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Universal Service Fund Brief - No. 11-9900 (10th Cir.)

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Released: February 5, 2013
Appellate Case: 11-9900 Document: 01018946127 Date Filed: 11/06/2012 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

____________

UNCITED ADDITIONAL UNIVERSAL SERVICE FUND ISSUES

PRINCIPAL BRIEF

(DEFERRED APPENDIX APPEAL)
____________




[Counsel for Petitioners Listed on Following Pages]






November 6, 2012


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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., 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, 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,
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., 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


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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, SD,
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, and Yukon Telephone
Co., Inc.
(Rural Telephone Service Co. et al.)


By Their Counsel


David Cosson

H. Russell Frisby, Jr.

2154 Wisconsin Avenue, NW

Harvey L. Reiter

Washington, DC 20007
Stinson Morrison Hecker LLP
Tel: 202-333-5275
1775 Pennsylvania Avenue, NW
dcosson@klctele.com
Suite 800

Washington, DC 20006
Tel: 202-785-9100
rfrisby@stinson.com
dlane@stinson.com
hreiter@stinson.com




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Allband Communications Cooperative
Arizona Corporation Commission
By Its Counsel
By Its Counsel

Don L. Keskey

Maureen A. Scott

Public Law Resource Center PLLC

Wesley Van Cleve

139 W. Lake Lansing Road, Suite 210

Janet F. Wagner

East Lansing, MI 48823
Arizona Corporation Commission
Tel: 517-999-7575
Legal Division
donkeskey@publiclawresourcecenter.com 1200 West Washington

Phoenix, AZ 85007
Tel: 602-542-3402
mscott@azcc.gov
wvancleve@azcc.gov
jwagner@azcc.gov


CenturyLink, Inc.
Consolidated Communications
By Its Counsel
Holdings, Inc.

Robert Allen Long, Jr.

By Its Counsel

Gerard J. Waldron

Russell Blau

Yaron Dori

Tamar Finn

Michael P. Beder

Bingham McCutchen LLP
Covington & Burling
2020 K Street, NW
1201 Pennsylvania Avenue, NW
Washington, DC 20006
Washington, DC 20004
Tel: 202-373-6000
Tel: 202-662-6000
russell.blau@bingham.com
ydori@cov.com
tamar.finn@bingham.com
rlong@cov.com

gwaldron@cov.com
mmosier@cov.com











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National Association of
Rural Independent Competitive
Regulatory Utility
Alliance
Commissioners
By Its Counsel
By Its Counsel

David Cosson

James Bradford Ramsay

2154 Wisconsin Avenue, NW
National Association of
Washington, DC 20007
Regulatory Utility
Tel: 202-333-5275
Commissioners
dcosson@klctele.com
1101 Vermont Avenue, NW

Suite 200

H. Russell Frisby, Jr.

Washington, DC 20005

Harvey L. Reiter

Tel: 202-898-2200
Stinson Morrison Hecker LLP
jramsay@naruc.org
1775 Pennsylvania Avenue, NW

Suite 800

Washington, DC 20006
Tel: 202-785-9100
rfrisby@stinson.com
hreiter@stinson.com


Vermont Public Service Board

By Its Counsel

Bridget Asay

Office of the Attorney General
for the State of Vermont
109 State Street
Montpelier, VT 05609-1001
Tel: 802-828-3181
basay@atg.state.vt.us

Elisabeth H. Ross

Birch, Horton, Bittner and Cherot
1155 Connecticut Ave. NW, Suite 1200
Washington, D.C. 20036
Tel: 202-659-5800
eross@dc.bhb.com



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TABLE OF CONTENTS

TABLE OF AUTHORITIES ................................................................................... iii
GLOSSARY ............................................................................................................ vii
STATEMENT OF ISSUES ....................................................................................... 1
STANDARD OF REVIEW ....................................................................................... 2
SUMMARY OF ARGUMENT ................................................................................. 3
I.
THE COMMISSION’S DECISION LIMITING USF SUPPORT
FOR BROADBAND DEPLOYMENT TO INCUMBENT PRICE CAP
CARRIERS DISREGARDED BOTH ITS STATUTORY DUTY TO
PROMOTE COMPETITION BETWEEN INCUMBENTS AND
COMPETITIVE CARRIERS AND ITS OWN POLICY MANDATING
“COMPETITIVE NEUTRALITY” BETWEEN INCUMBENTS AND
CETCs IN THE DISBURSEMENT OF USF SUPPORT. ................................ 7
A. The Commission’s Order Results in Disparate Treatment of Price
Cap ILECs and CETCs. ............................................................................... 8
B. The Five Year Head Start Given Price Cap Carriers Under the Order
Undermines the Act’s Goal of Promoting Competition for
Incumbent Carriers. ..................................................................................... 9
C. The Commission’s Claim That It Is Proper To Favor Incumbent
Carriers Because They Are Better Able To Expand Broadband Not
Only Flouts Its Competitive Neutrality Principle, It Is Unsupported
By Substantial Evidence. ........................................................................... 10
II. THE FCC VIOLATED SECTION 410(c) BY CHANGING
SEPARATIONS RULES WITHOUT REFERRING THOSE
ELEMENTS OF ITS REFORM PROPOSALS TO A
SEPARATIONS BOARD. ............................................................................... 14
A. Facts, Procedural History, and Regulatory Background. .......................... 14
B. The Order Ignores That There Are No Exceptions To The
Requirement That “Any Proceeding Regarding The Jurisdictional
Separation Of Common Carrier Property And Expenses Between
Interstate And Intrastate Operations” Be Referred To A Joint Board. ...... 17
1. Standards for Determining Which Rule Changes “Regard”
Separations. ......................................................................................... 18
2. Changes to the Part 36 Separations Rules Themselves. ...................... 19
3. Changes to Other Rules that Affect Separations Rules. ...................... 20
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III. THE COMMISSION IRRATIONALLY REFUSED TO MODIFY
SERVICE OBLIGATIONS FOR CARRIERS IT DENIED
UNIVERSAL SERVICE SUPPORT. .............................................................. 24
IV. THE ORDER, AS APPLIED TO CERTAIN SMALL RURAL
CARRIERS, IS UNCONSTITUTIONAL UNDER DUE PROCESS
PRINCIPLES AND AS A BILL OF ATTAINDER, AND ALSO
VIOLATES THE ACT, AND PRINCIPLES OF ESTOPPEL AND
CONTRACT LAW. ......................................................................................... 29
A. Statement Of Additional Facts................................................................... 29
B. Allband’s Constitutional Rights Are Violated By the Order. ................... 31
CONCLUSION ........................................................................................................ 38
CERTIFICATE OF COMPLIANCE ....................................................................... 39
CERTIFICATE OF SERVICE ................................................................................ 40





ii

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TABLE OF AUTHORITIES


Page(s)

CASES

Alenco Communications, Inc. v. FCC,
201 F.3d 608 (5th Cir. 2000) ............................................................................... 10
Bluefield Waterworks & Improvement Co. v. Public Service Comm’n of West
Virginia,
262 U.S. 679 (1923) ............................................................................................ 34
Covington & Lexington Tpk. Rd. Co. v Sandford,
164 U.S. 578 (1896) ............................................................................................ 38
Crockett Telephone Co. v. FCC,
963 F.2d 1564 (D.C. Cir. 1992) .......................................................................... 18
Federal Communications Commission, et al. v Fox Television Stations, Inc.,
132 S. Ct. 2307 (2012) ........................................................................................ 33
Federal Power Commission v Hope Natural Gas Company,
320 U.S. 591 (1944) ............................................................................................ 34
Idaho Power Co. v. FERC,
312 F.3d 454 (D.C. Cir. 2002) ............................................................................ 11
Lucas v. South Carolina Coastal Council,
505 U.S. 1003 (1992) .......................................................................................... 38
Maier v. EPA,
114 F.3d 1032 (10th Cir. 1997) .......................................................................... 28
Maryland Peoples’ Counsel v. FERC,
761 F.2d 768 (D.C. Cir. 1985) ............................................................................ 28
Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut.
Automobile Ins. Co.,
463 U.S. 29 (1983) .............................................................................................. 14
iii

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Pennsylvania Coal Co. v Mahon,
260 U.S. 393 (1922) ............................................................................................ 38
Sierra Club v. Gorsuch,
715 F.2d 653 (D.C. Cir. 1983) ............................................................................ 28
Smith v. Illinois Bell Tel. Co.,
282 U.S. 133 (1930) ...................................................................................... 16, 17
Stone v. Farmers’ Loan & Trust Co.,
116 U.S. 307 (1886) ............................................................................................ 38
Texas Office of Pub. Util. Counsel. v. FCC,
183 F.3d 393 (5th Cir. 1999) .................................................................. 18, 19, 20
United States v Brown,
381 U.S. 437 (1965) ............................................................................................ 35
United States v Lovett,
328 U.S. 303 (1946) ............................................................................................ 35
United States v Winstar Corp.,
518 U.S. 839 (1996) ............................................................................................ 37

AGENCY DECISIONS

Access Charge Reform, Reform of Access Charges Imposed by Competitive
Local Exchange Carriers,
Seventh Report and Order, 16 FCC Rcd 9923 (2001) ........................................ 13
Connect America Fund,
26 F.C.C.R. 4554 (2011)................................................................................. 9, 15
Connect America Fund,
26 F.C.C.R. 17663 (2011)............................................................................passim
Mescalero Apache Telecom, Inc.,
16 FCC Rcd 38136 (2001) .................................................................................. 14
M&L Enterprises, Inc., d/b/a Skyline Telephone Co.,
19 FCC Rcd 6761 (2004) .................................................................................... 14
iv

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Petition of Mid-Rivers Telephone Cooperative, Inc. for Order Declaring It
to Be an Incumbent Local Exchange Carrier in Terry, Montana Pursuant
to Section 251(h)(2),

Report and Order, 21 FCC Rcd 11506 (2006) .................................................... 13
Universal Service Order,
12 F.C.C.R. 8776 (1997)....................................................................................... 8
US West Communications, Inc. and Eagle Telecommunications,
10 F.C.C.R. 1771 (1995)..................................................................................... 14

STATUTES

5 U.S.C. §706(2) ........................................................................................................ 6
47 U.S.C. §160 ......................................................................................................... 27
47 U.S.C. §214(e) ......................................................................................... 5, 25, 29
47 U.S.C. §214(e)(1) ........................................................................................... 9, 25
47 U.S.C. §214(e)(2) .................................................................................................. 9
47 U.S.C. §214(e)(4) .......................................................................................... 26, 27
47 U.S.C. §214(e)(5) ................................................................................................ 24
47 U.S.C. §254(b) .................................................................................................... 31
47 U.S.C. §254(b)(5)................................................................................................ 31
47 U.S.C. §254(c) .................................................................................................... 25
47 U.S.C. §254(d) .................................................................................................... 31
47 U.S.C. §254(e) ................................................................................ 5, 9, 25, 27, 31
47 U.S.C. §410(c) ........................................................... 1, 14, 15, 16, 17, 18, 19, 21

REGULATIONS

47 C.F.R. §54.5 ........................................................................................................ 24
47 C.F.R. §36.603 .................................................................................................... 19
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47 C.F.R. §36.605(a) ................................................................................................ 19
47 C.F.R. §36.621(a)(4) ........................................................................................... 19
47 C.F.R. §36.621(a)(5) ........................................................................................... 19

LEGISLATIVE MATERIALS

S. Rep. No. 92-362 ................................................................................................... 22



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GLOSSARY


Act
Telecommunications Act of 1996
CAF
Connect America Fund
CETC
Competitive Eligible Telecommunications

Carrier
CLEC
Competitive Local Exchange Carrier
ETC
Eligible Telecommunications Carrier
FCC or Commission
Federal Communications Commission
ILEC
Incumbent Local Exchange Carrier
RLEC
Rural Local Exchange Carrier
RUS
Rural Utilities Service
USF
Universal Service Fund


































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STATEMENT OF ISSUES

1.
The Federal Communications Commission (FCC or Commission) is
required (1) by the Telecommunications Act of 1996 (Act) to promote both
universal service and local service competition and (2) by its own rules to ensure
“competitive neutrality” between service providers in distributing USF support.
Did the Commission arbitrarily disregard its statutory obligations and its own rules
in granting price cap carriers USF support for expanding broadband and a right of
first refusal to future universal service fund (USF) support, neither of which is
available to competitive eligible telecommunications carriers (CETCs)?
2.
The Commission is required by 47 U.S.C. § 410(c) to initially refer
issues regarding the jurisdictional separation of common carrier property and
expenses between interstate and intrastate operations (“separations”) that arise in a
rulemaking proceeding to a Federal-State Joint Board (“Separations Joint Board”):
The Commission shall refer any proceeding regarding the
jurisdictional separation of common carrier property and expenses
between interstate and intrastate operations, which it institutes
pursuant to a notice of proposed rulemaking . . . to a Federal-State
Joint Board. The Joint Board . . . shall prepare a recommended
decision for prompt review and action by the Commission. . . . The
Commission shall also afford the State members of the Joint Board an
opportunity to participate in its deliberations, but not vote . . .
47 U.S.C. § 410(c). Did the Commission violate Section 410(c), or, in the
alternative, act arbitrarily and capriciously, by failing to refer to a Separations Joint
Board elements of its proposed reform rules that directly impacted its separations
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rules and changed the level of common carrier property and expenses allocated to
the interstate jurisdiction?
3.
Was it arbitrary and capricious, unreasonable or otherwise contrary to
law for the FCC to withhold USF support from any carrier serving a territory also
served by an “unsubsidized competitor” without also relieving these carriers of
their ongoing mandatory service obligations under the Act?
4.
Is Connect America Fund, 26 F.C.C.R. 17663 (2011) (Order), as
applied to Allband Communications Cooperative, unconstitutional under Due
Process provisions, and as a Bill of Attainder, and is it also unlawful under
principles of estoppel and contract law, and as being arbitrary and contrary to the
Act?

STANDARD OF REVIEW

Sections I and III of the Brief are governed by the standard of review
discussed at pp. 39-42 of the Joint Preliminary Brief. Section II of this brief is
governed by the Chevron “step one” standard set out at pages 39-40 of the
Preliminary Joint Brief. If any factual or discretionary determinations were
involved in the failure to issue the referral – and there were none – the standard of
review set out at pages 41-42 of that brief would apply. Section IV of this brief is
governed by the de novo standard of review applicable to constitutional issues, as
set out at pages 40-41 of that brief.
2

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SUMMARY OF ARGUMENT

1.
The Act requires the FCC both to advance universal service and to
promote and protect competition between incumbent local exchange carriers
(ILECs) and CETCs. In granting ILECs an exclusive five year right to Phase I
Connect America Fund (CAF) funds for broadband deployment and an exclusive
right of first refusal to obtain CAF funds in Phase II, the Commission arbitrarily
gave no effect to the competition-promoting objectives of the Act. On the contrary,
because USF support is essential to the viability of rural service, its Order gives
ILECs a five year competitive head start, threatening the viability of rural
competitive local exchange carriers (CLECs). This has the effect of erecting, not
eliminating barriers to competition for ILECs in contravention of the Act.
The Commission’s disparate treatment of ILECs and CLECs in distribution
of USF support violates its own USF “competitive neutrality” principle that
support mechanisms must “neither unfairly advantage nor disadvantage one
provider over another.” While competitive neutrality does not require identical
treatment, the Commission’s policy requires that disparities be “minimized.” That
policy is self-evidently violated by the Order’s provisions giving ILECs exclusive
USF rights. The Commission’s assertion that the interest in competitive neutrality
is “outweighed” by its expectation that larger price cap carriers will be better able
to expand broadband deployment fails on two grounds. First, granting ILECs
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exclusive USF rights cannot be squared with the FCC’s professed continued
adherence to the “competitive neutrality” principle. Second, there is no record
support for its conclusion even if it were free to abandon the competitive neutrality
principle. On the contrary, the evidence (and the FCC’s own prior findings)
indicate that the favored price cap ILECs have a record of poor service to rural
communities and are the least likely entities to expand broadband deployment.
2.
Generally, the Telecommunications Act (the “Act”) establishes a dual
regulatory scheme, giving the FCC jurisdiction over interstate services, and the
states jurisdiction over intrastate services. “Separations” is necessary to enable
each sphere of governmental authority to carry out its responsibilities. The FCC
has adopted formal separations rules to govern carriers’ allocations of plant and
expenses between the two jurisdictions.
The Act requires the FCC, when it initiates a rulemaking proceeding, to refer
any issues regarding the jurisdictional separation of plant and expenses to a
Separations Joint Board, and base its decision on those issues on a Joint Board
Recommended Decision. In the proceeding below, the FCC changed separations
rules and practices in two ways. In some cases, the FCC directly adopted new
separations rules with new formal separations methodologies. In others, the FCC
made decisions that had as much effect on separations as direct changes to the
rules themselves, such as by ordering the reduction of intrastate access rates (and
4

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thereby revenues) and replacing them in part with a new interstate charge, without
also adjusting the allocation of the underlying costs between jurisdictions. It should
have referred all elements of its proposed reform that impacted separations to a
Separations Joint Board.
The FCC’s referral duty is mandatory where it adopts formal changes to its
separations methodologies in a rulemaking proceeding such as this one. Referral is
also mandatory where the FCC adopts rule changes that have direct effects on
separations methodologies. The FCC’s decisions regarding separations methods
should be reversed and remanded so that the FCC can submit those issues to a
Separations Joint Board and adopt a new decision based on a Separations Joint
Board Recommended Decision.
3.
Sections 214(e) and 254(e) of the Act establish an explicit quid pro
quo in which eligible telecommunications carriers assume obligations to provide
and advertise basic services in exchange for the opportunity to receive USF
support. The Order improperly thwarts Congressional intent by decreeing that
ETCs may not receive any support for areas where an “unsubsidized competitor”
offers service, but refusing to relieve these ETCs of their corresponding service
obligations. Assuming arguendo the FCC can rely on the presence of an
“unsubsidized competitor” as a reason to remove eligibility for support in
particular areas at all, it cannot do so without also relieving carriers of their service
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obligations for these areas. The decoupling of these two issues is inconsistent with
the statutory scheme.
4.
The Order as applied to Allband violates the Due Process Clause
because (i) the Order is void for vagueness; (ii) the Order comprises an unfair and
unconscionable retroactive reversal of Commission orders and federal loan
contracts upon which Allband has relied; and (iii) effects an unconstitutional
confiscation of Allband’s (and its customer-members’) property, in violation of
Fifth Amendment Due Process.

The Order (arising from a legislative rulemaking process) also imposes a
harsh and punitive result targeted at Allband, or a small identifiable class of rural
companies which undertook actions after, and in reliance upon, the 1996 USF
provisions, thus comprising an unconstitutional legislative action in the nature of a
Bill of Attainder.

The Order is also contrary to the 1996 Act; is arbitrary and unlawful under
Section 706(2) of the Administrative Procedures Act, 5 U.S.C. § 706(2); and is
unlawful under estoppel and contract law principles.
6

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I.

THE COMMISSION’S DECISION LIMITING USF SUPPORT
FOR BROADBAND DEPLOYMENT TO INCUMBENT PRICE CAP
CARRIERS DISREGARDED BOTH ITS STATUTORY DUTY
TO PROMOTE COMPETITION BETWEEN INCUMBENTS AND
COMPETITIVE CARRIERS AND ITS OWN POLICY MANDATING
“COMPETITIVE NEUTRALITY” BETWEEN INCUMBENTS AND
CETCs IN THE DISBURSEMENT OF USF SUPPORT.

Of critical importance to competitive rural local exchange carriers is the
impediment to their survival posed by the Commission’s discriminatory policy
favoring incumbent price cap carriers over CETCs in the disbursement of USF
funds targeted to support broadband. While RICA does not join the rural wireless
carriers’ argument that elimination of the identical support rule was arbitrary,1 we
agree fully with those carriers that denying any USF support to competitive
carriers for broadband and reserving it exclusively to price cap ILECs was
arbitrary in two respects.
First, the FCC failed to explain how a USF policy reserving USF support for
incumbents and excluding competitive rural carriers from USF support could be
reconciled with the Act’s directive that local telecom markets be open to
competition. See Wireless Carrier USF Br. at 32-35. As the wireless carriers aptly
put it, “making CAF II support accessible only to the largest LECs will serve only
to preserve and advance their dominance in the local telecom market.” Id. at 35.

1 See Wireless Carriers USF Brief, Section IV.
7

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Second, the FCC departed without reasoned explanation from its own USF
competitive neutrality principle that “universal support mechanisms and rules
neither unfairly advantage or disadvantage one provider over another.” Universal
Service Order, 12 F.C.C.R. 8776, ¶¶ 46-48 (1997). As the wireless carriers
explained, the Commission could not logically claim that admittedly disparate
treatment is acceptable as long as it is not “unfair” without addressing how it could
possibly be fair to exclude CETCs from USF support entirely and still preserve
competitive neutrality. Wireless Carrier USF Br. at 34.
Accordingly, RICA adopts and incorporates by reference the argument
contained at Section III of the Wireless Carrier USF Brief (pp. 32-35). This brief
supplements that argument on two points. It explains that by giving incumbent
carriers a five year head start, the FCC’s Order raises barriers to competition that
the Act obliges it to reduce. And, with respect to the Commission’s USF
competitive neutrality principle, it demonstrates the unsupported nature of the
Commission’s claim that it is proper to favor incumbent carriers because they are
better able to expand broadband. These points are discussed in more detail below.

A.

The Commission’s Order

Results in Disparate Treatment
of Price Cap ILECs and CETCs.

As noted in the preliminary joint brief, the FCC allocated $1.8 billion in
CAF support to areas served by price-cap ILECs. Under CAF Phase I, existing
high cost support to these carriers is frozen, but up to $300 million of new funding
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will be available to them, but not to CETCs, to promote broadband deployment. Id.
¶¶22, 25. CETCs’ existing support was capped effective December 31, 2011, and
will be phased-out over five years. Id. ¶519. CAF II will develop a cost model to
estimate the support necessary to fund broadband in high-cost areas. Order, ¶23.
Following adoption of the cost model, the incumbent price-cap carrier “shall be the
presumptive recipient of the model derived support amount for the five-year CAF
Phase II period,” Order, ¶171, provided it accepts a state-level broadband
deployment commitment. Id. Although the Order does not use the term, this right
of first refusal (RoFR) had its origins in the proposed rule, a proposal that would
have granted price cap carriers a RoFR for USF support in their service areas.
Connect America Fund, 26 F.C.C.R. 4554 (2011) (NPRM), ¶281. Even where the
price cap carrier does not exercise its right of first refusal, it is still permitted to bid
in the auction for USF support against other carriers.

B.

The Five Year Head Start Given Price Cap Carriers Under the
Order

Undermines the Act’s Goal of Promoting Competition
for Incumbent Carriers.

The Act requires both that only designated ETCs may receive universal
service support, 47 U.S.C.§§ 214(e)(1) and 254(e), and that additional qualified
carriers shall be designated ETCs in the areas of non-rural carriers. 47 U.S.C. §
214(e)(2). These provisions reflect the dual nature of the FCC’s obligations under
the Act, namely that it “must see to it that both universal service and local
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competition are realized.” Alenco Communications, Inc. v. FCC, 201 F.3d 608,
615 (5th Cir. 2000) (emphasis in original). In determining, however, that only price
cap carriers (the great majority of which are non-rural), but not their competitors,
are eligible for additional USF support over the next five years -- while their
competitors’ existing support is phased out during that same period - the
Commission has rendered meaningless the competition-promoting aspect of its
dual statutory obligations. Under the Order, incumbents are effectively given a five
year head start on their CETC competitors. Since, by the Commission’s own
account, USF support is essential to build out in rural areas, Order, ¶ 2, such a
head start gives incumbents a virtually insurmountable, and arbitrary advantage.

C.

The Commission’s Claim That It Is Proper To Favor Incumbent
Carriers Because They Are Better Able To Expand Broadband
Not Only Flouts Its Competitive Neutrality Principle, It Is
Unsupported By Substantial Evidence.

Conceding that its Order results in disparate treatment of incumbent price
cap carriers and CETCs, the Commission asserts that the departure from “strict”
competitive neutrality is “outweighed” by the access to advanced services to
consumers it expects price cap ILECs will provide when given the “opportunity to
commit to deploying broadband in their statewide service areas.” Order, ¶177. It
acknowledges that other providers might be able to commit to serving small areas,
but asserts that the price cap carriers’ service area-wide facilities put them in a
unique position to deploy broadband rapidly and efficiently in such large areas. Id.
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This explanation can neither be squared with the competitive neutrality principle
with which the Commission claims to comply nor justified by the record.
The competitive neutrality principle is quite explicit. The reference in its text
to support mechanisms that “neither unfairly advantage nor disadvantage one
provider over another,” Universal Service Order, supra, ¶ 46-7, necessarily implies
that competitive neutrality does not require identical treatment. But while perfect
neutrality might not be achievable, the Commission explained that its goal was to
“ensure that such disparities are minimized so that no entity receives an unfair
competitive advantage that may skew the marketplace or inhibit competition.” Id.,
¶ 48.(emphasis added). The Order, however, makes no claim – nor could it - that in
excluding CETCs it has “minimized disparities” in treatment. Nor does it claim
that the exclusion will not “skew the marketplace.” To the contrary it expects
exactly that result: it expects that incumbent price cap carriers, not their
competitors, will be the exclusive broadband providers in their service areas and
grants them USF support to further that end.
While agencies are generally given deference in the interpretation of their
own orders and regulations, their interpretation must still be plausible. Idaho
Power Co. v. FERC, 312 F.3d 454, 461-62 (D.C. Cir. 2002. Having established the
criteria for evaluation of the fit between its rules and its principles, the
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Commission is not free simply to ignore those criteria when they become
inconvenient. That, however, is exactly what has happened here.
Instead of explaining how the exclusion of CETCs could be “fair” or
addressing its original definition of the principle, the Order effectively abandons
any pretense of adhering to competitive neutrality and turns to its real justification:
the price cap carriers are big and rich (read AT&T, Verizon, CenturyLink) and can
somehow leverage their existing infrastructure to more quickly bring broadband to
more of the locations that they have previously ignored. Order, ¶ 177. By contrast,
competitors may be competent in small areas, but are believed to be singularly or
collectively incapable of rapid expansion to state-wide areas. Id.
Even if the Commission could lawfully depart from its competitive
neutrality principle, this excuse for doing so is not supported by the record. Take
first the Commission’s assertion that USF will go to areas where the ILEC is likely
to have the only wireline facilities and that few other bidders will have the
“financial and technological capabilities to deliver scalable broadband that will
meet our requirements over time.” Order, ¶175. No citation is provided for this
conclusion, and the record is to the contrary. Rural CLECs have repeatedly
explained to the Commission that in rural areas, price cap carriers’ facilities are
often old and ill-maintained. RICA Comments, CC Docket 01-92, August 21,
2001, pp 1-2 (“…large ILECs…had for some time avoided upgrading or even
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maintaining the facilities in these communities…”).2 More than a decade ago the
Commission itself observed:
CLECs often are more likely to deploy in rural areas the new facilities
capable of supporting advanced calling features and advanced
telecommunications services than are non-rural ILECs, which are
more likely first to deploy such facilities in their more concentrated,
urban markets.
Access Charge Reform, Reform of Access Charges Imposed by Competitive Local
Exchange Carriers, Seventh Report and Order, 16 FCC Rcd 9923, ¶ 65 (2001)
(“CLEC Order”).
Rural CLECs also explained that in rural areas with long local loops even
where the price cap carriers have up-to-date voice capable facilities, they are not
scalable to meet the new broadband requirement. Broadband provided over copper
loops with DSL technology may be upgradable to meet the new 4/1 standard in
small towns, but is not upgradeable to that standard on much longer loops serving
rural residents. RICA Ex Parte, October 17, 2011, p. 5. The Commission ignores
the contradictions between the record on this point and its “leverage” assumption.

2 Petition of Mid-Rivers Telephone Cooperative, Inc. for Order Declaring It to Be
an Incumbent Local Exchange Carrier in Terry, Montana Pursuant to Section
251(h)(2),
Report and Order, 21 FCC Rcd 11506 (2006), para. 12 (“Mid-Rivers
serves between 85 and 93 percent of the access lines in the Terry exchange. . . .
The Mid-Rivers facilities in Terry appear to be technically superior to those of
Qwest. Mid-Rivers also appears to provide maintenance and repair operations that
are located much closer . . . ”
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The Commission also ignores the logical implication of its finding that by
far the largest amount –both in absolute and percentage terms—of areas unserved
by broadband are in the service areas of the price cap companies. Order, ¶ 127
(83% of Americans without access to fixed broadband live in price cap study
areas). Indeed, the Commission’s conclusion is inconsistent with its own
recognition that large carriers have underperformed in rural communities. CLEC
Order, supra.3 Where, as here, the agency has ignored evidence – as well as its
own findings - contradicting its conclusions, its actions are arbitrary and
capricious. Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut.
Automobile Ins. Co., 463 U.S. 29, 43 (1983).

II.

THE FCC VIOLATED SECTION 410(c) BY CHANGING
SEPARATIONS RULES WITHOUT REFERRING THOSE
ELEMENTS OF ITS REFORM PROPOSALS TO A
SEPARATIONS BOARD.


A.

Facts, Procedural History, and Regulatory Background.

The FCC adopted the November 18, 2011 Order under review as a rule,
preceded by a Notice of Proposed Rulemaking.

3 Over the last twenty years, many large companies have sold their rural exchanges
rather than invest in network upgrades needed to improve and modernize rural
service. See, e.g., US West Communications, Inc. and Eagle Telecommunications,
10 F.C.C.R. 1771, 1774 (1995); M&L Enterprises, Inc., d/b/a Skyline Telephone
Co
., 19 FCC Rcd 6761 (2004); Mescalero Apache Telecom, Inc., 16 FCC Rcd
38136 (APD 2001) (order by Chief, Accounting Policy Division).
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The FCC recognized from the outset that its proposed comprehensive
reforms might very well impact separations. In its NPRM, the FCC asked parties to
comment on how its proposed reforms might affect or be affected by the existing
separations process and future reform.4 The FCC specifically noted that it has
already created a Separations Joint Board to study separations issues in another
docket. However, the FCC did not refer the separations issues in this proceeding to
that Separations Joint Board (or any new Separations Joint Board) for preparation
of a Recommended Decision pursuant to Section 410(c), even while
acknowledging that the proposed rule changes would likely alter existing
separations policies.
In their comments, parties reminded the FCC that it had to comply with its
statutory duty to refer separations issues to a Separations Joint Board. For example,
the Rural Broadband Alliance (“RBA”) cautioned the FCC not to “overlook the
statutorily required Joint Board processes that jurisdictionally separate network
costs used to provide both interstate and intrastate services.”5 RBA reminded the
FCC that it had to refer separations issues initially to a Joint Board under Section

4 NPRM, ¶ 396.
5 Comments of the RBA, submitted Aug. 22, 2011, at 18 (“RBA Aug.
Comments”).
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410(c)6 and pointed out a number of separations rules and policy changes
implicated by the FCC’s proposals.7
The Section 410(c) referral requirement fortifies the dual regulatory scheme
that the Act establishes for carriers’ provision of telecommunications services. The
Act generally gives the FCC jurisdiction over carriers’ provision of interstate
services8 and the states jurisdiction over carriers’ provision of intrastate services.9
Because most property and expenses relate both to interstate and intrastate service,
e.g., the cost of a switch that handles both interstate and intrastate calls, separation
of common carrier property and expenses is fundamental to preserving each
regulator’s sphere of authority. Indeed, in Smith v. Illinois Bell Telephone
Company, the U.S. Supreme Court held that it was essential for carriers to
“separate” their property, revenues and expenses between the two jurisdictions to
recognize “the competent governmental authority in each field of regulation

6 Attachment to RBA Aug. Comments at 26.
7 Id. See also, e.g. id. at 18 (cap on the High Cost Loop Fund), 26, 28-29
(reductions in intrastate access charges); Comments of the RBA, Apr. 18, 2011, 25
(other matters require referral to the Joint Board); see generally, Letter from
AT&T to FCC (Dec. 6, 2010), 1 (in the letter that prompted the FCC to seek
comments on separations impacts of its proposals in its NPRM, referenced at ¶ 396
n.569, AT&T said the FCC should “treat loops used to provide broadband as
exclusively interstate.”).
8 Section 152(a).
9 Section 152(b).
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appropriately.”10 The FCC adopted Part 36 of its rules to govern the allocation of
carriers’ revenues, costs and expenses between the two jurisdictions.

B.

The Order

Ignores That There Are No Exceptions To The
Requirement That “Any Proceeding Regarding The
Jurisdictional Separation Of Common Carrier Property
And Expenses Between Interstate And Intrastate Operations”
Be Referred To A Joint Board.

There are no exceptions to the requirement that “any proceeding regarding
the jurisdictional separation of common carrier property and expenses between
interstate and intrastate operations” be referred to a Joint Board. 47 U.S.C. §
410(c). This rulemaking “regard[ed]” jurisdictional separations, so the FCC was
required to refer the elements of its proposed comprehensive reform that changed
separations to a Separations Joint Board.
The FCC made a number of key changes to separations rules and policies in
the rulemaking order it finally adopted. As discussed further below, the FCC
changed Part 36 separations rules expressly in some parts of its order, and in
others, it used phraseology not explicitly cast in separations terms that had just as
much direct impact on the separations rules as the changes it made to the Part 36
rules themselves. The FCC also directly affected separations policies by ordering
the reduction of intrastate rates (and thereby revenues), and replacing them in part

10 Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 148 (1930).
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with a new interstate charge, without also making corollary changes to adjust the
allocation of the underlying costs between jurisdictions.
1.

Standards for Determining Which Rule Changes
“Regard” Separations.

As the D.C. Circuit held in Crockett Telephone Company v. FCC, the FCC
must make a Separations Joint Board referral under Section 410(c) when elements
of its proposed rules will result in separations methodology changes.11 Further,
even where the proposed rule changes do not explicitly change the separations
rules, but nevertheless effect allocations between jurisdictions, Joint Board referral
is required. As the Fifth Circuit stated in Texas Office of Public Utility Counsel v.
FCC: “[The FCC] must show that the Joint Board was aware of the effects on the
jurisdictional separations rules of replacing the existing high-cost support system.
The plain language of the statute shows that any shift in the allocation of

11Crockett Telephone Co. v. FCC, 963 F.2d 1564, 1571 (D.C. Cir. 1992)
(“Crockett”). In Crockett, the FCC and the state public utility commissions were
both using an informal “average schedule” method to approximate the result
achieved by formal separations rules. There was no rule change as the FCC had
simply informally consented to the States’ use of the same “average schedule”
method the FCC used. Id. In denying a petition for review by private company
petitioners seeking to overturn this FCC/state consensus, the Court held that
Section 410(c) by its terms applies only to rulemaking proceedings begun to alter
the separations rules, and so did not apply. Id.; see 47 U.S.C. § 410(c) (duty to
refer applies to proceedings the FCC “institutes pursuant to a notice of proposed
rulemaking”). By contrast, the FCC here has proceeded by issuing a rulemaking
notice. Further, there is no consensus between the state petitioners and the FCC.
The Section 410(c) referral requirement applies to achieve mandatory involvement
by states in FCC deliberations on separations rule changes.
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jurisdictional responsibility lies at the heart of § 410(c)'s consultation
requirement.”12
2.

Changes to the Part 36 Separations Rules Themselves.

In its decision, the FCC made numerous and substantial changes directly to
its Part 36 rules to accomplish its universal service/intercarrier compensation
reform. The FCC limited the portion of nationwide loop cost expense that certain
carriers could allocate to the interstate jurisdiction.13 It also significantly curtailed
carriers’ ability to receive “Safety net additive support” for new
Telecommunications Plant in Service;14 so that carriers would no longer be able to
recover these costs from the interstate jurisdiction. Moreover, it limited the amount
of Corporate Operations Expenses carriers could allocate to the interstate
jurisdiction.15
In one of its most glaring failures to respect the jurisdictional division of
authority, the FCC adopted a new Part 36.621(a)(5) rule giving its staff discretion
to publish a schedule each year establishing new limits on unseparated loop cost
allocated to the interstate jurisdiction.16 Loop costs below those actually incurred
by the carrier are then fed into the separations algorithms and reduce the amount of

12 Texas Office of Pub. Util. Counsel. v. FCC, 183 F.3d 393, 416 (5th Cir. 1999)
(emphasis added).
13 47 C.F.R. § 36.603, Order at App. A, 496-97.
14 47 C.F.R. § 36.605(a), Order at App. A, 497.
1547 § C.F.R. 36.621(a)(4), Order at App. A, 498-99.
16 Order, para. 218.
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cost allocated to the interstate jurisdiction. As a result, a carrier may have included
a level of investment in its “rate base” without objection in one year pursuant to the
FCC’s rule, but in the next year, the FCC Staff could issue a new “schedule” that
unilaterally and materially reduced the level of the previously permitted investment
or expense. The FCC would essentially move previously allowable interstate
expenses to the intrastate jurisdiction to reduce universal service support for loop
costs each time its Staff decided to reduce the allowable total unseparated costs of
a carrier.
In each of these instances, the FCC made actual changes to Part 36
separations rules in its Order without first consulting a Separations Joint Board.
3.

Changes to Other Rules that Affect Separations Rules.

The FCC’s changes to its universal service rules affected its separations
rules, thereby requiring referral under the Texas Office of Public Utility Counsel
precedent from the Fifth Circuit reviewed above. A number of its changes were
designed to limit the amount of universal service support carriers would receive.
The FCC capped the level of the High Cost Loop (“HCL”) Fund to limit the
support carriers would receive for various expenses, including capital and
operating expenses.17 It reduced HCL support for carriers whose intrastate end user

17 Order, paras. 214-217.
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local rates were below a local rate floor.18 If a carrier does not raise its intrastate
rates at least to that level, its support levels are reduced.
Each of these changes directly impacted the separation of property and
expenses between the jurisdictions. Costs that were assigned to the interstate
jurisdiction for recovery from the Universal Service Fund were essentially
reassigned to the intrastate jurisdiction for possible recovery from other sources.19
These costs and expenses had previously been allocated to the interstate
jurisdiction to be supported by the USF and now would no longer be covered by
the Fund.
These changes impact separations as much as changes to the rules
themselves. In fact, in enacting Section 410(c), Congress was specifically
concerned that FCC separations rule changes would leave costs to the states for
recovery by default in intrastate rates:
Thus, if the Commission declares its rate base to include certain costs,
these costs are not used in determining a State’s rate base; conversely,

18 Order, para. 235.
19 The RBA highlighted the separations’ impact of this proposed High Cost Loop
Fund cap rule change: “There is, however, a growing cost recovery problem that
results from the imposition of a cap on the High Cost Loop fund. Costs that are
assigned to the interstate jurisdiction for recovery from the HCL fund pursuant to
separations rules are essentially reassigned to the intrastate jurisdiction because of
the insufficiency of the Fund. Consideration of the impact of this result on a rural
incumbent rate-of-return carrier may properly be addressed by the Commission in
conjunction with the Federal State Joint Board; the state members of the Joint
Board are best placed to address the issues set forth above. . . . ” Attachment to the
RBA Aug. Comments at 18.
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if the Federal Communications Commission does not use certain
costs, the State may be left with these costs in determining its rate
base---and correspondingly higher rates for local services to the local
consumer. The determination of the rate base at the Federal level then,
has a strong relation to the rates which are charged at the local level.
Accordingly, the procedures for establishing the separations of plant
and expenses at the Federal level have invoked great concern among
the States as manifested by the interest expressed by the National
Association of Regulatory Utility Commissioners (NARUC).20
Universal service changes that have the effect of changing the state cost allocation
must be reviewed by a Separations Joint Board.
The FCC’s changes to intercarrier compensation rules also directly affected
separations rules, and required referral to a Separations Joint Board. Through its
intercarrier compensation reform, the FCC reduced and eliminated certain
intrastate access charges over a transition period.21 For many carriers, the intrastate
access revenues can represent a substantial portion of their existing intrastate
revenues. The FCC allowed carriers to charge a new interstate-approved rate, the
Access Recovery Charge, and receive some limited support from the Connect
America Fund as a partial and limited means of addressing substantial lost
revenue.22

20 S. Rep. No. 92-362, reprinted in 1971 U.S.C.C.A.N. 1511, 1513.
21 Order, para. 801, Figure 9.“Access charges” are rates that local carriers charge
interexchange carriers to provide access to their local networks for originating and
completing long distance calls.
22 Order, para. 905.
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The FCC failed to reclassify carrier access costs between jurisdictions as a
corollary to these actions, however. Thus, states were still officially “left” with
them in their intrastate allocations used for ratemaking.23 The FCC never asked a
Separations Joint Board to review the impacts of the proposal on existing
separations rules and methodologies, or make recommendations on what shift in
recovery, if any, in both revenues and expenses, was appropriate. The change had
as much of an impact on separations as direct changes to the Part 36 rules
themselves.
For these reasons, the Court should reverse and remand the FCC’s decision
on issues impacting jurisdictional separations, and direct the FCC to refer the
issues to a Separations Joint Board. The Court should direct the FCC to issue a
new decision, based on the Separations Joint Board’s Recommended Decision.

23 RBA notified the FCC that whatever means it adopted to reduce intrastate access
charges would have separations implications that should be reviewed first by a
Joint Board. Attachment to RBA Aug. 2011 Comments, at 26: “Under Section 410
of the Act, the appropriate initial process is the referral of this matter to the
Federal-State Joint Board. Irrespective of whether the Commission is determined
to achieve reductions in intrastate access charges through state preemption or
alternatively pursues the provision of cooperative incentives to the states, the result
will impact the jurisdictional separation of common carrier property and expenses
between the state and federal jurisdiction.”
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III.

THE COMMISSION IRRATIONALLY REFUSED TO MODIFY
SERVICE OBLIGATIONS FOR CARRIERS IT DENIED
UNIVERSAL SERVICE SUPPORT.

As part of its overhaul of its USF regulations, the FCC decided it will no
longer provide USF support to carriers serving any territory, regardless of cost,
where voice and broadband service are available to customers from an
“unsubsidized competitor.”24 Order, ¶170 (price cap territories), ¶283 (RLEC
territories).25 Petitioners have argued that this was arbitrary and capricious because
“unsubsidized competitors” have no obligation to provide service to all customers
on demand. See Joint Universal Service Fund Principal Brief at 53-55. Assuming
arguendo, however, that the FCC could properly eliminate support in these
“overlap” territories, it committed further error by refusing to relieve Eligible
Telecommunications Carriers (ETCs) of their ongoing duty to serve all comers
without USF support.

24 The FCC defined an “unsubsidized competitor” as “a facilities-based provider of
residential terrestrial fixed voice and broadband service.” Order, ¶103. Newly-
adopted 47 C.F.R. §54.5 provides that “An ‘unsubsidized competitor’ is a
facilities-based provider of residential fixed voice and broadband service that does
not receive high-cost support.” Thus, the definition does not require qualification
as an ETC, and does not exclude benefitting from other types of subsidies.
25 In price cap territories, an ETC will be ineligible to receive support in CAF
Phase II for any census block in which an “unsubsidized competitor” offers
services. In RLEC territories, an ETC will be denied support, after a three-year
transition period, only if one or more “unsubsidized competitors” serve an entire
service area as designated under §214(e)(5).
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Under the Act, the receipt of USF support comes with corresponding
obligations. Any ETC designated under Section 214(e) must, throughout the
service area for which the designation is received:
(A)
offer the services that are supported by Federal universal service
support mechanisms under section 254(c) of this title …; and
(B)
advertise the availability of such services and the charges therefor
using media of general distribution.
47 U.S.C. §214(e)(1). Thus, an ETC must hold out its supported services
indifferently to all potential customers. Conversely, only a carrier that is designated
as an ETC, and thus accepts these obligations, may receive USF support. 47 U.S.C.
§254(e). The service obligation is inextricably tied to the support.
The Order is contrary to Section 214 because it requires ETCs to provide
services for which the carrier is not receiving, and cannot receive, support. The
service obligation imposed by Section 214(e) does not apply to services that
merely are authorized to receive support under Section 254(c); rather, it applies to
services that actually “are supported by Federal universal service support
mechanisms.” Contrary to this limitation, the Order maintains ETCs’ service
obligations even in areas where they no longer will receive federal universal
service support.
Further, the statute permits an ETC to relinquish its right to USF support,
and its corresponding duty to serve, only if the state commission (or where
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applicable the FCC) designates more than one ETC within the same service area.
47 U.S.C. §214(e)(4). In that case, the state commission must ensure that all
customers served by the relinquishing carrier will continue to be served by one of
the other ETCs. Id. This statutory structure leaves no room for doubt that Congress
intended eligibility for support and the duty to serve to be two sides of the same
coin.
The FCC arbitrarily and unlawfully severed this linkage by declaring that
ETCs will no longer be eligible for support in any service area in which an
“unsubsidized competitor” is operating, but will continue to be subject to the duties
of an ETC. Significantly, the FCC does not require that the “unsubsidized
competitor” be an ETC. This omission has two critical consequences. First, if the
“unsubsidized competitor” were required to be an ETC, existing ETCs would have
an opportunity to relinquish their status under Section 214(e)(4). If, however, an
ETC loses support because of the presence of a non-ETC competitor, it is no
longer “eligible” to receive support, but remains unable to relinquish the
corresponding duty to serve.
Second, eliminating support in any service area in which an “unsubsidized
competitor” is operating virtually ensures that ETCs will face escalating, and
ultimately unsustainable, financial burdens. By definition, ETCs are subject to
more costly obligations than their competitors. Under the Order, ETCs facing an
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“unsubsidized competitor” in their service area are still required to advertise and
offer basic voice services as a carrier of last resort throughout the entire area. In
contrast, competitors who are not ETCs are free to engage in “cream-skimming,”
serving only the low-cost parts of a service area. ETCs will not be able to cover the
cost of their more comprehensive service obligations with increased rates, given
both competitive and regulatory limits on end-user charges. See Joint Universal
Service Fund Principal Brief at 43-44; cf. Order, ¶¶9-10. Yet the Order removes
universal service support while maintaining these obligations. This amounts to an
unfunded mandate, which violates Section 254’s requirement that ETCs receive
support that is sufficient. See 47 U.S.C. §254(e).
The FCC recognized this issue, but refused to deal with it. Instead, it sought
comment in the Further NPRM section of the Order on suggestions that “the
Commission should relax or eliminate ETCs’ voice service obligations” as it
removes eligibility for support. Order, ¶1095; see also ¶¶1096-1101 (proposing to
address these issues on a case-by-case basis through §214(e)(4) relinquishment
process and forbearance under §10 of the Act, 47 U.S.C. §160).
It was arbitrary, capricious, unreasonable and contrary to law for the
Commission to maintain the service obligations while eliminating support.
Congress clearly intended these obligations and benefits to be complementary.
When the FCC decides that a carrier can no longer receive USF support for serving
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a particular area, that carrier is no longer “eligible” for support and can no longer
be treated as an “eligible telecommunications carrier” subject to a duty to serve.
The Commission has created unnecessary tension and confusion for the
states and providers by seeking comment on this issue rather than logically
resolving an obvious paradox it has created through its misapplication of the law.
Although an administrative agency has discretion as to how it manages its docket
and the order in which it addresses issues, it abuses that discretion when it
separates consideration of issues that logically must be decided together. “While
there may well be circumstances where a particular objection is more properly
deferred to a later proceeding, that is assuredly not the case where the objection
goes to the heart of the public interest determination immediately to be made.”
Maryland Peoples’ Counsel v. FERC, 761 F.2d 768, 778 (D.C. Cir. 1985) (internal
citation omitted). See also Maier v. EPA, 114 F. 3d 1032, 1039-1040 (10th Cir.
1997) (Court may review an agency’s refusal to initiate rulemaking if the decision
rests on an insufficient legal predicate); Sierra Club v. Gorsuch, 715 F.2d 653,
658-59 (D.C. Cir. 1983) (Court’s review of agency decision to defer action on a
particular issue should be deferential, but “must not be frustrated by blind
acceptance” of agency’s claim that decision is still under study) (emphasis in
original).
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The ultimate effect of the Order is that ETCs facing an “unsubsidized
competitor” in their service area will remain subject to costly unsupported service
obligations, at least unless and until the Commission acts at some unspecified
future time, in either its further rulemaking or some other proceeding, to relieve
them of those obligations. Of course, there is no assurance that the outcome of the
future proceedings will be to lift these obligations, so ETCs may remain subject to
them indefinitely. This state of affairs is contrary to the intent of Congress as
expressed in §214(e), and the Commission’s refusal to remedy it was arbitrary,
capricious, unreasonable and contrary to law. Accordingly, the Court should vacate
and remand the rules reducing support in areas served by an “unsubsidized
competitor.”

IV.

THE ORDER

, AS APPLIED TO CERTAIN SMALL RURAL
CARRIERS, IS UNCONSTITUTIONAL UNDER DUE PROCESS
PRINCIPLES AND AS A BILL OF ATTAINDER, AND ALSO
VIOLATES THE ACT, AND PRINCIPLES OF ESTOPPEL AND
CONTRACT LAW.

A.

Statement Of Additional Facts.

Allband Communications Cooperative (Allband) was created in 2003 by
local residents seeking to obtain communications services in their heavily forested
rural area located in four contiguous counties in northern Michigan, which never
before had such services.
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Upon adoption of the 1996 USF amendments to the Act, the local residents
pursued their only option to obtain service, by creating a communications
cooperative, and by obtaining a grant from Michigan State University (MSU) to
further the project. Commencing in 2004, the Michigan Public Service
Commission (MPSC) issued several orders granting Allband necessary licenses
and ETC status. In 2005, the FCC approved Allband as an ILEC, an important
step to obtain USF funding. Allband thereby assumed the responsibilities of an
ILEC and ETC to provide a range of emergency and interconnection services
essential to the public interest. Allband then received approval of an $8 million
loan from the USDA Rural Utility Service (RUS), premised upon receipt of USF
revenues as security. Allband then constructed an advanced communications
network, commencing partial service in late 2005. By 2010, Allband had
constructed an efficient modern communications network that, for the first time,
provided service to the residents in its large rural exchange area.
The annual USF funds provided to Allband comprise the bulk of the
revenues necessary to make payments on Allband’s RUS loans. Allband, its
creditors, and the RUS, all relied upon the USF revenues as the financial security
for payment of the RUS loans.
Allband made extensive filings in the subject FCC dockets establishing that
the continuation of the existing level of USF funding (without imposition of the
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Order’s per-line reductions and expense limitations) are critical to Allband’s
survival. Without such USF support, Allband will be forced to close down, cease
services, and default on its RUS loans, which inevitably would result in bankruptcy
and the stranding of Allband’s modern network providing service to the public.26

B.

Allband’s Constitutional Rights Are Violated By the Order

.
The Order is unlawful and beyond the jurisdiction of the Commission
because it is contrary to the plain language of, and objectives and purposes of
Congress underlying, the 1996 Act. The 1996 Act established the USF fund and
program to promote the establishment of service in rural areas having no service,
such as the area Allband now serves. Allband fully meets all of the provisions and
purposes of the 1996 Act, such as the USF provisions of Section 254(b).
The Order, as it adversely impacts Allband, also contravenes the provisions,
and the goals and objectives of Congress under Section 254(b)(5) and 254(d) of the
Act, requiring “specific, predictable and sufficient… mechanisms to preserve and
advance universal service”; and under Section 254(e) which requires that universal
service support provided to ETC Providers “should be explicit and sufficient to
achieve the purposes of this section.”

26 The FCC’s Wireline Bureau (WLB), pursuant to delegated authority, issued an
order dated July 25, 2012, granting Allband a 3-year waiver of the Order; on
August 24, 2012, Allband filed an Application for Review of the WLB order,
seeking a waiver of the Order for the duration of the RUS loans.
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The Order imposes a drastic reduction in the per-line USF funding support
to be provided some small rural companies such as Allband, and also established a
“benchmark regression rule” which purports to impose limitations on capital and
operations costs reimbursable from the USF. This rule operates pursuant to an
economic model utilizing national variables, which are subject to change on a
yearly basis. The model does not adequately consider the individual circumstances
of each small rural company, or their service areas. The benchmark regression rule
is thus hopelessly vague, unascertainable, uncertain, and arbitrary as applied to
small companies such as Allband. The Order undermines confidence in the
viability of Allband by local residents, employees, vendors, interconnecting
carriers, and the financial community. This in turn degrades Allband’s
opportunities to provide and expand services in its rural area, which thus
contravenes the purposes of the 1996 Act and the USF program.

The Order, as applied to Allband, is also unconstitutional under the Due
Process clause because (i) it imposes a retroactive reversal of Commission orders
and USF program commitments upon which Allband (and the RUS) have relied in
establishing Allband and in incurring capital costs, funded by the RUS loan, to
construct its network, and (ii) because the expense reimbursement limitations
under the ever-changeable “benchmark regression rule,” on a going-forward basis,
are hopelessly vague and unascertainable. The Order thus fails to meet the
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holdings and reasoning stated in Federal Communications Commission, et al. v.
Fox Television Stations, Inc., 132 S. Ct. 2307 (2012), wherein the Court held that
Due Process is violated when FCC regulations are vague, and holding that “…
clarity in regulation is essential to the protections provided by the Due Process
Clause of the Fifth Amendment . . . ” requiring . . . “the invalidation of laws that
are impermissibly vague. . . . ” The Court in Fox also ruled that a waiver option (or
“policy of forbearance”) in the regulatory scheme does not absolve the
constitutional defect.
A similar Due Process defect as found in Fox (vague and unascertainable
regulatory standards and requirements) has been imposed by the Order, as applied
to Allband. An even more egregious violation of Due Process has occurred here,
however, because the Order goes beyond lack of advance notice and vagueness by
effecting a retroactive reversal of prior orders and policies upon which there has
been substantial reliance, coupled with the substitution of detrimental rules and
policies on an unforeseen retroactive basis.
The Order is also unconstitutional as applied to Allband under the Fifth
Amendment Due Process clause, as it would effect a confiscation of Allband’s
(and its customer-members’ property), and will financially destroy commitments
made by Allband to its employees, vendors, and entities providing credit and loans.
The Order limits USF reimbursements relied upon by Allband to undertake long-
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term capital investments and service obligations, and to cover expenses and to
repay RUS loans. By ignoring these circumstances, the Commission as a
ratemaking agency has acted contrary to the venerable precedent of the United
States Supreme Court in Bluefield Waterworks & Improvement Co. v. Public
Service Comm’n of West Virginia, 262 U.S. 679, 692-693; 42 S. Ct. 675 (1923),
requiring regulatory action to provide a return … “to assure confidence in the
financial soundness of the utility and… to maintain and support its credit and
enable it to raise the money necessary for the proper discharge of its public
duties…” The Order is likewise contrary to Federal Power Commission v. Hope
Natural Gas Company, 320 U.S. 591 (1944), wherein the Court held that the
“return … should be sufficient to assure confidence in the financial integrity of the
enterprise, so as to maintain its credit and to attract capital.”
The Order, as applied to Allband, also constitutes an unconstitutional Bill
of Attainder. The Order, including the April 25, 2012 “delegated” WLB Order
limiting USF expense reimbursements under the “benchmark regression rule”
threatens to reduce reimbursement funding from the USF, crippling Allband and a
small class of similar rural carriers which relied on the 1996 Act’s USF. The Order
punishes Allband for pursuing the Act’s opportunities and violates Allband’s Fifth
Amendment and other Due Process protections. The Order effectively targets a
small class of companies for differential treatment as being outside of the so-called
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“market-based” economic model favored by the Commission. Such treatment and
similar punishments have been reversed by the U. S. Supreme Court in United
States v Lovett, 328 U.S. 303, 315 (1946) and more recently in United States v
Brown, 381 U.S. 437 (1965). In Lovett and Brown, the Court did not hesitate to
reverse as Bills of Attainders governmental orders which selectively denied
petitioners their fundamental constitutional rights.
The Order, as applied to Allband, is also unlawful and arbitrary because it is
irrational to the extreme. The Orders imposition of per-line reductions and
expense limitation reimbursements under the USF program (i) are not supported by
the plain language of the Act; (ii) retroactively reverses purposes and objectives of
Congress in the 1996 Act as noted, and (iii) ignores the direct reliance on the USF
by Allband, the RUS, the MPSC, and agencies administering the USF program.
The Order should be reversed as applied to Allband based upon estoppel
principles.
The Order is also arbitrary because it fails to recognize that the destructive
impacts upon Allband (or similar small rural carriers) are wholly unnecessary to
achieve the stated goals or objectives of the Order. The Order’s suggestion that it
seeks to curtail the unchecked growth of the USF is not accomplished by reducing
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Allband’s USF funding, and by destroying Allband and its services.27 The Order’s
stated goal to reduce waste and inefficiency, or to conserve the USF budget, also is
not accomplished by punishing Allband. There exists no evidence of waste or
inefficiency attributable to Allband. The July 25, 2012, WLB order granting
Allband a 3-year waiver from the Order expressly found the opposite—
acknowledging that Allband was a lean and efficient operation, providing reliable
service in a rural area in accordance with the public interest.
The Order also arbitrarily failed to consider Allband’s assertions that the
USF funding should not be reduced as applied to already invested capital and
expenses incurred in reliance on the USF, and at most, should apply only to
prospective investment incurred after the Order. Allband cannot retroactively pull
out already constructed plant, or cancel maintenance, depreciation, taxes, and
related expenses on such plant, or alter decisions made in the past. A rational, non-
arbitrary order would recognize that a lawful and constitutional order can and
should only apply to investment and expense decisions made on a prospective
basis, on and after the Order is effective.

27 Allband’s USF funding of about $1.3 million constitutes an imperceptible
portion of the multi-billion USF annual budget. The combined amount saved from
imposing the Order’s $3,000 per line cap, on all companies in the United States,
also constitutes a negligible portion of the annual USF budget (as documented by
calculations in Allband filings using Exhibit B of the April 25, 2012 WLB Order).
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The Order is also unlawful and arbitrary because, besides destroying
Allband and its services, and stranding its recently constructed network, the Order
will cause a prompt default by Allband of its RUS loan contracts and obligations.
The Order wholly ignores that the pre-Order USF revenue stream was relied upon
by both Allband and the RUS to pay back the RUS loans. The Order would thus
undercut the loan programs of a sister agency of the federal government. This
retroactive reversal of policy, and resulting impacts, has been ruled unlawful in an
analogous context in United States v Winstar Corp, 518 US 839 (1996). In that
case, the plaintiffs were awarded substantial damages against the United States in a
similar situation. In Allband’s situation, however, the pursuit of damages on a post-
loan default basis, after cessation of operations to the public, would be clearly
inadequate. In order for Allband to continue service and to uphold its loan
obligations to the RUS, Allband asserts that reversal of the FCC Order as applied
to Allband is necessary and far more appropriate.
The Order is also unlawful and beyond the jurisdiction of the FCC because
it intrudes much too far into the economic market place. The Order serves to pick
“winners and losers” among companies—to force Allband and perhaps other small
carriers established under the USF out of business and into bankruptcy, perhaps
with an unwarranted windfall to the same large powerful companies which refused
for decades to provide service in the subject rural service areas. Allband asserts
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that the FCC’s jurisdiction does not go this far, and that the attempted unilateral
assumption of such power is neither lawful nor necessary. Regulation does not
entail the power to destroy.28

CONCLUSION

For the reasons stated above, this Court should reverse and/or remand the
Order and vacate it in its entirety.
Respectfully submitted,

/s/ Harvey L. Reiter
Harvey L. Reiter
H. Russell Frisby, Jr.
Stinson Morrison Hecker LLP
1775 Pennsylvania Avenue, NW #800
Washington, DC 20006
202-728-3016
hreiter@stinson.com







On behalf of the Joint Petitioners
November 6, 2012


listed on the cover of this filing29

28 The Court in Pennsylvania Coal Co v. Mahon, 260 U.S. 393, 415 (1922), held
the government may effect a taking without physical occupation or appropriation if
it “goes too far....” The “power to regulate is not a power to destroy....” Stone v.
Farmers’ Loan and Trust Co,
116 U.S. 307, 331 (1886); see also, Covington &
Lexington Tpk. Rd. Co. v. Sandford
, 164 U.S. 578, 597 (1896). The Court in Lucas
v. South Carolina Coastal Council,
505 U.S. 1003, 1015 (1992), held a non-
possessory regulation may constitute a per se taking if it deprives the owner of “all
economically beneficial or productive use of land.”
29 Rural Independent Competitive Alliance joins only in Section I; the National
Association of Regulatory Commissioners, Arizona Corporation Commission,
Vermont Public Service Board and Rural Telephone Service Co. et al. join only in
Section II; Consolidated Communications Holdings, Inc. and CenturyLink, Inc.
join only in Section III; and Allband Communications Cooperative joins only in
Section IV of this brief.
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CERTIFICATE OF COMPLIANCE

Certificate of Compliance With Type-Volume Limitations,

Typeface Requirements, Type Style Requirements, Privacy

Redaction Requirements, and Virus Scan



1.
This filing complies with the type-volume limitation of the Amended
First Briefing Order because it contains 7,785 words, excluding the parts of the
filing exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
2.
This filing complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and 10th Cir. R. 32(a) and the type style requirements of Fed. R. App. P.
32(a)(6) because this filing has been prepared in a proportionally spaced typeface
using Microsoft Word 2010 in 14-point Times New Roman font.
3.
All required privacy redactions have been made.
4.
This filing was scanned for viruses with Sophos Anti-Virus Program,
last updated on November 6, 2012, and according to the program is free of viruses.

/s/ Harvey L. Reiter

November 6, 2012
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CERTIFICATE OF SERVICE

I hereby certify that, on November 6, 2012, per the Court’s order of October
17, 2012, I caused the foregoing document to be electronically filed with the Court
via e-mail. I also certify this document was furnished through ECF electronic
service to all parties in this case through a registered CM/ECF user. This document
is available for viewing and downloading on the CM/ECF system.


/s/ Harvey L. Reiter
November 6, 2012

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