Petition for Writ of Certiorari — Celpage, Inc. v. Federal Communications Commission
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\ Supremé Court, U.S.
a, FILED
09107 2 DEC 231999
: sini
In the
SUPREME COURT OF THE UNITED STATES
CELPAGE, INC., et al.;
Petitioners,
Vv.
FEDERAL COMMUNICATIONS COMMISSION;
UNITED STATES OF AMERICA,
Respondents.
On Petition for a Writ of Certiorari to the
United States Court of Appeals
for the Fifth Circuit
PETITION FOR A WRIT OF CERTIORARI
_ Frederick M. Joyce
JOYCE & JACOBS, Attys. at
Law, L.L.P.
1019 19th Street, N.W., PH-2
Washington, DC 20036
(202) 457-0100
December 23, 1999 Counsel for Celpage, Inc.
ait
QUESTIONS PRESENTED
The historic concept of "Universal Service" was derived
from the Communications Act of 1934's mandate to "make
available, so far as possible, to all the people of the United
States a rapid, efficient, Nation-wide, and world-wide wire and
radio communication service with adequate facilities at
reasonable charges." Prior to the adoption of the
Telecommunications Act of 1996 ("Telecom Act"), "Universal
Service" meant the availability of basic exchange telephone
service to all parts of the nation at affordable, relatively
comparable rates.
The Telecom Act revised the Universal Service regime
in several important respects. In the final days preceding
enactment of the Telecom Act, a few Senators sponsored an
amendment to that bill to create a new federal program whose
purpose was to make discounted telecommunications, and any
other "special services" the FCC might designate, available to _
"elementary schools, secondary schools and libraries for
educational purposes..." That amendment also required
telecommunications carriers, in response to any "bona fide
request" for services specified by the FCC, to provide those
services to schools and libraries at discounted rates. This
amendment was approved by the Senate, and became part of
the Telecom Act. Congress did not authorize or appropriate any
funds for this program; rather, it was to be funded by what the
Statute termed "contributions" from "all providers of
telecommunications services." The Universal Service -
provisions of the Telecom Act thus present these important
questions, all of which qualify for a grant of certiorari under
Rule 10(c) of this Court's Rules:
1. Whether the Fifth Circuit erred in upholding
certain Universal Service statutory provisions in that the U.S.
Congress has improperly delegated, in violation of the Taxing
- lii-
Clause and the Origination Clause, its revenue and legislative
authority to a regulatory agency, the FCC, allowing the FCC to
adopt and impose Universal Service tax payment obligations on
telecommunications carriers and non-carriers for an unlimited
range of federal programs?
2. Whether the Fifth Circuit erred in upholding the
Universal Service statute in that it is so vague as to give the
FCC virtual carte blanche as to how to define the supported
services, how to pay for them, and how to punish parties who.
refuse to "contribute" a percentage of their annual revenues to
these programs? .
3. Whether the Fifth Circuit erred in upholding the
FCC's interpretation of Section 332 of the Act, thereby
improperly allowing the states to impose Universal Service tax
payment obligations on Commercial Mobile Radio Service
("CMRS") carriers?
-iv-
The parties to the proceedings in the Fifth Circuit are
listed in the caption of the decision below, see Appendix at
Appendix 1.
Pursuant to Supreme Court Rule 29.6, petitioner
Celpage states that is has no parent company. Pam Am
Wireless, Inc. is a wholly-owned subsidiary of Celpage.
-Ve
TABLE OF CONTENTS .
Page
QUESTIONS PRESENTED. 03650 OAS: ii
LIST OF PARTIES AND AFFILIATES. .'............ iv
TAREE OE Bas Ae sc kcibcnacsks inks denen Vii
CTR MIRE a nso oa os ck we wha ede exes ona ees l
TFG I i aS eae oka Re er
STATUTORY PROVISIONS INVOLVED............. 1
STATEMENT OF THE CARE. 6600 cess iu cencseenanc ]
.. Universal Service Regulatory History ........... 1.
a The U.S. Senate's Creation of New "Universal
SOGVNE FIONN is ce ccbaccbicceeses ces 3
3. The FCC's Universal Service Rulemaking
PII is 0 bia he dae CERO ea 5
4, The Fifth Circuit Decision. ...............00: 10
3: Petitioner's Interest in These Proceedings. ....... 11
REASONS FOR ISSUING THE WRIT. ......... eae 12
I. THE FCC'S NEW UNIVERSAL SERVICE
REGIME IS AN UNCONSTITUTIONAL TAX. . 12
II. THE STATUTORY PROGRAM IS VOID FOR
VARIES 85 ok BN ea wees ca ran Beas 21
Il. THE FCC'S DETERMINATION THAT STATES
MAY IMPOSE UNIVERSAL SERVICE
OBLIGATIONS ON CMRS PROVIDERS WAS
CLEARLY ERRONEOUS. .......00s0cceese's 26
CONCTATISION: .5 605s Sivas veasdeeacee baaeees 30
- Vi -
Page
APPENDIX
Opinion of the Court of Appeals
for the Fifth Circuit ................ Appendix 1
Fifth Circuit Denial of Rehearing ... Appendix 111
1 UBL, OEM Appendix 113
Wi ARE IGE os oe ssa. Appendix 123
d
Cost Estimate (July 19, 1995) ...... Appendix 134
U.S. General Accounting Office,
Letter to Senator Ted Stevens,
February 10, 1998 (B-278820) ...... Appendix 148
- Vii -
TABLE OF AUTHORITIES
CONSTITUTIONAL PROVISIONS Page
US. Const. ast. £, $5 7,8. osc. tice 14, 19, 21
CASES
A.L.A. Schechter Poultry Corp. v. United States,
yy ie Ee: ) See rrp panes 14
A.B. Small Co. v. American Sugar Ref. Co.,
267 US. S53 CURRIN ooe ha tis 3S Aes 22
American Trucking Ass'ns, et al. v.
U.S. Environmental Protection Agency,
175 F.3d 1027 (D.C. Cir. 1999). ............ 9, 15
Cellular Telecommunications Indus. Ass'n v. FCC,
168 F.3d 1332 (D.C. Cir. 1999). ..... sha te aatewt 26
Chevron, U.S.A., Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984). ............26.- 10, 27
Connally v. General Constr. Co., 3
268 US. SUS (IDI: 6 0s 6A ERE 22
Coates v. Cincinnati, 402 U.S. 611 (1971). ............ 23
Dane v. Jackson, 256 U.S. 589 (1921). ............... 21
Department of Revenue v. ACF Indust.,
SIG US. Soar ka oie oe
- Viii -
Page
Kolender v. Lawson, 461 U.S. 352 SINOOR his eis. 25
Loving v. United States, 517 U.S. 748 eC) rere 13, 14
Marshall Field & Co. v. Clark, 143 U.S. 649 (1892). .... 15
Morton Salt Co. v. City of South Hutchinson,
159 F.2d 897 (ie Ce 19S) ew ec. 21
Mountain States Tel. & Te!. Co. v. Pueblo of Santa Ana,
GPE NA PTE, oor ks oo oe 28
National Cable TV Ass'n v. United States,
One wa SOULE, ix, 18, 19, 21
Pace v. Burgess, 92 U.S. 372 SUMMER cc ics cc ee 16
Plaut v. Spendthrift Farm, 514 U.S. 211 CRON Kikie 6 i ce 14
Reid v. Rolling Fork Pub. Util. Dist.,
979 F.2d 1084 (5th Cir. 1992). es 6
Rural Tel. Coalition. v. FCC, <=
838 F.2d 1307 (D.C. Cir. ee 20
Smith v. Illinois Bell, 282 U.S. 133 CIS 6 sb 5s Soke 2
Smith v. Goguen, 415 U.S. 566 GRR 5 be 24,25
Texas Office of Pub. Util. Counsel v. FCC.
183 F.3d 393 (Sth Cir. 1999). ............ passim
Twin City Bank v. Nebeker, 167 U.S. 196 (eee. 5 16
Page
United States v. City of Huntington, WV,
999 F.2d 71 (4th Cir. 1993). .............2.0. 21
United States v. Munoz-Flores,
MS Ris SEO hv cS aknncda vase beues 18, 19
United States v. United States Shoe Corp.,
5239 US. SOO Ce Fn EA AOS 18, 19
United States v. Maryland,
471 F.Supp. 1030 (D.Md. 1979). .............. 20
William Thomas v. Network Solutions, et al., — -
176 F.3d S00 (DC. Car. 1998). os ie ee 18, 19
Whisenhunt v. Spradlin, 464 U.S. 965 (1983). ......... 22
STATUTES AND LEGISLATIVE HISTORY
Telecommunications Act of 1996,
Pub. L. No. 104-104, 110 Stat. 56 (1996). ........ 4
OT USE OB aa is 4
SVU SLL. SPM 5 55s OEE 4
GT AISI BOE ve ba ise hae aS oes di ees 29
47 ULB. © SI ins os i ea so sk aS 4
OT UAE Ss oss cba ive ek Ai ae ee 4, 25
47-O SS. 9 ZOD. EIA 13, 23
mg?
SIUSC. 4D os 2S IAS. 5, 25
By Page
PR BON 6 ob a oe cieiin iwc. cae: 5
WE CDAD Bae 5 5598's Fh hos ch Sc 5
PUA. F TI oa vk evn ance cccaccc: 4,5
OF RR BAPE wos ce hac ea eas ats. 4
OPED GIMME. 6 8ot58 be ads aks ob ic Sk, 11
MF AR BOM 6 6 iF ea Kise, passim
WE Ge No 108-711 (0003), 28
Joint Explanatory Statement of the Comm. of Conference,
H.R. Rep. No. 104-458 (1996). ............. 4, 28
Os MO PNG IETS ANS) ois oN vedo 28
FEDERAL AGENCY DECISIONS
" Amendment of Part 67 (New Part 36) of the Commission's
Rules and Establishment of a Federal-State Joint Bd., Report
and Order,
2 FCC Red. 2639, { 17 (1987), recon. granted in part,
3 FCC Red. 5518 (1988) .......... eee ck cee 2
Changes to the Bd. of Dirs. of the Nat'l Exch. Carrier Ass n,
Inc.; Federal-State Joint Bd. on Universal Service,
12 FCC Red. 18, 400 (1997). .................. y
-Xi-.
Page
Federal-State Joint Bd. on Universal Service, Report and
Order,
bi PX, Ce, Free iwc dasa cccasaeesas l
Federal-State Joint Bd. on Universal Service, Recommended
Decision,
ba Ws Ss OE CS VG a hi eo heed eee 5
Federal-State Joint Bd. on Universal Service, Report and
Order,
Le eu Oe, Or Pe CO a ls oe hee ean cen passim
Federal-State Joint Bd. on Universal Service, Third Order on
Reconsideration,
B22 FRA, OE, Zoe CASTE. 6 views 6660944580. 8, 24
Federal-State Joint Bd. on Universal Service, Fourth Order on
Reconsideration,
ee ke Mek Te, tt reer passim
Federal-State Joint Bd. on Universal Service, Twelfth Order on
Reconsideration,
64 FR 30440 (May 28, 1999). ......... 8,9, 17, 24
MTS & WATS Market Structure, Third Report and Order,
ptt ee FE. +s ree ye
MTS & WATS Market Structure and Amendment of Part 67 of
the Commission's Rules and Establishment of a Joint Bd.,
Decision and Order,
Si Fed. Ree. 1371 Gam. 13, 1966). ..42 5. cee. 3
- Xii -
Page
MTS & WATS Market Structure and Amendment of Part 67 of
the Commission's Rules, Report and Order,
2 FCC Red. 2953 (1987), recon. 3 FCC Red. 4543
(PMC O Ue ESE sean saes oh et 3
National Exch. Carrier Ass'n, Inc.,
5 FCC Red. 173, (Com. Car. Bur. SN Ad sce 3
Order In the Matter of Request for Review of the Decision of
the Universal Service Administrator by Wathena Unified Sch.
Dist., Wathena, Kansas, DA 99-2493 (Released November 9,
casing SEE CO EE Ea aes Cee aay Eee 9
Order In the Matter of Request for Review of the Decision of
the Universal Service Administrator by Greenfield Sch. Dist.,
Greenfield, Wisconsin, DA 99-2614 (Released November 22,
cing UPSET ET Cote U PIC Or Op een ented ane 9
Proposed First Quarter Universal Service Contribution
Factors, Public Notice, DA 97-2392 (released Nov. 13, 1997).
a cane reas oeeueliene RanlG 7
FEDERAL REGULATIONS
PETRA MAGE. oo oon ck... ore DAK 12
a Yn ene a ae 12
47 CER, § 54. 10ii8), @). ..........-......... 23
We BN ee ree or ne 23
EPRI 2. os ee 23
- X11 -
Page
47 CER. § S4.601(C). 0. ccc ccc ccc ccc ceccceccece 23
PCPR ASI. oi ke
OTHER AUTHORITIES
Congressional Budget Office Cost Esuumate (July 19, 1995)
pela Se a Wn afelale ea ees Adie ola oa a na ee 16
Federal-State Joint Bd. on Universal Service, Report to
Congress in Response to Senate Bill 1768 and Conference
Report on H.R. 3579, FCC 98-85 (rel. May 8, 1998). .... 14
U.S. General Accounting Office, Letter to Senator Ted Stevens,
February 10, 1998 (B-278820)...................... 17
OPINIONS BELOW
The opinion of the Fifth Circuit reviewing the FCC's
Universal Service Order is reported at 183 F.3d 393. It is
reproduced in the Appendix beginning at Appendix 1.
JURISDICTION
The judgment of the Fifth Circuit was entered on July
30, 1999. A tmely petition for rehearing en banc was denied
on September 28, 1999. See Appendix 111. This Court has
jurisdiction over these consolidated cases pursuant to 28 U.S.C.
§ 1254 (1). See also S. Ct. R. 12.4.
STATUTORY PROVISIONS INVOLVED
The statutory provisions involved in this case are
Sections 254 and 332 of the Communications Act, 47 U.S.C.
$§ 254, 332. These provisions are reprinted in the Appendix at
Appendix 113 through Appendix 133.
STATEMENT OF THE CASE
1. Universal Service Regulatory History. The
historic concept of "Universal Service" was derived from the
Act's mandate to "make available, so far as possible, to all the
people of the United States a rapid, efficient, Nation-wide, and
world-wide wire and radio communication service with
adequate facilities at reasonable charges." 47 U.S.C. § 151.
Until adoption of the Telecom Act, "universal service” meant
the availability of basic exchange telephone service to all parts
of the nation at affordable, relatively comparable rates. See,
€.g., Federal-State Joint Bd. on Universal Service, 11 FCC Red.
7920 (1996). It is more costly to serve some areas than others:
consequently, keeping rates "affordable" for consumers in high
cost areas has meant averaging those costs with the costs of
serving Consumers in the lower cost areas, or shifting them to
interexchange customers. In the days of the Bell System
ty
monopoly, this assignment of exchange plant costs to the
interstate jurisdiction was accomplished through a division of
revenues process. See MTS & WATS Market Structure, Third
Report and Order, 93 FCC 2d 241, | 11 (1983) ("Access
Charge Order").
In 1983, the FCC instituted a program of "access
charges" which, as the name implied, imposed flat rate charges
for access to the public switched telephone network ("PSTN").
End users were thereafter required to pay a "subscriber line
charge" to the particular local exchange carrier ("LEC") from
which they received local telephone service, and interexchange
carriers ("[IXC") were required to pay “carner Common line"
("CCL") charges and usage-based charges to the LECs. See
Access Charge Order at 44 138-150.
Because much of the same LEC plant is used for both
intrastate and interstate traffic, the costs of that plant must be
allocated to either the state jurisdiction (recovered in the rates
for local exchange service), or the interstate jurisdiction
(recovered through the SLC and the charges to long distance
carniers). See, e.g., Access Charge Order at ¥ 59 quoting Smith
v. Illinois Bell, 282 U.S. 133 (1930). To accomplish this task,
the FCC, on the recommendations from State-Federal Joint
Boards, adopted a revised Jurisdictional Separations Manual to
determine the allocation of costs between the state and
interstate jurisdictions. See Amendment of Part 67 (New Part
36) of the Commission's Rules and Establishment of a Federal-
State Joint Board, Report and Order, 2 FCC Red. 2639, ¥ 17
(1987), recon. granted in part, 3 FCC Red. 5518 (1988).
Post-divestiture Universal Service "high cost
assistance" relied upon the access charge and jurisdictional
separations processes to lower basic telephone rates in high-
3
cost areas by allowing LECs with high local "loop"! costs to
allocate more of those costs to the interstate jurisdiction. See,
e.g., National Exchange Carrier Ass'n, Inc., 5 FCC Red. 173,4
2 (Com. Car. Bur. 1989). The "Lifeline" program and the
subsequently-adopted "Link-Up America" program, aimed at
assisting low income consumers, also relied upon this complex
regime of cost-shifting. "Lifeline" involved a waiver of the
federal subscriber line charge for qualifying consumers in
participating states. See MTS & WATS Market Structure and
Amendment of Part 67_of the Commission's Rules and
Establishment of a Joint Board, Decision and Order, 51 Fed.
Reg. 1371 (Jan. 13, 1986). "Link Up" allowed LECs that
waived service initiation fees for such consumers to assign the
amount of those fees to the interstate jurisdiction. See MTS &
WATS Market Structure and Amendment of Part 67 of the
Commission's Rules, Report_and Order, 2 FCC Red. 2953
(1987), recon. 3 FCC Red. 4543 (1988),
In short, the Universal Service program, then and now,
shifts the costs of local exchange service from some consumers
to others. Until the enactment of the Telecom Act, this shifting
of costs Occurred only among providers of what consumers
think of as "telephone service,” that is, local and long distance
telecommunications carriers.
a The U.S. Senate's Creation of New
"Universal Service" Programs. On February 8, 1996, the
"A "loop" is a "pair of wires, or its equivalent, between a customer's stauion
and the central office from which the station is served." See 47 C_F.R. Part
36, Appendix-Glossary. The "central office" is a “switching unit... having
the necessary equipment and operations arrangements for terminating and
interconnecting subscriber lines and trunks or trunks only." Id.
4
Telecom Act* was signed into law. The Telecom Act added a
new Section 254 to the Communications Act of 1934? ("the
Act"), which required that a Federal State Joint-Board
recommend, and the Commission adopt, rules to revise the
then-extant system of Universal Service subsidies, including
defining the services to be supported by the new system and
adopting explicit support mechanisms. See 47 U.S.C. § 254(a),
(b).
Section 254 created a new federal program to make
discounted telecommunications, and any other "special
services” the FCC might designate, available to "elementary
schools, secondary schools and libraries for educational
purposes ...." 47 U.S.C. § 254(h)(1)(B); see Con. Rep. 104-
458, 104th Cong., Ist Sess. (1996), at CR19-20. That law also
required telecommunications carmiers, in response to any "bona
fide request" for services specified by the FCC, to provide
those services to schools and libraries at discounted rates. See
id. This statutory amendment was approved by the Senate, and
became part of the Telecom Act. Congress did not authorize or
appropriate any funds for this program; rather, it was to be
funded by "contributions" from "all providers of
telecommunications services." 47 U.S.C. §254(b)(4).
The “universal service" provisions of the Telecom Act
thus established a program for subsidization of supported
telecommunications services provided by eligible carriers in
high-cost areas, 47 U.S.C. § 254(b)(3)(G), left in place the
"Lifeline" and "Link-Up” programs for low income consumers,
47 USC. § 254), and created the new, discounted
telecommunications and information services program for
> Pub. L. No. 104-104, 110 Stat. 56 (Feb. 8, 1996) (codified in scattered
sections of 47 U.S.C.).
* 47 U.S.C. §§ 151-714 (k)(3).
5
qualified schools and libraries, and discounted
telecommunications services for rural health care providers. 47
U.S.C. § 254(h)(1)(A), (B).
To pay for all these programs, the new statute redefined
and greatly expanded the range of parties required to support
Universal Service. Whereas the basic telephone services
previously covered under "universal service” were supported
only by LECs and IXCs, the new statute imposed Universal
Service payment obligations upon: "[e]very
telecommunications carrier that provides interstate
telecommunications services ... [and,] [aJny other provider of
interstate telecommunications may be required to contribute to
the preservation and advancement of universal service if the
public interest so requires." 47 U.S.C. § 254(d).
The statute further states that "only an eligible
telecommunications carrier designated under Section 2 14(e).
. . Shall be eligible to receive specific Federal universal service
support... ." 47 U.S.C. § 254(e). A carrier receiving "such
support shall use that support only for the provision,
maintenance, and upgrading of facilities and services for which
the support is intended." Id.
x The FCC's Universal Service Rulemaking
Proceedings. On November 8, 1996, the Federal-State Joint
Board (the "Joint Board”) in CC Docket No. 96-45 released its
recommendations to implement the provisions of new Section
254. Federal-State Joint Board on Universal Service,
Recommended Decision, 12 FCC Red. 87 (1996). The FCC
generally adopted the Joint Board's recommendations,
including those recommendations as to the services to be
Supported as part of "Universal Service": the eligibility of
carriers to receive Support from the Universal Service Fund
6
("USF"),* including the funds for schools and libraries and rural
health care providers; the carriers required to contribute to the
USF; and the basis for assessing carriers’ contributions. See
Federal-State Joint Board on Universal Service, Report and
Order, 12 FCC Red. 8776 at ¥ 56-107, 127-325, 424-749 (May
8, 1997) (the "R&O").
The FCC determined that only carriers providing
specified services would be eligible for Universal Service
support: single party service,” voice-grade access to the public
switched network, Dual Tone Multifrequency signaling or its
functional equivalent,° access to emergency service, access to
operator services, access to interexchange service, access to
directory assistance, and toll limitation services for qualifying
low-income customers. See id. at ¥ 56. To be eligible for USF
support from the high-cost area and low-income consumer
funds, a carrier was required to provide all of the services
covered by the definition of Universal Service. See id. at {J 56,
89, 90. The FCC also held that non-telecommunications
service providers were eligible for USF payments from the
schools and libraries fund, although for now they have no USF
payment obligations. See id. at ¥ 32.
The Commission's rules for support of schools and
libraries thus require telecommunications companies, including
paging companies such as Celpage, to subsidize non-
* The USF is actually four funds: the high-cost fund; the low-income fund;
the schools and libraries fund; and the rural health care fund. See R&O at
q 18.
* "Single party service” means "only one customer will be served by each
subscriber loop or access line" (for example, not party-line service). See
R&O at J 62.
* DTMF facilitates the transportation of signaling through the network,
shortening call set-up time. See R&O n. 68.
7
telecommunications carriers. See R&O, JJ 425, -428.
Moreover, unlike all other affected parties, paging carriers may
not recoup their contributions to the USF in the form of support
payments. The FCC has defined "Universal Service" to include
only services which paging carriers cannot provide over their
allocated narrowband 25 kHz channels.
- Despite these facts, which Celpage formally raised in
the FCC's rulemaking proceeding, the FCC declined to exempt
any Class of carriers from USF contribution requirements, and
decided that all carriers should contribute to the USF at the
same rate, whether or not they would be eligible for USF
subsidies. See id. at JJ 39,777. The FCC further determined
that “contributions” would be based upon a Carrier's gross end-
user revenues (interstate revenues only for the high-cost area
and low-income consumer funds; both interstate and intrastate
revenues for the schools and libraries and rural health care
funds) without any deductions, even for uncollectibles. See id.
at {7 40, 772. Additionally, the FCC agreed with the Joint
Board that Section 332(c)(3)(A) of the Act did not prevent the
States from requiring CMRS carriers to contribute to intrastate
Universal Service programs. See id. at JJ 397, 791.
On July 18, 1997, the FCC ordered the National
Exchange Carrier Association, Inc. ("NECA") to establish an
independent, not-for-profit subsidiary, namely the Universal
Service Administrative Company ("USAC"), to administer
certain aspects of the USF. Changes to the Board of Directors
of the National Exchange Carrier Ass'n, Inc.: Federal-State
Joint Board on Universal Service, 12 FCC Rcd. 18, 400
(released July 18, 1997) ("NECA Order").
NECA estimated that the amount required to fund and
administer the USF would be $968.3 million for the first
quarter of 1998 alone. See Proposed First Quarter Universal
Service Contribution Factors, Public Notice, DA 97-2392
8
(released Nov. 13, 1997) (the "First Quarter Contribution
Notice").’ Based upon NECA's estimated costs for the high-
cost program ($432.3 million) and low-income program ($136
million) in the -First Quarter Contribution Notice, the new
maximum total cost of the USF for the first three months of
1998 was $905.8 million.
That figure was predicted to grow in subsequent
quarters.* And grow it did. By 1999, the FCC had doubled the
size of the schools and libraries fund to the $2.25 billion cap.”
See Twelfth Order on Reconsideration, 64 FR 30440 7 1
("Twelfth Recon. Order").
In its Fourth Recon. Order, the FCC largely denied the
petitions for reconsideration of the R&O. The FCC specifically
rejected arguments of paging carriers that application of the full
USF burden to them was inequitable and contrary to the
express language of Section 254. Fourth Recon. Order at J
256-266. The FCC also upheld its ruling that the states may
impose intrastate Universal Service requirements on CMRS
providers. Id. ¥§ 262-266. The FCC also rejected several
petitioners’ contentions that the Universal Service program was
” The FCC subsequently directed USAC to collect no more than $25 million
per quarter for the first and second quarters of 1998 to support the rural
health care program, and no more than $625 million for the first half of 1998
to support the schools and libraries program. See Federal-State Joint Board
on Universal Service, Third Order on Reconsideration, FCC 97-411, 12
FCC Red. 22801 (released Dec. 16, 1997) (the "Third Recon. Order").
* See Report to Congress on Universal Service, Separate Statement of
Chairman William E. Kennard, Report No. CC 98-9, FCC 98-67 (April 10,
1998)
(<http://www .fcc.gov/Bureaus/Common_Carrier/Reports/fcc98067 .html>).
* In addition to the remaining requirements of the Schools and Libraries
rural health care funds, proceedings are ongoing to adopt cost proxies for
the requirements of the high-cost fund for rural LECs.
9
an unconstitutional tax. Id. J 262.
To say that the FCC's universal service program has
generated controversy would be an enormous understatement.
As the cost and size of the program has grown exponentially in
its brief -tenure, so, too, has dissension among the FCC
Commissioners, state public utility Commissions, and on
Capitol Hill with regard to the Scope and legality of this
enormous regulatory program. '°
Even the recipients of these funds have joined the fray.
On a daily basis, the FCC's Common Carrier Bureau
adjudicates complaints from schools and libraries who have
been denied their requests for universal service funding.''
Nevertheless, the FCC's current Chairman evidently favors this
program; indeed, he has repeatedly expressed a desire to
expand its scope beyond its already vast borders. !”
10
See Twelfth Recon. Order, Dissenting Staiement of Commissioner
Furchtgott-Roth (May : i 1999)
(http://www.fec. gov/Speeches/Furchtgott_Roth/Statements/sthfr923.html );
See also Twelfth Recon. Order, Statement of Commissioner Michael K.
Powell Concurring in Part and Dissenting in Part (May 27, 1999)
(http://www.fcc.gov/Speeches/Powell/Statements/stmkp9 15.html); see also
Memorandum to Honorable George W. Gekas, Chairman, Subcommittee on
Commercial and Administrative Law, House Judiciary Committee, re:
Impact of American Trucking Ass'n v. EPA on FCC Rulemaking Under
Section 254 of the Telecommunications Act of 1996 (September 16, 1999)
(http://www. fcc. gov/Speeches/Furchtgott_Roth/Statements/sthfr946. html).
'' See, e.g., Order In the Matter of Request for Review of the Decision of
the Universal Service Administrator by Wathena Unified School District
Wathena, Kansas, DA 99-2493 (Released Nov. 9, 1999): Order In the
Matter of Request for Review of the Decision of the Universal Service
Administrator by Greenfield School District, Greenfield, Wisconsin, DA 99-
2614 (Released Nov. 22, 1999).
'? See Twelfth Recon. Order, Statement of Chairman Kennard (May 27,
1999) (http://www.fcc.gov/Speeches/Kennard/Statements/stwek936.html).
10
4. The Fifth Circuit Decision. Several incumbent
LECs, satellite service providers, state utility commissions, and
petitioner Celpage filed petitions for review of the FCC's R&O,
which were consolidated in the Fifth Circuit. Following
briefing and argument, the Fifth Circuit concluded for the most
part that the R&O does not violate statutory requirements or the
Constitution."
In addressing Celpage's arguments, the Fifth Circuit
rejected Celpage's contention that the universal service program
is an unconstitutional tax under the Taxing Clause and the
Origination Clause. Id. at 426-28. While the Fifth Circuit
noted that it was a "close question" as to whether the FCC's
interpretation of the statute raises "serious constitutional
doubts," it nonetheless deferred under the Chevron standard of
review, and found that the FCC had jurisdiction to fund non-
telecommunications and Internet services through the universal
service program. Id. at nn.93, 95.'*
The Fifth Circuit also denied Celpage'’s equal protection
'* Texas Office of Pub. Util. Counsel v. FCC, 183 F.3d 393 (Sth Cir. 1999)
("Texas OPUC"). While upholding most of the FCC's R&O, the Fifth
Circuit did reverse and remand portions of the R&O that do not directly bear
on Celpage's arguments, including: the FCC's decision to assess
contributions based on international and interstate revenues; the requirement
that ILECs recover their contributions from access charges; the blanket
prohibition on additional state eligibility requirements for carriers receiving
high-cost support; and the-rule prohibiting local telephone service providers
from disconnecting low-income subscribers. The Fifth Circuit concluded
that the FCC exceeded its jurisdictional authority when it assessed
contributions for the schools and libraries and high-cost support programs
based on the combined intrastate and interstate revenues of interstate
telecommunications providers.
'* Furthermore, it inexplicably acknowledged that the FCC could order
funds to be used to pay for the janitorial services in the school's computer
rooms. Id. at n.93.
and unlawful taking challenges. Id. at 428-29. In response to
Celpage's equal protection argument, the Fifth Circuit
concluded that the FCC's explanation that paging carriers
benefit from a larger and more universal public network system
Satisfied the "debatably rational” test articulated by the Fifth
Circuit in Reid v. Rolling Fork Public Utilities District, 979
F.2d 1084, 1087 (Sth Cir. 1992). Id. at 428.
Celpage's unlawful takings claim was dispensed of as
not being ripe for review, because, the Fifth Circuit concluded,
“a takings claims is not ripe until a claimant has unsuccessfully
sought compensation from the state." Id. at 428-29.
Similarly, and despite acknowledging fairly obvious
loopholes or vagaries in the statute and in the FCC's
interpretation thereof, the Fifth Circuit did not address
Celpage's vagueness argument, finding that the vagueness
challenge was not ripe for review because the FCC had made
a "tentative decision” regarding the calculations to be made to
assess wireless carriers’ revenues. Id. at 430.
Finally, while acknowledging that Celpage raised a
“convincing challenge” to the FCC's determination that Section
332 was not a bar to state-imposed universal service payments
by CMRS carriers, the Fifth Circuit nevertheless upheld the
FCC's decision, finding that "the FCC's reading reflects
Congress's unambiguous intent as expressed in the plain
language of the statute and takes into account Congress's
instruction that § 254 be constructed in ways that do not
conflict with other federal laws." Id. at 433.
9 Petitioner's Interest in These Proceedings.
Petitioner Celpage is a CMRS telecommunications
camer. See 47 U.S.C. §332(c)(1). Celpage provides one-way
Paging services throughout Puerto Rico and the U.S. Virgin
{slands. Telecommunications carriers such as Celpage, which
provide only one-way messaging services, are required to
12
“contribute” a percentage of their revenues each year to these
new universal service funds, to pay for a variety of computer
and other non-telecommunications programs in schools and
libraries, and to subsidize telephone services that are provided
by monopoly LECs and oligopoly IXCs. Yet, Celpage is
ineligible to receive universal service subsidies because it is not
technically capable of providing the services the FCC deemed
necessary to become an "eligible telecommunications carrier."
See 47 C.F.R §§ 54.101, 54.201.
REASONS FOR ISSUING THE WRIT
This Petition presents the Court with profound,
fundamental questions concerning separations of power. This
Petition raises the important question of whether Congress,
under the guise of adopting a vast, enormously expensive, and
completely unfunded Federal program, may shirk its
appropriation and taxation duties under the Constitution.
Also, the FCC's interpretation of Section 332, allowing
for state imposition of Universal Service obligations on CMRS
carriers, simply cannot be reconciled with the plain language of
the Act or long-standing principles of statutory construction.
That interpretation, which the Fifth Circuit affirmed, should be
reversed.
I. THE FCC'S NEW UNIVERSAL SERVICE
REGIME IS AN UNCONSTITUTIONAL TAX.
The U.S. Congress has improperly delegated its revenue
and legislative authority to a regulatory agency, the FCC, in
violation of the Taxing Clause.'° The U.S. Supreme Court
'S Although the 5th Circuit suggested that Celpage did not raise a "Taxing
Clause" objection to the FCC's program until its Reply Brief, Texas OPUC,
183 F.3d at 427 and n.52., it then proceeded to address that argument;
hence, this issue is properly raised in this Petition.
13
recently restated the fundamental maxim that "[e]ven before the
birth of this country, separation of powers was known to be a
defense against tyranny." Loving v. United States, 517 U.S.
748 (1996) (citing Motesquieu, The Spirit of the Laws, 151-52:
1 W. Blackstone, Commentaries 146-47, 269-70). The FCC's
universal service program is a form of regulatory tyranny..
Under this newly expanded program, the FCC may
adopt any universal service tax rate it chooses, and impose this
tax upon anyone, be they a telecommunications carrier or not.
See R&O at JJ 425, 428.
Under similar circumstances, this Court has stated that
"Congress cannot delegate legislative power to the President to
exercise an unfettered discretion to make whatever laws he
thinks may be needed or advisable for the rehabilitation and
expansion of trade or industry.". A.L.A. Schechter Poultry
Corp. v. United States, 295 U.S. 495, 537-38 (1935) (citations
omitted). The universal service program is similarly flawed.
Congress has delegated unlimited authority to an executive
agency to raise revenues and pass whatever regulations that
agency deems necessary to promote a federal welfare program
under the rubric of "universal service."
Although the FCC presumably believes it is acting in
the public's best interests in implementing this enormously
expensive and complicated program, the statute provides the
agency virtually "no standards, aside from the statement of the
general aims" of the universal service program. A.L.A.
Schechter Poultry Corp., 295 U.S. at 541-42.
Even the "general aims" of Section 254 are opaque.
Congress has defined "universal service" only as "an evolving
level of telecommunications services... ." 47 U.S.C. §
254(c)(1). The enormous revenue and legislative power that
Congress has delegated to the FCC "is not canalized within
banks that keep it from overflowing. It is unconfined and
14
vagrant." A.L.A. Schechter Poultry Corp., 295 U.S. at 551
(Cardozo, J., concurring).
However well-intentioned this program may be, it
bluntly violates the core Constitutional requirement that only
elected Members of Congress have authority to levy and collect
taxes, and promulgate general welfare programs. See U.S.
Const. art. I, §§ 7, 8.'° “By allocating specific powers and
responsibilities to a branch fitted to the task, the Framers
created a national government that is both effective and
accountable.” Loving, 517 U.S. at 757 (emphasis added); see
also Plaut v. Spendthnft Farm, 514 U.S. 211 (1995). The FCC
is not a “branch fitted to the-task" of defining and funding a
multi-billion dollar general welfare program.
Section 254 breaches the walls between the branches of
government, creating an enormous revenue and general welfare
program, under the FCC's exclusive aegis, that is neither
effective nor accountable to Congress. To date, this program
has siphoned hundreds of millions of dollars from
telecommunications companies, while leaving the nation no
closer toward achieving "Universal Service," as the term has
'* See also Millard, Nicole L., Universal Service, Section 254 of the
Telecommunicauons Act of 1996: A Hidden Tax?, 50 Federal
Communications Law Journal 255 (1997).
'’ Annual percentages of households with telephone service “available”
have changed little since the passage of the Telecom Act. In 1994, the
percentage was 95.4; in 1995, it was 95.2; in 1996, it was 95.0; in 1997, it
was 95.0; in 1998, it was 95.2; and through March of 1999, it was 94.9.
Federal-State Joint Board, Monitoring Report, CC Docket No. 98-202,
Report No. CC 99-27 (Released July 12, 1999) ("1999 Monitoring Report”)
(<http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Lin
k/monitor.html>).
eo
15
historically been understood."
The statute's broad delegation to the FCC of revenue
and legislative powers is fundamentally unconstitutional.
Congress is not accountable for the billions of dollars flowing
into this universal service program. Indeed, many Members of
Congress have blamed the FCC for excesses in this revenue
program.'°
The statute does not merely ask the FCC to "execute"
Congress's intentions, it unconstitutionally confers upon this
small agency the "power to make the law" and "discretion as to
what it shall be... .". Marshall Field & Co. v. Clark, 143 U.S.
649, 693 (1892) (citations omitted). That delegation of
Congressional legislative power is unconstitutional.
The constitutional infirmities of the FCC's expanded
universal service program are comparable to those found by the
D.C. Circuit in American Trucking Associations, et al. v. U.S.
Environmental Protection Agency, 175 F.3d 1027 (D.C. Cir.
1999). There, the D.C. Circuit ruled that the EPA had
construed certain provisions of the Clean Air Act "so loosely as
to render them unconstitutional delegations of legislative
power.” Id. at 1034.
* See, ¢.g., Federal-State Joint Board on Universal Service, Report to
PB CC Docket No. 96-45, FCC 98-67 ("First Report to Congress"),
Dissenting Statement of Commissioner Harold Furchtgott-Roth (rel. Apr.
10, 1998); Federal-State Joint Board on Universal Service, Report to
Songtess in Response 10 Senate Bill 1768 and Conference Report on H.R.
3579, FCC 98-85 ("Second Report to Congress”), Dissenting Statement of
Commissioner Harold Furchtgott-Roth (rel. May 8, 1998).
" See, ¢.g., Sen. Conrad Burns, GAO Says FCC Overstepped Bounds, Press
Release, <http://www.senate.gov/~burns/p980212d.htm> (rel. Feb. 12,
1998). McCain Speech to U.S. Telephone Association, Press Release, (rel.
Mar. 5, 1998) <http://www.senate.gov/~mccain/telespch.htm>.
16
The FCC spent all of one paragraph in its appellate brief
addressing Celpage's claim that the Universal Service program
is an unconstitutional tax. See FCC Br. at 141. The FCC
argued that the program is not a tax because "universal service
contributions are not commingled with government revenues
raised through taxes ... ." Id... As a matter of fact, the FCC is
mistaken.
The fact is that Universal Service "coniributions" have
been designated by Congress as general revenues. Indeed,
Senators who sponsored the universal service amendments to
the Telecom Act admit that universal service revenues will
“appear on [the federal budget] as governmental receipts and
direct spending ... ." Senate amici Br. at 13. Likewise, the
Congressional Budget Office projects that the universal service
program will add between $4.3 billion to $7.3 billion per year
to the federal budget between 1996 and the year 2000. See
Congressional Budget Office "Cost Estimate” at 4 (July 19,
1995) at Appendix 134. And, the Office of Management and
Budget has determined that USF contributions should be
treated as federal revenues. See U.S. General Accounting
Office, Letter to Senator Ted Stevens, February 10, 1998
(B-278820) at n.16, at Appendix 148.
In determining whether the universal service program
is a tax, as opposed to something else (the FCC never explained
what these USF "contributions" are, if they are not taxes), this
Court must "regard things rather than names." Pace v. Burgess,
92 US. 372, 376 (1876). Under Constitutional standards, this
program must be deemed a tax. "[RJevenue bills are those that
levy taxes in the strict sense of the word, and are not bills for
other purposes which may incidentally create revenue." Twin
City Bank v. Nebeker, 167 U.S. 196, 202 (1897) (citations
omitted).
In the case of the universal service program, the main
were
17
task that the FCC has accomplished to date is to raise money,
and lots of it. Cf. Second Report to Congress, supra n.14,
Attachment B (indicating that for the Schools and Libraries
Fund alone, collections for the first quarter of 1998 exceeded
$298 million; collections for the first half of 1998 were
expected to reach approximately $619 million). The programs
that the FCC has funded to date are largely not
telecommunications services; and, most of them were
previously funded by — and local governments, or through
other federal programs.”
The FCC has not even attempted to argue that there is
any correlation between the USF fees paid by
telecommunications carriers, and the "value" of this program to
\
* See, e.g., USAC, Federal Universal Service Programs: Fund Size
Projections and Contribution Base for the First Quarter 2000 (filed
November 2, 1999) (“USAC 102000 Report”), available at
<http://www.fcc.gov/ccb/universal_service/quarter.html> at 21-22 (USAC
has committed $1,714,700,000 in Schools and Libraries Fund support for
“Year 1," (January 1, 1998 through June 30, 1999) and as of October 29,
1999 has paid more than $1.1 billion; demand for “Year 2” (July 1, 1999
through June 30, 2000) is estimated at $2.35 billion, of which more than
$1.46 billion is for internal connections); Appendix 11B (as of October 20,
1999, USAC has disbursed $13,026,686.48 for Year 2 requests). See also,
Twelfth Recon. Order, Dissenting Statement of Commissioner Harold
Furchtgott-Roth, supra note 10 (noting large percentage of requested funds
for internal connections and availability of $10 billion for infrastructure
from 40 other federal programs); Federal State Board on Universal Service,
Fifth Order on Reconsideration and Fourth Report and Order, 13 F.C.C.R.
14915, Dissenting Statement of Commissioner Furchtgott-Roth at 5 (1998)
(noting DOE report that 80% of schools and libraries were connected to the
Internet prior to the USF). The commitments for the Schools and Libraries
Fund exceed those for either of the “core” universal service programs: the
Low Income and High Cost Funds, the latter of which is operating largely
under the pre-Telecom Act system until January 1, 2000. See, e.g., 1999
Monitoring Report, supra n. 12, at 2-4; Table 2.2 ($463,935,302 paid for
Lifeline and Link-Up support in 1998); Table 3.5 (projected high cost 1998
fund size, less administrative expenses, is $1,696,400,000).
18
them. Rather, this program "provides revenue for the
government, for use on projects that do not directly benefit the
payee ...", consequently, this is an unlawful tax program. See
National Cable TV Ass'n v. U.S., 415 U.S. 336, 341- 43 (1974)
(FCC's 1.5% “regulatory fee" on cable TV operators reversed
since it would require cable operators to pay "not only for
benefits they received but for the protective services rendered
the public by the Commission."). See also William Thomas v.
Network Solutions, et al., 176 F.3d 500 (D.C. Cir. 1999) (an
Internet domain name registration fee which covered more than
the registration costs, but was used in part to pay for Internet
infrastructure, was an unconstitutional and unauthorized tax).
Surely, if it is unconstitutional to charge Internet users $30.00
to help pay for “Internet infrastructure," then a federal program
that assesses a flat assessment on telecommunications carrier
revenues to help pay for computer systems in schools and
libraries is most certainly an unconstitutional tax.
These new USF funds are not incidental to some
existing regulatory program. Even the Fifth Circuit
acknowledged that these funds will be used to pay for non-
telecommunications services, and services that are not subject
to FCC jurisdiction. Texas OPUC, 183 F.3d at nn. 93, 95.
Consequently, the new universal service program cannot be
found constitutional on the grounds that the revenues to be
raised are merely incidental to some specific government
program. Cf. United States v. Munoz-Flores, 495 U.S. 385
(1990).
The unconstitutional aspects of the new universal
service program are no different in kind than those of the
Harbor Maintenance Tax ("HMT") program, which this Court
recently struck down. See United States v. United States Shoe
Corp., 118 S. Ct. 1290 (1998). Although that tax was found
unconstitutional under the Export Clause, the analogies to the
universal service program are compelling.
19
In U.S. Shoe, as in this case, the federal government
claimed that the tax in question was a "use fee" assessed on
commercial users of the Nation's ports. Id. at 1291. This
Court disagreed, finding that the export fees bore "the indicia
of a tax." Id. This Court found that for the HMT to be a "usage
fee," there must be a clearer "connection between a service the
Government renders and the compensation it receives for that
service ...." Id. at 1292. It found no such connection since
the tax was imposed on the value of the cargo, rather tnan in
proportion to usage of federal harbor services. Id.
Similarly, with the universal service program there is no
correlation between the tax imposed (a flat, combined rate of
almost 5% assessed against all telecommunications revenues),
and a carrier's use of the PSTN (which is not, in any event, a
"government-supplied service, facility or benefit" that might
warrant a usage fee). For paging carriers such as Celpage, for
instance, the universal service tax is based on revenues earned
from their own proprietary radio networks, not the PSTN. The
PSTN is not owned, maintained, or even financially supported
in whole or part by the federal government; there simply is no
“connection between a service the Government renders” and the
universal service fees paid. Id. at9. Moreover, if mere use of
the telephone network was sufficient to support this as a
regulatory fee, then every business in the U.S. that uses a
telephone could be subject to this FCC "fee."
Since this universal service program is not a valid "use
fee" program, but is in reality a general revenue program, the
Constitution requires that the program originate in the U.S.
House of Representatives and be approved by Congress. See
Const. art I, §§ 7, 8. Cf. National Cable TV Ass'n v. U.S., 415
U.S. 336; William Thomas v. Network Solutions, 176 F.3d 500.
The consequences for a violation of the Origination Clause
cannot be disputed: the courts must strike down any law that
violates the Constitution. United States v. Munoz-Flores, 495
20
U.S. 385, 396-97: Marbury v. Madison, | Cranch 137, 176-80
(1803).
Despite the FCC's protestations to the contrary, see
R&O, Ff 39, 268-269, 787; it is clear that the Universal Service
regime adopted by the FCC has at its core the purpose of
raising revenue for matters that are in the general “public
good.” In contrast, the prior interstate access charge regime
was upheld against a tax challenge, because those rules merely
provided an apportionment of costs between interstate and
intrastate telephone services, to equalize costs to consumers of
using the largely inseparable telephone network among those
who comprise that network. See Rural Tel. Coalition. v. FCC,
838 F.2d 1307, 1314 (D.C. Cir. 1988).
In contrast to the old regime, the new FCC scheme
creates a broad and comprehensive federal aid program for
rural areas, the poor, educational institutions, and certain health
care services, substantially different in scope and nature from
the regulatory regime it purportedly supplants. As worthy as
those goals may be, such a broad relief mission renders the
Universal Service scheme indistinguishable from any other tax
used to subsidize programs for support of the common good.
A tax is “taking money from the taxpayer for public purposes.”
United States v. Maryland, 471 F.Supp. 1030, 1036 (D.Md.
1979). Tellingly, the CBO and the OMB have determined that
USF contributions should be treated as federal revenues, and
USF payments as federal outlays; indeed, portions of the USF
have been included in the federal budget. See Congressional
Budget Office "Cost Estimate” at Appendix 134; see also U.S.
General Accounting Office, Letter to Senator Ted Stevens,
February 10, 1998 (B-278820) at n.16, at Appendix 148.
The fact that this tax is limited to supporting only
certain activities (albeit, an enormous array of services) does
not make it any less a tax for the benefit of the common
21
welfare. The government cannot turn a "tax" into a "fee"
simply by assessing separate amounts for each government
service to be supported. See United States v. City of
Huntington, WV, 999 F.2d 71, 73-74 (4th Cir. 1993).
In contrast to a tax, a "fee" usually indicates that the
payor has received some privilege not available to the public at
large; “a ‘fee’ connotes a ‘benefit."” National Cable Television
Ass'n. v. United States, 415 U.S. at 341. Although the FCC
and the Fifth Circuit attempt to point to some special "benefit"
that paging carriers will receive from the PSTN, that "benefit"
is no different than that of any business that uses the telephone
network. See R&O at J 805, Fourth Recon. Order at q 262. Cf.
National Cable Televisions Ass'n., 415 U.S. ‘at 340-4].
CMRS carriers have used the PSTN for decades prior
to the adoption of the R&O; but, so too has nearly 95% of the
U.S. population. The imposition of a tax burden on a select
group, wholly unrelated to any benefit received by the group so
burdened, is simply unconstitutional. See, e.g., Dane v.
Jackson, 256 U.S. 589, 599 (1921); Morton Salt Co. v. City of
South Hutchinson, 159 F.2d 897, 90] (10th Cir. 1947).
In addition to violating the Taxing Clause, the FCC's
Universal Service program violates the Origination Clause. ~
See Celpage Reply Br. at 15. All bills for raising revenue must
originate in the House of Representatives. U.S. Const. art. I,
§ 7, cl. 1. The Telecom Act, including the Universal Service
provisions of Section 254, Originated in the Senate.?!
Consequently, since the Universal Service program is a tax, it
is also unconstitutional under the Origination Clause.
II. THE STATUTORY PROGRAM IS VOID FOR
VAGUENESS.
*! See Senate Bill S. 652.
22
A "void for vagueness" challenge to a statute turns on
whether the statute provides "fair warning" to allow one to
know what standards apply. As this Court has held, the
requirement of fair warning prohibits "exaction of obedience to
2 rule or standard which [is] so vague and indefinite as really to
be no rule or standard at all." Whisenhunt v. Spradlin, 464 U.S.
965, 970 (1983) (quoting A.B. Small Co. v. American Sugar
Refining Co., 267 U.S. 233 (1925)). Furthermore, "a statute
which either forbids or requires the doing of an act in terms so
vague that men of common intelligence must necessarily guess
at its meaning and differ as to its application, violates the first
essential of due process of law." Connally v. General
Construction Co., 269 U.S. 385, 391, 46 S.Ct. 126, 127, 70
L.Ed. 322 (1925). The universal service statute and the FCC's
rules cannot meet these constitutional standards.
The FCC claims that "economic regulations are
afforded considerable deference in the vagueness analysis . . .
FCC Br. at 147. But, this program contains numerous
Criminal sanctions and provisions. For example, Section
54.711 of the universal service rules states that "inaccurate or
untruthful information contained in the Universal Service
Worksheet may lead to prosecution under the criminal
provisions of Title 18 of the United States Code." 47 C.F.R. §
54.711(a). And, "[contributors failing to file the Universal
Service Worksheet or paying contributions in a timely fashion
may be subject to the enforcement provisions of the
Communications Act and any other applicable law.
Under any vagueness standard of review, the universal
service Statute cannot pass constitutional muster. The statute
provides no guidance as to who must pay these universal
service assessments, or the amount owed. This statute is
therefore vague "not in the sense that it requires a person to
conform his conduct to an imprecise but comprehensible
normative standard, but rather in the sense that no standard of
23
conduct is specified at all." Coates v. Cincinnati, 402 U.S. 611,
614 (1971). Indeed, the statute does not even define "universal
Service" in a manner that would be comprehensible to most
people. The only faint attempt at defining "universal service”
in the statute is this: "Universal service is an evolving level of
telecommunications service that the Commission shall establish
periodically under this section, taking into account advances in
telecommunications and_ information technologies and
services." 47 U.S.C. § 254(c)(1).
As the Fifth Circuit acknowledged, the FCC has been
given virtual carte blanche to define "universal service" as it
sees fit, which may include access to Internet services, cellular
telephone service, paging services, satellite and cable TV-based
"communications" services, Internet for children, inside wiring,
and other yet to be imagined telecommunications and non-
telecommunications services. Texas OPUC, 183 F.3d at 442,
n.93. The FCC concedes that it can impose payment
obligations to support even the janitorial services attendant to
some of these school and library programs. Id. at n. 93. All of
these services, with the exception of paging, are covered in one
form or another by the FCC's universal service rules. See 47
C.F.R. § 54.101(a), (b); 47 CFR. §§ 54.503, 54.517(b)
(support for Internet access, and installation and maintenance
of internal connections for schools and libraries); 47 C.F.R. §
54.601(c) (rural health care Support available for
telecommunications services of bandwidths up to and including
1.544 Mbps and toll free Internet access).
By contrast, the historic use of the term "universal
Service,” that is, "plain old telephone service” in every
household, would be entirely unrecognizable to even the most
sophisticated reader of the FCC's universal service rules. See,
€.g., MTS and WATS Market Structure (Part 1 of 2), 93
F.C.C.2d 241, JJ 82-83 (1983); Amendment of Part 36 of the
Commission's Rules and Establishment of a Joint Board, 6
24
F.C.C.R. 2936, | 1 (1991).
No "reasonable person" of "common intelligence” could
know or surmise from the previous universal service program,
that the FCC would adopt such a new and expansive definition
of "universal service" as it has. See Smith v. Gogeon, 415 U.S.
566, 572 n.8 (1974) (a law is void for vagueness if persons of
common intelligence must guess at its meaning); and Celpage
Br. at 25-27. Indeed, many Members of Congress and FCC
Commissioners have expressed dismay at the FCC's overly
expansive interpretation of this vague statute. Proposed Fourth
Quarter 1999 Universal Service Factors, DA 99-1857,
Dissenting Statement of Harold Furchtgott-Roth (rel. Sept. 10,
1999).”
The statute does not tell the FCC how much money it
must raise;or when it has met the program's objectives. The
statute does not tell the FCC what tax rates to charge; the FCC
can pick any it chooses. In fact, the FCC twice dramatically
modified the USF rates in only the first year of the program.
Federal-State Joint Board on Universal Service, Third Order
on Reconsideration, FCC 97-411, 12 F.C.C.R. 22801 (rel. Dec.
16, 1997) ("Third Recon. Order"). Once, in apparent response
to Congressional outrage, the agency cut the contribution target
by nearly 50%, with little explanation. Id. Since then, the FCC
has nearly doubled the rate. See Twelfth Recon. Order,
Statement of Commr. Harold Furchtgott-Roth (stating that the
Order raised the e-rate contribution factor from .57% to .99%).
The statute provides virtually no guidance to the FCC;
the meaning of "universal service" was left open to speculation,
* See also FCC Raises “Gore Tax" $900 Million, Press Release of Senator
Conrad Burns, <http://www.senate.gov/~burns/p990527c.htm> (May 27,
1999); Statement of Congressman John D. Dingell on FCC’s E-Rate Funding
Proposal, <http://www.house.gov/commerce_democrats/press/106nr2.htum>
(May 5, 1999).
25
or to the whims and preferences of five FCC Commissioners.
The statute therefore violates "the requirement that a legislature
establish minimal guidelines to govern law enforcement.”
Kolender v. Lawson, 461 U.S. 352, 358 (1983).23
There is nothing in the statute to restrain this agency
from assessing universal service taxes against anyone it
chooses; indeed, the FCC has iinposed payment obligations on
non-telecommunications carriers. Fourth Recon. Order at 4]
276-77. If Congress had intended the program to be limited
only to telecommunications “carriers,” it presumably would
have used that term, which it employed in Section 254(d) of the
Act. Compare 47 U.S.C. § 254(b)(4), with 47 U.S.C. §254(d).
Instead, section 254(b)(4) broadly states that "[a]ll providers of
telecommunications services should make an equitable and
nondiscriminatory contribution to the preservation and
advancement of universal service." 47 U.S.C. § 254(b)(4)
(emphasis added). That language covers virtually every
business in the United States.
The fact is that the FCC has already extended Universal
Service obligations to non-common carrier, private networks.
Although it has decided "not [to] exercise [its] permissive
authority to require systems integrators, broadcasters and non-
project schools, libraries and rural health care providers to
contribute to universal service," Fourth Recon. Order at FJ 276-
77, the FCC could assess these taxes against an even broader
* A penal law is void for vagueness if it fails to "define the criminal offense
with sufficient definiteness that Ordinary people can understand what
conduct is prohibited” or fails to establish guidelines to prevent "arbitrary
and discriminatory enforcement” of the law. Kolender v. Lawson, 461 U.S.
at 357. Of these, "the more important aspect of vagueness doctrine ‘is ... the
requirement that a legislature establish minimal guidelines to govern law
enforcement.’ " Id., at 358 (quoting Smith v. Goguen, 415 U.S. at 574-575).
>
26
array of non-telecommunications entities.’ The FCC
obviously believes that it could extend universal service
obligations to non-telecommunications carriers; and, the statute
does not clearly prohibit such an expansive interpretation.
Consequently, the entire statutory program is unconstitutionally
vague.
Ill. THE FCC'S DETERMINATION THAT STATES
MAY IMPOSE UNIVERSAL SERVICE
OBLIGATIONS ON CMRS PROVIDERS WAS
CLEARLY ERRONEOUS.
The FCC determined that, in adopting their own
Universal Service programs, the states may impose fifty or
more disparate contribution requirements on CMRS carriers.
R&O, J 791; Fourth Recon. Order at { 303. That interpretation
of the statute was upheld by the D.C. Circuit in Cellular
Telecommunications Industry Association v. FCC, 168 F.3d
1332 (D.C.Cir. 1999). The Fifth Circuit, despite
acknowledging Celpage's "compelling argument,” came to the
same conclusions. Texas OPUC, 183 F.3d at 430-31. These
findings flatly contradict the express language of Section 332:
of the Act.
Section 332(c)(3) of the Act provides, in pertinent part,
the following:
24
Statement __of _Comm'r. __Furchtgott-Roth Regarding the
Clarification/Reiteration of "Services" Eligible for Discounts to the Schools
and Libraries _ Fund, at 3 (rel. June 38 1998)
(<http://www.fcc.gov/Speeches/Furchtgott_Roth/Statements/sthfr832.html>)
("One final note of caution to the network equipment manufacturing
industry. As with any instance of corporate welfare, the beneficiaries - -
here the hardware and software providers in that industry - - are on a
slippery slope. ... Network equipment manufacturers should beware, as
many have already argued that it is unfair to allow an industry to take from
a public fund without having the corresponding obligation to contribute to
it.").
27
Notwithstanding [47 U.S.C.] sections 2(b) and
221(b), no State or local government shall have
authority to regulate the entry of or the rates
charged by any commercial mobile service or
any private mobile service, except that this
paragraph shall not prohibit a State from
regulating the other terms and conditions of
commercial mobile services. Nothing in this
subparagraph shall exempt providers of
commercial mobile services (where such
services are a substitute for land line telephone
exchange service for a substantial portion of
the communications within such State) from
requirements imposed by a State commission
on all providers of telecommunications services
necessary to ensure the universal availability of
telecommunications service at affordable rates.
47 U.S.C. § 332(c)(3) (emphasis added).
The quoted language of Section 332(c)(3) could not be
more clear: CMRS providers are subject to state-imposed
Universal Service requirements only "where" the CMRS
services to be subjected to those requirements "are a substitute”
for traditional, local exchange services "for a substantial
portion of the communications within" the state seeking to
impose those requirements. Unless the statutory conditions are
met, a state may not impose upon CMRS providers any
requirements "necessary to ensure" Universal Service. That
quoted language remains in the Act, and was not amended by
the Universal Service provisions of the Telecom Act. See 47
U.S.C. § 254.
The FCC's strained interpretation reads Section
332(c)(3)'s clear language entirely out of the Act, which the
FCC may not do. See, e.g., Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984)
28
("If the intent of Congress is clear, that is the end of the matter;
for . . . the agency, must give effect to the unambiguously
expressed intent of Congress”). See also Mountain States Tel.
& Tel. Co. v. Pueblo of Santa Ana, 472 U.S. 237, 249 (1985)
(It is an “elementary canon of construction that a statute should
be interpreted so as to not render one part inoperative.").
The FCC ignored the broad preemptive scope and plain
terms of Section 332(c)(3). That provision divested the states
of intrastate jurisdiction over the most fundamental aspects of
the CMRS business, namely prices and market entry, which the
states had traditionally wielded under Sections 2(b) and 221(b)
of the Act. In adopting that provision, Congress expressed its
view that land mobile services are inherently interstate in
nature. See H.R. Rep. No. 103-711, 103rd Cong., Ist Sess.
(1993), at 260.
In contrast to the broad preemptive intent underlying
Section 332(c)(3), the legislative history of Section 254(f) does
not evince a Congressional intent to expand State jurisdiction
over CMRS carriers with regard to universal service. Rather,
the limited discussion of this provision in the legislative history
indicates a Congressional concern only that existing State
authority with regard to universal service be “preserved.” See
Con. Rep. 104-458, 104th Cong., Ist Sess. (1996), at 132
("State authority with respect to Universal Service is
specifically preserved under new Section 254(f)"); see also
Senate Rep. No. 104-23, 104th Cong., Ist Sess. (1995), at 11.
This conclusion is reinforced by Section 601(c) of the Telecom
Act, which forbids construing the 1996 Act to modify existing
law unless expressly so provided.
The FCC determined that "a state is not required to
demonstrate that CMRS is a substitute for land line service”
when imposing Universal Service mechanisms pursuant to
Section 254(f). Fourth Recon. Order at | 301, quoting
29
Pittencrieff Communications, Inc., Memorandum Opinion and
Order, File No. WTB/POL 96-2, FCC 97-343 (rel. October 2,
1997). This strained reading of the language of Section 332 is
a wholly unreasonable interpretation and this Court owes it no
deference.
If Congress had believed that Universal Service
contributions were more accurately characterized as "other
terms and conditions” of CMRS services, rather than a form of
preempted rate regulation, there would have been no need for
Congress to have added the second sentence of Section
332(c)(3). It would make little sense to state in the second
sentence of Section 332(c)(3) that "nothing in this
subparagraph" prevented the states from imposing an obligation
of the kind that they are allowed to impose under the first
sentence of the same subparagraph. Moreover, there would
have been no logical reason to add the qualifying phrase,
"where such services are a substitute for land line telephone
exchange service for a_ substantial portion of the
communications within such State," if the states had the
unqualified power to impose Universal Service obligations as
“other terms and conditions" under the first sentence of Section
332(c)(3). The FCC's interpretation renders the second
sentence of Section 332(c)(3) inoperative, contrary to basic
tules of statutory construction. Department of Revenue v. ACF
Indust., 510 U.S. 332, 340-41 (1994).
The FCC's tortured reading of Sections 332(c)(3) and
254(b) is not necessary to reconcile those two provisions.
Section 254(f) permits a state to impose Universal Service
obligations upon any telecommunications carrier subject to that
State's jurisdiction; CMRS carriers simply are not within that
group of carriers. The power granted by Section 254(f) is
hardly a_ nullity: it extends to the majority of
telecommunications carriers, including LECs, IXCs, and fixed-
Service radio common carriers (for example, microwave)
30
providing intrastate services, as well as to resellers of those
services. Section 254(f) clarifies that the federal Universal
Service scheme does not impinge on the states’ authority over
the carriers they regulate under Section 2(b), as long as the
Universal Service obligations imposed by the states pursuant to
that authority are equitable, non-discriminatory, and do not
contravene federal law.
Consequently, the FCC's determination that the states
may impose intrastate Universal Service obligations upon
CMRS providers cannot be reconciled with the language of
Sections 332(c)(3), and 2(b), nor with the legislative history of
the Telecom Act. That determination must be reversed.
CONCLUSION
For the reasons stated, the petition for a writ of
certiorari should be granted.
Respectfully submitted,
Frederick M. Joyce
Joyce & Jacobs, Attys. at Law, L.L.P.
1019 19th Street, N.W.
Fourteenth Floor - PH2
Washington, DC 20036
(202) 457-0100
Counsel for Celpage, Inc.
December 23, 1999
Appendix |
183 F.3d 393
TEXAS OFFICE OF PUBLIC UTILITY COUNSEL;
Celpage, Inc.; Southwestern Bell Telephone Company; GTE
Midwest, Inc.; Louisiana Public Service Commission, an
Executive Branch Department of the State of Louisiana;
COMSAT Corporation; People of the State of California:
Public Utilities Commission of the State of California; Iowa
Utilities Board; South Dakota Public Utilities Commission;
Pennsylvania Public Utility Commission; Bell Atlantic
Telephone Companies; Vermont Department of Public
Service; GTE Service Corporation; GTE Alaska
Incorporated; GTE Arkansas Incorporated; GTE California
Incorporated; .-GTE Florida Incorporated; GTE South
Incorporated; GTE Southwest Incorporated; GTE North
Incorporated; GTE Northwest Incorporated; GTE Hawaiian
Telephone Company Incorporated; GTE West Coast
Incorporated; Contel of California, Inc.; Contel of
Minnesota, Inc.; Contel of the South, Inc.; Public Service
Commission of Nevada: Cincinnati Bell Telephone
Company; Florida Public Service Commission; People of
the State of New York; Public Service Commission of the
State of New York; and The State Corporation Commission
of the State of Kansas, Petitioners,
Ve
FEDERAL COMMUNICATIONS COMMISSION and
United States of America, Respondents.
No. 97-60421.
United States Court of Appeals,
Fifth Circuit.
July 30, 1999.
Appendix 2
Petitions for Review of a Final Order of the Federal
Communications Commission.
Before SMITH, DUHE and EMILIO M. GARZA, Circuit
Judges.
. JERRY E. SMITH, Circuit Judge:
This is a consolidated challenge to the most recent attempt of
the Federal Communications Commission ("FCC") to
implement provisions of the landmark 1996
Telecommunications Act (the "Act"). [FN1] Petitioners,
joined by numerous intervenors, challenge several aspects of
the FCC's Universal Service Order (the "Order")
implementing the provisions of the Act codified at 47 U.S.C.
§ 254. We grant the petition for review in part, deny it in
part, affirm in part, reverse in part, and remand in part.
FN1. Telecommunications Act of 1996, Pub.L. No.
104-104, 110 Stat. 56 (to be codified as amended in
scattered sections of title 47, United States Code).
1. BACKGROUND.
A. THE 1996 ACT AND THE UNIVERSAL SERVICE
ORDER.
Beginning with the passage of the Communications Act of
1934 (the "1934 Act"), Congress has made universal service a
basic goal of telecommunications regulation. As Section |
of the 1934 Act stated, the FCC was created
[f]or the purpose of regulating interstate and foreign
commerce in communication by wire and radio so as to
make available, so far as possible, to all the people of the
United States, without discrimination on the basis of race,
color, religion, national origin, or sex, a rapid, efficient,
Appendix 3
Nation- wide, and world-wide wire and radio
communication service with adequate*406 facilities at
reasonable charges...
47 U.S.C. § 151 (as amended).
Armed with this statutory mandate, the FCC historically has
focused on increasing the availability of reasonably priced, .
basic telephone service via the landline telecommunications
network. [FN2] Rather than relying on market forces alone,
the agency has used a combination of implicit and explicit
Subsidies to achieve its goal of greater telephone
“subscribership. Explicit subsidies provide carriers or
individuals with specific grants that can be used to pay for or
reduce the charges for telephone service. This form of
subsidy includes using revenues from line charges on end-
users to subsidize high-cost service directly and to support
the Lifeline Assistance program for low-income subscribers.
FN2. In economic terms, universal service programs
are justified as a way to address a "market failure.”
While the carriers have little incentive to expand the
telecommunications infrastructure into areas of low
population density or geographic isolation, each
individual user of the network benefits from the
greatest possible number of users. See Eli M. Noam,
Will Universal Service and Common Carriage
Survive the Telecommunications Act of 1996?, 97
COLUM. L.REV. 955, 958-59 (1997).
Implicit subsidies are more complicated and involve the
manipulation of rates for some customers to subsidize more
affordable rates for others. For example, the regulators may
require the carrier to charge "above-cost” rates to low-cost,
profitable urban customers to offer the "below-cost" rates to
expensive, unprofitable rural customers.
Appendix 4
For obvious reasons, this system of implicit subsidies can
work well only under regulated conditions. In a competitive
environment, a carrier that tries to subsidize below-cost rates
to rural customers with above-cost rates to urban customers is
vulnerable to a competitor that offers at-cost rates to urban
customers. Because opening local telephone markets to
competition is a principal objective of the Act, Congress
recognized that the universal service system of implicit
subsidies would have to be re-examined.
To attain the goal of local competition while preserving
universal service, Congress directed the FCC to replace the
patchwork of explicit and implicit subsidies with "specific,
predictable and sufficient Federal and State mechanisms to
preserve and advance universal service." 47 U.S.C. §
254(b)(5). Congress also specified new universal service
support for schools, libraries, and rural health care providers.
See 47 U.S.C. § 254(h). It then directed the FCC to define
such a system and to establish a timetable for implementation
within fifteen months of the passage of the Act.
The Federal-State Joint Board (the "Joint Board"), created by
the Act to coordinate federal and state regulatory interests,
issued two recommendations on how to implement the
universal service provisions. [FN3] The FCC met the
statutory deadline when it issued the Order on May 8, 1997.
[FN4] Since that time, the agency has issued seven
reconsideration orders (the last one on May 28, 1999) and has
made *407 two reports to Congress regarding the Order.
FN3. The first Recommended Decision was issued on
November 8, 1996 (12 FCC Rcd 87 (1996)), the
second Recommended Decision on November 25,
1998 (13 FCC Rcd 24744 (1998)).
Appendix 5
FN4. Congress also directed that the FCC establish
rules to achieve the local competition goals of the Act
within six months of the Act's enactment. The
agency met this deadline when it issued the Local
Competition Order on August 8, 1996. Almost all
parts of this order were affirmed by the Supreme
Court. See AT & T v. Iowa Utils. Bd., 525 U.S. 366,
119 S.Ct. 721, 142 L.Ed.2d 835 (1999).
On the same day it issued the Order, the FCC released
the Access Charge Order. Access charges are the
charges assessed between local exchange companies
(LEC's) and interexchange companies (IXC’'s) for the
use of one network by callers from the other network.
Challenges to this order were also consolidated
before the Eighth Circuit. See Southwestern Bell
Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998).
The FCC designated a set of core services eligible for
universal service support, proposed a mechanism for
supporting those services, and established a timetable for
implementation. See Order ¥¥ 21-42. Pursuant to the Act,
the agency developed rules for modifying the existing system
of support for high- cost service areas and created new
Support programs for schools, libraries, and health care
facilities.
1. HIGH-COST SUPPORT.
The FCC's plans for changing the high-cost support system -
required it to resolve a number of complicated issues,
including (1) what methodology to use for calculating high-
cost support; (2) how to allocate costs between the states and
the federal government; (3) which carriers should be required
to contribute to the support system; and (4) when to
implement the high-cost Support program. The agency
Appendix 6
resolved the question of how to calculate the proper amount
of high-cost support by accepting the Joint Board's second
recommendation to identify areas where the forward-looking
cost of service exceeds a cost-based benchmark and to
provide extra support to any state that cannot maintain
reasonable comparability. [FN5] See Second Recommended
Decision J 19; Seventh Report and Order J 61 n.157.
FN5. This methodology is a departure from the
revenue-based national benchmark proposed in the
Order. The revenue-based benchmark was
challenged for including discretionary revenues in its
calculation and for
its nationwide scope. Because of the
revisions proposed by the Joint Board's
Second Recommended Decision, we now
consider those challenges to the prior revenue-
based methodology moot. See infra part
I.A.1.b.
Most importantly, the FCC decided to use the "forward-
looking" costs to calculate the relevant costs of a carrier
serving a given geographical area. In other words, to
encourage carriers to act efficiently, the agency would base its
calculation on the costs an efficient carrier would incur
(rather than the costs the incumbent carriers historically have
incurred). [FN6]
FN6. The agency made a decision to provide only
25% of the funds for high- cost support, leaving the
State commissions ("the states") to provide the rest of
the funds. According to the FCC, the states
traditionally have provided a majority of universal
service support, and if the agency were to fund all the
high-cost support, it would overcompensate carriers.
Appendix 7
Moreover, the FCC claims that the 25% figure
approximates the costs that historically have been
assigned to the interstate jurisdiction. See Order |
201.
The Joint Board, however, recommended that the
FCC scrap the 25%/75% division of responsibility in
favor of a more flexible plan of allocation. See
Second Recommended Decision {i 4-5, 41-46. The
rFcec accepted the Joint
Board's recommendation and eliminated the
25/75 rule on May 27, 1999, thereby mooting
the issue for this court. See infra part
Iil.A.1.c. See also Seventh Report and Order q
3 ("We explicitly reconsider and repudiate any
Suggestion in the First Report and Order that
federal support should be limited to 25 percent
of the difference between the benchmark and
forward-looking cost estimates....").
The FCC developed rules for determining which carriers
Should be required to contribute to the interstate universal
Service support system and how their contributions should be
calculated. It decided to require all telecommunications
carriers and certain non-telecommunications carriers to
contribute in proportion to their share of end-user
telecommunications revenues. See Order Yi 39-42. The
agency determined that to reduce the burden on individual
carriers’ prices, the carriers’ contribution base should be as
broad as possible. See Order { 783. Therefore, the agency
required contributing carriers to include their international
telecommunications revenues in their contribution base and
rejected claims by certain carriers, [FN7] which do not
receive direct subsidies from *408 the support program,
seeking an exemption from making any contributions. See
Order J 805.
Appendix 8
FN7. These carriers include wireless service providers
o f paging and
commercial mobile radio service ("“CMRS").
The FCC also rejected a claim by CMRS
providers seeking an exemption from making
contributions to state support funds.
Finally, the FCC adopted a timetable for implementing its
high-cost support plan. Because it has not yet developed an
accurate assessment of forward-looking costs, it delayed
implementation of its support program for non-rural carriers
until January 1, 2000. [FN8] Additionally, because the
agency believes it will take even longer to develop accurate
forward-looking cost models for rural carriers, it delayed the
implementation of its new support plan for rural carriers to
“no sooner than January 1, 2001." See Order { 204.
FN8. In the original order, the FCC had planned
implementation by January 1, 1999. This date was
delayed until July 1, 1999, and again to January 1,
2000. See Seventh Report and Order { 5.
During this delay in implementation, the FCC decided that
carriers will continue to receive support at the levels
generated by existing universal support programs.
According to the agency, this gradual, phased-in plan for
implementing its new high-cost support system meets the
Act's requirement of a “specific timetable for completion.”
See 47 U.S.C. § 254(a)(2).
2. SCHOOLS AND LIBRARIES.
Pursuant to § 254(h), the FCC adopted rules implementing
new programs for schools, libraries, and health care facilities,
in particular by providing universal service support for
Appendix 9
internet access and internal connections in schools and
libraries. See Order J 436. The agency decided that any
entity, including non-telecommunications carriers, that
provides internet access or internal connections to schools
and libraries will receive universal service support. See
Order ¥ 594.
To fund the new § 254(h) programs, the FCC accepted the
Joint Board's recommendation to assess the interstate and
intrastate revenues of providers of _ interstate
telecommunications service. See Order J 808. Because
many states do not already have similar support programs for
schools and libraries, the agency justified its inclusion of
intrastate revenues as necessary to ensure adequate funding
for § 254(h) programs.
B. CHALLENGES TO THE ORDER.
On September 5, 1997, petitioner Celpage Inc. filed a motion
in this court to stay the Order. We denied that motion on
October 16, 1997, and rejected a similar motion by various
rural telephone companies on December 31, 1997. Their
petitions, along with challenges to the Order by other
petitioners, were consolidated in this court.
There are two sets of challenges to the Order. The first
regards the FCC's plan for replacing the current mixture of
explicit and implicit subsidies with an explicit universal
service support system for high-cost areas. On both statutory
and constitutional grounds, petitioners attack (1) the
methodology for calculating support under the plan; (2) the
allocation of funding responsibilities between the FCC and
the states; and (3) the agency's restrictions on how carriers
can recover universal service costs.
_ Appendix 10
Other petitioners attack the FCC's high-cost support plan as
an encroachment on_ state authority over intrastate
telecommunications regulation because it restricts state
eligibility requirements and imposes a "no disconnect" rule
for low-income telephone subscribers. Petitioners also
challenge, for lack of specificity and for failing to delay
implementation of the plan for some rural carriers, the FCC's
timetable for implementing the new universal service plan.
Additionally, petitioners challenge the FCC's system for
assessing contributions, arguing that it improperly includes
CMRS providers and unfairly assesses carriers on the basis of
their international and interstate revenues.
The second set of challenges regards the FCC's proposal for
implementing § 254(h) *409 programs supporting schools,
libraries, and health care providers. Petitioners claim that the
FCC impermissibly expanded the scope of § 254(h) support
to include the provision of internet access and internal
connections. Moreover, they attack the FCC's statutory
authority to provide such support to non-telecommunications
providers.
Additionally, petitioners charge that the agency encroached
on state authority to implement state support programs for
schools and libraries and failed to designate which
telecommunications services will receive § 254(h) support.
They also argue that the FCC exceeded its statutory authority
by requiring subsidies for toll-free telephone calls to internet
service providers by non- rural health care providers.
Finally, they attack the FCC's § 254(h) contribution system
because it assesses both the intrastate and interstate revenues
of carriers. [FN9]
FN9. The FCC also determined that it could require
Carriers to contribute, based on both interstate and
Appendix 11
intrastate revenues, to high-cost Support as well as §
254(h) support. But for policy reasons, it decided to
assess contributions on both interstate and intrastate
revenues for support of § 254(h) programs only. It
maintains, however, that it may impose similar
assessments for high-cost support as well. See
Seventh Report and Order 4] 87-90.
We review the states’ challenge to the FCC's claim of
jurisdictional authority over intrastate rates in the
context of its actions regarding support of the §
254(h) programs, but we also discuss its implications
for FCC jurisdictional authority for support of high-
cost programs. See
infra, part III.B.6.
We affirm most of the FCC's decisions regarding its
implementation of the high-cost support system, concluding,
for the most part, that the Order violates neither the statutory
requirements nor the Constitution. We remand for further
consideration, however, as to the FCC's decision to assess
contributions from carriers based on both international and
interstate revenues. We also reverse (1) the requirement that
ILEC's recover their contributions from access charges and
(2) the blanket prohibition on additional state eligibility
requirements for carriers receiving high-cost support.
On jurisdictional grounds, we reverse the rule prohibiting
local telephone service providers from disconnecting low-
income subscribers. We also conclude that the agency
exceeded its jurisdictional authority when it assessed
contributions for § 254(h) "schools and libraries" programs
based on the combined intrastate and interstate revenues of
interstate telecommunications providers and when it asserted
its jurisdictional authority to do the same on behalf of high-
cost support.
Appendix 12
fl. STANDARD OF REVIEW.
[1] When deciding whether the FCC has the statutory
authority to adopt the rules included in the Order, we review
the agency's interpretation under Chevron U.S.A., Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837, 104
S.Ct. 2778, 81 L.Ed.2d 694 (1984), by first deciding whether
“Congress has directly spoken to the precise question at
issue,” id. at 842, 104 S.Ct. 2778. If so, we "give effect to
the unambiguously expressed intent of Congress.” Id. at 842-
43, 104 S.Ct. 2778. In this situation, we reverse an agency's
interpretation if it does not conform to the plain meaning of
the statute. This level of review is often called "Chevron
step-one” review.
[2][3] Where the statute is silent or ambiguous, however,
“the question for the court is whether the agency's answer is
based on a permissible construction of the statute." Id. at
843, 104 S.Ct. 2778. We may reverse the agency's
construction of an ambiguous or silent provision only if we
find it “arbitrary, capricious or manifestly contrary to the
statute.” Id. at 844, 104 S.Ct. 2778. That is to say, we will
sustain an agency interpretation of an ambiguous statute if the
interpretation “is based on a permissible construction of the
statute.” *410 Id. at 843, 104 S.Ct. 2778. We refer to this
more deferential level of review as "Chevron step-two"
review.
[4] The Administrative Procedure Act ("APA") also
authorizes us to reverse an agency's action if it acted
arbitrarily or capriciously in adopting its interpretation by
failing to give a reasonable explanation for how it reached its
decision. See 5 U.S.C. § 706(2)(A) (1994); see also Harris
v. United States, 19 F.3d 1090 (Sth Cir.1994). “Arbitrary and
capricious” review under the APA differs from Chevron step-
ee,
Appendix 13
two review, because it focuses on the reasonability of the
agency's decision-making processes rather than on the
reasonability of its interpretation. [FN 10]
FN10. See Arent v. Shalala, 70 F.3d 610, 614-16
(D.C.Cir.1995); see also Gary Lawson, Outcome,
Procedure and Process: Agency Duties of
Explanation for Legal Conclusions, 48 RUTGERS
L.REV. 313 (1996). We recognize the difference
between Chevron Step-two review and the APA's
. arbitrary and capricious review is not always obvious.
Indeed, the different standards of review overlap,
because both require a reviewing court to decide
whether the agency action is “manifestly contrary to
the statute" (Chevron ) or "otherwise not in
accordance with law." (APA). See Arent, 70 F.3d at
615 & n. 6.
[5] Finally, we do not give the FCC's actions the usual
deference when reviewing a potential violation of a
constitutional right. "The intent of Congress in 5 U.S.C. §
706(2)(B) was that courts Should make an independent
assessment of a citizen's claim of constitutional right when
reviewing agency decision-making." Porter v. Califano, 592
F.2d 770, 780 (Sth Cir.1979 ).
Il. ANALYSIS.
A. HIGH-COST SUPPORT.
1. METHODOLOGY FOR CALCULATING SUPPORT
FOR HIGH-COST AREAS.
a. FORWARD-LOOKING COST-OF-SER VICE
METHODOLOGY.
[6][7] GTE and Southwestern Bell (collectively "GTE") and
the FCC engage ina fairly complex economic debate over the
Appendix 14
merits of calculating costs using the forward-looking cost
models based on the “least cost, most efficient" carrier.
[FN11] Because *411 incumbent local exchange carriers
("ILEC's") such as GTE will receive their subsidies, under the
new system, based on the difference between the costs of
providing service to a high-cost region and the revenue that
could be derived from that service, GTE fears that using the
costs of a hypothetical most-efficient carrier will significantly
reduce the amount of universal service support it receives.
FN11. As an initial matter, the FCC asks us to dismiss
all challenges to its methodology for calculating high-
cost support, claiming that such challenges are not
ripe in light of the Joint Board's Second
Recommended Decision. The Joint Board advised
the agency to make substantial revisions in the high-
cost support methodology, including the elimination
of the 25%/75% division between federal and state
contributions and the modification of the revenue
benchmark used to calculate high-cost support. The
FCC accepted these recommendations, and we
dismiss challenges to those issues as moot. See infra
parts III.A.1.b and c.
But the FCC did not modify other portions of the
Order, including its use
of forward-looking cost models. See
Seventh Report and Order § 48. We agree
with GTE that the mere existence of a Joint
Board recommendation does not permit the
FCC to block all judicial review of its high-
cost methodology, especially after the agency
has issued its order implementing these
recommendations.
The Supreme Court has consistently endorsed judicial
review of final agency actions. “Although ... the FCC
Appendix 15 __
regulation could properly be characterized as a
statement only of intentions, the Court held that 'such
regulations have the force of law before their
sanctions are invoked as well as after. When, as here,
they are promulgated by order of the Commission and
the expected conformity to them causes injury
cognizable by a court of equity, they are appropriately
the subject of attack....'"" Abbott Lab. v. Gardner, 387
U.S. 136, 150, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967)
(quoting Columbia Broadcasting Sys. v. United
States, 316 U.S. 407, 418-19, 62 S.Ct. 1194, 86 L.Ed.
1563 (1942)).
Additionally, we consider four factors when
evaluating a claim of lack of ripeness in the
administrative context: (1) whether the issues are
purely legal; (2) whether the issues are based on a
final agency action; (3) whether the controversy has a
direct and immediate impact on the plaintiff: and ( 4)
whether the litigation will expedite, rather than delay
or impede, effective enforcement by the agency. Se
Dresser Indus. a,
United States, 596 F.2d 1231. 1235 (Sth
Cir.1979). To find a case ripe, we require the
party bringing the challenge (here, GTE) to
establish all four factors in seeking judicial
review. See Merchants Fast Motor Lines, Inc.
v. Interstate Commerce Comm'n. 5 F.3d 911,
920 (Sth Cir. 1993).
The FCC does not claim that the issues presented are
not purely legal, and we have already explained why,
under Abbott Laboratories, the Order remains a final
agency action. There is no indication that the
petitioners are currently unaffected by the legal force
of the Order. Finally, we agree with GTE that because
the FCC has had ample time (three years) and
4
Appendix 16
opportunity to implement the Order, judicial guidance
on the legality of the Order will not delay or impede
the agency's ability to carry out its statutory duties.
i. STATUTORY INTERPRETATION.
The question, of course, is not whether it is good policy for
the FCC to use such cost models, [FN12] but whether the
decision to adopt this methodology conforms to the plain
language of the statute. If the language is ambiguous, we
must then ask whether the use of forward-looking cost
models is reasonable given the terms of the statute and the
deference the FCC must be afforded under Chevron.
Additionally, we must consider whether the agency's actions
in reaching its decision are “arbitrary and capricious” under
the APA. See 5 U.S.C. § 706(2)(A).
FN12. GTE refers us to Justice Brandeis's dissent
(joined by Justice Holmes) in Missouri ex rel.
Southwestern Bell Tel. Co. v. Public Serv. Comm'n,
262 U.S. 276, 43 S.Ct. 544, 67 L.Ed. 981 (1923), :
criticizing use of “fair value" (another v n of ;
forward-looking cost models) in ratemaking. GTE 3
notes that Justice Breyer has endorsed Justice
Brandeis’s criticisms. Even in his separate opinion in
Iowa Uulities, however, Justice Breyer did not
advocate that the Court prohibit the FCC from
adopting forward-looking cost models. See lowa
Utilities, 119 S.Ct. at 752 (Breyer, J., concurring in
part and dissenting in part) (“These examples do not
Show that the FCC's rules are’ themselves
unreasonable”).
Most importantly, the Brandeis criticism of "fair
value” has never reflected the view of a majority of
the Court, which on several occasions has declined to
Appendix 17
adopt Justice Brandeis's views on this question. See
Federal Power Comm'n v. Texaco Inc., 417 U.S. 380,
94 S.Ct. 2315, 41 L.Ed.2d 14] (1974); Federal Power
Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 64
S.Ct. 281, 88 L.Ed. 333 (1944). Instead, the Court
consistently has refused to "designat[e][ ] a single
theory of ratemaking [that] would unnecessarily
foreclose alternatives which could benefit both
consumers and investors." Duquesne Light Co. v.
Barasch, 488 im 2 v9,
316, 109 S.Ct. 609, 102 L.Ed.2d 646 (1989).
In fact, the Court has explicitly sustained similar cost
models not based on historical costs. See Mobil Oil
Exploration & Producing Southeast Inc. v. United
Distrib. Cos., 498 U.S. 211, 224-25 n. 5, 111 S.Ct.
615, 112 L.Ed.2d 636 (1991) (indicating that similar
non-historical based cost model was not arbitrary,
Capricious, or manifestly contrary to the statute at
issue. ).
We conclude that the plain language is ambiguous as to
whether the FCC's cost models are permitted. We then
decide that under Chevron Step-two, the FCC's forward-
looking cost models are authorized under their reasonable
interpretations of the statutory language. Finally, we do not
conclude that the FCC acted in a “arbitrary and capricious”
manner in reaching its decision to adopt forward-looking cost
models.
[8] GTE argues that the methodology violates the “equitable
and nondiscriminatory" language in § 254(b)(4). We
disagree with GTE's claim that the plain language of §
254(b)(4) prohibits the FCC from adopting its methodology.
The section of the statute that GTE relies on represents one
Appendix 18
of seven principles identified by the statute as the basis for
the agency's universal service policies. Rather than setting
up specific conditions or requirements, § 254(b) reflects a
Congressional intent to delegate these difficult policy choices
to agency discretion: "The Joint Board and the Commission
shall base policies for the preservation and advancement of
universal service on the following pninciples....". (Emphasis
added.) 47 U.S.C. § 254(b).
*412 Moreover, the FCC has offered reasonable
explanations for how its use of the forward-looking cost
models cannot be characterized as inequitable and
discriminatory. For instance, the FCC points out that all
carriers, including interexchange carriers ("IXC's") such as
AT & T and MCI, are subject to the same cost methodology
and must move toward the same efficient cost level to
maximize the benefits of universal service support.
[9] The term "sufficient" appears in § 254(e), and the plain
language of § 254(e) makes sufficiency of universal service
support a direct statutory command rather than a statement of
one of several principles. Stil, we do not find that the use of
the single word “sufficient,” even in the language of
command, demonstrates Congress's unambiguous intent
regarding the forward- looking cost models. We therefore
review under Chevron step-two and conclude that the agency
has offered reasonable justifications for its adoption of the
"most efficient" methodology.
[10] The FCC points to cases in which agencies have
adopted similar methodologies to encourage competition.
[FN13] It also argues that nothing in the statute defines
"sufficient" to mean that universal service support must equal
the actual costs incurred by ILEC's. These reasons suffice to
survive the reasonableness requirement of Chevron step-two.
Appendix 19
FN13. See, e.g., West Tex. Util. Co. v. Burlington
N.R.R., Docket No. 41191 (Surface Transp. Bd. May
3, 1996), affd sub nom. Burlington N.R.R. v. Surface
Transp. Bd., 114 F.3d 206, 213 (D.C.Cir.1997)
(sustaining, as reasonable, agency application of
“stand alone cost constraints” based on rates that a
hypothetical carrier would have to charge to earn a
reasonable return).
To be sure, the FCC's reason for adopting this methodology
is not just to preserve universal service. Rather, it is also
trying to encourage local competition by setting the cost
models at the "most efficient" level so that carriers will have
the incentive to improve Operations. As long as it can
reasonably argue that the methodology will provide sufficient
support for universal service, however, it is free, under the
deference we afford it under Chevron step-two, to adopt a
methodology that serves its other goal of encouraging local
competition.
il. "ARBITRARY AND CAPRICIOUS."
(11][12] Arguing that the FCC has departed from its own
Stated methodology, GTE charges the agency with “arbitrary
and capricious" actions under the APA. See 5 U.S.C. §
706(2)(A). The APA's “arbitrary and capricious" standard of
review is narrow and requires only a finding that the agency
“articulate[d] a rational relationship between the facts found
and the choice made." Harris v. United States. 19 F.3d 1090,
1096 (Sth Cir.1994).
GTE points out that while the agency has wedded itself to
the "most efficient" carrier cost methodology, it used current
depreciation schedules to develop its models for projecting
forward-looking costs. These schedules are not based on the
Appendix 20
actual costs of the current regulated system, but, GTE
contends, have been artificially deflated by state regulators so
that local carriers recover less than they would in a real,
competitive market. Using these artificially-deflated
schedules in the cost models disadvantages the ILEC's,
because they will not be able to recover their capital costs as
they would if free from regulation.
Actually, the FCC has departed from its general "most
efficient" methodology by making a number of adjustments
to its cost model. For instance, instead of assuming the
"most efficient" wire center locations in its cost models, the
agency simply made calculations based on whatever wire
centers already exist. See Order J 251(1). This allowance
actually benefits the ILEC’s.
While GTE argues that the FCC's failure to adhere tightly to
its "most efficient" *413 methodology fails the "arbitrary and
capricious" test, that test, properly understood, is far less
onerous. If the FCC's departures from its methodology
"articulate a rational relationship,” we will not apply the
"arbitrary and capricious” remedy.
[13] The FCC seeks to mitigate the effect of the "most
efficient" methodology by accounting for wire centers that
already exist. Additionally, and contrary to GTE's assertions,
the agency is prescribing a range within which the
depreciation schedules must fall, rather than simply adopting
the schedules that already exist. For the time being, the FCC
will rely on the actual depreciation schedules, because it does
not see a prospect of significant competition in the near future
in the high-cost markets. See Order ¥ 250(5). Moreover,
the agency has committed itself to re-prescribe the range for
these schedules every three years. See id. { 250(5) n. 662.
These reasons establish enough of a "rational relationship"
Appendix 21
with facts presented for the forward-looking cost
methodology to pass the APA's arbitrary and capricious test.
[FN 14]
FN14. GTE claims that implementing the forward-
looking cost methodology will force ILEC’s to operate
at a loss, and this constitutes an unconstitutional
taking under Brooks-Scanlon. GTE's claim has no
merit; it has not shown that a taking has occurred or
that any taking will be permanent or would be sO
Serious as to be considered “confiscatory."
See Duquesne, 488 U.S. at 314, i109 S.Ct.
609. ("[A]n otherwise reasonable rate is not
subject to constitutional attack by questioning
the theoretical consistency of the method that
produced it.").
Unlike the situation in Brooks-Scanlon, the
circumstance here is that the regulatory entity setting
the rules, the FCC, is not requiring the ILEC's to
remain open or to charge low rates, thereby forcing
them to operate at a permanent loss. See Continental
Air Lines v. Dole, 784 F.2d 1245, 1251 (Sth Cir.1986)
(distinguishing Brooks-Scanlon where agency
required loss-making operation for a limited time
only).
b. METHODOLOGY FOR CALCULATING THE
REVENUE BENCHMARK.
{14][15] GTE challenged the inclusion of revenues from
"discretionary" services in the revenue benchmark used to
compare costs and revenues for the purposes of universal
Service support. The Joint Board, however, recently
proposed eliminating the entire revenue benchmark in favor
of a single national cost benchmark. See Second
Appendix 22
Recommended Decision 4] 41-50. The FCC accepted this
recommendation.See Seventh Report and Order 4 61 ("[W]Je
reconsider and reject the determination in the First Report
and Order that federal support for rate comparability should
be determined using a revenue-based benchmark.”). [FN15]
This decision moots GTE’s challenge to the inclusion of
discretionary revenues, because no revenues will be used in
the calculation of the benchmark. [FN16]
FN15. Vermont has filed a petition for review of the
Seventh Report and Order in the District of Columbia
Circuit. See No. 99-1243 (D.C.Cir.). Pursuant to 28
U.S.C. § 2349(a), it thereby has vested that court with
exclusive jurisdiction to review the Seventh Report
and Order. Unless the District of Columbia Circuit
transfers the petition to this court pursuant to 28
U.S.C. § 2112(a), we lack jurisdiction to consider the
order on its merits.
We still retain jurisdiction to the extent that the new
order changes or affects the Order that is the subject
of this consolidated proceeding. As we explain
below, the FCC's repudiation of its revenue
benchmarks and the 25% allocation moot the
petitioners’ chalienges for purposes of this appeal.
Petitioners, however, are not precluded, by our
dismissal in this proceeding, from filing appeals of
the new cost-based benchmark and the new allocation
methodology in another proceeding.
FN 16. Mootness goes to the heart of our jurisdiction
under Article III of the Constitution. Therefore, we
must consider mootness even if the parties do not
raise it, because “resolution of this question is
essential if federal courts are to function within their
constitutional spheres of
Appendix 23
authority." North Carolina v. Rice, 404 U.S.
244, 245, 92 S.Ct. 402, 30 LEd2d 413
(1971),
[16][17][18] A case becomes moot if (1) there is no
reasonable expectation that the alleged violation will recur
and (2) interim relief or events have completely and
irrevocably *414 eradicated the effects of the alleged
violation. County of Los Angeles v. Davis, 440 U.S. 625,
631, 99 S.Ct. 1379, 59 L.Ed.2d 642 (1979). [FN17] The
FCC's new approach eradicates any possible effect of
discretionary revenues on the levels of the petitioners’
universal service support. [FN 18] We therefore dismiss, as
moot, GTE's challenge to the use of discretionary revenues in
the high-cost support benchmark.
FN17. Even if these conditions are met, there are at
least three exceptions to the mootness doctrine. First,
courts may assert jurisdiction if the official action
being challenged is capable of "Tepetition, yet evading
review." See Nader v. Volpe, 475 F.2d 916, 917
(D.C.Cir. 1973). Second, courts also have
adjudicated otherwise moot issues if the defendant
has voluntarily ceased the challenged activity to avoid
judicial resolution and there is a reasonable possibility
that the challenged conduct will resume. See Gluth
v. Kangas, 951 F.2d 1504,
1507-08 (9th Cir.1991) (refusing to hold
voluntary cessation of prison library
restrictions moot in light of long history of
policy). Finally, courts have avoided
mootness where the mooted issue still has
collateral or future consequences. See Super
Tire Eng'g Co. v. McCorkle, 416 USS. 115,
122, 94 S.Ct. 1694, 40 L.Ed.2d | (1974)
Appendix 24
(refusing to moot employer's challenge to state
benefits for strikers even though strike had
ended, because issue would affect employer's
future relations with union).
Only the first and second exceptions are arguably
applicable to the FCC's new order, and we do not
think either exception applies. The "repetition"
exception will not apply unless there is a reasonable
expectation that the same litigant will again be
subjected to the same action. See DeFunis v.
Odegaard, 416 U.S. 312, 315-17, 94 S.Ct. 1704, 40
L.Ed.2d 164 (1974) (mooting student's lawsuit
because he will graduate regardless of outcome of
litigation). The second exception requires a showing
that the challenged conduct will resume. There is
little basis for suggesting that the FCC, after a long
and torturous process involving a recommendation
from the Joint Board and months of deliberation, will
reverse itself on the question of revenue benchmarks.
FN18. Reconsideration of agency actions by the
implementing agency can moot issues otherwise
subject to judicial review because the reviewing
court can no longer grant effective relief.
See, e.g., Center for Science in the Pub.
Interest v. Regan, 727 F.2d 1161, 1164
(D.C.Cir.1984) (holding that a change in
position of Department of Treasury regarding
labeling of alcoholic beverages mooted federal
appeal); see also 15 JAMES W. MOORE,
MOORE'S FEDERAL PRACTICE § 101.96,
at 101-179 (3d ed. 1998) ("[A] parallel
proceeding in another forum and [ ] resolution
of that controversy in that forum will moot the
issues presented in the federal action ....
— ee ee ee ee ee
—
Appendix 25
regardless of whether or not that parallel
forum is an administrative proceeding.").
GTE also challenged the FCC's use of a national benchmark
for purposes of revenue calculations. Because GTE's
challenge focused on the problems of a national revenue
benchmark, the FCC's elimination of the revenue benchmark
also moots its challenge to the national benchmark.
GTE's basic attack on the national revenue benchmark is that
ILEC's operating in states with below-average revenues will
be systematically undercompensated by a universal service
support system based on a national revenue benchmark. But
none of these arguments necessarily applies to a cost-based
national benchmark. [FN 19] Indeed, the FCC adopted the
cost-based national benchmark because it agreed that
"revenues may not accurately reflect the level of need for
support to enable reasonably comparable rates because states
have varying rate-setting methods and goals." Seventh
Report and Order { 62.
FN19. Accord Center for Science in the Pub. Interest,
727 F.2d at 1164 ("Most of the issues presented in
these appeals are not necessarily pertinent to
examination of the second {administrative action] and
may well prove irrelevant in that context.").
Because the subject matter of GTE's appeal--a national
revenue benchmark--no longer has any legal force, "[a]ny
further judicial pronouncements -- Would be purely
advisory." See Center for Science in the Public Interest, 727
F.2d at 1164. "We cannot assume jurisdiction to decide a
case on the ground that it is the same case as one presented to
us, when it is admitted that it is not and when it presents
different issues." Id. at 1166 n. 6 (emphasis added).
a ee ae
Appendix 26
Therefore, we also dismiss, as moot, the *415 challenges to
the FCC's national revenue benchmark. [FN20]
FN20. Our conclusion regarding mootness does not
conflict with Natural Resources Defense Council v.
EPA, 489 F.2d 390 (Sth Cir.1974), in which we
refused to moot a challenge to the EPA's approval of
Georgia's Clean Air Act implementation plan despite
the EPA's later decision to withdraw its approval.
Because the EPA's reasons for withdrawing approval
s h o wied : mR @ 48
it still fundamentally disagreed with the
petitioners’ interpretation of the Clean Air
Act's requirements, we asserted jurisdiction.
In this case, the FCC's new order not only alters, but
explicitly repudiates, the reasoning behind its use of
revenues in calculating the benchmark. All of the
petitioners’ challenges to the benchmark calculations
focused on the unreliability or unfairness of such
revenue- based calculations. By eliminating the use
of revenues, the petitioners and the FCC no longer
fundamentally disagree on the problems that revenues
cause in calculating the benchmark for high-cost
Support.
Thus, Natural Resources Defense Council does not
conflict with the reasoning of Center for Science in
the Public Interest, 727 F.2d at 1166, in which the
court mooted a challenge after the Treasury had
implemented a new, superseding — regulation
containing different reasoning and _ substantive
provisions different from the challenged regulation.
In both cases, the courts analyzed whether the
intervening agency action represented a substantive
shift in an agency's interpretation of its statutory
duties. i
ee a ee
ee eee ae eee oo
— iN
Appendix 27
c. LIMITING THE FEDERAL MECHANISM TO
TWENTY-FIVE PERCENT OF UNIVERSAL
SERVICE COSTS.
[19] The third step in the FCC's methodology for calculating
support to high-cost, non-rural areas allocates 25% of the
funding responsibility to the agency, leaving 75% to be
provided by the states. In other words, onlv 25% of the
overall funds for the explicit universal support program for
high-cost areas will be provided from the funds collected
from interstate telephone calls; the rest must be provided by
the states, usually through charges on intrastate service.
Certain states, [FN21] GTE, and Kansas and Vermont
[FN22] challenged this allocation on Statutory grounds.
Specifically, they question the 25% rule for failing to provide
“sufficient” support under § 254(e). Kansas and Vermont also
challenged the FCC's 25% allocation decision for lack of
notice and for failing to ensure reasonable comparability
between rural and urban rates.
FN21. Nine state commissions--from Texas,
California, Florida, Iowa, Louisiana, New York,
Nevada, Pennsylvania, and South Dakota--have
presented a joint appeal, and we refer to them as "the
States."
FN22. The state commissions of Kansas and Vermont
filed a separate appeal. Although both Kansas and
Vermont challenge the 25% allocation, only Vermont
maintains its challenge to the FCC's transitional
Support rules for rural carriers. See infra part
If].A.6.c.i.
As in the case of arguments against the revenue benchmark,
Appendix 28
we do not consider these challenges, because the FCC has
accepted the Joint Board's recommendation to scrap the
25%/75% rule. [FN23] The Seventh Report and Order
proposes a new methodology that places "no artificial limits
on the amount of federal support that is available" when a
State cannot by itself maintain reasonable comparability.
Seventh Report and Order J 34. This new framework is "a
different regulation, containing on its face reasoning not
previously articulated by the agency as its policy." Center for
Science in the Pub. Interest, 727 F.2d at 1166. Therefore, we
dismiss the challenges by al! of the petitioners as moot.
[FN24]
FN23. See Seventh Report and Order § 3 ("We
explicitly reconsider and repudiate any suggestion in
the First Report and Order that federal support should
be limited to 25 percent of the difference between the
benchmark and_ the forward-looking cost
estimates....").
FN24->Vermont invites us to review the Seventh
Report and. Order 's interpretation of reasonable
comparability in the context of that recent order's
revised approach 10 allocating costs between the
different states and between the state and federal
funds. To the extent. that Vermont's “reasonable
comparability" arguments: were based on a challenge
t Oo t h e 2 5 &
allocation, we dismiss its arguments as moot.
To the extent its arguments focused on the
alleged failure of the FCC to articulate a
definition of “reasonable comparability,” we
would have to examine the merits of the
Seventh Report and Order. As we explained,
supra n. 16, we cannot review the merits of
Appendix 29
that order, because we lack jurisdiction over
the merits of the new allocation methodology
untii it is transferred to this court by the
District of Columbia Circuit.
*416 d. PROPERLY CONSULTING WITH THE JOINT
BOARD BEFORE AMENDING
JURISDICTIONAL SEPARATIONS RULES.
[20] GTE raises an administrative procedural objection to the
FCC's adoption of new jurisdictional separations rules
[FN25] that propose to end existing high-cost fund support
for non-rural carriers on January 1, 1999. [FN26] Instead of
arguing that the new rule is arbitrary and capricious, GTE
claims that the agency failed properly to refer the matter to
the Joint Board, in violation of 47 U.S.C. § 410(c), which
States that "[t]he Commission shall refer any proceeding
regarding the jurisdictional separation of common carrier
property and expenses between interstate and intrastate
Operations ... to a Federal-State Joint Board.”
FN25. "Beginning January 1, 1999, non-rural carriers
$82 61 n o longer
receive support pursuant to this [program].”
47 CF.R. § 36.601(c).
FN26. This implementation date has now been
delayed until January 1, 2000. See Seventh Report
and Order 5.
The FCC responds that it did make a general referral to the
Joint Board in March 1996 and that the Joint Board
Subsequently recommended that the agency replace the
existing support mechanisms for non-rural carriers with a
new universal service system. The plan to replace the
Appendix 30
existing support mechanism, the FCC argues, requires a
change in the method of jurisdictional separation, and by
recommending the plan, the Joint Board had already
considered the jurisdictional effects. [FN27]
FN27. Jurisdictional separations rules are part of a
process whereby it "may be determined what portion
of an asset is employed to produce or deliver
interstate as opposed to intrastate service.” Louisiana
Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 356, 106
S.Ct. 1890, 90 L.Ed.2d 369 (1986). Section 410(c)
requires the FCC to consult the Joint Board, but it
does not "dictate how costs must be recovered...."
See National Ass'n of Regulatory Uul. Comm'rs v.
FCC, 737 F.2d 1095, 1112 n. 19 (D.C.Cir. 1984).
GTE and the FCC disagree on the level of specificity needed
to fulfill the Joint Board consultation requirement of §
410(c). GTE argues that simply identifying the broad subject
of universal service reform did not raise the issue of altering
the system that is used to shift costs in many high-cost areas
to the interstate jumsdiction. In particular, GTE contends
that the Joint Board failed to consider the amounts of the fund
allocation between the interstate and intrastate jurisdictions
when it considered the plan to implement a new support
mechanism.
Although the FCC does not have to raise every possible
detail in its referral to the Joint Board, it 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 jurisdictional responsibility lies at
the heart of § 410(c)'s consultation requirement.
LNT GE ee ee ee,
Appendix 31
The Joint Board was aware that replacing the existing high-
cost support system will affect the jurisdictional separations
rules. This is shown by the fact, for instance, that the Joint
Board made a detailed discussion of the current jurisdictional
separations rules, acknowledging that they "currently assign
25 percent of each LEC's loop costs to the interstate
jurisdiction." See First Recommended Decision q 188.
In discussing the comments submitted by affected parties,
the Joint Board recognized that the jurisdictional separations
rules are part of the old regime of "embedded" or "historical"
costs. See id. J 207. Thus, the Joint Board does seem to
recognize that the jurisdictional separations mules are part of
the old “embedded cost" *417 system and were developed in
the context of allocating the actual costs of developing the
local and long- distance networks. By recommending
replacing the historical cost system with a forward-looking
“most efficient" cost model, the Joint Board must have
considered that the jurisdictional separations rules no longer
would apply in the same way. Although no detailed
discussion appears in the First Recommended Decision, the
Joint Board's recognition that the Jurisdictional separations
rules would be affected by adopting a new cost model fulfills
§ 410(c)'s consultation requirement. [FN28]
FN28. The FCC did not arbitrarily and capriciously
fail to explain the reason for its amendment of rule
36.601(c). It stated that the new universal service
mechanism will replace the old high-cost fund
Subsidies and that the change will occur on January 1,
1999 (later extended to July 1, 1999 and then to
January 1, 2000). The agency's general explanations
of the effect of the new support mechanism provide
enough of a reason to survive GTE's attack.
Appendix 32
2. ELIGIBILITY REQUIREMENTS FOR CARRIERS
SEEKING UNIVERSAL SERVICE SUPPORT.
The states and intervenor Southwestern Bell ("SBC")
challenge the FCC's reading of the Act's provisions governing
eligibility requirements for carriers seeking universal service
support. In general, they question the agency's interpretation
of § 214(e) as too narrow and restrictive of the ability of state
commissions to set their own criteria and exercise their own
discretion over a carrier's eligibility.
a. LIMITING THE CRITERIA THAT STATE
COMMISSIONS MAY CONSIDER WHEN ASSESSING A
CARRIER'S ELIGIBILITY.
[21] Section 214(e) governs the designation of carriers
eligible to receive federal universal service support. Section
214(e)(1)(A) and (B) set out the eligibility requirements, and
§ 214(e)(2) [FN29] governs the designation of eligible
carriers by state commissions.
FN29. The subsection reads:
A State commission shall upon its own motion or
upon request designate a common carrier that meets
the requirements of paragraph (1) as an eligible
telecommunications carrier for a _ service area
designated by the State commission. Upon request
and consistent with the public interest, convenience,
and necessity, the State commission may, in the case
ofan area served by a rural telephone company, and
shall, in the case of all other areas, designate
more than one common carrier as an eligible
telecommunications carrier for a service area
designated by a State commission, so long as
each additional requesting carrier meets the
Appendix 33
requirements of paragraph (1). Before
designating an additional eligible
telecommunications carrier for an area served
by a rural telephone company, the State
commission shall find that the designation is
in the public interest.
In the Order, the FCC interpreted § 214(e)(2) in this way.
With limited exceptions for rural areas, a state commission
has no discretion when assessing a carrier's eligibility for
federal support. If a carrier Satisfies the terms of § 214(e)(1),
a state commission must designate it as eligible. Thus, the
FCC ruled that a state commission may not impose additional
eligibility requirements on a carrier seeking universal service
Support in non-rural service areas. See Order J 135. The
agency does permit the states to impose service quality
obligations on local carriers if those obligations are unrelated
to a carmier's eligibility to receive federal universal service
support. According to the FCC, this interpretation "gives
effect to the unambiguously expressed intent of Congress."
See Chevron, 467 U.S. at 842- 43, 104 S.Ct. 2778.
The states and SBC offer two lines of attack. First, they
argue that the plain language of § 214(e)(2) does not support
the FCC's blanket prohibition on additional state eligibility
requirements. Second, they say that the FCC exceeded its
jurisdictional authority, in violation of 47 U.S.C. § 152(b), by
purporting to interfere with the states’ regulation of intrastate
service. Because we conclude that the agency *418 erred in
prohibiting the states from imposing additional eligibility
requirements, we do not reach the states’ jurisdictional
challenges.
On the plain language front, the states argue that § 214(e)(2)
does not unambiguously prohibit them from regulating
Appendix 34
carriers receiving federal universal support. Specifically,
they contend that Congress did not mean to prohibit the states
from imposing service quality standards on eligible carriers.
According to the states, the language on which the FCC
relies--"[a] State Commission shall upon its own motion or
upon request designate a common carrier that meets the
requirements of paragraph (1) as an_ eligible
telecommunications carrier"--does not expressly circumscribe
State authority to add additional eligibility requirements.
The agency's best hope for express authority for its action
rests on the statute's use of the word "Shall" in § 214(e)(2).
Generally speaking, courts have read "shall" as a more direct
statutory command than words such as "should" and "may."
[FN30] Though we agree that the use of the word "shall"
indicates a congressional command, nothing in the statute
indicates that this command prohibits states from imposing
their own eligibility requirements. Instead, we read §
214(e)(2) as addressing how many carriers a state may
designate for a given service area, and not how much
discretion a state commission retains to impose eligibility
standards.
FN30. See MCI Telecomm. Corp. v. FCC, 765 F.2d
1186, 1191 (D.C.Cir.1985) (holding that "shall" is
"the language of command").
The first sentence requires state commissions to designate at
least one common carrier as eligible, but that carrier must still
meet the eligibility requirements in § 214(e)(!1). The second
sentence then confers discretion on the states to designate
more than one carrier in rural areas, while requiring them to
designate eligible carriers in non-rural areas consistent with
the "public interest" requirement. Nothing in the statute,
under this reading of the plain language, speaks at all to
ges Oe ee ee eee ee ee eee ee ee
Appendix 35
whether the FCC may prevent state commissions from
imposing additional criteria on eligible carriers. [FN31]
FN31. To be sure, if a state commission imposed such
onerous eligibility requirements that no otherwise
eligible carrier could receive designation,
that state commission would probably run
afoul of § 214(e)(2)'s mandate to “designate” a
carrier or "designate more than one carrier.”
Thus, the FCC erred in prohibiting the states from imposing
additional eligibility requirements on carriers otherwise
eligible to receive federal universal service Support. The
plain language of the statute speaks to the question of how
many Carriers a state commission may designate, but nothing
in the subsection prohibits the states from imposing their own
eligibility requirernents. [FN32] This reading makes sense in
light of the states’ historical role in ensuring service quality
standards for local service. Therefore, we reverse that portion
of the Order prohibiting the states from imposing any
additional requirements when designating carriers as eligible
for federal universal service support.
FN32. Additionally, § 152(b) of Act instructs us to
construe the Act to avoid giving the FCC jurisdiction
Over "charges, classifications, practices, services,
facilities, or regulations for and in connection with
intrastate communications services..." 47 U.S.C. §
152(b). See Louisiana Pub. Serv. Comm'n v. FCC,
476 U.S. 355, 376 n. 5, 106 S.Ct. 1890, 90 L.Ed.2d
369 (1986) ("[Section] 152(b) not only imposes
jurisdictional limits on the power of a federal agency,
bout also, b oy
Stating that nothing in the Act shall be
construed to extend FCC jurisdiction to
Appendix 36
intrastate service, provides its own rule of
Statutory construction.”); see also discussion
of “no disconnect” rule, infra part [I1.A.3.
b. The Terms of Section 214(e)(5) Governing the
Definition of Service
Areas.
In their initial brief, the states argued that the FCC had
impermissibly encroached on their exclusive authority to
*419 designate service areas for universal service support.
The FCC, however, pointed out that 4 185 of the Order had
only encouraged the states to make certain decisions [FN33]
when designating service areas. The agency explicitly denies
that the paragraph requires the states to follow its
“encouragements.” Thus, it appears that the states
misinterpreted the FCC's intentions in ¥ 185 and that there is
no issue left for us to address.
FN33. In order to promote competition, the FCC
encourages states to adopt the existing study areas of
ILECs as service areas for non-rural areas because it
would create a significant barrier to entry. The FCC
further encourages states to consider designating
service areas that the ILECs have not traditionally
served, this limiting the [LEC advantage over new
entrants.
Order 7 185.
[22] The states, however, continue to contest one aspect of
the Order regarding the definition of service areas. The FCC
maintains that it may establish a different definition of
service areas for rural carners, with the agreement of the
States, without having to submit such a new definition first to
the Joint Board. The states argue that the plain language of §
Appendix 37
214(e)(5) allows the agency to act only “after taking into
account recommendations of [the Joint Board]...."
The FCC has two procedural responses and one substantive
defense. Because we agree with the FCC that the States have
no standing, we do not reach the FCC's other defenses.
The agency argues that the states have no Standing to
challenge its ruling, because the states have failed to show
any harm. [FN34] After all, as the FCC points out, it must
sull garner the approval of each respective state before a rural
Service area can be re defined. The states argue that they are
harmed because the state members of the Joint Board are
denied a chance to participate in the decisionmaking process,
So the states are less able to coordinate with each other.
They further contend that bypassing the Joint Board denied
the states any meaningful Participation in revising service
area definitions for rural territories.
FN34. We review the FCC's standing defense, like all
constitutional questions, under a de novo standard of
review. See 5 U.S.C. § 706 (Stating that "a reviewing
court shall decide all relevant questions of law [and]
interpret constitutional and Statutory provisions").
This claim is weak, because the states’ independent ability to
velo particular service areas seems to provide them with a
substantial amount of "meaningful Participation." This is
unlike the situation in the cases the states rely on, in that the
states here are not challenging a federal preemption order that
threatens their sovereign authority. See California v. FCC,
75 F.3d 1350, 1361 (9th Cir. 1996). Therefore, the states lack
Standing to challenge this portion of the Order.
¢. DECLINING TO REQUIRE ELIGIBLE CARRIERS TO
Appendix 38
OFFER SUPPORTED SERVICES ON AN
UNBUNDLED BASIS.
[23] GTE argues that the FCC's failure to require carriers to
"unbundle” their offerings when receiving universal service
support violates the congressional intent expressed in §
214(e)(1) under Chevron step-one. "Bundling" refers to a
carrier's practice of offering different services together as one
package. For instance, a carrier might offer basic phone
service as part of a package that includes call-waiting and
voicemail.
GTE fears that a new carrier could "cherry pick" high-profit
customers by offering only bundled local telephone service
packages. Because the intended beneficiaries of universal
service are, by definition, less able to afford even basic
service, offering expensive bundled packages will allow new
Carriers to steal wealthier, low-cost customers while leaving
ILEC's such as GTE to provide service to everyone else.
GTE reasons that Congress, by requiring carriers receiving
federal universal service support to advertise the availability
of its *420 supported services, intended to require new
Carriers tO participate in universal service--an intent that
would be thwarted by allowing the new carriers to offer
bundled services.
The FCC responds that the plain language of the statute is
satisfied as long as a carrier offers “services that are
supported by Federal universal service mechanisms." 47
U.S.C. 214(e)(1 (A). Except for the advertising requirement,
the statute makes no mention of "bundling" or other
eligibility criteria. In fact, the FCC argues that because of
the exclusive grant of eligibility authority conferred on the
states by § 214(e)(2), it cannot impose additional eligibility
criteria. Because the statute is silent on the question of
Appendix 39
bundling, and because the statute seems to prohibit further
eligibility criteria, the agency asks us to give deference to its
interpretation of § 214(e) under Chevron step-two.
We agree that the statute's plain language does not reveal
Congress's unambiguous intent. It is not evident, however,
that the FCC's interpretation of the Statute meets even the
minimum level of reasonability required in step- two review.
Section 214(e)(1) plainly requires carriers receiving
universal service support to offer such Supported services to
as many Customers as possible. Thus, an eligible carrier must
offer such services “throughout the service area” and
“advertise the availability of such services.” This
requirement makes sense in light of the new universal service
program's goal of maintaining affordable service in a
competitive local market. Allowing bundling, however,
would completely undermine the goal of the first two
requirements, because a carrier could qualify for universal
service support by simply Offering and then advertising
expensive, bundled services to low-income customers who
cannot afford it.
The FCC suggests that GTE's problems stem not from
bundling but from state- imposed “carrier of last resort”
("COLR") requirements, which prohibit ILEC’s such as GTE
trom disconnecting low-profit consumers and leave ILEC's
vulnerable to outside competition. But the elimination of
COLR requirements would only further undermine the goal
of making basic services available to low income consumers
and those in "rural, insular, and high cost areas." See 47
U.S.C. § 254(b)(3). This again would violate the express
intent of the universal service program. Without a better
explanation for its unreasonable interpretation, we would be
inclined to find the FCC's implementation “arbitrary and
Appendix 40
capncious and manifestly contrary to the statute.” See
Chevron, 467 U.S. at 844, 104 S.Ct. 2778.
Fortunately, the agency also has explained that "only an
eligible carner that succeeds tn attracting and/or maintaining
a customer base to whom it provides universal service will
receive universal service support.” Order ¥ 138. Therefore, it
reasons that if offering only bundled services would price
low- income customers out of the market, the carner offering
bundled services would eventually lose universal service
support. Thus, the FCC can avoid the problem of providing
universal service support to carriers that do not serve high-
cost customers for which the support is intended. = This
explanation supports the FCC's claim that its decision to
allow bundling ts reasonable under Chevron step-two review.
Though the decision is a close one, we conclude that the
FCC's retusal to require eligible carriers to provide unbundled
services ts neither “arbitrary, capricious,” nor “manifestly
contrary to the statute.” See Chevron, 467 U.S. at 844, 104
S.Ct. 2778. Because the agency will prevent companies
from using bundling to receive federal support while avoiding
high- cost customers, we do not find its interpretation "so
implausible that wt could not be ascribed to a difference in
view or the product of agency expertise.” Motor Vehicle
Mirs- Ass'n v. State Farin Mut. Auto. Ins. Co., 463 U.S. *421
29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983).
3) AUTHORITY TO PROHIBIT CARRIERS FROM
DISCONNECTING LOCAL SERVICE TO LOW-
INCOME CONSUMERS WHO FAIL TO PAY TOLL
CHARGES...
[24] Bell Atlanuc and the states challenge the FCC's
adoption of a regulation [FN35] prohibiting carriers receiving
Appendix 41
universal service support from disconnecting Lifeline
services [FN36] from low-income consumers who have failed
to pay toll charges. See Order J 390. The petitioners charge
that the “no disconnect" rule exceeds the agency's
jurisdictional authority under § 2(b) of the 1934 Act, [FN37]
which prohibits FCC regulation of intrastate
telecommunications service. Because the plain language of
the statute expresses Congress's unambiguous intent, we
review the agency's interpretation under Chevron step-one.
FN35. 47 C.F.R. § 54.401(b).
FN36. The Lifeline program refers to the 3 ©
efforts to expand telephone services to qualifying
low-income subscribers. The agency defines Lifeline
services to include single-party service, voice-grade
access to the public switched telephone network,
BTMF or its functional digital equivalent, access to
directory assistance, and toll-limitation Services.
See Order ¥ 390.
FN37. "[NJothing in this subchapter shall be
construed to apply or to give the Commission
jurisdiction with respect to (1) charges,
Classifications, practices, services. facilities, or
regulations for or in connection with intrastate
communication service by wire or radio of any
carrier..." 47 U.S.C. § 152(b) (as amended).
The agency has three responses. First. it argues that § 2(b)
does not apply where Congress has given the FCC an
“unambiguous or straightforward" grant of authority. See
Louisiana Pub. Serv. Comm'n, 476 U.S. at 377, 106 S.Ct.
1890. The agency argues that Congress granted such express
authority in § 254(b)(3), which directs the FCC to base its
Appendix 42
policies on the principle that "low-income consumers and
those in rural, insular, and high cost areas, should have access
to telecommunications and information services...."
As we have discussed, § 254(b) identifies seven principles
the FCC should consider in developing its policies; it hardly
constitutes a series of specific statutory commands. Indeed,
we have avoided relying on the aspirational language in §
254(b) to bind the FCC to adopt certain cost methodologies
for calculating universal service support. [FN38]
FN38. See supra part III.A. 1.a.1.
[25] Just as we declined to read § 254(b) as an inexorable
statutory command against the FCC, we decline to read it as a
grant of plenary power overriding other portions of the Act.
The agency has no “unambiguous or straightforward" grant of
authority to override the limits set by § 2(b), and, accordingly,
it has no jurisdiction to adopt the "no disconnect" rule on the
basis of the vague, general language of § 254(b)(3). [FN39]
FN39. The SBC intervenors challenge a related FCC
rule prohibiting the practice of requiring deposits
from customers initiating service with toll- blocking
for interstate service. Unfortunately for SBC, none
of the petitioners on this issue (the states and Bell
Atlantic) raised a challenge to this similar but separate
rule in the FCC proceeding. Therefore, we cannot
consider it on appeal. See United Gas Pipe Line Co.
v. FERC, 824 F.2d 417, 437 (Sth Cir.1987).
[26] Second, the FCC contends that the petitioners’
jurisdictional challenge is inapposite because the "no
disconnect" rule does not purport to regulate intrastate
service, but merely prevents the disconnection of interstate
ee eS ee ee, eee
Appendix 43
Service (and, as a consequence, of intrastate service) for
failure to pay toll charges. [FN40] As Bell Atlantic *422
rightly responds, however, the "no disconnect" rule is a
“regulation,” because it dictates the circumstances under
which local service must be maintained. Therefore, the
FCC, by issuing the rule, has acted “with respect to” and "in
connection with" intrastate service within the meaning of §
2(b).
FN40. Bell Atlantic argues that the FCC has waived
this argument on appeal. We do not agree. The
FCC's brief states that the "no disconnect" rule "does
not purport to regulate intrastate service ... but merely
to prevent the disconnection of service (including
interstate access service) to customers who have
failed to pay toll charges." Though weak, this
statement preserves the FCC's attempt to exceed its
jurisdictional boundaries on the ground that it cannot
regulate an interstate matter without also regulating an
intrastate matter.
The FCC points out that even if the "no disconnect" rule is a
“regulation” within the meaning of § 2(b), courts have
Sustained agency jurisdiction over similar rules under the
“Impossibility” exception. In North Carolina Uuls. Comm'n
Vv. FCC, 552 F.2d 1036 (4th Cir.1977), the court upheld FCC
regulations permitting local subscribers to connect their
telephones to the local loop to make interstate calls. North
Carolina previously had required subscribers to use leased
telephones and argued that § 2(b) prevented FCC intervention
because the vast majority of these calls were intrastate. The
court rejected this argument, holding that "the FCC has
jurisdiction to prescribe the conditions under which terminal
equipment may be interconnected with the interstate
telephone line network." Id. at 1048.
Appendix 44
Essentially, the FCC asks us to find that the “no disconnect”
rule, aimed at regulating interstate service, is impossible to
separate from intrastate service. In similar cases, the District
of Columbia Circuit has permitted the FCC to intervene in
relatively localized service issues [FN41] and has developed
a useful framework for analyzing what the petitioners refer to
as the "impossibility" exception to § 2(b). See Public Serv.
Comm'n v. FCC ("Maryland PSC"), 909 F.2d 1510, 1515
(D.C.Cir. 1990).
FN41. See, e.g., Public Uul. Comm'n v. FCC, 886
F.2d 1325 (D.C.Cir.1989); Illinois Bell Tel. Co. v.
FCC, 883 F.2d 104 (D.C.Cir.1989); National Ass'n of
Regulatory Utl. Comm'rs v. FCC, 880 F.2d 422
(D.C.Cir.1989).
To permit the FCC to preempt state regulation of whether to
cut off low-income subscribers, that circuit requires the
agency to show that "(1) the matter to be regulated has both
interstate and intrastate aspects; (2) FCC preemption is
necessary to protect a valid federal regulatory objective; and
(3) state regulation would negate the exercise by the FCC of
its own lawful authority because regulation of the interstate
aspects of the matter cannot be unbundled from regulation of
intrastate aspects." Maryland PSC, 909 F.2d at 1515 (internal
quotations and citations omitted). This framework creates a
properly narrow exception to § 2(b) that allows the FCC to
preempt state regulation only when it has shown it cannot
carry out its authorized federal objectives without
encroaching on state autonomy.
Applying this framework to the "no disconnect” rule, we
agree with Bell Atlantic that the FCC has failed to show why
allowing the states to control disconnections trom local
service would “negate the exercise of the FCC's lawful
Appendix 45
authority....". As Bell Atlantic points out, the agency offered
only a bnef explanation of what lawfully authorized federal
objectives are being served by the "no disconnect” mule and
why it is necessary to preempt local authority to achieve these
objectives.
In the Order, the FCC simply states that the "no disconnect"
rule advances its goal of increasing subscribership and that it
will improve the competitiveness of the market for billing
and collection of toll charges. See Order 1 390- 391. But
the agency has not adequately explained, in either its brief or
its Order, why these goals would be "negated" by allowing
the states to control disconnection of local subscribers. In
contrast to what occurred in Maryland PSC. where the court
allowed the FCC to assert juris diction to prevent ILEC's
from shifting local costs to interstate consumers, the FCC has
offered no similar explanation of how protecting interstate
service requires imposition of a “no disconnect" rule.
Therefore, we decline *423 to allow the agency to assert
jurisdiction over the disconnection of local service based on
the impossibility exception.
Finally, the FCC argues that in the wake of lowa Utilities, it
has jurisdiction over all areas. including intrastate matters. to
which the Act applies. In lowa Uulities, the Court rejected
jurisdictional challenges to the portions of the FCC's Local
Competition Order implementing §§ 251 and 252 of the Act,
which govern the interconnection of new local service
camers with the ILEC's and establish procedures for
negouating, arbitrating, and approving any interconnection
agreements. As in the instant case, petitioners Challenged the
FCC's jurisdiction to implement the Act, arguing that much
of the authority to enforce the provisions ($§ 251 and 252)
remain with the state commissions by virtue of § 2(b).
Specifically, they contended that the Act gives the FCC
Appendix 46
jurisdiction Over intrastate matters only when the statute
explicitly applies to intrastate services and specifically
confers agency jurisdiction over intrastate services.
The Court brushed aside these attempts to raise the § 2(b)
jurisdictional fence and squarely held that " § 201(b) [FN42]
explicitly gives the FCC jurisdiction to make rules governing
matters to which the 1996 Act applies.” lowa Utilities, 119
S.Ct. at 730. Though § 2(b)'s language stating that "nothing
in this Act shall be construed to apply or to give the
Commission jurisdiction” implies that FCC jurisdiction does
not always follow where the Act applies, the Court held that
"the term ‘apply’ limits the substantive reach of the statute ...
and the phrase ‘or Commission jurisdiction’ limits ... the
FCC's ancillary jurisdiction." Id. at 731. Relying on this
holding, the FCC argues that because § 254 applies to
intrastate as well as interstate matters, § 201(b) confers the
necessary jurisdiction to implement the "no disconnect" rule.
FN42. "The Commission may prescribe such rules
and regulations as may be necessary in the public
interest to Carry out the provisions of this Act." 47
U.S.C. § 201(b).
[27] Though the Court's broad language seems to support the
FCC's position, Beli Atlantic finds comfort in the Court's
preservation of Louisiana PSC. In reconciling its holding with
Louisiana PSC, the Court held that the FCC must show that
the meaning of a statutory provision applies to intrastate
matters in an “unambiguous and straightforward" manner as
"to override the command of § 2(b)." Iowa Utilities, 119
S.Ct. at 731 (quoting Louisiana PSC, 476 U.S. at 377, 106
S.Ct. 1890). If the agency fails in this initial task, it cannot
use its normally broad regulatory authority to assert what is
now only ancillary jurisdiction because of the still-intact
Appendix 47
jurisdictional fence created by § 2(by. See id. Therefore,
after lowa Utilities, § 2(b) still serves as (1) a rule of statutory
construction [FN43] requiring the FCC to find unambiguous
Statutory authority applying to intrastate matters and (2) a
jurisdictionalbarrier restricting the agency from using its
plenary authority to assert ancillary jurisdiction by “taking
intrastate action solely because it further[s] an interstate
goal." See Iowa Utilities, 119 S.Ct. at 73] (citing Louisiana
PSC, 476 U.S. at 374, 106 S.Ct. 1890).
FN43. Accord Louisiana PSC, 476 US. at 376 n. 5,
106 S.Ct. 1890 ("[Section] 152(b) not Only imposes
jurisdictional limits on the power of a federal agency,
but also, by stating that nothing in the Act shall be
construed to extend FCC jurisdiction to intrastate
Service, provides its own rule of statutory
construction.")
The question is whether § 254 does indeed “apply” to
intrastate matters in a sufficiently "unambiguous" manner.
Without such a finding, Iowa Utilities flatly holds that the
FCC cannot use its plenary authority to assert ancillary
jurisdiction.
Unfortunately, Iowa Utilities provides little guidance for
resolving the question whether § 254 applies to intrastate
services. For the Supreme Court, "the question ... is not
Whether the Federal Government *424 has taken the
regulation of local telecommunications competition away
from the States. With regard to the matters addressed by the
1996 Act, it unquestionably has." Iowa Utilities, 119 S.Ct. at
730 n. 6. The Court did not further explain why it felt §§ 25]
and 252 "unquestionably" applied to intrastate matters.
The FCC bases its contention that § 254 plainly applies to
ee |
Appendix 48
intrastate as well as interstate matters on § 254(b)(3),(c), and
(j). According to the agency, § 254(b)(3) applies to intrastate
service by stating that "low income consumers ... should have
access to telecommunications and information services,
including interexchange services and advanced
telecommunications and information services."
The use of the word "including," fhe FCC argues, indicates
that the object of § 254 is to provide access to more than just
interexchange services. Furthermore, § 254(c) instructs the
agency to consider, in the process of establishing what
constitutes universal service, whether such services "have ...
been subscribed to by a substantial majority of residential
customers." Finally, § 254(j) specifically preserves the
Lifeline Assistance program, which has always provided
subsidies for both intrastate and interstate services.
We have already discussed our reluctance to rely on the
aspirational language of § 254(b). [FN44] Moreover, the
phrase "including interexchange carriers" cannot be said
unambiguously to mean that § 254 applies to local services,
and § 254(c)'s mention of a “majority of residential
customers” is far from straightforward. Neither is there
much guidance from § 254(j), which specifically protects the
Lifeline Assistance program from being affected by any other
part of § 254 but does not in any way clarify to what degree §
254 applies to intrastate universal service.
FN44. See supra part [.A.3.
Instead, there is substantial support in the statute for a dual
regulatory structure in the administration of the universal
service program. Section 254(d) specifically instructs
interstate carriers to contribute to the FCC's universal service
mechanisms, while § 254(f) instructs intrastate carriers to
Appendix 49
contribute to the states’ individual universal service
mechanisms. This section contains the only discussion of
intrastate universal service mechanisms and directs intrastate
carriers to report to the states rather than to the FCC.
In light of Iowa Utilities and Louisiana PSC, therefore, we
conclude that, "while it is, no doubt, possible to find some
support in the broad language of the section for [the FCC's]
position, we do not find the meaning of the section so
unambiguous or straightforward as to override the command
of § 152(b)." Louisiana PSC, 476 U.S. at 377, 106 S.Ct.
1890. Unlike §§ 251 and 252, which were solely concerned
with intrastate issues (i.e., interconnection of new entrants
into the local telephone market), § 254 applies to both
interstate and intrastate services. It does so, however, only to
the extent that-it gives exclusive authority over intrastate
contributions to the state commissions. We find it
incongruous to use this explicit limitation on FCC authority
as the hook to provide it with jurisdiction.
Therefore, the FCC exceeded its jurisdiction when it
imposed the "no disconnect" rule. Because there is no
express grant of statutory authority, a proper showing of
“impossibility,” or a persuasive explanation of how § 254
applies to intrastate service, we reverse, for want of agency
jurisdiction, those portions of the Order implementing the "no
disconnect" rule.
4. RECOVERY OF _ UNIVERSAL SERVICE
CONTRIBUTIONS.
a. REQUIRING INCUMBENTS TO RECOVER
CONTRIBUTIONS THROUGH ACCESS CHARGES.
[28] GTE and the FCC again wrangle over the meaning of
"explicit" in their *425 dispute regarding the rule requiring
Appendix 50
most ILEC's to recover their universal service contributions
through access charges. GTE contends that the rule violates
§ 254(e)'s command that any support for universal service be
"explicit," because recovering contributions through
increased access charges is a form of implicit subsidy.
GTE argues that the rule unfairly disadvantages ILEC's
because, unlike their potential new competitors, they cannot
recover their universal service contributions through explicit
charges on their end-users, but, instead, are required by the
FCC to increase their access charges on long-distance service
providers. Though they do not necessarily lose out in terms
of amounts recovered, GTE fears that this recovery method
will put them at a competitive disadvantage because, instead
of than seeing the costs of universal service on his bill as an
explicit surcharge, an ILEC consumer will pay for the costs
of universal service through higher rates.
The FCC advances a different understanding of "explicit."
"Regardless of how carriers recover their contributions, the
FCC's universal service system ‘satisfies the statutory
requirement that support be explicit’ by requiring each.carrier
to contribute a specific percentage of its end user revenues"
(quoting Order J 854). As long as carriers know exactly how
much they are contributing to the support mechanisms, the
subsidies are explicit.
The statute provides little guidance on whether "explicit"
means “explicit to the consumer" (as urged by GTE) or
“explicit to the carrier" (as urged by the FCC). The statute
does state, how ever, that all universal service support should
be "explicit." We read "explicit" to mean the opposite of
"implicit." See § 254(e).
By forcing GTE to recover its universal service contributions
Appendix 51
from its access charges, the FCC's interpretation maintains an
implicit subsidy for ILEC’s such as GTE. In fact, requiring
carriers to recover their contributions from access charges on
interstate calls shifts the costs of intrastate universal service
to the interstate jurisdiction. These are precisely the sorts of
implicit subsidies currently used by the FCC in its DAM
weighting program. See Order ¥ 212 (discussing rules that
permit small LEC's to recover costs for intrastate services
from interstate access charges).
We are convinced that the plain language of § 254(e) does
not permit the FCC to maintain any implicit subsidies for
universal service support. Therefore, we will not afford the
FCC any Chevron step-two deference in light of this
unambiguous Congressional intent. Because the agency
continues to require implicit subsidies for ILEC's in violation
of a plain, direct statutory command, we reverse its decision
to require ILEC's to recover universal service contributions
from their interstate access charges.
b. REQUIRING INTERSTATE CARRIERS TO REDUCE
INTERSTATE ACCESS CHARGES BY THE
AMOUNT OF FEDERAL HIGH-COST SUPPORT THEY
RECEIVE UNDER THE NEW UNIVERSAL
SERVICE SYSTEM.
[29] The states contest an aspect of the Order's effect on
interstate access charges, arguing that the requirement that
carriers reduce their interstate access charges by the amount
of direct federal high-cost support they receive will leave
insufficient funds for intrastate universal service. The states
make two unconvincing plain-language arguments. _ First,
they point to § 254(b)(5)'s language about "specific,
predictable and sufficient" mechanisms to "preserve and
advance universal service." As we have observed, § 254(b)
Appendix 52
identifies a set of principles and does not lay out any specific
- commands for the FCC. Even § 254(e), which is framed as a
direct, statutory command, is ambiguous as to what
constitutes "sufficient" support. Therefore, we do not
consider the language an expression of Congress's
"unambiguous intent" allowing Chevron step-one *426
review, and we review its interpretation for reasonability
under Chevron step-two.
The states argue that § 254(e) does not permit the application
of federal universal service funds for the interstate
jurisdiction. In essence, they seek to preserve state universal
service support by reading the statute ‘to require all high-cost
support to remain intrastate. Though this might make
compelling policy, nothing in the plain language of § 254(e)
[FN45] unequivocally establishes the states’ right to all of the
federal universal support funds. The statutory language is at
best ambiguous as to Congress's intent, which, under
Chevron step-two, leaves it to the FCC's reasonable
interpretation.
FN45. "A carrier that receives such support shall use
ta as support only
for the provision, maintenance, and upgrading
of facilities and services for which the support
is intended."
The FCC has offered good reason to believe that its new
explicit support through direct subsidies will replace the
amounts lost through the reduction of access charges. See
Report to Congress { 230. To be sure, the states and
intervenor NASUCA [FN46] make a plausible argument that
ILEC's will receive less under the new plan than they did
through implicit subsidies. As we have determined,
however, because the FCC has offered reasonable
Appendix 53
explanations of why it thinks the funds will still be
"sufficient" to support high-cost areas, we defer to the
agency's judgment of what is "sufficient."
FN46. National Association of State Utility Consumer
Advocates.
Under the agency's new universal service plan, it is possible
that the states will receive less support for intrastate universal
service costs than they did under the old plan. While this
may seem unfair as a matter of policy, the states have failed
to show that the FCC's interpretation, which may possibly
result in a reduction of their level of support, is “arbitrary,
capricious, or manifestly contrary to the statute." Chevron,
467 U.S. at 844, 104 S.Ct. 2778. ,
5. CONTRIBUTIONS.
a. REQUIRING CMRS CARRIERS TO CONTRIBUTE TO
THE FEDERAL UNIVERSAL SERVICE
FUND. [FN47]
FN47. Intervenor American Cable Television
Association challenges the FCC for failing to meet the
requirements of the Regulatory Flexibility Act before
promulgating the Order. None of the petitioners
raises this argument, nor does the FCC respond to it,
and therefore we do not consider it. See discussion
of MCT's intervenor argument, infra part IIL.A.6.b.
Celpage Inc., a paging carrier, and intervenors representing a
number of wireless telecommunications companies (referred
to in general as commercial mobile radio service or "CMRS"
providers), challenge the FCC's decision to subject them to
the universal service support scheme. Celpage raises a
number of constitutional and statutory Challenges to the
Appendix 54
decision to require their contributions to the universal service
fund. Specifically, Celpage attacks the agency's universal
service contribution requirement as an unconstitutional tax, a
violation of equal protection, and an uncompensated taking.
Additionally, Celpage charges that the FCC's action violates §
254's plain language, is arbitrary and capricious, and does not
meet the agency's own principle of competitive neutrality.
i. CONSTITUTIONAL CHALLENGES.
(a). UNCONSTITUTIONAL TAX.
There are two ways in which the universal service
contribution requirement for paging carriers could constitute
an unconstitutional tax. First, the FCC's application of the
universal service requirement to paging carriers such as
Celpage might be an unconstitutional delegation of
Congress's exclusive taxing power under the Taxing Clause.
[FN48] Alternatively, because *427 the Act originated in the
Senate, [FN49] its requirement of universal service
contributions from paging carriers might violate the
Origination Clause's requirement that all "[b]ills for raising
[r]evenue originate in the House of Representatives" [FN50]
FN48. U.S. CONST., art. I, § 8, cl. 1 ("The
Congress shall have Power to lay and collect
Taxes....").
FN49. See Telecommunications Act of 1996, Pub.L.
No. 104-104, 110 Stat. 56 (1996) (enacting S. 652).
FNSO. U.S. CONST., art. I, § 7, cl. 1 ("All Bills for
Raising Revenue shall originate in the House of
Representatives.")
[30][31] Despite their similarities, the Taxing Clause and
Appendix 55
Origination Clause challenges to the universal service
contribution system represent separate lines of analysis.
[FN51] In its initial brief, however, Celpage raises only the
Origination Clause challenge and does not raise a Taxing
Clause claim until its reply brief. Therefore, we will not
consider it, [FN52] and we focus our efforts on Celpage's
claim that the universal service contribution requirement, as
applied to paging carriers, is a violation of the Origination
Clause. [FN53]
FN51. The Taxing Clause a
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