# Petition for Writ of Certiorari — Celpage, Inc. v. Federal Communications Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_0629%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 2000 - **Citation:** 530 U.S. 1210 ## Text \ 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, 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) (). * 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”) (). 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, (rel. Feb. 12, 1998). McCain Speech to U.S. Telephone Association, Press Release, (rel. Mar. 5, 1998) . 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 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, (May 27, 1999); Statement of Congressman John D. Dingell on FCC’s E-Rate Funding Proposal, (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) () ("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 e [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_0629%3A1. Public record. Not legal advice.