATIVE,

INC.; SMART CITY TELECOM;

SMITHVILLE COMMUNICATIONS,

INC.; SOUTH SLOPE COOPERATIVE

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TELEPHONE CO., INC.; SPRING

GROVE COMMUNICATIONS; STAR

TELEPHONE COMPANY; 3 RIVERS

TELEPHONE COOPERATIVE, INC.;

WALNUT TELEPHONE COMPANY,

INC.; WEST RIVER COOPERATIVE

TELEPHONE COMPANY, INC.; RONAN

TELEPHONE COMPANY; HOT

SPRINGS TELEPHONE COMPANY;

HYPERCUBE TELECOM, LLC;

VIRGINIA STATE CORPORATION

COMMISSION; MONTANA PUBLIC

SERVICE COMMISSION, VERIZON;

AT&T, INC.; SPRINT NEXTEL

CORPORATION; LEVEL 3

COMMUNICATIONS, LLC;

CENTURYLINK INC.; COX

COMMUNICATIONS, INC.; NATIONAL

TELECOMMUNICATIONS

COOPERATIVE ASSOCIATION;

INDEPENDENT TELEPHONE &

TELECOMMUNICATIONS ALLIANCE;

ORGANIZATION FOR THE

PROTECTION AND ADVANCEMENT

OF SMALL TELEPHONE COMPANIES,

a/k/a ORGANIZATION FOR THE

PROMOTION AND ADVANCEMENT

OF SMALL TELECOMMUNICATIONS

COMPANIES (OPASTCO); METROPCS

COMMUNICATIONS, INC.;

ARLINGTON TELEPHONE COMPANY;

THE BLAIR TELEPHONE COMPANY;

CAMBRIDGE TELEPHONE COMPANY;

CLARKS TELECOMMUNICATIONS

CO.; CONSOLIDATED TELEPHONE

COMPANY; CONSOLIDATED TELCO,

INC.; CONSOLIDATED TELCOM, INC.;

THE CURTIS TELEPHONE COMPANY;

EASTERN NEBRASKA TELEPHONE

COMPANY; GREAT PLAINS

COMMUNICATIONS, INC.; K. & M.

TELEPHONE COMPANY, INC.;

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NEBRASKA CENTRAL TELEPHONE

COMPANY; NORTHEAST NEBRASKA

TELEPHONE COMPANY; ROCK

COUNTY TELEPHONE COMPANY;

THREE RIVER TELCO; NATIONAL

EXCHANGE CARRIER ASSOCIATION,

INC. (NECA), COMCAST

CORPORATION; VONAGE HOLDINGS

CORPORATION; RURAL

TELECOMMUNICATIONS GROUP,

INC.; NATIONAL CABLE &

TELECOMMUNICATIONS

ASSOCIATION; CENTRAL TEXAS

TELEPHONE COOPERATIVE, INC.;

VENTURE COMMUNICATIONS

COOPERATIVE, INC.; ALPINE

COMMUNICATIONS, LC; EMERY

TELCOM; PENASCO VALLEY

TELEPHONE COOPERATIVE, INC.;

SMART CITY TELECOM; SMITHVILLE

COMMUNICATIONS, INC.; SOUTH

SLOPE COOPERATIVE TELEPHONE

CO., INC.; SPRING GROVE

COMMUNICATIONS; STAR

TELEPHONE COMPANY; 3 RIVERS

TELEPHONE COOPERATIVE, INC.;

WALNUT TELEPHONE COMPANY,

INC.; WEST RIVER COOPERATIVE

TELEPHONE COMPANY, INC.; RONAN

TELEPHONE COMPANY; HOT

SPRINGS TELEPHONE COMPANY;

HYPERCUBE TELECOM, LLC,

Intervenors.

STATE MEMBERS OF THE FEDERAL-

STATE JOINT BOARD ON UNIVERSAL

SERVICE,

Amicus Curiae.

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PETITION FOR REVIEW OF ORDERS OF THE

FEDERAL COMMUNICATIONS COMMISSION

(FCC No. 11-161)

Before BRISCOE, HOLMES, and BACHARACH, Circuit Judges.

BACHARACH, Circuit Judge.

Argued for Petitioners:

James Bradford Ramsey, National Association of Regulatory Utility Commissioners,

Washington, D.C., Russell Blau, Bingham McCutchen LLP, Washington, D.C., Robert

Allen Long, Jr., Covington & Burling, Washington, D.C., Michael B. Wallace, Wise

Carter Child & Caraway, Jackson, Mississippi, Pratik A. Shah, Akin Gump Strauss Hauer

& Feld LLP, Washington, D.C, Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,

McLean, Virginia, Joseph K. Witmer, Pennsylvania Public Utility Commission,

Harrisburg, Pennsylvania, Christopher F. Van de Verg, Annapolis, Maryland, Lucas M.

Walker, Molo Lamken, Washington, D.C., Don Lee Keskey, Public Law Resource Center

PLLC, Lansing, Michigan, Harvey Reiter, Stinson Morrison Hecker LLP, Washington,

David Bergmann, Columbus, Ohio, E. Ashton Johnston, Lampert, O’Connor & Johnston,

P.C., Washington, D.C., Heather Marie Zachary, Wilmer Cutler Pickering Hale and Dorr,

Washington, D.C., and William Scott McCollough, McCollough Henry, Austin, Texas.

Argued for Respondents:

Richard Welch, James M. Carr, and Maureen Katherine Flood, Federal Communications

Commission, Washington, D.C.

Argued for Respondents-Intervenors:

Scott H. Angstreich, Huber, Hansen, Todd, Evans & Figel, Washington, D.C., Howard J.

Symons, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., and Samuel L. Feder,

Jenner & Block LLP, Washington, D.C.

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Appearances for Petitioners:

David R. Irvine, Jenson Stavros & Guelker, and Alan L. Smith, Salt Lake City, Utah, for

Direct Communications Cedar Valley, LLC, Totah Communications, Inc., H&B

Communications, Inc., The Moundridge Telephone Company of Moundridge, Pioneer

Telephone Association, Inc., Twin Valley Telephone, Inc., and Pine Telephone Company,

Inc.

Bohdan R. Pankiw, Kathryn G. Sophy, Shaun A. Sparks, and Joseph K. Witmer,

Pennsylvania Public Utility Commission, Harrisburg, Pennsylvania, for Pennsylvania

Public Utility Commission.

Benjamin H. Dickens, Jr. and Mary J. Sisak, Blooston, Mordkofsky, Dickens, Duffy &

Prendergrast, LLP, and Craig S. Johnson, Johnson & Sporleder, Jefferson City, Missouri,

for Choctaw Telephone Company.

James Christopher Falvey and Charles Anthony Zdebski, Eckert Seamens Cherin &

Mellott, Washington, D.C., for Core Communications, Inc.

David Bergmann, Columbus, Ohio, Paula Marie Carmody, Maryland’s Office of People’s

Counsel, Baltimore, Maryland, and Christopher J. White, New Jersey Division of Rate

Counsel, Office of the Public Advocate, Newark, New Jersey, for National Association of

State Utility Consumer Advocates.

Russell Blau and Tamar Elizabeth Finn, Bingham McCutchen LLP, Washington, D.C.,

for National Telecommunications Cooperative Association, U.S. Telepacific Corp.,

OPASTCO, and Western Telecommunications Alliance.

Rebecca Hawkins and Michael B. Wallace, Wise Carter Child & Caraway, Jackson,

Mississippi, David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,

McLean, Virginia, for Cellular South Inc.

Daniel Deacon, Jonathan Nuechterlein and Heather Marie Zachary, Wilmer Cutler

Pickering Hale and Dorr, Washington, D.C., and Christopher M. Heimann and Gary L.

Phillips, AT&T, Inc., Washington, D.C., for AT&T, Inc.

William Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent,

II, Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and

Steven H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Halo

Wireless, Inc.

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Jennifer P. Bagg, E. Ashton Johnston, and Donna M. Lampert, Lampert, O’Connor &

Johnston, P.C., Washington, D.C., and Glenn Richards, Pillsbury Winthrop Shaw

Pittman, Washington, D.C., for The Voice on the Net Coalition, Inc.

John Holland Jones, Office of the Ohio Attorney General, Columbus, Ohio, for Public

Utilities Commission of Ohio.

Thomas Jones, David Paul Murray, and Nirali Patel, Willkie, Farr & Gallagher LLP,

Washington, D.C., for TW Telecom Inc.

Bridget Asay, Office of the Attorney General for the State of Vermont, Montpelier,

Vermont, for Vermont Public Service Board.

William Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent,

II, Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and

Steven H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Transcom

Enhanced Services, Inc.

Robert A. Fox, Kansas Corporation Commission Topeka, Kansas, for The State

Corporation Commission.

Yaron Dori, Robert Allen Long, Jr., and Gerard J. Waldron, Covington & Burling,

Washington, D.C., for Centurylink, Inc.

John Boles Capehart, Akin Gump Strauss Hauer & Feld, Dallas, Texas, Sean Conway,

Patricia Ann Millett, and James Edward Tysse, Akin Gump Strauss Hauer & Feld,

Washington, D.C., and Michael C. Small, Akin Gump Strauss Hauer & Feld,

Washington, D.C., for Gila River Indian Community and Gila River

Telecommunications, Inc.

Don Lee Keskey, Public Law Resources Center PLLC, Lansing Michigan, for

Consolidated Telco, Inc.

Roger Dale Dixon, Jr., Law Offices of Dale Dixon, Carlsbad, California, for North

County Communications Corporation.

David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,

Virginia, for United States Cellular Corporation.

David LaFuria, Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez &

Sachs, LLP, McLean, Virginia, for Petitioners PR Wireless, Inc. and Docomo Pacific,

Inc.

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Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,

Virginia, for Petitioners Nex-Tech Wireless, LLC, and Cellular Network Partnership, A

Limited Partnership.

Russell Blau, Bingham McCutchen LLP, Washington, D.C., for Consolidated

Communications Holdings, Inc.

James Bradford Ramsay and Holly R. Smith, National Association of Regulatory Utility

Commissioners, Washington, D.C., for National Association of Regulatory Utility

Commissioners.

David Cosson, Washington, D.C., H. Russell Frisby, Jr., Dennis Lane, and Harvey Reiter,

Stinson Morrison Hecker LLP, Washington, D.C., for Rural Independent Competitive

Alliance, Rural Telephone Service Company, Inc., Adak Eagle Enterprises LLC, Adams

Telephone Cooperative, Alenco Communications, Inc., Arlington Telephone Company,

Bay Springs Telephone Company, Big Bend Telephone Company, The Blair Telephone

Company, Blountsville Telephone LLC, Blue Valley Telecommunications, Inc., Bluffton

Telephone Company, Inc., BPM, Inc., Brantley Telephone Company, Inc., Brazoria

Telephone Company, Brindlee Mountain Telephone LLC, Bruce Telephone Company,

Bugs Island Telephone Cooperative, Cameron Telephone Company, LLC, Chariton

Valley Telephone Corporation, Chequamegon Communications Cooperative, Inc.,

Chickamauga Telephone Corporation, Chicksaw Telephone Company, Chippewa County

Telephone Company, Clear Lake Independent Telephone Company, Comsouth

Telecommunications, Inc., Copper Valley Telephone Cooperative, Cordova Telephone

Cooperative, Crockett Telephone Company, Inc., Darien Telephone Company, Deerfield

Famers’ Telephone Company, Delta Telephone Company, Inc., East Ascention

Telephone Company, LLC, Eastern Nebraska Telephone Company, Eastex Telephone

Coop., Inc., Egyptian Telephone Cooperative Association, Elizabeth Telephone

Company, LLC, Ellijay Telephone Company, Farmers Telephone Cooperative, Inc.,

Flatrock Telephone Coop., Inc., Franklin Telephone Company, Inc., Fulton Telephone

Company, Inc., Glenwood Telephone Company, Granby Telephone Company LLC, Hart

Telephone Company, Hiawatha Telephone Company, Holway Telephone Company,

Home Telephone Company (St. Jacob Illinois), Home Telephone Company (Moncks

Corner, South Carolina), Hopper Telecommunications Company, Inc., Horry Telephone

Cooperative, Inc., Interior Telephone Company, Kaplan Telephone Company, Inc., KLM

Telephone Company, City of Ketchikan, Alaska, Lackawaxen Telecommunications

Services, Inc., Lafourche Telephone Company, LLC, La Harpe Telephone Company,

Inc., Lakeside Telephone Company, Lincolnville Telephone Company, Loretto

Telephone Company, Inc., Madison Telephone Company, Matanuska Telephone

Association, Inc., McDonough Telephone Coop., Inc., MGW Telephone Company, Inc.,

Mid Century Telephone Coop., Inc., Midway Telephone Company, Mid-Maine Telecom,

LLC, Mound Bayou Telephone & Communications, Inc., Mondville Telephone

Company, Inc., Mukluk Telephone Company, Inc., National Telephone of Alabama, Inc.,

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Ontonagon County Telephone Company, Otelco Mid-Missouri LLC, Otelco Telephone

LLC, Panhandle Telephone Cooperative, Inc., Pembroke Telephone Company, Inc.,

People’s Telephone Company, Peoples Telephone Company, Piedmont Rural Telephone

Cooperative, Inc., Pine Belt Telephone Company, Pine Tree Telephone LLC, Pioneer

Telephone Cooperative, Inc., Poka Lambro Telephone Cooperative, Inc., Public Service

Telephone Company, Ringgold Telephone Company, Roanoke Telephone Company,

Inc., Rock County Telephone Company, Saco River Telephone LLC, Sandhill Telephone

Cooperative, Inc., Shoreham Telephone LLC, The Siskiyou Telephone Company, Sledge

Telephone Company, South Canaan Telephone Company, South Central Telephone

Association, Star Telephone Company, Inc., Stayton Cooperative Telephone Company,

The North-Eastern Pennsylvania Telephone Company, Tidewater Telecom, Inc., Tohono

O’Odham Utility Authority, Unitel, Inc., War Telephone LLC, West Carolina Rural

Telephone Cooperative, Inc., West Tennessee Telephone Company, Inc., West Wisconsin

Telecom Cooperative, Inc., Wiggins Telephone Association, Winnebago Cooperative

Telecom Association, Yukon Telephone Co., Inc.

Maureen A. Scott, Wesley Van Cleve, and Janet F. Wagner, Arizona Corporation

Commission, Legal Division, Phoenix, Arizona, for Arizona Corporation Commission.

Jeffrey A. Lamken and Lucas M. Walker, Molo Lamkin, Washington, D.C.,

for Windstream Communications, Inc., and Windstream Corporation.

Appearances for Respondents:

Laurence Nicholas Bourne, James M. Carr, Maureen Katherine Flood, Jacob Matthew

Lewis, Austin Schlick, and Richard Welch, Federal Communications Commission,

Washington, D.C., for the Federal Communications Commission.

Robert Nicholson and Robert J. Wiggers, United States Department of Justice,

Washington, D.C., for United States of America.

Appearances for Intervenors:

Thomas J. Moorman, Woods & Aitken, Washington, D.C. and Paul M. Schudel, Woods

& Aitken, Lincoln, Nebraska, for The Blair Telephone Company, Clarks

Telecommunications Co., Consolidated Telco, Inc., Consolidated Telephone Company,

Consolidated Telecom, Inc., The Curtis Telephone Company, Great Plains

Communication, Inc. K&M Telephone Company, Inc., Nebraska Central Telephone

Company, Rock County Telephone Company, Three River Telco, Cambridge Telephone

Company, Northeast Nebraska Telephone Company.

David Cosson, Washington, D.C., for Eastern Nebraska Telephone Company, and H.

Russell Frisby, Jr., Dennis Lane, and Harvey Reiter, Stinson Morrison Hecker LLP,

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Washington, D.C., and Thomas J. Moorman, Woods & Aitken, Washington, D.C. and

Paul M. Schudel, Woods & Aitken, Lincoln, Nebraska, for Arlington Telephone

Company.

Yaron Dori, Robert Allen Long, Jr., and Gerard J. Waldron, Covington & Burling,

Washington, D.C., for Centurylink, Inc.

Gerard J. Duffy, Benjamin H. Dickens, Jr., Robert M. Jackson, and Mary J. Sisak,

Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP, Washington, D.C., for 3

Rivers Telephone Cooperative, Inc. , Venture Communications Cooperative, Inc., Alpine

Communications, LC, Emery Telcom, Penasco Valley Telephone Cooperative, Inc.,

Smart City Telecom, Smithville Communications, Inc., South Slope Cooperative

Telephone Co., Inc., Spring Grove Communications, Star Telephone Company, Walnut

Telephone Company, and West River Cooperative Telephone Company, Inc.

Ivan C. Evilsizer, Evilsizer Law Office, Helena, Montana, for Ronan Telephone

Company and Hot Springs Telephone Company.

Helen E. Disenhaus and Ashton Johnston, Lampert, O’Connor & Johnston, P.C.,

Washington, D.C., for Hypercube Telecom, LLC.

Raymond Lee Doggett, Jr., Virginia State Corporation Commission, Richmond, Virginia,

for Virginia State Corporation Commission.

Dennis Lopach, Montana Public Service Commission, Helena, Montana, for Montana

Public Service Commission.

Christopher M. Heimann and Gary L. Phillips, SBC Communications, Washington, D.C.,

Jonathan Nuechterlein and Heather Marie Zachary, Wilmer Cutler Pickering Hale and

Dorr, Washington, D.C., for AT&T, Inc.

J. G. Herrington and David E. Mills, Dow Lohnes, PLLC, Washington, D.C., for Cox

Communications.

Scott H. Angstreich, Joshua D. Branson, Brendan J. Crimmins, Kellogg, Huber, Hansen,

Todd, Evans & Figel, Washington, D.C., and Michael E. Glover and Christopher Michael

Miller, Verizon Communications, Inc., Arlington, Virginia, for Verizon.

Russell Blau, Bingham McCutchen LLP, Washington, D.C., for National

Telecommunications Cooperative Association.

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Carl W. Northrop, Telecommunications Law Professionals PLLC, Washington, D.C.,

Mark A. Stachiw, MetroPCS Communications, Inc., Richardson, Texas, for MetroPCS

Communications, Inc.

Clare Kindall, Office of the Attorney General Energy Department, New Britain,

Connecticut, for Connecticut Public Utilities Regulatory Authority.

Samuel L. Feder and Luke C. Platzer, Jenner & Block LLP, Washington, D.C., for

Comcast Corporation.

Christopher J. Wright, Wiltshire & Grannis, LLP, Washington, D.C., for Level 3

Communications, LLC, Vonage Holdings Corp., and Sprint Nextel Corporation.

Rick C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National

Cable & Telecommunications Association, Washington, D.C., and Ernest C. Cooper,

Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky &

Popeo, P.C., Washington, D.C., for National Cable & Telecommunications Association.

Genevieve Morelli, The Independent Telephone & Telecommunications Alliance,

Washington, D.C., for Independent Telephone & Telecommunications Alliance.

Gerard J. Duffy, Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP,

Washington, D.C., for Western Telecommunications Alliance.

Gregory Jon Vogt, Law Offices of Gregory J. Vogt, PLLC, Alexandria, Virginia, and

Richard A. Askoff, Sr., National Exchange Carrier Association, Inc., Whippany, New

Jersey for National Exchange Carrier Association.

Craig Edward Gilmore, L. Charles Keller, and David H. Solomon, Wilkinson, Barker,

Knauer, LLP, Washington, D.C., for T-Mobile USA, Inc.

Caressa Davison Bennet, Kenneth Charles Johnson, Anthony Veach, and Daryl Altey

Zakov, Bennet & Bennet, Bethesda, Maryland, for Rural Telecommunications Group,

Inc. and Central Telephone Cooperative, Inc.

Appearances for Amicus Curiae:

James Hughes Cawley, Pennsylvania Public Utility Commission, Harrisburg,

Pennsylvania, and James Bradford Ramsay, National Association of Regulatory Utility

Commissioners, Washington, D.C., for State Members of the Federal-State Joint Board

on Universal Service.

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Table of Contents

Page

I.

The FCC’s Restructuring of the Telecommunications Market

2

A.

The Old Regime

2

B.

The New Regime

7

C.

The Transition from the Old Regime to the New

Regime

8

D.

The Types of Challenges

9

II.

Challenges to the FCC’s Authority to Implement a National

Bill-and-Keep Framework for All Traffic

10

A.

Standard of Review

11

B.

The FCC’s Authority Over Access Charges on All Traffic

13

1.

Traffic Between LECs and Long-Distance Carriers

13

a.

The FCC’s Rationale

13

b.

The Petitioners’ Arguments

14

c.

Traffic Between LECs and IXCs

as “Reciprocal Compensation”

15

i.

“Reciprocal Compensation” as a Term

of Art

15

ii.

Plain Meaning of the Term

“Reciprocal Compensation”

17

d.

The Petitioners’ Reliance on §§ 252(d)(2)(A)

and 251(c)(2)(A)

18

i

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i.

Section 252(d)(2)(A)

19

ii.

Section 251(c)(2)(A)

20

2.

Preemption of State Regulatory Authority Over

Intrastate Access Charges

22

a.

Sections 152(b) and 601(c)

22

b.

Section 253

24

c.

Section 251(d)(3)

26

d.

Section 251(g)

27

3.

FCC Authority Over Intrastate Origination Charges

29

a.

Section 251(b)(5) and Originating

Access Traffic

30

b.

The FCC’s Interpretations of

“Transport” and “Termination”

31

c.

The Purported Prohibition of Originating

Access Charges

32

C.

Bill-and-Keep as a Default Methodology

33

1.

Consideration Under § 252

35

2.

The “Just and Reasonable” Rate

Requirement in §§ 201(b) and 252(d)(2)

41

a.

Consideration of a Statutory Right

to Payments from Other Carriers

43

b.

Sufficiency of Cost Recovery

44

D.

Authority for the States to Suspend or Modify the

New Requirements

45

ii

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III.

Challenges to Cost Recovery as Arbitrary and Capricious

47

A.

The Transitional Plan

47

B.

The Petitioners’ Challenges

49

C.

Standard of Review

49

D.

Consideration of the Apportionment

Requirement in Smith

51

1.

The Apportionment Requirement

51

2.

Application of Smith to the FCC’s

Recovery Mechanism

52

3.

Waiver of the Challenge to the Access

Recovery Charge

54

4.

Recovery of Interstate Costs through

End-User Rates and Universal Service Support

55

E.

Challenges Involving the Adequacy of the Recovery

Mechanism

56

IV.

Procedural Irregularities in the Rulemaking Process

58

A.

The FCC Proceedings

58

B.

The Petitioners’ Arguments

60

1.

The Waiver Issue

60

2.

The FCC’s Motion to Strike

61

C.

Our Review of the Constitutional Challenges

62

D.

The Petitioners’ Due Process Challenges

63

1.

General Challenges to the Ex Partes

63

iii

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2.

Ex Parte Challenges Based on Specific

Documents

65

3.

The FCC’s Placement of Documents in the

Rulemaking Record

66

4.

The FCC’s Decision to Rule on Pending Petitions

67

5.

Adequacy of the August 3, 2011, Notice

68

6.

Length of the Comment Period

68

7.

Cumulative Challenge

69

E.

“Commandeering” of State Commissions

69

V.

Individual Challenges to the Order

71

A.

Rural Independent Competitive Alliance’s Challenge

to the FCC’s Limitation on Funding Support for

Rural Competitive LECs

71

B.

The Challenge by National Telecommunications

Cooperative Association, U.S. TelePacific Corporation,

and North County Communications Corporation to the

Transition of CMRS-LEC Traffic to Bill-and-Keep

75

C.

Core Communications, Inc. and North County

Communications Corporation’s Challenge to the

FCC’s New Regulations on Access Stimulation

77

1.

The FCC’s Refusal to Allow CLECs to Use

ILEC Ratemaking Procedures

78

2.

The FCC’s Requirement for Access-Stimulating

CLECs to Benchmark to the Price-Cap LEC

with the State’s Lowest Access Rates

81

iv

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D.

AT&T, Inc.’s Challenge to the FCC’s Decision

to Allow VoIP-LEC Partnerships to Collect

Intercarrier Compensation Charges for Services

Performed by the VoIP Partner

83

E.

Voice on the Net Coalition, Inc.’s Challenges to the

FCC’s No-Blocking Obligation

86

1.

The Waiver Test

87

2.

Challenge to the Notice

89

3.

Challenge to the Adequacy of the Explanation

91

4.

Challenge to the FCC’s Ancillary Jurisdiction

91

F.

Transcom Enhanced Services, Inc.’s Challenges to

the FCC’s IntraMTA Rule, Provisions on Call-

Identification, and Blocking of Calls

93

1.

Transcom’s Challenge to the FCC’s IntraMTA

Rule

93

2.

Transcom’s Challenge to the Call-Identifying

Rules

97

3.

Transcom’s Challenge to the FCC’s No-

Blocking Rules

99

G.

Windstream Corporation and Windstream

Communications, Inc.’s Challenges to Origination

Charges

99

1.

Windstream’s Challenge to the FCC’s

Explanation in the Original Order

101

2.

Windstream’s Challenge to the FCC’s

Explanation for the New Rule

102

v

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3.

Windstream’s Challenge to the FCC’s

Failure to Provide Funding Support

104

4.

Windstream’s Challenge to the Initial

Period of Six Months

108

VI.

Conclusion

108

vi

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Issues Involving Intercarrier Compensation

Exercising its rulemaking authority under the Communications Act of 1934 and

the Telecommunications Act of 1996, the FCC overhauled the intercarrier compensation

regime and adopted a “uniform national bill-and-keep framework . . . for all

telecommunications traffic exchanged with a [local exchange carrier].” 2 R. at 403 ¶ 34.

To ease the transition to a new regime of bill-and-keep, the FCC also adopted a

comprehensive plan to phase out the old intercarrier compensation system. See id. at 403-

04 ¶ 35. The Petitioners challenge the plan on grounds that it exceeded the FCC’s

authority, was arbitrary and capricious, and resulted in a denial of due process.1 These

challenges are rejected.

1

This opinion involves arguments the Petitioners and Intervenors presented in the

following briefs:

!

Joint Intercarrier Compensation Principal Brief of Petitioners (July 17,

2013);

!

Additional Intercarrier Compensation Issues Principal Brief (Pet’rs) (July

11, 2013);

!

AT&T Principal Brief (July 16, 2013);

!

Voice on the Net Coalition, Inc. Principal Brief (July 15, 2013);

!

Transcom Principal Brief (July 12, 2013);

!

National Association of State Utility Consumer Advocates Principal Brief

(July 12, 2013);

!

Windstream Principal Brief (July 17, 2013);

!

Incumbent Local Exchange Carrier Intervenors’ Brief in Support of

Petitioners (July 15, 2013).

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I.

The FCC’s Restructuring of the Telecommunications Market

In assessing the Petitioners’ challenges to this plan, we must take into account

what the FCC was trying to accomplish.

A.

The Old Regime

The FCC adopted the plan against the backdrop of two types of arrangements.

One provided reciprocal compensation for local calls, and the other involved charges for

long-distance carriers to connect to a local carrier’s network. In the Order, the FCC

revamped this regime, exercising authority over all traffic exchanged with a local

exchange carrier (“LEC”), including intrastate calls. See id. at 632 ¶ 739, 642 ¶¶ 761-62.

Before 1996, regulation of telecommunications was generally divided between the

FCC and state commissions. The FCC regulated interstate service, and state commissions

regulated intrastate service. La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 360 (1986).

Under this division of authority, states granted exclusive franchises to LECs within their

designated service areas. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371 (1999).

Through these franchises, the LECs owned the local telecommunications networks. Id.

In 1996, Congress set out to restructure the market to enhance competition. These

efforts led to enactment of the Telecommunications Act of 1996. In this statute, Congress

empowered the FCC and created a new breed of competitors (called “Competitive LECs”

or “CLECs”). See id. at 378 n.6; MCI Telecomm. Corp. v. Bell Atl. Pa., 271 F.3d 491,

498 (3d Cir. 2001).

2

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Under the new statute, all LECs would assume certain duties. See 47 U.S.C.

§ 251. One of these duties involved the establishment of arrangements for “reciprocal

compensation” in the “transport and termination of telecommunications.” Id. at

§ 251(b)(5). This statutory duty includes two key terms underlying the present litigation:

“reciprocal compensation” and “telecommunications.” In the Order, the FCC recently

interpreted these terms to cover all traffic, including intrastate service and use of local

networks by long-distance carriers. Id. at 643 ¶ 764, 644 n.1374, 647 ¶ 772, 754-55

¶ 971.

This interpretation reflects a departure from the FCC’s previous reading of the

1996 Act. In the past, for example, the FCC had narrowly read the phrase “reciprocal

compensation” as limited to local traffic. See Bell Atl. Tel. Cos. v. FCC, 206 F.3d 1, 4

(D.C. Cir. 2000). Under the FCC’s previous interpretation, the parties or state

commissions set the charges for intrastate traffic between two LECs. Supp. R. at 20-21

¶ 53.

The charges were called “access charges” because long-distance carriers (called

“IXCs”) paid LECs for the opportunity to use their networks at the start- and end-points

of the calls. See id. at 19 ¶ 48. This system is known as “exchange access.” 47 U.S.C.

§ 153(20).

3

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In exchange access, long-distance calls start (or “originate”) on an LEC’s network,

continue on the IXC’s network to another local telephone exchange, and end (or

“terminate”) on the network of another LEC. This process is illustrated in Diagram 1:

Under the old regime, compensation between local- and long-distance carriers

involved one of three combinations:

!

between an IXC and two LECs for an interstate call,

!

between an IXC and two LECs for a call within the boundaries of a single

state, and

!

between two LECs.

The three different combinations led to three different types of access charges,

each with its own mode of regulation:

!

Interstate IXC-LEC Traffic: For this kind of traffic, the IXC paid an access

charge to the originating LEC and a terminating interstate access charge to

the terminating LEC. The access charges were regulated by the FCC.

Supp. R. at 21 ¶ 53. For example, Diagram 2 illustrates a call from Denver

to Oklahoma City:

4

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!

Intrastate IXC-LEC Traffic: For traffic within a single state by an IXC and

LEC, the IXC paid an access charge to the originating LEC and an access

charge to the terminating LEC. The access charge was governed by state

law and was typically set above interstate rates. Id. This illustration

reflects a typical intrastate call, one from Denver to Colorado Springs:

!

Local LEC-LEC Traffic: For local traffic between two LECs, the LECs

paid each other consistently with their reciprocal compensation

arrangement. The arrangement was either negotiated by the parties or set

by the states using a methodology prescribed by the FCC under 47

§§ 201(b) and 251(b)(5). Id. An example appears in Diagram 4, which

shows a call from someone in Denver to another person in Denver:

5

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Each arrangement assumed that the calling party should pay for the call. 2 R. at

634 ¶ 744. This assumption was based on the view that the callers were the only persons

that benefited from the call and that they should bear all of the costs. Id. Thus, callers

paid their own carriers, which in turn paid other carriers for access to their networks to

reach the person being called. Diagram 5 shows the payments for local- and long-

distance calls:

6

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B.

The New Regime

In the Order, the FCC restructured this system in three ways. First, the FCC

reinterpreted the 1996 law to cover all traffic, including traffic subject to charges for

access to a network. Id. at 642 ¶ 761-62. Second, the FCC claimed that it could prevent

state commissions from approving access charges for intrastate calls in the absence of an

7

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agreement between the parties. Id. at 644 ¶ 766. Third, the FCC rejected the idea that a

caller should bear the full cost of the call; thus, the FCC prescribed a new system, known

as “bill-and-keep,” for all traffic. Id. at 632 ¶ 741; see id. at 634 ¶ 744, 640 ¶ 756.

“Bill-and-keep” anticipates that carriers will recover their costs from their end-user

customers rather than from other carriers. See id. at 631 ¶ 737, 648 ¶ 775 n.1408. In

moving to “bill-and-keep,” the FCC reasoned that the parties to a call should split the

costs because both enjoy the benefits. Id. at 634 ¶ 744, 640 ¶ 756, 649 n.1409. Once bill-

and-keep is fully implemented for all traffic exchanged with an LEC, the calling party

and the called party will divide the costs. Id. at 649 n.1409.

C.

The Transition from the Old Regime to the New Regime

Recognizing that the change would disrupt the market, the FCC opted to gradually

transition to bill-and-keep. In the transition period, incumbent LECs (“ILECs”) could

recover some, but not all, of their lost intercarrier compensation revenue through the

FCC’s funding mechanisms. Id. at 683-84 ¶¶ 847-48.

The length of the transitional period will vary for different types of LECs. To

determine the transitional period, the FCC classifies ILECs based on the way that they are

regulated: “Price-cap ILECs” are LECs that must set rates at or below a price cap, and

“rate-of-return ILECs” are allowed to charge based on a set rate of return. Nat’l Rural

Telecomm. Ass’n v. FCC, 988 F.2d 174, 177-78 (D.C. Cir. 1993). For price-cap ILECs,

the FCC set a six-year period to gradually decrease reciprocal compensation charges and

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access charges for termination; for rate-of-return ILECs, the transition for these

intercarrier charges will last nine years. 2 R. at 661-63 ¶ 801, 661-63 Figure 9.

CLECs are generally required to benchmark rates to an ILEC and utilize its

timeline for the transition. Id. at 272 ¶ 801. Traffic involving a wireless provider (called

“CMRS”) must transition to bill-and-keep either immediately or within six months,

depending on whether the traffic was subject to an existing agreement on intercarrier

compensation. Id. at 765 ¶ 996 (ordering an immediate transition); id. at 1145-46 ¶ 7

(extending the transition to six months for some CMRS-LEC traffic).

The FCC allows ILECs to recover some, but not all, of their lost intercarrier

compensation revenues through a federal recovery mechanism. See id. at 683-84 ¶¶ 847-

48. Through this mechanism, carriers can recover some of their lost revenue through an

Access Recovery Charge on their end users. See id. at 715 ¶ 908. Carriers unable to

recover all of their eligible recovery through the Access Recovery Charge are eligible for

explicit support through the Connect America Fund. See id. at 721-22 ¶ 918.

D.

The Types of Challenges

The Petitioners challenge four aspects of the reforms: (1) implementation of bill-

and-keep for all traffic; (2) limitations on funding mechanisms during the transitional

period; (3) irregularities in the rule-making process; and (4) application of the reforms to

particular circumstances. We reject all of the challenges.

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II.

Challenges to the FCC’s Authority to Implement a National Bill-and-Keep

Framework for All Traffic

In the Order, the FCC concluded that 47 U.S.C. § 251(b)(5) applied to all

telecommunications traffic exchanged with an LEC. Based on this conclusion, the FCC

prescribed bill-and-keep as the default methodology for that traffic. The Petitioners

challenge not only the FCC’s authority to regulate the traffic, but also the way in which

the FCC chose to exercise this authority. Thus, we must address both challenges: the

FCC’s authority and the content of the new regulations.

The FCC claims authority under 47 U.S.C. §§ 251(b)(5) and 201(b) to implement

bill-and-keep as the default intercarrier compensation framework for all traffic exchanged

with an LEC. See id. at 641 ¶ 760. For traffic between LECs and wireless providers, the

FCC also invokes authority under 47 U.S.C. § 332. Id. at 641 ¶ 760 n.1350, 675-76

¶¶ 834-36. And for interstate traffic, the FCC relies on 47 U.S.C. § 201. Id. at 646-47

¶ 771, 675-76 ¶¶ 834-36.

Attacking this framework, the Petitioners raise three challenges.

First, they challenge the FCC’s authority under § 251(b)(5). Joint Intercarrier

Compensation Principal Br. of Pet’rs at 7-28 (July 17, 2013). This challenge

encompasses three aspects of the traffic: (1) the FCC’s authority to regulate access

charges imposed by LECs on long-distance carriers; (2) the exclusive authority of states

in regulating intrastate access charges; and (3) the FCC’s authority over origination

charges. Id.

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Second, the Petitioners argue that bill-and-keep does not constitute a permissible

methodology for at least some of the traffic. Id. at 28-45.

Third, the Petitioners argue that the FCC lacks authority to order state

commissions to refuse exemptions to the bill-and-keep regime. Id. at 46-49.

A.

Standard of Review

Congress has unambiguously authorized the FCC to administer the

Communications Act through rulemaking and adjudication. City of Arlington v. FCC, __

U.S. __, 133 S. Ct. 1863, 1874 (2013). Thus, we apply Chevron deference to the FCC’s

interpretation of the statute and its own authority. Id. at 1874; Sorenson Commc’ns, Inc.

v. FCC, 659 F.3d 1035, 1042 (10th Cir. 2011).

Chevron involves a two-step inquiry. Chevron U.S.A., Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837, 842-43 (1984); Sorenson, 659 F.3d at 1042.

In the first step, we ask whether Congress has spoken on the issue. Qwest

Commc’ns Int’l, Inc. v. FCC, 398 F.3d 1222, 1229-30 (10th Cir. 2005) (quoting Chevron,

467 U.S. at 842). When the statute is unambiguous, we look no further and “give effect

to Congress’s unambiguously expressed intent.” Qwest, 398 F.3d at 1230 (citing

Chevron, 467 U.S. at 842-43).

“[I]f the statute is silent or ambiguous with respect to the specific issue,” we must

decide “whether the agency’s answer is based on a permissible construction of the

statute.” Chevron, 467 U.S. at 843; see City of Arlington, 133 S. Ct. at 1874 (“Where

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Congress has established a clear line, the agency cannot go beyond it; and where

Congress has established an ambiguous line, the agency can go no further than the

ambiguity will fairly allow.”). When we address this issue, the Petitioners must show that

the FCC’s interpretation of the statute was impermissible. Nat’l Cable & Telecomms.

Ass’n, Inc. v. Gulf Power Co., 534 U.S. 327, 333 (2002).

We review changes in the FCC’s interpretation of the Communications Act under

the Administrative Procedure Act (“APA”). See Nat’l Cable & Telecomms. Ass’n v.

Brand X Internet Servs., 545 U.S. 967, 981 (2005). But the APA does not subject the

FCC’s change in position to heightened review. FCC v. Fox Television Stations, Inc.,

556 U.S. 502, 514 (2009); Qwest Corp. v. FCC, 689 F.3d 1214, 1224 (10th Cir. 2012).

The APA requires only that “‘the new policy [be] permissible under the statute, [and] that

there are good reasons for it.’” Qwest Corp., 689 F.3d at 1225 (quoting Fox Television,

556 U.S. at 515). This requirement is satisfied if the FCC acknowledges that it is

changing position and provides a reasoned explanation for “disregarding facts and

circumstances that underlay or were engendered by the prior policy.” Fox Television, 556

U.S. at 515.2

In applying Chevron and the APA, we confine our review to the grounds relied on

by the agency. Nat’l R.R. Passenger Corp. v. Bos. & Me. Corp., 503 U.S. 407, 420

2

The Petitioners contended at oral argument that the FCC could not take an

expansive approach to its statutory authority when the agency had earlier taken a contrary

position. We reject this contention. An agency’s earlier interpretation of a statute does

not restrict future exercises of authority under Chevron. See Nat’l Cable & Telecomms.

Ass’n, 545 U.S. at 981.

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(1992) (citing S.E.C. v. Chenery Corp., 318 U.S. 80, 88 (1943)); S. Utah Wilderness

Alliance v. Office of Surface Mining Reclamation & Enforcement, 620 F.3d 1227, 1236

(10th Cir. 2010). But we can rely on “implicitly adopted rationales . . . as long as they

represent the ‘fair and considered judgment’ of the agency, rather than a ‘post hoc

rationalization.’” S. Utah Wilderness Alliance, 620 F.3d at 1236 (quoting Auer v.

Robbins, 519 U.S. 452, 462 (1997)).

B.

The FCC’s Authority Over Access Charges on All Traffic

The FCC interprets 47 U.S.C. § 201(b) and § 251(b)(5) to apply to all traffic,

including access given to long-distance carriers, intrastate traffic, and origination. This

interpretation is reasonable.

1.

Traffic Between LECs and Long-Distance Carriers

In adopting the new regulations, the FCC concluded that it had jurisdiction over all

traffic between LECs and long-distance carriers. 2 R. at 641 ¶ 760, 642 ¶¶ 761-62, 646-

47 ¶¶ 771-72.

a.

The FCC’s Rationale

This interpretation flows in part from the language in § 251(b)(5). This section

provides that each LEC must “establish reciprocal compensation arrangements for the

transport and termination of telecommunications.” 47 U.S.C. § 251(b)(5). The term

“telecommunications” is defined in the statute and “encompasses communications traffic

of any geographic scope . . . or regulatory classification.” 47 U.S.C. § 153(50). Because

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the term is untethered to geographic or regulatory limits, the FCC regards its authority

under § 251(b)(5) to cover all traffic regardless of geography or regulatory classification.

2 R. at 642 ¶ 761.

In addition, the FCC relies on 47 U.S.C. § 201(b), which authorizes the adoption

of regulations as necessary to carry out §§ 251 and 252. Id. at 641 ¶ 760; see 47 U.S.C.

§ 201(b); AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 (1999).

Based on the broad definition of “telecommunications” and the text of § 201, the

FCC recently concluded that § 251(b)(5) covers all traffic between IXCs and LECs. 2 R.

at 642 ¶ 761, 643-44 ¶ 765. In doing so, the FCC recognized that it had changed its

interpretation of § 251(b)(5). Id. at 642 ¶ 761. But the FCC reasoned that its earlier

reading of the law had been “inconsistent” with the text. Id.3

b.

The Petitioners’ Arguments

The Petitioners oppose this interpretation, contending that: (1) the statutory term

“reciprocal compensation” does not include traffic between IXCs and LECs, and (2)

other sections in the Communications Act preclude this reading of the FCC’s statutory

authority. These contentions fail under Chevron.

3 The Petitioners contend that we should prefer an agency interpretation adopted

“when the origins of both the statute and the finding were fresh in the minds of their

administrators.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 12 n.9 (July

17, 2013) (quoting Sec’y of Labor v. Excel Mining, LLC, 334 F.3d 1, 7 (D.C. Cir. 2003)).

Because the FCC’s interpretation of the Communications Act is entitled to Chevron

deference under settled law, its “freshness” is irrelevant. See Brand X Internet Servs., 545

U.S. at 1001-02.

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c.

Traffic Between LECs and IXCs as “Reciprocal

Compensation”

The FCC broadly interprets the phrase “reciprocal compensation” to encompass

any intercarrier compensation agreements between carriers. See id. at 641-42 ¶¶ 761-62,

643-44 ¶ 765. The Petitioners raise two challenges to this conclusion under the first step

of Chevron: (1) Congress used the term “reciprocal compensation” as a technical term of

art to denote local traffic between two LECs; and (2) the plain meaning of “reciprocal

compensation” cannot include traffic between IXCs and LECs because the payments go

only one way (to the LECs). Joint Intercarrier Compensation Principal Br. of Pet’rs at 7-

13 (July 17, 2013).

i.

“Reciprocal Compensation” as a Term of Art

The Petitioners contend that Congress used the term “reciprocal compensation” as

a term of art. Id. at 7-9. According to the Petitioners, the term “reciprocal compensation”

was used in 1996 to refer to intercarrier compensation for local calls. Id. at 8-9. The

Petitioners’ evidence does not remove the ambiguity in the phrase “reciprocal

compensation.”

Under step one of Chevron, we start with the statutory text to determine whether

the phrase “reciprocal compensation” is a term of art. See Ass’n of Am. R.R.s v. Surface

Transp. Bd., 161 F.3d 58, 64 (D.C. Cir. 1998). At this step, we give technical terms of art

their established meaning absent a contrary indication in the statute. McDermott Int’l Inc.

v. Wilander, 498 U.S. 337, 342 (1991); La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355,

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371-72 (1986). Thus, we must decide whether the Petitioners have shown that Congress

referred to the term “reciprocal compensation” as a term of art limited to local traffic. We

conclude that the Petitioners did not satisfy this burden.

The Petitioners rely on two pieces of evidence: (1) an FCC website description of

the term “reciprocal compensation,” which limited its application to local calls; and (2)

accounts in the trade press, which discussed state-imposed reciprocal compensation

requirements for local traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at 8

n.4, 9 n.5 (July 17, 2013). The two pieces of evidence do not eliminate ambiguity in the

phrase.

The website simply described “reciprocal compensation” as the FCC did at the

time. The FCC was then defining “reciprocal compensation” as limited to local traffic

between two LECs. The FCC now embraces a contrary definition, and we have no reason

to treat the prior interpretation as evidence of a term of art and disregard the current

interpretation.

Accounts in the trade press also do little to eliminate ambiguity in the phrase

“reciprocal compensation.” Before enactment of the statute in 1996, the trade press

included some references to reciprocal compensation on local calls. See 3 R. at 1471

n.19. But these accounts do not suggest that the term “reciprocal compensation” is

inherently limited to local calls.

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Accordingly, the Petitioners have not shown that the term “reciprocal

compensation” embodied a term of art limited to local traffic.

ii.

Plain Meaning of the Term “Reciprocal

Compensation”

The Petitioners also argue that the FCC has distorted the plain meaning of the term

“reciprocal compensation.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 25-

26 (July 17, 2013). According to the Petitioners, traffic between an LEC and IXC is not

“reciprocal” because the charges and traffic go only one way. Id. at 10, 25-26; Joint

Intercarrier Compensation Reply Br. of Pet’rs at 9-10 (July 31, 2013). For this position,

the Petitioners contend that for compensation to be “reciprocal,” both carriers must pay

each other. Joint Intercarrier Compensation Principal Br. of Pet’rs at 10 (July 17, 2013).

Relying on this definition, the Petitioners argue that access charges “are never reciprocal”

because the IXC pays the LECs on both ends to originate and terminate the traffic. Id.

(emphasis omitted).

In effect, the Petitioners are arguing at step one of Chevron that § 251(b)(5) is

unambiguous because access charges are always paid to the LEC and never to the IXC.

But the nature of access charges does not remove ambiguities in the phrase “reciprocal

compensation.” See Pac. Bell v. Cook Telecom, Inc., 197 F.3d 1236, 1242-44 (9th Cir.

1999) (concluding that § 251(b)(5) can plausibly be read to cover an agreement between

an LEC and one-way paging provider even though the compensation flows only one

way).

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Section 251(b)(5) requires LECs to establish arrangements for “reciprocal

compensation.” 47 U.S.C. § 251(b)(5). Thus, we could adopt the Petitioners’

interpretation only if the statute requires traffic and compensation to “actually flow to and

from both carriers . . . to be a ‘reciprocal compensation arrangement.’” Pac. Bell, 197

F.3d at 1244. This is a reasonable reading of the statute. But the statute can also be read

to simply require the existence of reciprocal obligations. See id. (concluding that one-

way paging providers were entitled to reciprocal compensation under the statute even

through traffic and payment are never reciprocal). A carrier can have a reciprocal

entitlement to compensation for transporting and terminating traffic even if it does not

ultimately transport or terminate a call. See Atlas Tel. Co. v. Okla. Corp. Comm’n, 400

F.3d 1256, 1264 (10th Cir. 2005) (stating that under 47 U.S.C. § 251(b)(5), the term

“reciprocal compensation” can cover traffic transported on an IXC’s network).

The statutory term “reciprocal compensation” is ambiguous; thus, we reach the

second step of Chevron. At step two, we conclude that the FCC reasonably interpreted

the term “reciprocal compensation” for “telecommunications” to include the traffic

between IXCs and LECs.

d.

The Petitioners’ Reliance on §§ 252(d)(2)(A) and

251(c)(2)(A)

The Petitioners argue that two other statutory sections (§§ 252(d)(2)(A) and

251(c)(2)(A)) would prevent application of § 251(b)(5) to access traffic. Joint Intercarrier

Compensation Principal Br. of Pet’rs at 10-11 (July 17, 2013). We disagree.

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i.

Section 252(d)(2)(A)

The Petitioners invoke § 252(d)(2)(A), arguing that it precludes an expansive

reading of § 251(b)(5) because traffic never originates on an IXC’s network. Id. at 11-12;

Joint Intercarrier Compensation Reply Br. of Pet’rs at 9 (July 31, 2013). This argument is

invalid.

Section 252(d)(2)(A) applies to state commission arbitrations of interconnection

agreements between an ILEC and another telecommunications carrier. See 47 U.S.C.

§ 252. Under this section, state commissions can consider reciprocal compensation terms

just and reasonable only if they “provide for the mutual and reciprocal recovery by each

carrier of costs associated with the transport and termination on each carrier’s network

facilities of calls that originate on the network facilities of the other carrier.” Id. at

§ 252(d)(2)(A). Because IXCs do not originate calls, the Petitioners contend that

reciprocal compensation arrangements cannot apply to traffic between LECs and IXCs.

See Joint Intercarrier Compensation Principal Br. of Pet’rs at 11-12 (July 17, 2013).

The FCC rejected this argument, reasoning that § 252(d)(2)(A) does not limit

§ 251(b)(5). See 2 R. at 645-46 ¶ 768. In rejecting the argument, the FCC found that

§ 252(d)(2)(A) “‘deals with the mechanics of who owes what to whom,’” but “‘does not

define the scope of traffic to which § 251(b)(5) applies.’” Id. (quoting In re High-Cost

Universal Serv. Support, 24 FCC Rcd. 6475, 6481 ¶ 12 (2008)). With this finding, the

FCC reiterated that Congress did not intend “‘the pricing standards in section 252(d)(2) to

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limit the otherwise broad scope of section 251(b)(5).’” 2 R. at 645-46 ¶ 768 (quoting

High-Cost Universal Serv. Support, 24 FCC Rcd. 6475, 6480 ¶ 11 (2008)). Instead, the

FCC concluded that § 252(d)(2)’s pricing rules do “not address what happens when

carriers exchange traffic that originates or terminates on a third carrier’s network.” In re

High-Cost Universal Serv. Support, 24 FCC Rcd. at 6481 ¶ 12.

The FCC’s interpretation is reasonable. Section 251(b)(5) broadly refers to “the

transport and termination of telecommunications.” 47 U.S.C. § 251(b)(5). This section is

incorporated into § 252(d)(2), but not the other way around. Consequently, there is

nothing in § 252(d)(2) to suggest that it limits the scope of § 251(b)(5). In these

circumstances, the FCC reasonably relied on the breadth of § 251(b)(5) to conclude that it

is not narrowed by § 252(d)(2).

ii.

Section 251(c)(2)(A)

The Petitioners also rely on § 251(c)(2)(A), which distinguishes between

“exchange access” and “exchange service.” This section requires ILECs to provide

telecommunications carriers with interconnection to their networks “for the transmission

and routing of telephone exchange service [local calls] and exchange access [long-

distance calls].” 47 U.S.C. § 251(c)(2)(A). Because the section distinguishes between

“exchange service” and “exchange access,” the Petitioners argue that “reciprocal

compensation” must refer to something other than “exchange access.” Joint Intercarrier

Compensation Principal Br. of Pet’rs at 11-12 (July 17, 2013). We reject this argument.

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The Petitioners’ argument does not render § 251(b)(5) unambiguous or vitiate the

reasonableness of the FCC’s interpretation. For this argument, the Petitioners incorrectly

conflate “exchange service” and “reciprocal compensation.” Section 251(c)(2)(A) refers

to an ILEC’s duty to allow others to interconnect for local- and long-distance calls. This

duty is distinct from the duty in § 251(b)(5) to establish arrangements for reciprocal

compensation. See, e.g., Verizon Cal., Inc. v. Peevey, 462 F.3d 1142, 1146 (9th Cir.

2006). Thus, § 251(c)(2)(A) does not unambiguously shed light on how the FCC should

interpret § 251(b)(5).

The Petitioners cite a House Conference report. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 11 n.8 (July 17, 2013); Joint Intercarrier Compensation Reply

Br. of Pet’rs at 11 n.12 (July 31, 2013). But the report does not remove the ambiguity in

§ 251(b)(5). The House Report addressed only the need for the FCC to preserve its own

authority under § 201 and the FCC’s continued authority over access charges. “The

obligations and procedures prescribed in [§ 251] do not apply to interconnection

arrangements between local exchange carriers and telecommunications carriers under

§ 201 of the Communications Act for the purpose of providing interexchange service, and

nothing in this section is intended to affect the Commission’s access charge rules.” H.R.

Conf. Rep. 104-458, at 117. The House Report does not undermine the FCC’s authority

to enact a national reciprocal compensation framework under §§ 251(b)(5) and 201(b).

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2.

Preemption of State Regulatory Authority Over Intrastate

Access Charges

The Petitioners argue that even if the FCC can regulate IXC-LEC traffic, this

authority would include calls that were interstate, but not intrastate. Joint Intercarrier

Compensation Principal Br. of Pet’rs at 14-25 (July 17, 2013). For this argument, the

Petitioners rely on:

!

47 U.S.C. § 152(b),

!

47 U.S.C. § 601(c),

!

§ 601(c) of the Telecommunications Act of 1996,

!

47 U.S.C. § 253,

!

47 U.S.C. § 251(d)(3), and

!

47 U.S.C. § 251(g).

We disagree with the Petitioners in their interpretation of these sections.

a.

Sections 152(b) and 601(c)

According to the Petitioners, 47 U.S.C. § 152(b) and § 601(c)(1) of the

Telecommunications Act of 1996 insulate intrastate access charges from federal

regulation under § 251(b)(5). Joint Intercarrier Compensation Principal Br. of Pet’rs at

14-15 (July 17, 2013).

Sections 152(b) and 601(c)(1) provide in part:

47 U.S.C. § 152(b): [N]othing in this chapter shall be construed to

apply or to give the Commission jurisdiction with respect to (1)

charges, classifications, practices, services, facilities, or regulations

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for or in connection with intrastate communication service by wire or

radio of any carrier.

* * * *

§ 601(c)(1) of the Telecommunications Act of 1996: No Implied

Effect. This Act and the amendments made by this Act . . . shall not

be construed to modify, impair, or supersede Federal, State, or local

law unless expressly so provided in such Act or amendments.4

Because the FCC’s earlier, valid interpretation did not require preemption of intrastate

access charges, the Petitioners argue that § 251(b)(5) cannot be read more broadly to

require preemption now. Id. at 15.

The Petitioners address the argument as if it arises at the first Chevron step. But

the argument is insufficient at this step because Congress intended the 1996 Act to apply

to intrastate communications and expressly allowed the FCC to preempt state law. AT&T

Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 n.6 (1999); MCI Telecomms. Corp. v. Pub.

Serv. Comm’n of Utah, 216 F.3d 929, 938 (10th Cir. 2000).

Nonetheless, the Petitioners argue that § 152(b) and § 601(c)(1) require the FCC to

narrowly interpret § 251(b)(5) to avoid interference with state regulation of intrastate

traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at 14-15, 19, 39 n.29 (July

17, 2013). We disagree. Otherwise, we would be interpreting §§ 152(b) and 601(c)(1) in

a way that would upset the regulatory scheme envisioned in the 1996 Act. See Geier v.

Am. Honda Motor Co., Inc., 529 U.S. 861, 870 (2000).

4

Section 601(c)(1) was codified at 47 U.S.C. § 152 in the Historical and Statutory

Notes.

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Section 152(b) simply limits the FCC’s ancillary jurisdiction. See AT&T Corp.,

525 U.S. at 380-81 & n.7 (stating that § 152(b) serves only to limit the FCC’s ancillary

authority). And, § 601(c)(1) does not limit Congress’s actual delegation of authority to

the FCC. See Qwest Corp. v. Minn. Pub. Utils. Comm’n, 684 F.3d 721, 731 (8th Cir.

2012) (§ 601(c)(1) does not save state regulatory action conflicting with FCC

regulations); Farina v. Nokia, Inc., 625 F.3d 97, 131 (3d Cir. 2010) (declining to interpret

§ 601(c)(1) broadly “where a federal regulatory scheme reflects a careful balancing”).

Because §§ 152(b) and 601(c)(1) do not unambiguously narrow the scope of § 251(b)(5),

we proceed to Chevron’s second step. See City of Arlington v. FCC, __ U.S. __, 133 S.

Ct. 1863, 1868 (2013).

At that step, we defer to the FCC’s interpretation of a statutory ambiguity that

concerns the scope of its regulatory authority. See id. at 1874. This deference applies to

“statutes designed to curtail the scope of agency discretion.” Id. at 1872.

Administrative deference is suitable here. Congress appears to grant plenary

authority to the FCC through § 251, and §§ 152(b) and 601(c)(1) do not preclude the FCC

from interpreting § 251(b)(5) to allow preemption of state regulation over intrastate

access charges.

b.

Section 253

The Petitioners also argue that the FCC has usurped state authority to promote

broadband development through a system of intercarrier compensation. Joint Intercarrier

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Compensation Principal Br. of Pet’rs at 16-18, 22 (July 17, 2013). For this argument, the

Petitioners use Pennsylvania as an example. Id. According to the Petitioners,

Pennsylvania uses access charges to promote broadband development and Pennsylvania’s

laws are not preempted under 47 U.S.C. § 253. Id. at 22 & n.20. Reliance on § 253 is

misguided.

We have not been asked to decide the validity of the Pennsylvania law. Instead,

the Petitioners ask us to decide if the FCC acted arbitrarily and capriciously in deciding to

preempt intrastate access charges under § 251(b)(5). In deciding to preempt regimes for

state access charges, the FCC did not act arbitrarily or capriciously.

The FCC’s policy choice is not undermined by the alleged efforts in Pennsylvania.

Though the Petitioners boast of efforts in Pennsylvania, they are silent regarding the steps

to promote broadband in the 49 other states. Without evidence of a nationwide effort to

promote broadband, the FCC concluded that a national approach would promote certainty

and predictability. 2 R. at 656 ¶ 790. In reaching this conclusion, the FCC expressed

concern regarding “variability and unpredictability” when broadband development is left

to the states. Id. at 657-58 ¶ 794.

The lone example of Pennsylvania, as a leader in developing broadband networks,

does little to undermine the FCC’s concern with variability among the states. The FCC

explained its preference for a national strategy to develop broadband, and the Petitioners’

example of Pennsylvania does not render the FCC’s strategy arbitrary or capricious.

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c.

Section 251(d)(3)

The Petitioners further rely on 47 U.S.C. § 251(d)(3) to rebut the FCC’s

interpretation that § 251(b)(5) includes intrastate traffic between IXCs and LECs. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 16-18 (July 17, 2013). Section

251(d)(3), entitled “Preservation of State access regulations,” prevents the FCC from

preempting state commissions’ regulations, orders, or policies that: (1) establish LEC

access and interconnection obligations, (2) are consistent with the requirements of § 251,

and (3) do not substantially prevent implementation of the requirements of § 251 and the

purposes of the Act. 47 U.S.C. § 251(d)(3). According to the Petitioners, § 251(d)(3)

prevents the FCC from preempting state access charges. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 16-18 (July 17, 2013).

This argument is unpersuasive. The FCC reasonably concluded that § 251(d)(3)

does not speak to the preemptive effect of § 251(b)(5) or limit the permissible

interpretations of the statute or the FCC’s rulemaking authority. 2 R. at 644 n.1374, 644-

45 ¶ 767. The FCC has interpreted intrastate traffic as subject to § 251(b)(5); and, in

exercising the grant of power under § 251(b)(5), the FCC is establishing a national bill-

and-keep policy for all access traffic.

This is the context for our consideration of § 251(d)(3). As noted above,

§ 251(d)(3) preserves state regulations only if they would not substantially prevent

implementation of § 251. And, in exercising its powers under § 251, the FCC views

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intrastate access charges as an obstacle to reform. Id. at 644-45 ¶ 767. That finding is

enough for the FCC to exercise its authority to preempt intrastate access charges under

§ 251(d)(3). See Qwest Corp. v. Ariz. Corp. Comm’n, 567 F.3d 1109, 1120 (9th Cir.

2009) (holding that state requirements were inconsistent with, and prevented

implementation of, § 251 because the FCC had precluded the requirements); Ill. Bell Tel.

Co. v. Box, 548 F.3d 607, 611 (7th Cir. 2008) (concluding that § 251(d)(3) did not save

state regulations that were contrary to the FCC’s determinations). As a result, § 251(d)(3)

does not preclude the FCC’s broad interpretation of its authority under § 251(b)(5).

d.

Section 251(g)

Section 251(g) preserved existing obligations to provide access and

interconnection, along with compensation, until they are explicitly superseded by FCC

regulations. 47 U.S.C. § 251(g). This section does not undermine the FCC’s

interpretation of § 251(b)(5).

Both sides point to § 251(g) as support for their interpretations of § 251(b)(5). The

Petitioners argue that § 251(g) involved only interstate traffic, reasoning that when this

section took effect, no court or agency decision had purported to give the FCC

jurisdiction over intrastate traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs

at 23-25 (July 17, 2013). The FCC argues the opposite: that § 251(g) shows that

Congress contemplated FCC regulation over intrastate traffic. Federal Resp’ts’ Final

Resp. to the Joint Intercarrier Compensation Principal Br. of Pet’rs at 18 (July 29, 2013).

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We need not choose between these conflicting interpretations of § 251(g) because the

FCC did not rely on this section. See 2 R. at 644 n.1374 (noting that the FCC “need not

resolve [the] issue, because all traffic terminated on an LEC [would], going forward, be

governed by section 251(b)(5) regardless of whether section 251(g) previously covered

the state intrastate access regime”).

And the Petitioners’ argument would not require us to narrow the scope of traffic

governed by § 251(b)(5). At most, the Petitioners’ argument would lead to a narrow

reading of § 251(g), for it would address only the viability of agreements involving

intrastate traffic until the FCC acted. This reading would leave § 251(g) silent on the

continued viability of compensation arrangements for intrastate traffic.

Under the first step of Chevron, we are called upon to decide whether the FCC’s

interpretation of § 251(b)(5) is unambiguously foreclosed by § 251(g). For the sake of

argument, we can assume that the Petitioners are correct in stating that § 251(g) did not

address intrastate traffic. If that is true, however, § 251(g) could not act as an

unambiguous expression of congressional intent on the extent of the FCC’s authority over

intrastate traffic.

The resulting issue is whether the FCC’s broad reading of § 251(b)(5) is

permissible notwithstanding § 251(g). We conclude that the FCC’s interpretation is

permissible. Section 251(g) provides only for the continuation of arrangements for access

charges under any consent decree existing when the 1996 statute went into effect. See 47

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U.S.C. § 251(g). But the statute also provides that these arrangements would end when

the FCC acted. See id.

When Congress enacted the 1996 law, the D.C. District Court had required access

charges for calls that were both interstate and intrastate. United States v. AT&T, 552 F.

Supp. 131, 169 n.161 (D.D.C. 1982). Under § 251(g), these arrangements would end

when they were superseded by the FCC. 47 U.S.C. § 251(g). In light of § 251(g), the

FCC could reasonably conclude that it had the power to supersede the arrangements for

access charges that were both interstate and intrastate because all had arisen out of the

same consent decree. See 2 R. at 644 n.1374.

This interpretation was not the only one possible. For example, one could also

view § 251(g) to reflect the widespread assumptions in 1996 that states (not the FCC)

regulated intrastate access. But under the second step of Chevron, the FCC’s contrary

reading of § 251(g) was at least reasonable. As a result, we defer to the FCC’s reading of

§ 251(g).

3.

FCC Authority Over Intrastate Origination Charges

With this reading, we conclude that the FCC enjoys at least some regulatory

authority over intrastate traffic between LECs and IXCs. But we must address the scope

of this authority, for the Petitioners argue that it would not extend to origination charges.

This argument is three-fold: (1) Originating access traffic is exempt from reciprocal

compensation because § 251(b)(5) refers only to “transport and termination,” not

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“origination”; (2) the FCC failed to acknowledge that it had changed its definitions of

“transport” and “termination”; and (3) the FCC’s preemption of originating access

charges is arbitrary and capricious because it does not allow originating LECs to recover

their origination costs. Joint Intercarrier Compensation Principal Br. of Pet’rs at 25-28

(July 17, 2013). The first two challenges lack merit, and the third challenge is not ripe.

a.

Section 251(b)(5) and Originating Access Traffic

In the Order, the FCC capped charges for originating access. 2 R. at 836-37

¶ 1298, 661 ¶ 801, 661 Figure 9, 667 ¶ 22. The Petitioners deny regulatory authority over

origination charges even under the FCC’s interpretation of § 251(b)(5). According to the

Petitioners, originating access charges are not subject to § 251(b)(5) because it refers to

“transport and termination,” but not “origination.” Joint Intercarrier Compensation

Principal Br. of Pet’rs at 26 (July 17, 2013) (citing 47 U.S.C. § 251(b)(5)). We reject the

Petitioners’ interpretation of § 251(b)(5).

This section authorizes arrangements for the reciprocal compensation of “transport

and termination.” Both sides point to the omission of origination charges.

For their part, the Petitioners suggest that the omission leaves the FCC powerless

to reform origination charges. Id. The FCC argues the opposite: If § 251(b)(5)

authorizes arrangements for reciprocal compensation involving transport and termination,

the omission of origination charges must have meant that LECs are unable to charge

access fees for origination. R. at 669 ¶ 817 (citing In re Implementation of the Local

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Competition Provisions in the Telecomms. Act of 1996, 11 FCC Rcd. 15499, 16016

¶ 1042 (1996)); Federal Resp’ts’ Final Resp. to the Joint Intercarrier Compensation

Principal Br. of Pet’rs at 21-22 (July 29, 2013).

This view is supported by “a venerable canon of statutory construction,” “[t]he

maxim ‘expressio unius est exclusio alterius’—which translates roughly as ‘the

expression of one thing is the exclusion of other things.’” United States v. Hernandez-

Ferrer, 599 F.3d 63, 67-68 (1st Cir. 2010).

The FCC’s interpretation reflects a reasonable approach. The Petitioners state that

for toll calls, carriers must perform three types of functions: origination, transport, and

termination. Joint Intercarrier Compensation Principal Br. of Pet’rs at 26 (July 17, 2013).

Two of the three functions are included in § 251(b)(5). The single omission could

suggest that Congress intended to exclude “origination” from the duty to provide

compensation. Because the FCC’s interpretation of § 251(b)(5) is reasonable, it is

entitled to deference under Chevron. Thus, we reject the Petitioners’ challenge to FCC

regulation of origination charges.

b.

The FCC’s Interpretations of “Transport” and

“Termination”

The Petitioners argue that the FCC has arbitrarily changed its definition of the

statutory term “termination” without acknowledging the change. Joint Intercarrier

Compensation Principal Br. of Pet’rs at 12-13 (July 17, 2013). According to the

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Petitioners, the FCC previously defined the term “termination” in a way that excluded

“origination.” Id. at 13.

This argument is incorrect, for the FCC has not changed its definition of

“termination.” 2 R. at 642 ¶ 761. Instead, the FCC has changed its view regarding the

traffic that is subject to § 251(b)(5). Id. With this change, the FCC provided an

explanation. Id. at 642-43 ¶¶ 761-64.

In light of this explanation, we reject the Petitioners’ challenge. It presupposes

that the FCC has redefined the terms “transport” and “termination” without saying why.

But these definitions have not changed. Instead, the FCC has refocused on the statutory

term “telecommunications,” concluding that it is this term—rather than “transport” or

“termination”—that determines the scope of § 251(b)(5). Id. at 647 ¶ 761. By focusing

on the term “telecommunications” and explaining this focus, the FCC stated why it was

reassessing the scope of § 251(b)(5); accordingly, we reject the Petitioners’ challenge.

c.

The Purported Prohibition of Originating Access Charges

The Petitioners also argue that the prohibition on originating access charges is

arbitrary and capricious because the FCC did not explain why the “prohibition on

origination charges applies where the originating LEC receives no further compensation

from its end-user.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 27-28 (July

17, 2013). This challenge is not ripe.

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The FCC has announced that it will eventually abolish originating access charges

and has capped originating access charges at current levels. See 2 R. at 650 ¶¶ 777-78. In

the interim, the FCC has sought further comment “on other possible approaches to

originating access reform, including implementation issues and our legal authority to

adopt any such reforms.” Id. at 839 ¶ 1305. Because the FCC has not yet abolished

originating access charges, this challenge is unripe. See AT&T Corp. v. Iowa Utils. Bd.,

525 U.S. 366, 386 (1999) (“When . . . there is no immediate effect on the plaintiff’s

primary conduct, federal courts normally do not entertain pre-enforcement challenges to

agency rules and policy statements.”).

C.

Bill-and-Keep as a Default Methodology

The FCC not only extended its regulations to all access traffic, but also began a

transition to bill-and-keep as the default standard for reciprocal compensation. 2 R. at

646 ¶ 769. According to the FCC’s interpretation of its authority, § 201(b) allows the

adoption of rules and regulations to implement § 251(b)(5). Id. at 646 ¶ 770. In

implementing § 251(b)(5), the FCC considers bill-and-keep to be “just and reasonable”

under § 201(b); thus, the FCC concluded it has statutory authority to implement bill-and-

keep as the default reciprocal compensation standard for all traffic subject to § 251(b)(5).

Id. at 646-47 ¶¶ 771-72.

In arriving at this conclusion, the FCC addressed opposition based on §§ 252(c)

and 252(d)(2). Id. at 647-48 ¶ 773. Section 252 does two things: (1) It preserves state

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rate-setting authority in state commission arbitrations involving ILECs and other carriers;

and (2) it defines “just and reasonable” rates. 47 U.S.C. § 252.

For two reasons, the FCC concluded that these provisions did not prevent adoption

of a bill-and-keep methodology. 2 R. at 647-48 ¶¶ 774-75. First, the FCC pointed to

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 384 (1999), which authorizes the FCC to

establish a pricing methodology for state commissions to apply in these arbitrations. 2 R.

at 648 ¶ 773. In choosing among pricing methodologies, the FCC found specific

approval of bill-and-keep in 47 U.S.C. § 252(d)(2)(B). Id. at 648-49 ¶ 775. Second, the

FCC found that bill-and-keep is just and reasonable under § 252(d)(2) because it allows

carriers to recover their transport and termination costs from their end-users. Id. at 648-

49 ¶¶ 775-76.

Both conclusions are criticized by the Petitioners. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 28-45 (July 17, 2013). They argue that: (1) bill-and-keep

effectively sets a zero rate that infringes on state rate-setting authority under § 252(d), and

(2) bill-and-keep does not lead to just and reasonable intercarrier compensation rates

under §§ 252(d)(2)(A) and 201(b). Id. at 28-45.

We apply Chevron and defer to the FCC’s interpretation of its authority to enact

bill-and-keep as the default standard for reciprocal compensation.

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1.

Consideration Under § 252

The Petitioners contend that the FCC cannot establish bill-and-keep as a

methodology because it intrudes on state rate-setting authority under § 252. Id. at 28-31.

State authority is preserved in three parts of § 252: (b), (c), and (d).

In (b), Congress preserved the authority of states in arbitrating interconnection

agreements between ILECs and other carriers. See 47 U.S.C. § 252(b).

In (c), § 252 required state commissions—not the FCC—to “establish any rates for

interconnection, services, or network elements according to subsection (d) of this

section.” Id. at § 252(c)(2).

And in (d), Congress preserved state arbitration authority over “[c]harges for the

transport and termination of traffic.” Id. § 252(d)(2). Under this section, a state

commission cannot consider reciprocal compensation terms and conditions just and

reasonable unless:

(i)

such terms and conditions provide for the mutual and

reciprocal recovery by each carrier of costs associated with

the transport and termination on each carrier’s network

facilities of calls that originate on the network facilities of the

other carrier; and

(ii)

such terms and conditions determine such costs on the basis

of a reasonable approximation of the additional costs of

terminating such calls.

Id. at § 252(d)(2)(A). Though subsection (d) preserves state arbitration authority over

charges, it also expressly allows approval of bill-and-keep arrangements, prohibiting a

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construction that would “preclude arrangements that afford the mutual recovery of costs

through the offsetting of reciprocal obligations, including arrangements that waive mutual

recovery (such as bill-and-keep arrangements).” Id. at § 252(d)(2)(B)(i).

The FCC has focused on this language, pointing out that Congress specifically

stated that bill-and-keep arrangements are considered “just and reasonable.” 2 R. at 648-

49 ¶ 775.

The Petitioners argue that the FCC has misinterpreted § 252(d)(2)(B)(i), stating

that it simply requires carriers to voluntarily waive payments and submit to bill-and-keep

arrangements. Joint Intercarrier Compensation Principal Br. of Pet’rs at 36-37 (July 17,

2013). This interpretation conflicts with the statute. Section 252(d)(2)’s pricing

standards apply only to terms imposed through compulsory arbitration. See 47 U.S.C.

§ 252(c). Voluntarily negotiated terms can contradict the statutory requirements and are

not subject to this pricing provision. See id. at § 252(a)(1). Thus, the FCC was entitled to

reject the Petitioners’ narrow interpretation of § 252(d)(2).

Because the statute expressly authorizes bill-and-keep arrangements along with

state rate-setting authority, we believe the FCC’s interpretation of § 252(d)(2) is

reasonable and entitled to deference under Chevron. See City of Arlington v. FCC, __

U.S. __, 133 S. Ct. 1863, 1874 (2013).

Under Section 252(d)(2), states continue to enjoy authority to arbitrate “terms and

conditions” in reciprocal compensation. See 47 U.S.C. § 252(d)(2). For example, even

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under bill-and-keep arrangements, states must arbitrate the “edge” of carrier’s networks.

2 R. at 649-50 ¶ 776. This reservoir of state authority can be significant.

The “edge” of a carrier’s network consists of the points “at which a carrier must

deliver terminating traffic to avail itself of bill-and-keep.” Id. The location of the “edge”

of a carrier’s network determines the transport and termination costs for the carrier.

The impact is illustrated in Diagram 6. In this scenario, Carrier A has low

transport and termination costs because it needs only to transport the calls a short distance

(between Points A and B).

A different delineation of the edge could significantly increase Carrier A’s costs.

This impact is illustrated in Diagram 7, which would reflect a state commission’s decision

to set the edge of Carrier A’s network at Point D rather than Point A:

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The FCC reasonably determined that by continuing to set the network “edge,”

states retain their role under § 252(d) in “determin[ing] the concrete result in particular

circumstances.” Id. at 649-50 ¶ 776 (quoting AT&T v. Iowa Utils. Bd., 525 U.S. 366, 384

(1999)).

The Petitioners disagree. In their view, AT&T Corp. v. Iowa Utilities Board, 525

U.S. 366 (1999), and Iowa Utilities Board v. Federal Communications Commission, 219

F.3d 744 (8th Cir. 2000), rev’d in part by Verizon Commc’ns. Inc. v. FCC, 535 U.S. 467

(2002), preserved the states’ role in “establishing the actual reciprocal compensation rate,

not finding points on a network at which a carrier must deliver traffic.” Joint Intercarrier

Compensation Principal Br. of Pet’rs at 29-31 (July 17, 2013). The Petitioners argue that

bill-and-keep effectively sets the intercarrier compensation rate at zero and intrudes on

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state rate-setting authority.5 Id. at 29-30 (citing Iowa Utils. Bd., 219 F.3d at 757, rev’d in

part, Verizon Commc’ns, Inc. v. FCC, 535 U.S. 467 (2002)).

We reject the Petitioners’ broad reading of AT&T and Iowa Utilities Board.

In AT&T, the Supreme Court upheld the FCC’s rule-making authority over §§ 251

and 252. AT&T, 525 U.S. at 378. Interpreting § 252(c)(2)’s reservation of rate-setting

authority to state commissions, the Court upheld the FCC’s requirement that state

commissions use a particular methodology for prices involving interconnection and

5

In their reply brief, the Petitioners also challenge the FCC’s rate limitations during

the transition to bill-and-keep. Joint Intercarrier Compensation Reply Br. of Pet’rs at 15

(July 31, 2013). This challenge is new. In their opening brief, the Petitioners did not

challenge the FCC’s decision to prescribe interim rates. Instead, the Petitioners

challenged only the FCC’s final prescription of bill-and-keep as a methodology for all

traffic. Indeed, the term “interim rates” was mentioned just once in the Petitioners’

opening brief. Joint Intercarrier Compensation Principal Br. of Pet’rs at 40 (July 17,

2013). And that reference came in a quotation that the Petitioners used for an unrelated

argument, addressing the applicability of § 252(d)(2)(A) to interstate intercarrier

compensation rates under § 201. See id. Because “[a]rguments inadequately briefed in

the opening brief are waived,” Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th

Cir. 1998), we would ordinarily decline to reach the Petitioners’ new contention in their

reply brief regarding the invalidity of the FCC’s interim rates. See Joint Intercarrier

Compensation Reply Br. of Pet’rs at 14-15 (July 31, 2013).

Though the Petitioners did not challenge interim rates in their opening brief, the

LEC Intervenors did. See Incumbent Local Exchange Carrier Intervenors’ Br. in Supp. of

Pet’rs at 8 (July 15, 2013) (“Nonetheless, the Order end-runs the statutory directive by

adopting a methodology that prescribes specific transition rates plus a specific ultimate

rate of zero.”). But intervenors generally cannot raise new issues. Arapahoe Cnty. Pub.

Airport Auth. v. FAA, 242 F.3d 1213, 1217 n.4 (10th Cir. 2001). This prohibition is

prudential and should be avoided only in “extraordinary” cases. Id. Because we are

“hesitant to definitively opine on such [a] legally significant issue[] when [it has] received

such cursory treatment,” United States v. Gordon, 710 F.3d 1124, 1150 (10th Cir. 2013),

we decline to disregard the general rule. As a result, we do not reach the Petitioners’

arguments in their reply brief on the validity of the FCC’s interim rates.

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unbundled access. See id. at 384-85. In doing so, the Supreme Court concluded that the

FCC has rulemaking authority to implement a pricing methodology for the states to

implement, “determining the concrete result in particular circumstances. That is enough

to constitute the establishment of rates.” Id. at 384.

In Iowa Utilities Board, the Eighth Circuit Court of Appeals applied judicial

estoppel to strike down the FCC’s proxy prices for interconnection, network element

charges, wholesale rates, and transport and termination rates. 219 F.3d at 756-57. The

court did not distinguish between reciprocal compensation rates and interconnection,

network element charges, and wholesale rates. Id. Instead, the court held that “[s]etting

specific prices goes beyond the FCC’s authority to design a pricing methodology and

intrudes on the states’ right to set the actual rates pursuant to § 252(c)(2).” Id. at 757.

Against the backdrop of AT&T and Iowa Utilities Board, the FCC reasonably

concluded that bill-and-keep involves a permissible methodology notwithstanding the

states’ authority to set rates under § 252(c). The Petitioners assume that the state

commissions have authority to require intercarrier compensation, for the states can set

“rates” for interconnection under § 252(c)(2). This assumption is belied by § 252(d)(2),

which governs state arbitrations over the “terms and conditions for reciprocal

compensation.” 47 U.S.C. § 252(d)(2).

The phrase “terms and conditions” does not necessarily require intercarrier

compensation, for the statute expressly provides that § 252(d)(2)(A) should “not be

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construed . . . to preclude . . . bill-and-keep arrangements.” Id. at § 252(d)(2)(B)(i). If the

states’ rate-setting authority required carriers to pay one another, the statutory approval of

bill-and-keep arrangements would not make sense. See The Telecomms. Act of 1996:

Law & Legislative History 6 (eds. Robert E. Emeritz, Jeffrey Tobias, Kathryn S. Berthat,

Kathleen C. Dolan, & Michael M. Eisenstadt 1996) (stating that under § 251(b), “each

LEC must . . . enter into reciprocal compensation arrangements with interconnecting

carriers, a requirement that can be met by ‘bill-and-keep’ arrangements”). Thus, the FCC

reasonably interpreted the statute to allow the elimination of any intercarrier

compensation through the adoption of bill-and-keep.

As the Petitioners argue, this methodology would eliminate the existence of any

“rates” for intercarrier compensation. With elimination of these “rates,” the state

commissions would have less to arbitrate under § 252(c). But that is the product of the

statutory approval of “bill-and-keep” rather than an invention of the FCC. Through bill-

and-keep, state commissions will continue to define the edges of the networks; that role

preserves state regulatory authority over the “terms and conditions” of reciprocal

compensation. There is no violation of § 252(c).

2.

The “Just and Reasonable” Rate Requirement in §§ 201(b) and

252(d)(2)

The Petitioners point to 47 U.S.C. §§ 201(b) and 252(d)(2), arguing that they

require rates to be “just and reasonable.” Joint Intercarrier Compensation Principal Br. of

Pet’rs at 39-40 (July 17, 2013); see 47 U.S.C. §§ 201(b), 252(d)(2). Invoking these

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sections, the Petitioners argue that the FCC’s bill-and-keep methodology is not “just and

reasonable.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 39-42 (July 17,

2013). This argument is invalid under Chevron.

According to the FCC, bill-and-keep allows for just and reasonable rates by

providing for the “mutual and reciprocal recovery of costs through the offsetting of

reciprocal obligations.” Federal Resp’ts’ Final Resp. to the Joint Intercarrier

Compensation Principal Br. of Pet’rs at 33-34 (July 29, 2013). Under a bill-and-keep

arrangement, each carrier obtains an “in kind” exchange. To illustrate:

In Diagram 8, Carrier 1 transports and terminates calls that originate on Carrier 2’s

network. In exchange, Carrier 2 transports and terminates calls that originate on Carrier

1’s network. Both parties obtain reciprocal benefits, and both can recover their additional

costs from their end-users. 2 R. at 648-49 ¶ 775 & n.1408, 649-50 ¶ 776.

The FCC reasoned that under this methodology, a carrier that terminates a call that

originates with another carrier performs a service for its end-user, the call’s recipient.

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Because both end-users benefit from the call, the end-users should split the cost and pay

their respective carriers for the call. Through this in-kind exchange of services, bill-and-

keep allows carriers to obtain compensation for the call from their own customers. Id. at

640-41 ¶¶ 756-57, 648 n.1408, 649 n.1410.

The Petitioners contend that bill-and-keep leads to unreasonable rates for two

reasons: (1) Carriers have a statutory right to payment from other carriers; and (2)

reciprocal compensation arrangements do not allow for sufficient cost recovery. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 34-38, 41-43 (July 17, 2013).

a.

Consideration of a Statutory Right to Payments from

Other Carriers

The first contention involves a statutory right to payments from other carriers. Id.

at 42. For this contention, however, the Petitioners do not point to any statutory

language. Instead, they rely on Louisiana Public Service Commission v. Federal

Communications Commission, 476 U.S. 355, 364-65 (1986), for the proposition that

carriers are entitled to recover their reasonable expenses and a fair return on their

investment through customer rates. Id. at 41. But Louisiana Public Service Commission

requires only that carriers recover their reasonable expenses and a fair return on their

investment from their customers and does not specify the source of this recovery. La.

Pub. Serv. Comm’n, 476 U.S. at 364-65. Therefore, the FCC rationally concluded that §§

201(b) and 252(d)(2) are satisfied by an in-kind exchange of services. See id. at 646-47

¶ 771, 649-650 ¶ 776.

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b.

Sufficiency of Cost Recovery

Under Section 252(d)(2)(A)(ii), state commissions can consider terms and

conditions just and reasonable only if they permit recovery by each carrier of costs based

on a “reasonable approximation of the additional costs of terminating such calls.” 47

U.S.C. § 252(d)(2)(A)(ii). Pointing to this provision, the Petitioners argue that: (1) the

FCC was inconsistent by acknowledging that carriers incur costs for termination and

generally cannot raise end-user rates because of competition, (2) the FCC failed to

explain its departure from earlier reliance on termination costs, and (3) bill-and-keep is

not “just and reasonable” because it does not allow sufficient recovery of costs. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 34-38 (July 17, 2013). These

arguments are unpersuasive.

Bill-and-keep anticipates that carriers will recover their costs from their end-users.

2 R. at 648 ¶ 775 & n.1408, 649-50 ¶ 776. States are free to set end-user rates, and the

Order does not prevent states from raising end-user rates to allow a fair recovery of

termination costs. See id. at 649-50 ¶ 776.

The Petitioners’ fall-back position is that the FCC failed to explain its change in

position. Joint Intercarrier Compensation Principal Br. of Pet’rs at 37-38 (July 17, 2013).

We disagree, for the FCC pointed to new analyses showing that both parties benefit from

a call and that bill-and-keep allows for mutual recovery of costs. 2 R. at 640-41 ¶¶ 755-

59.

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Finally, the Petitioners contend that bill-and-keep violates § 252(d)(2) by failing to

explicitly provide for cost recovery. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 37-38 (July 17, 2013). We reject this argument for two reasons. First, as

discussed in Chief Judge Briscoe’s separate opinion, the FCC reforms include funds for

carriers that would otherwise lose revenues. 2 R. at 683-88 ¶¶ 847-53. Second, the FCC

has found that carriers can offset lost revenue by increasing charges on end-users. Id. at

403 ¶ 34, 648-49 ¶ 775 n.1408. The FCC’s rationale involves a reasonable predictive

judgment, warranting our deference. See Ace Tel. Ass’n v. Koppendrayer, 432 F.3d 876,

880 (8th Cir. 2005) (holding that a reciprocal compensation rate of zero did not violate

the “just and reasonable” requirement in 47 U.S.C. § 252(d)(2)); MCI Telecomms. Corp.

v. U.S. W. Commc’ns, 204 F.3d 1262, 1271-72 (9th Cir. 2000) (upholding a determination

that bill-and-keep was “just and reasonable” under 47 U.S.C. § 252(d)(2)(A)). As a

result, we conclude that the FCC did not arbitrarily or capriciously fail to provide for cost

recovery.

D.

Authority for the States to Suspend or Modify the New Requirements

The Petitioners also argue that the FCC has assumed powers reserved to state

commissions under 47 U.S.C. § 251(f)(2). This section empowers state commissions to

suspend or modify requirements under § 251(b) for small LECs that would otherwise

incur an undue burden. 47 U.S.C. § 251(f)(2).

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The FCC addressed § 251(f)(2), cautioning “states that suspensions or

modifications of the bill-and-keep methodology . . . would . . . re-introduce regulatory

uncertainty . . . and undermine the efficiencies gained from adopting a uniform national

framework.” 2 R. at 671-72 ¶ 824. In light of this concern, the FCC discouraged grants

of relief under § 251(f)(2), stating that any suspension or modification of bill-and-keep

would likely undermine the public interest. Id. The FCC added that it would “monitor

state action” and might “provide specific guidance” in the future. Id.

The Petitioners object to this admonition, contending that the FCC prejudged state

commission decisions and effectively prohibited states from modifying the bill-and-keep

regime. Joint Intercarrier Compensation Principal Br. of Pet’rs at 46-48 (July 17, 2013).

This challenge is not ripe.

The FCC’s cautionary statement does not constitute a binding rule; instead, it

reflects only a prediction that applications for suspension or modification would fail

under the statutory standard. See 2 R. at 671-72 ¶ 824. Because this prediction does not

“impose an obligation, deny a right or fix some legal relationship,” the Petitioners’

challenge is premature. Chi. & S. Air Lines v. Waterman S.S. Corp., 333 U.S. 103, 112-

13 (1948); see Nat’l Ass’n of Broadcasters v. FCC, 569 F.3d 416, 425 (D.C. Cir. 2009)

(holding that a challenge to the FCC’s “prediction,” which involved future waiver

requests, was not ripe); see also Minn. Pub. Utils. Comm’n v. FCC, 483 F.3d 570, 582-83

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(8th Cir. 2007) (holding that a state regulator’s challenge to an FCC order was not ripe

because it involved only a prediction of what the FCC would do in the future).

III.

Challenges to Cost Recovery as Arbitrary and Capricious

The Petitioners have challenged not only the ultimate goal of the reforms, but also

the way in which the FCC chose to transition toward a national bill-and-keep

methodology.

A.

The Transitional Plan

Perceiving that an immediate change would unduly disrupt the market, the FCC

elected to gradually move toward a bill-and-keep methodology. 2 R. at 659-60 ¶ 798,

661-62 ¶ 801 & Figure 9. The FCC decided to transition terminating access charges to

bill-and-keep over a six-year period for price cap carriers and over a nine-year period for

rate-of-return carriers. See id. at 661-62 ¶ 801 & Figure 9. The FCC limited interstate

originating access charges to existing levels, but has not yet decided how to transition

these charges to bill-and-keep. See id. at 669 ¶¶ 817-18.

The FCC created a federal recovery mechanism to ease the transition to bill-and-

keep for incumbent LECs. See id. at 683 ¶ 847. This recovery mechanism is not revenue

neutral, for the FCC helps incumbent LECs recover only part of their lost revenues. See

id. at 684-85 ¶ 851, 723-24 ¶ 924. The amount of the recovery will be based on existing

trends that show declining revenues. See id. at 684-85 ¶ 851. For price-cap carriers, the

recovery generally starts at 90% of 2011 revenues and declines 10% per year. Id. For

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rate-of-return carriers, the recovery starts at 2011 revenues for switched access and net

reciprocal compensation. Id. When the FCC acted, rate-of-return carriers were

experiencing yearly drops in revenue of: (1) 3% for interstate switched access, and (2)

10% for intrastate intercarrier compensation. Choosing a benchmark between 3% and

10%, the FCC chose to reduce the eligible recovery for rate-of-return carriers by 5% each

year. Id.

Under the FCC’s recovery mechanism, carriers can recover part of their lost

revenues through: (1) a federally tariffed Access Recovery Charge on end-users, and (2)

supplemental support from the Connect America Fund. Id. at 685-88 ¶¶ 852-53. The

Access Recovery Charge is limited to prevent individual end-users from paying excessive

rates and is allocated at a carrier’s holding-company level. Id. at 685-688 ¶ 852, 717

¶ 910. To obtain supplemental support from the Connect America Fund, carriers must

meet certain broadband obligations. Id. at 721-22 ¶ 918.

Although the FCC predicts this recovery mechanism will suffice for regulated

services, carriers can request additional support and waiver of their broadband obligations

through a “Total Cost and Earnings Review” process. See id. at 723-24 ¶ 924, 725 ¶ 926.

This process allows a carrier to show that the standard recovery mechanism is “legally

insufficient” and “threatens [the carrier’s] financial integrity or otherwise impedes [its]

ability to attract capital.” Id. at 723-25 ¶¶ 924-25. The FCC regards this process as a

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sufficient safety valve to prevent rates from becoming confiscatory. See id. at 724 ¶ 924

& n.1834.

The recovery mechanism will phase out over time. See id. at 684-85 ¶ 851. As it

phases out, carriers will recover their network costs from end-users and the Universal

Service Fund. Id. at 403 ¶ 34. But carriers will remain able to seek additional support

through the FCC’s Total Cost and Earnings Review process. See id. at 684-85 ¶ 851, 724

¶ 924.

B.

The Petitioners’ Challenges

The Petitioners raise two types of APA challenges to the FCC’s recovery

mechanism and final bill-and-keep framework. First, the Petitioners argue that the FCC

failed to apportion costs, as required in Smith v. Illinois Telephone Co., 282 U.S. 133

(1930). Joint Intercarrier Compensation Principal Br. of Pet’rs at 50-51 (July 17, 2013).

Second, the Petitioners challenge the sufficiency of the recovery mechanism for carriers

losing revenue under the reforms. Id. at 53-54, 56.

C.

Standard of Review

In challenging the interim measures and final bill-and-keep framework, the

Petitioners focus on the reasonableness of the FCC’s actions; thus, we review these

challenges under the APA. Id.; see 5 U.S.C. § 706(2)(A). For this review, we consider

whether the FCC acted arbitrarily, capriciously, with an abuse of discretion, or otherwise

in violation of the law. Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1045 (10th Cir.

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2011). The regulations are presumptively valid, and the Petitioners bear the burden of

proof. Id. at 1046. We will uphold the regulations if the FCC has “examine[d] the

relevant data and articulate[d] a satisfactory explanation for its action including a rational

connection between the facts found and the choice made.” Id. (quoting Motor Vehicle

Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Agency action is

arbitrary and capricious only if the agency:

has relied on factors which Congress has not intended it to consider,

entirely failed to consider an important aspect of the problem,

offered an explanation for its decision that runs counter to the

evidence before the agency, or is so implausible that it could not be

ascribed to a difference in view or the product of agency expertise.

Motor Vehicle Mfrs. Ass’n, 463 U.S. at 43.

In reviewing the regulations, we can consider only the rationale articulated by the

agency. Licon v. Ledezma, 638 F.3d 1303, 1308 (10th Cir. 2011). But “we will uphold a

decision of less than ideal clarity if the agency’s path may reasonably be discerned.”

Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974); Licon,

638 F.3d at 1308.

Our review under the “‘arbitrary and capricious’ standard is particularly deferential

in matters implicating predictive judgments and interim regulations.” Rural Cellular

Ass’n v. FCC, 588 F.3d 1095, 1105 (D.C. Cir. 2009); see Sorenson Commc’ns, Inc., 659

F.3d 1035, 1046 (10th Cir. 2011) (substantial deference is appropriate for interim

ratemaking); accord Alenco Commc’n, Inc. v. FCC, 201 F.3d 608, 616 (5th Cir. 2000)

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(review of transitional regulations is “especially deferential”). When we review the

FCC’s predictive judgment on a matter within its expertise and discretion, “complete

factual support in the record . . . is not possible or required.” FCC v. Nat’l Citizens

Comm. for Broad., 436 U.S. 775, 814 (1978).

D.

Consideration of the Apportionment Requirement in Smith

The Petitioners argue that the FCC failed to apportion the costs attributable to

interstate and intrastate traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at

50-51, 54 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 5 (July

31, 2013). This argument is rejected.

1.

The Apportionment Requirement

The apportionment requirement originated in Smith v. Illinois Bell Telephone Co.,

282 U.S. 133 (1930). There, a state commission set intrastate rates; but the district court

invalidated the rate schedule, reasoning that the rates were too low to allow the carriers to

recover their costs. Id. at 142, 146. In determining the sufficiency of the rates, the state

regulator and the district court assumed that the carriers used all of their property for

intrastate service. Id. at 144-46. But the carriers also used their facilities for interstate

service. Id. at 146-47. The Supreme Court viewed the district court’s conclusion as

flawed because it had failed to account for interstate service. Id. at 150-51. To determine

whether the intrastate rates were high enough, the district court had to decide which of the

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carrier’s properties were used for intrastate service; otherwise, the court could not know

how much the carrier had to recoup for the cost of that property. Id. at 150-51, 162.

Smith’s protection is narrow: A regulator may not impose confiscatory rates,

assuming that a regulator in another jurisdiction will exercise its unilateral independent

authority to allow a fair recovery. Id. at 148-49.

2.

Application of Smith to the FCC’s Recovery Mechanism

The Petitioners contend that the FCC failed to apportion costs between the

intrastate and interstate jurisdictions. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 50-51, 54 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at

5 (July 31, 2013). According to the Petitioners, the failure to apportion costs renders the

FCC’s recovery mechanism inadequate because it: (1) requires recovery of intrastate

revenues through the interstate jurisdiction, and (2) does not provide sufficient recovery

of costs. Joint Intercarrier Compensation Principal Br. of Pet’rs at 54 (July 17, 2013); see

Joint Intercarrier Compensation Reply Br. of Pet’rs at 6 n.6 (July 31, 2013) (challenging

the recovery of intrastate costs through interstate charges).

We disagree. Smith requires jurisdictional separation to ensure that the regulator

sets rates based on costs of service in the regulator’s jurisdiction. Smith, 28 U.S. at 148-

49. The problem in Smith was that the state regulator had jurisdiction only for intrastate

service, but was setting rates based on the cost of both intrastate and interstate service.

Id. at 150-51, 162.

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Our circumstances differ because the FCC enjoys authority to: (1) set interstate

rates, and (2) regulate access traffic that is either interstate or intrastate. Because the FCC

obtained regulatory authority over intrastate traffic, it can affect intrastate rates through

regulation. The FCC’s regulatory authority over intrastate traffic supports flexibility in

our application of Smith. See Lone Star Gas Co. v. Texas, 304 U.S. 224, 241 (1938)

(distinguishing Smith from the case of a federal agency acting within its authority); MCI

Telecomms. Corp. v. FCC, 750 F.2d 135, 141 (D.C. Cir. 1984) (“Smith appears to be

based on the limits of state jurisdiction, rather than on constraints imposed on federal

agencies by the due process clause.”).

Smith does not require the apportionment to be exact, for it requires “only

reasonable measures.” Smith, 282 U.S. at 150. When the FCC acts on an interim basis to

transition to a new regulatory structure, Smith is flexible in requiring “reasonable

measures.” See Rural Tel. Coal. v. FCC, 838 F.2d 1307, 1315 (D.C. Cir. 1988) (holding

that a cost allocation constituted a reasonable measure under Smith as “part of a

transitional process, and ‘[i]nterim solutions may need to consider the past expectations

of parties and the unfairness of abruptly shifting policies’”); MCI Telecomms. Corp., 750

F.2d at 141 (rejecting MCI’s challenge because Smith “was not considering the

constitutionality of an interim ratemaking solution”). This flexibility is particularly

appropriate when the FCC implements: “(a) an interim ratemaking solution (b) justified

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by a substantial policy objective.” ACS of Anchorage, Inc. v. FCC, 290 F.3d 403, 408

(D.C. Cir. 2002).

The FCC’s transition plan appropriately allows recovery of lost intrastate revenues

through a federal recovery mechanism. By funding shortfalls for intrastate services, the

FCC did not leave LECs to obtain recovery from another jurisdiction. The situation in

Smith was the opposite, and the FCC’s recovery mechanism is valid under any reasonable

interpretation of Smith. See id. at 409-10.

3.

Waiver of the Challenge to the Access Recovery Charge

The National Association of State Utility Consumer Advocates challenges the

Access Recovery Charge on two grounds: (1) The FCC did not analyze its authority to

implement the charge; and (2) the FCC acted arbitrarily and capriciously by allowing

carriers to pass along state-specific costs to customers in other states. National

Association of State Utility Consumer Advocates Principal Br. at 5-6, 11-14 (July 12,

2013). But we cannot reach these issues because they were not properly raised before the

FCC. See 47 U.S.C. § 405(a); Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215, 1227-28

(10th Cir. 2009).

The National Association contends that these issues were raised in the petition for

reconsideration filed by the Public Service Commission for the District of Columbia.

National Association of State Utility Consumer Advocates Reply Br. at 1 (July 31, 2013)

(citing 6 R. at 4046-53). It is true that the National Association’s second challenge was

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raised in the D.C. Commission’s petition for reconsideration. 6 R. at 4049. But this

petition had not been decided when the present action began. See National Association of

State Utility Consumer Advocates Reply Br. at 2 (July 31, 2013).6 Thus, the National

Association cannot avoid waiver based on the D.C. Commission’s presentation of a

similar challenge. See Petroleum Commc’ns, Inc. v. FCC, 22 F.3d 1164, 1170-71 (D.C.

Cir. 1994).

4.

Recovery of Interstate Costs through End-User Rates and

Universal Service Support

In their reply, the Petitioners challenge the FCC’s ultimate bill-and-keep

framework on grounds that it will require interstate cost recovery through local end-user

rates once the federal recovery mechanism phases out. Joint Intercarrier Compensation

Reply Br. of Pet’rs at 5-6 (July 31, 2013). According to the Petitioners, local end-user

rates are subject to the intrastate jurisdiction and cannot be used for interstate cost

recovery. Id.

This argument does not fit our facts. Bill-and-keep allows carriers to recover their

interstate costs not only from end-users, but also from the Universal Service Fund. See 2

6

The parties have not advised us of an eventual decision on the D.C. Commission’s

petition for reconsideration. But even if the FCC has eventually decided the petition for

reconsideration, the present challenge would have been premature. See TeleSTAR, Inc. v.

FCC, 888 F.2d 132, 134 (D.C. Cir. 1989) (per curiam) (“We hold . . . that when a petition

for review is filed before the challenged action is final and thus ripe for review,

subsequent action by the agency on a motion for reconsideration does not ripen the

petition for review or secure appellate jurisdiction.”); see also Council Tree Commc’ns,

Inc. v. FCC, 503 F.3d 284, 287 (3d Cir. 2007) (stating that because a petition for

reconsideration remained pending when the petition for review was filed, as well as the

time of the court’s eventual decision, the petition for review was “incurably premature”).

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R. at 403 ¶ 34, 648-49 ¶ 775 n.1408. The FCC concluded that these sources can provide

carriers with a sufficient return without shifting the burden to another jurisdiction. Id. at

723-24 ¶ 924. This conclusion involved a reasonable predictive judgment.

Even if the prediction had been unwise, however, the FCC has not required

carriers to recover federal costs based on rates outside of the FCC’s jurisdiction. Thus,

we reject the Petitioners’ Smith challenge based on recovery of costs through local end-

user rates.

E.

Challenges Involving the Adequacy of the Recovery Mechanism

The Petitioners also contend that the FCC arbitrarily and capriciously failed to

allow carriers to recover a fair return. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 53-54, 56-57 (July 17, 2013). According to the Petitioners, the eligible recovery

declines precipitously at 5% per year, the recovery mechanism will not allow carriers to

recover even this amount, and the recovery mechanism will eventually disappear. Id.

With these limitations, the Petitioners argue that the FCC has capped other intercarrier

compensation rates and limited financial support. Id. With less revenue and inadequate

financial support, the Petitioners contend that future rates will be too low. Id. at 56. The

Court rejects the Petitioners’ argument as a facial challenge; as an as-applied challenge,

the issue is not ripe.

The facial challenge fails because the FCC’s Order will not necessarily lead to

confiscatory rates. The FCC has concluded that the telecommunications industry is

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transitioning to IP networks, the bill-and-keep regime will advance that transition, and the

FCC’s funding mechanism will phase out at a slower rate than the baseline. 2 R. at 631

¶ 736, 707-08 ¶ 894. With these developments, the FCC could consider existing trends in

the marketplace and alternative opportunities for carriers to generate revenue.

With landline revenues in steady decline, the FCC concluded that its recovery

mechanism would fairly represent what carriers would have earned without the reforms.

Id. at 724 ¶ 924.

The FCC considered not only the downward trends in the market, but also other

opportunities for carriers to generate revenue. It is true that bill-and-keep will end

intercarrier compensation for transport and termination of switched access. Id. at 640

¶ 756. But the FCC reasoned that LECs can continue to collect compensation from other

carriers and that the reforms would improve productivity and decrease costs. Id. at 725-

26 ¶ 928. For example, incumbent LECs could continue to collect compensation for

originating access and dedicated transport. Id. With continuation of these charges, the

FCC projected gains in productivity and decreases in expenses. Id. at 726-27 ¶¶ 929-30.

The FCC’s reasoning does not suffer any facial flaws, and we reject the Petitioners’ facial

challenge.

We also decline to entertain the as-applied challenge because it is not ripe. When

a carrier faces an insufficient return, it can seek greater support under the Total Cost and

Earnings Review Process. Id. at 723-26 ¶¶ 924-28. Until this process is invoked, the as-

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applied challenge is premature. If the FCC imposes confiscatory rates, carriers could then

bring as-applied challenges. See Verizon Commc’n, Inc. v. FCC, 535 U.S. 467, 526-27,

528 n.39 (2002).

IV.

Procedural Irregularities in the Rulemaking Process

The Petitioners also challenge the Order on due-process grounds.

A.

The FCC Proceedings

The FCC issued the Order after four formal notices and a lengthy rulemaking

process. In re Universal Serv. Reform Mobility Fund, 25 FCC Rcd. 14716 (2010); In re

Connect America Fund, 26 FCC Rcd. 4554 (2011); Further Inquiry into Tribal Issues

Relating to Establishment of a Mobility Fund, 26 FCC Rcd. 5997 (2011); Further Inquiry

Into Certain Issues in the Universal Serv.-Intercarrier Compensation Transformation

Proceeding, 26 FCC Rcd. 11112 (2011). Through that process, the FCC obtained

hundreds of comments and thousands of ex parte submissions. See 2 R. at 398 ¶ 12,

1029-45.

In ultimately determining how to proceed, the FCC relied on a plan (called the

“ABC Plan”) proposed by six price-cap carriers in response to the FCC’s 2011 notice.

See, e.g., id. at 445-46 ¶ 142. The FCC’s final notice requested additional comment on

the ABC Plan. 1 R. at 290. For this plan, the FCC provided a three-week notice and

comment period, followed by a 13-day reply period. See id. at 290, 378.

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The FCC rulemaking proceedings were “permit-but-disclose” proceedings. Id. at

26-27 ¶ 65; see 47 C.F.R. § 1.1200(a). In these proceedings, “ex parte presentations to

Commission decision-making personnel are permissible but subject to certain disclosure

requirements.” 47 C.F.R. § 1.1200; see EchoStar Satellite LLC v. FCC, 457 F.3d 31, 39

(D.C. Cir. 2006). Thus, following ex parte presentations, the proponents must place

copies of all written ex parte presentations in the record and file written summaries of all

data and arguments presented in oral ex parte presentations. See 47 C.F.R.

§ 1.1206(b)(1)-(2). These rules also provide for submission of confidential information,

FCC notice of ex parte presentations it has received, and a sunshine period starting

immediately before the FCC votes (when only limited written responses to ex partes are

permitted). Id.

In following its ex parte rules, the FCC obtained hundreds of ex parte submissions

between the close of the final comment period and the “blackout” date. 6 R. at 3754-71.

As allowed under the FCC’s rules, many of these submissions were confidential and

others had to sign confidentiality agreements to access unredacted versions. To promote

transparency, the FCC placed three lists (referring to more than 110 publicly available

sources) and a mobile service competition analysis into the rulemaking record after the

close of the comment period. See id. at 3847-53, 3918-21, 3947-61.

In the Order, the FCC not only promulgated rules, but also addressed pending

petitions. 2 R. at 757 ¶ 975.

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B.

The Petitioners’ Arguments

The Petitioners raise seven constitutional challenges to the FCC’s order. Six

involve denial of due process from the FCC’s procedure. These challenges involve: (1)

the number and timing of the ex parte submissions, (2) the consideration of specific ex

partes, (3) the FCC’s placement of documents in the rulemaking record after close of the

comment period, (4) the FCC’s commingling of adjudicatory and rulemaking

proceedings, (5) the inadequacy of the notice issued on August 3, 2011, and (6) the

brevity of the final comment schedule. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 58-62 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-

33 (July 31, 2013). The Petitioners’ seventh challenge is that the FCC improperly

commandeered state commissions. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 62-63 (July 17, 2013).

1.

The Waiver Issue

Before addressing the seven challenges, we must decide whether we can entertain

some of the arguments raised in the Petitioners’ reply. The FCC moves to strike some of

these arguments, asserting that the Petitioners had omitted them in the opening brief.

Mot. to Strike Args. in the Joint Intercarrier Compensation Reply Br. of Pet’rs (Sept. 30,

2013). The Petitioners contend that in their reply brief, they simply elaborated on the

due-process arguments raised in their opening brief or responded to the FCC’s arguments.

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Joint Pet’r Resp. to FCC Mot. to Strike Args. from the Joint Intercarrier Compensation

Reply Br. at 1 (Oct. 15, 2013).

Generally, “[a]rguments inadequately briefed in the opening brief are waived.”

Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998). To enforce this

requirement, we have granted motions to strike arguments that are raised for the first time

in a reply brief. E.g., M.D. Mark, Inc. v. Kerr-McGee Corp., 565 F.3d 753, 768 n.7 (10th

Cir. 2009).

Waiver is based on Federal Rule of Appellate Procedure 28(a)(8)(A), which

requires a party to include its arguments and reasons, with supporting citations to the

record.

In their reply, the Petitioners have referred to documents not mentioned in the

opening brief and raised more specific objections to the FCC’s rulemaking procedure.

Compare Joint Intercarrier Compensation Principal Br. of Pet’rs at 58-62 (July 17, 2013),

with Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013). But the

new references do not justify an order striking the reply.

2.

The FCC’s Motion to Strike

In their opening brief, the Petitioners mount a general challenge to the FCC’s

rulemaking procedure. Joint Intercarrier Compensation Principal Br. of Pet’rs at 61 (July

17, 2013). But the Petitioners’ reply brief can be read in two ways: (1) The Petitioners

continue to mount a general cumulative challenge to the FCC’s rulemaking procedure and

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have included more specific record citations as general examples to illustrate their

broader argument; or (2) the Petitioners continue to mount a cumulative challenge, but

also intend to rely on the citations identified for the first time in the reply brief. See Joint

Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013). The first reading

involves permissible elaboration on the opening brief. The second reading would involve

a violation of Rule 28(a)(8)(A). Instead of striking the reply, we read it narrowly, with

citation of the materials only to illustrate the general cumulative challenge advanced in

the opening brief.

C.

Our Review of the Constitutional Challenges

The Petitioners’ procedural challenges stem from the constitutional right to due

process, which requires notice and a fair opportunity to be heard. See Fuentes v. Shevin,

407 U.S. 67, 80 (1972). The APA adds more specific requirements. For example, an

agency must provide notice of the proposed rulemaking and allow interested persons “an

opportunity to participate in the rulemaking through submission of written data, views, or

arguments with or without opportunity for oral presentation.” 5 U.S.C. § 553(b)-(c).

“‘Absent constitutional constraints or extremely compelling circumstances the

administrative agencies should be free to fashion their own rules of procedure and

methods of inquiry permitting them to discharge their multitudinous duties.’” Phillips

Petroleum Co. v. EPA, 803 F.2d 545, 559 (10th Cir. 1986) (quoting Vt. Yankee Nuclear

Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 543 (1978)). “Congress

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intended that the discretion of the agencies and not that of the courts be exercised in

determining when extra procedural devices should be employed.” Wyoming v. Dep’t of

Agric., 661 F.3d 1209, 1239 (10th Cir. 2011). Therefore, the agencies enjoy discretion to

establish the procedures they utilize to make substantive judgments. See id.

D.

The Petitioners’ Due Process Challenges

The Petitioners identify six types of errors that cumulatively resulted in a denial of

due process. Joint Intercarrier Compensation Principal Br. of Pet’rs at 58-62 (July 17,

2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013).

1.

General Challenges to the Ex Partes

The Petitioners initially focus on the hundreds of ex partes with the FCC. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 59-61 (July 17, 2013). According to

the Petitioners, the ex parte filings multiplied just before the blackout date and the FCC

frequently allowed access only upon the signing of a confidentiality agreement. Id. at 60.

The Petitioners note that eight of the ex partes had been posted only three days before the

FCC adopted the Order. Joint Intercarrier Compensation Reply Br. of Pet’rs at 30 (July

31, 2013). For these ex partes, the Petitioners contend that interested parties were unable

to respond before the blackout period began. Joint Intercarrier Compensation Principal

Br. of Pet’rs at 61 (July 17, 2013).

Ex parte contacts were proper, for they “are the bread and butter of the process of

administration and are completely appropriate so long as they do not frustrate judicial

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review or raise serious questions of fairness.” Home Box Office, Inc. v. FCC, 567 F.2d 9,

57 (D.C. Cir. 1977) (per curiam).

The administrative proceedings involved continuous responses to the FCC’s

notices and to other responses. Ultimately, however, the proceedings had to end. When

they did, many parties could legitimately contend that they needed more time to reply to

others’ responses. The only alternative, however, would have been to keep the comment

period alive forever.

The APA ensures an opportunity to comment on the notice of proposed

rulemaking, but not to reply to the rulemaking record. See Am. Mining Cong. v.

Marshall, 671 F.2d 1251, 1262 (10th Cir. 1982) (stating that the APA provides a right to

comment on proposed rulemaking, but not “the rulemaking record”). In light of this

limitation under the APA, we cannot impose additional requirements under the guise of

due process. See Vt. Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435

U.S. 519, 524-25 (1979).

The Petitioners have not shown a failure to comply with the APA or even reliance

on any of the disputed ex partes. Am. Mining Cong., 671 F.2d at 1261; see Sierra Club v.

Costle, 657 F.2d 298, 398-99 (D.C. Cir. 1981) (“The decisive point, however, is that EDF

itself has failed to show us any particular document or documents to which it lacked an

opportunity to respond, and which also were vital to EPA’s support for the rule.”). As a

result, we reject the general challenges to the ex partes.

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2.

Ex Parte Challenges Based on Specific Documents

In their reply brief, the Petitioners point to four ex partes to support their due

process challenge: (1) an October 20, 2011, Verizon ex parte filing that addresses Access

Recovery Charges, (2) an October 18, 2011, Verizon ex parte concerning regulation of

Voice-Over-the-Internet (“VoIP”), (3) an October 21, 2011, Verizon ex parte that

addresses VoIP preemption, and (4) an October 19, 2011, AT&T ex parte that addresses

VoIP jurisdiction. 6 R. at 3980-81, 3929, 3938-45, 4005; Joint Intercarrier Compensation

Reply Br. of Pet’rs at 31-32 & nn.33-34 (July 31, 2013).7

In their opening brief, the Petitioners did not address the ex partes of October 18,

October 19, or October 21; thus, the Petitioners have waived any argument based

specifically on these documents. See Harman v. Pollock, 446 F.3d 1069, 1082 n.1 (10th

Cir. 2006) (per curiam).8 Because the Petitioners raised the October 20, 2011, Verizon ex

parte in their opening brief, we will analyze it here. See Joint Intercarrier Compensation

Principal Br. of Pet’rs at 60-61 (July 17, 2013).

In its ex parte on October 20, 2011, Verizon discussed the Access Recovery

Charge on end-users. See 6 R. at 3980-81. And, in a meeting with the FCC’s general

7

In their opening brief, the Petitioners also referred to five AT&T contacts as

examples of ex partes. Joint Intercarrier Compensation Principal Br. of Pet’rs at 60 (July

17, 2013). But the Petitioners did not specifically rely on these documents; thus, we have

considered them in our general discussion and do not specifically address them here.

8

We have considered these documents as general examples of ex parte contacts.

We will also consider them as general examples of subjects covered in pending

adjudicatory petitions discussed in these proceedings.

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counsel, Verizon discussed the Access Recovery Charge and its implementation at the

holding-company level. See id. at 3980. The Petitioners contend in their reply that: (1)

the FCC did not sufficiently inform them in the notice about implementation at the

holding company level, and (2) Verizon unfairly obtained knowledge about this matter

prior to circulation of the Order. Joint Intercarrier Compensation Reply Br. of Pet’rs at

31 (July 31, 2013); see Joint Intercarrier Compensation Principal Br. of Pet’rs at 60-61

(July 17, 2013).

We reject these arguments. The ABC Plan involved application of the Access

Recovery Charge at the holding-company level; and in the notice on August 3, 2011, the

FCC specifically asked for comments on this provision. 5 R. at 3000-01; 1 R. at 302.

3.

The FCC’s Placement of Documents in the Rulemaking Record

The Petitioners also complain that the FCC placed over 110 documents into the

rulemaking record after the close of the comment period. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 59-60 (July 17, 2013) (citing 6 R. at 3847-53, 3918-21, 3947-

61). The FCC’s handling of these documents did not result in a denial of due process.

Ordinarily, agencies should not add information to the rulemaking record after the

close of the comment period. See Small Refiner Lead Phase-Down Task Force v. U.S.

EPA, 705 F.2d 506, 540-41 (D.C. Cir. 1983). But the APA “does not require that every

bit of background information used by an administrative agency be published for public

comment.” Am. Mining Cong. v. Marshall, 671 F.2d 1251, 1262 (10th Cir. 1982). And

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agencies need not submit “additional fact gathering [that] merely supplements

information in the rulemaking record by checking or confirming prior assessments

without changing methodology, by confirming or corroborating data in the rulemaking

record, or by internally generating information using a methodology disclosed in the

rulemaking record” to further notice and comment. Chamber of Commerce of U.S. v.

SEC, 443 F.3d 890, 900 (D.C. Cir. 2006).

The Petitioners do not explain the significance of the additional documents or tie

them to any of the disputed provisions in the Order; thus, we reject the Petitioners’

procedural challenge based on late insertion of these documents into the record. See Am.

Mining Cong., 671 F.2d at 1261.

4.

The FCC’s Decision to Rule on Pending Petitions

The FCC found that its conclusions had “effectively address[ed], in whole or in

part, certain pending petitions” and granted or denied several petitions. 2 R. at 757 ¶ 975.

The Petitioners claim, without citation, that the FCC improperly commingled rulemaking

and adjudicatory proceedings. Joint Intercarrier Compensation Principal Br. of Pet’rs at

59 (July 17, 2013). We reject the argument.

Commingling of functions is permitted when the proceeding involved rulemaking.

See AT&T v. FCC, 449 F.2d 439, 454-55 (2d Cir. 1971). And the FCC’s proceeding

involved rulemaking even if the new rules had the effect of deciding others’ petitions.

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The incidental disposition of those petitions did not convert the rulemaking proceeding

into an adjudication, and there was no violation of due process or the APA.

5.

Adequacy of the August 3, 2011, Notice

In their reply, the Petitioners argue that the notice on August 3, 2011, was

inadequate. Joint Intercarrier Compensation Reply Br. of Pet’rs at 28 (July 31, 2013).

This argument was waived because it was omitted in the Petitioners’ opening brief. See

Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998).

In the opening brief, the Petitioners made vague references to the sufficiency of the

notice. See Joint Intercarrier Compensation Principal Br. of Pet’rs at 58 (July 17, 2013)

(“Courts vacate APA rulemakings that fail to substantially comply with the requirement

for public participation or which provide no meaningful opportunity for comment.”); id.

at 61 (“Courts have previously vacated FCC rulemakings where there was no realistic

notice or opportunity to be heard.”). But these references would not have alerted the FCC

or the Court to a challenge based on the sufficiency of the August 3 notice. As a result,

we decline to consider the Petitioners’ new argument in their reply about the sufficiency

of the August 3 notice.

6.

Length of the Comment Period

In their reply brief, the Petitioners also challenge the length of the FCC’s comment

period. Joint Intercarrier Compensation Reply Br. of Pet’rs at 28-29 (July 31, 2013).

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Because the Petitioners did not present this argument in their opening brief, the issue is

waived. See Adler, 144 F.3d at 679.

7.

Cumulative Challenge

The Petitioners have not shown that any part of the FCC’s procedure was

erroneous; thus, we reject the Petitioners’ cumulative challenge. See Sorenson Commc’ns

v. FCC, 659 F.3d 1035, 1046 (10th Cir. 2011) (applying a presumption of validity to the

FCC’s actions).

E.

“Commandeering” of State Commissions

The Petitioners also contend that the FCC has commandeered state commissions

by: (1) requiring them to regulate according to new federal standards under § 252, and

(2) shifting cost recovery to the states. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 62-63 (July 17, 2013). We disagree.

Generally, the federal government unlawfully conscripts states when they must

involuntarily enact or administer a federal regulatory program. See Printz v. United

States, 521 U.S. 898, 932 (1997); New York v. United States, 505 U.S. 144, 176 (1992).

The same may be true when the federal government provides a state with funding to

implement a program and later “surpris[es] participating States with post-acceptance or

‘retroactive conditions.’” Nat’l Fed’n of Indep. Bus. v. Sebelius, __ U.S. __, 132 S. Ct.

2566, 2606 (2012). But “[w]here federal regulation of private activity is within the scope

of the Commerce Clause, [the Court has] recognized the ability of Congress to offer

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