Opposition Brief — Celpage, Inc. v. Federal Communications Commission

Supreme Court, U.S.

FILED

—_ ce. "wan 29 9°09

Nos. 99-1072, 99-1244 and 99-1349

Jn the Supreme Court of the Ubkites States — |

CELPAGE, INC., ET AL., PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

GTE SERVICE CORPORATION, ET AL., PETITIONERS

Vv.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

AT&T CORPORATION, ET AL., PETITIONERS

VU.

CINCINNATI BELL TELEPHONE COMPANY, ET AL.

ON PETITIONS FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE

FEDERAL COMMUNICATIONS COMMISSION

IN OPPOSITION

SETH P. WAXMAN

Solicitor General

CHRISTOPHER J. WRIGHT Counsel of Record

General Counsel Department of Justice

JONATHAN E, NUECHTERLEIN Washington, D.C. 20530-0001

Deputy General Counsel (202) 514-2217

JOHN E. INGLE

Deputy Associate General

Counsei

LISA S. GELB

Counsel

Federal Communications.

Commission

Washington, D.C. 20554

QUESTIONS PRESENTED

1. Whether the universal-service provisions of 47

U.S.C. 254 (Supp. III 1997) violate the Taxing Clause or

the Origination Clause or are void for vagueness.

2. Whether the Federal Communications Com-

mission (FCC) reasonably determined that, under 47

U.S.C. 254(f) and 332(c)(3)(A) (Supp. III 1997), pro-

viders of commercial mobile radio services must contri-

bute to state universal-service subsidies.

3. Whether the FCC may, consistent with the

Takings Clause, adopt a forward-looking cost methodol-

ogy to determine the proper level of federal universal-

service subsidies.

4. Whether the FCC has statutory jurisdiction to

consider a telecommunications carrier’s intrastate reve-

nues, as well as its interstate revenues, to determine

the carrier’s contribution to the federal universal-

service program for schools, libraries, and rural health-

care facilities.

(I)

——

TABLE OF CONTENTS

Page

supe cp cerca A I OL TE RTT ]

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TABLE OF AUTHORITIES

Cases:

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366

SUNNY ‘sivralelinepsinesibeie tebe sibinlacessllennokensaioibaniseiaprcseaieussccstus. 7

Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970) .......... 14

Brooks-Scanlon Co. v. Railroad Comm ‘n, 251 USS.

RY titer etitinieacaniesonedpiairrbesenckancesicccestpsiccasc sc. 13, 25

Cellular Telecomms. Indus. Ass’n v. FCC. 168 F.3d

NE Ire SI MONI ac cindncessasnnisssasstnnsniniorsoeeeacatecsootaccce, 19, 20

Chevron U.S.A. Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984) 0.0.0... 12,19

Dane v. Jackson, 256 U.S. 589 (1921) cocccccccccccsseeeeeeecccc 17

Delta Air Lines, Inc. v. August, 450 U.S. 346

ED isle ila il bdecisecsctencidasiepadettscinsindh side dean dsssaticos. cco ca 14

Duquesne Light Co. v. Barasch, 488 U.S. 299

cee gasped PAO Oe 12, 13, 21, 22, 23. 24

Edye v. Robertson (Head Money Cases), 112 US.

casa as SD ONT 17

FPC v. Hope Natural Gas Co., 320 U.S. 591

i IS OS A OE 21-22, 24, 25-26

GTE South, Inc. v. Morrison, 6 F. Supp. 2d 517

(E.D. Va. 1998), aff’d on other grounds, 199 F.3d

MCN, SOMO scilerictsseiacscabiciiaiucaccnescin didssi2arecse: 26

lowa Utils. Bd. v. FCC, 120 F305 th Cir.

Loa: et AE RES 7, 26, 27, 28

Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355

SIMD WiRtOh Lcttashcabar dante oieanicuibainicsltcnhinctudemtianics dectaas ccs. 2

Market St. Ry. v. Railroad Comm’n, 324 U.S. 548

NTI his eecanesthis DbanecapinsttaniecessssishasonticacisSoseheadee sick caus. 2, 23

IV

Cases—Continued: Page

Mistretta v. United States, 488 U.S. 361 (1989) .....0.0000... 16

Mobil Oil Exploration & Producing S.E., Inc.

v. United Distrib. Cos., 498 U.S. 211 (1991) ........... 12-13, 23

NEPCO Mun. Rate Comm. v. FERC, 668 F.2d

SF CEs TEED seccreiesnsicsesseasieninaitnsivtiviontondaiiaing jussaiuianenions 24

National Cable Television Ass’n v. United States,

EE TE OOD cchsigneins cisohnsteniusciesnsitatnhieipncipsuitiiegsitiiniien 17

Pennsylvania Dep’t of Corrections v. Yeskey,

Ee te SE. secs tancitecaiccinciestindaesneininiesspieetcinseaeaaicic 14

Skinner v. Mid-America Pipeline Co., 490 U.S.

Ee ecincentcnicirnssganinitcin Mindapinittiblisinsaciaeammnianicepiaicimionn 15,17

Smith v. Illinois Bell Tel. Co., 282 U.S. 133 (1930) ......... 2

Smyth v. Ames, 169 U.S. 466 (1898) .........0r.cecccsescosssesssesees 23

Southwestern Bell Tel. Co. v. AT&T Communica-

tions of the Southwest, No. A97T-CA-13255, 1998

WL 657717 (W.D. Tex. Aug. 31, 1998) ...........cccccccrscscsseses 26

Sprint Spectrum v. State Corp. Comm’n, 149 F.3d

BO COIs GC, TID es sceetisssinihttcascntctienibiancetnnensccsrencisimnsimisenisn 19

Thomas v. Network Solutions, Inc., 176 F.3d

Ca, Cir. TDD: coicnisnsesestnnnsnnencssontiseninminssoninmniarnieinicntanne 17

United States v. Munoz-Flores, 495 U.S. 385

CRI sine xidnsessniitbdniinbiciigiiniatanseeeciancaelaniimiataannnisiatalnsonin 11, 15, 16, 17

United States v. Riverside Bayview Homes, Inc.,

PE ELT, Fie VE, tiie itinserns eebicihinneinnndainateasinine 21

United States v. United States Shoe Corp.,

a RE CG isienetaiinet issiensenceniaiianiatoniinaiisitisicnisaiinaiiioen 17

Valuation Proceedings Under §§ 303(c) and 306 of the

Regional Rail Reorganization Act, In re, 439 F. Supp.

BOE CIOS, CA, TIRED sessescsnsisccnacesinseniiiesiannasnineiiaamtasensiaaianias 24-25

Constitution and statutes:

U.S. Const.:

Art. I:

§ 7, Cl. 1 (Origination Clause) .......... cesses 11, 15, 16, 17

DCD Siistchessecacetnnencecstaincesincienscintnioninn 14, 15, 18

Amend. V (Takings Clause) ..........ccccceseeeeee 13, 17, 20, 26, 27

Statutes—Continued: Page

Communications Act of 1934, 47 U.S.C. 151 et seq.:

a TE ies THEW iccasidecctenens snaassienadaddaeeatea 2,3

EE Sis Be aatensetiensinscieisdstciecieh tee beaintaa Matacaiinahadicaceadlaai tind 2

SS Ue Pee iisesiniidnsibicbaminiaiaaes 13, 14, 22, 29

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Ee Seen UE Seciiniehtesdaasatieaacaalidintendieeniaige taeda an 4, 26

SE RF: SO wicstinincaci lcs teasintaieibiaicachastaliiiaialadontags 4

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GE SE ai Se ithshsdessiahtabsldlaatisindagiactbaaiasialanatiedi acaba 6, 27

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EE REE Te stnicicssceitececcdleeacacetetleeaicon Iaiciaigiiaienaate 27

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BE Cain BD sniesnceienisisseninacdaistcecieeitnini ie emote 5

GE TEs SD sicisndinecinseptecinciitntntscndineadiemianen 12, 20, 27

BE | WE BIO sissccccnssistcsrscanninstnstntensatctncieatinmiaaladammabiaidects 5

Gr EEDA, Fe wiceeinintisnssnceencccnsicacineiictisiagaaedalaniiiicmane 5

BE UE BED assciccecnsnsrcineicnesiinisiaen 8, 11, 12, 18, 19, 20

SE - SIRs, BOD casicsssinstnasiearittnniniviteniativanstanaiiaetiaaniania 5

Telecommunications Act of 1996, Pub. L. No. 104-104,

Be Ses TO ccsstiniinshtcchinsinincetimceeniielainitanlcntmedidh denial et CRs 4

VI

Miscellaneous: Page

Federal-State Jount Bd. on Universal Serv., In re:

12 F.C.C.R. 8776 (1997) ..........0+000 7, 8, 9, 10, 14, 21, 22, 24, 25

SF 0.G.B.. SERRE CIES) cntncsnvenigmnianinan 10

ec Docket No. 96-45, FCC 99-306 (adopted Oct. 21,

1999), appeal pending sub nom. U.S. West v. FCC,

No. 99-9546 (10th Cir. filed Dec. 10, 1999) oo. 10

ee Docket No. 96-45, FCC 99-304 (adopted Oct. 21, 1999),

appeal pending sub nom. U.S. West v. FCC, No. 99-

9547 (10th Cir. filed Dec. 10, 1998) ...............cscssssssssseseeseaes 10

Implementation of Local Competition Provisions in

the Telecomms. Act of 1996, In re, 11 F.C.C.R.

RE GGD CEIDG) avissarinievsssssnsisniinnnscnhssitisinansslaninainiiilaesiamsaiaiiaatibie 6,7

In the Supreme Court of the Gnited States

No. 99-1072

CELPAGE, INC., ET AL., PETITIONERS

Vv.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

No. 99-1244

GTE SERVICE CORPORATION, ET AL., PETITIONERS

Vv.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

No. 99-1249

AT&T CORPORATION, ET AL., PETITIONERS

Vv.

CINCINNATI BELL TELEPHONE COMPANY, ET AL.

ON PETITIONS FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE

FEDERAL COMMUNICATIONS COMMISSION

IN OPPOSITION

OPINIONS BELOW

The decision of the court of appeals (AT&T Pet. App.

la-115a; Celpage Pet. App. 1-110; GTE Pet. App. la-

98a) is reported at 183 F.3d 393. The Order of the

Federal Communications Commission (excerpted in

(1)

eae

AT&T App. 119a-249a; GTE App. 99a-150a) is reported

at 12 F.C.C.R. 8776.

JURISDICTION

The judgment of the court of appeals was entered on

July 30, 1999. Petitions for rehearing were denied on

September 28, 1999 (AT&T Pet. App. 116a-118a). Cel-

page filed a petition for a writ of certiorari on

December 23, 1999. AT&T and GTE filed petitions for

a writ of certiorari on January 26, 2000. The juris-

diction of this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

1. a. Under the Communications Act of 1934 (1934

Act), 47 U.S.C. 151 et seq., as originally enacted, in-

dividual States generally regulated the rates and terms

of local telephone service and the Federal Communi-

cations Commission (FCC) generally regulated the

rates and terms of interstate long-distance service. 47

U.S.C. 152, 201; see Lowisiana Pub. Serv. Comm’n v.

FCC, 476 U.S. 355, 360 (1986). Initially, most of the

rates set by the States and the FCC entitled local tele-

phone companies, known as “local exchange carriers” or

“LECs,” to a reasonable rate of return based on pru-

dently incurred historical costs.

Many components of the telephone network are used

to provide both local and long-distance service. The

costs associated with each component have traditionally

been allocated between the interstate domain and the

intrastate domain and recovered through rates set by

the appropriate regulatory authority. Smith v. Illinois

Bell Tel. Co., 282 U.S. 133 (1930); 47 U.S.C. 221(c). That

allocation is known as the “separations” process. Costs

allocated to the interstate domain are generally re-

covered by local exchange carriers through access

charges imposed on long-distance carriers for the use of

3

the local network. Costs allocated to the intrastate

domain are generally recovered through the rates that

consumers pay for local service.

b. The 1934 Act required the FCC to regulate inter-

state communications “so as 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 communications service with adequate facilities at

reasonable charges.” 47 U.S.C. 151 (1994 & Supp. III

1997). Without some type of direct or indirect financial

assistance, some Americans could not afford telephone

service. For people living in rural or isolated areas, for

example, the cost of telephone service could be pro-

hibitively high, because of the greater expense of

installing telephone lines and the reduced economies of

scale. Moreover, people with low incomes, regardless of

where they live, might not be able to afford telephone

service.

The FCC and the States established a variety of sub-

sidy mechanisms to ensure affordable telephone service

for all Americans, 7.e., “universal service.” For ex-

ample, the FCC modified the separations process for

the smallest local exchange carriers (those with fewer

than 50,000 lines) by allocating a greater-than-usual

portion of traffic-sensitive switching costs to the inter-

state domain. That modification, by shifting more of

those shared costs from local customers to long-

distance customers, subsidized local rates. Other

federal universal-service subsidies include the “Link-

Up” and “Lifeline” programs, which reduce initial con-

nection charges and monthly basic local service fees for

low-income customers. See FCC C.A. Br. 9-13.

- Many States, in turn, have required local exchange

carriers to charge the same rate for service throughout

their service areas, even though some parts of each

area may be more costly to serve than other parts.

Such “geographic averaging” creates a subsidy from

customers in low-cost areas to customers in high-cost

areas. In addition, many States have set business rates

at higher levels than residential rates, even though the

cost of providing service to business and residential

customers may be the same. Some States also have ex-

plicit subsidy programs to achieve universal service.

See FCC C.A. Br. 11-12 & n.8.

The patchwork of implicit and explicit federal and

state subsidies worked well, in the era of monopoly local

telephone service, to ensure that affordable telephone

service was available to virtually everyone. But that

era was tocometoanend. .

2. The Telecommunications Act of 1996 (1996 Act),

Pub. L. No. 104-104, 110 Stat. 56, fundamentally

changed the regulation of teleecommunications. In the

core “local competition” provisions of the 1996 Act,

Congress established requirements and procedures

designed to open local telephone markets to full com-

petition. 47 U.S.C. 251, 252.’ In particular, incumbent

local exchange carriers were required to interconnect

their networks with those of competing providers and

to lease their network elements to those competing

providers at nondiscriminatory cost-based rates. See

47 U.S.C. 251(¢)(2) and (3), 252(d)(1).

Congress anticipated that such competition would

cause the retail rates for local telephone service to

move toward the carriers’ forward-looking costs. Con-

gress also anticipated that such a process would erode

the implicit subsidies supporting universal service. For

example, competition for customers who can be served

1 Citations in this brief of provisions of the 1996 Act are to

Supplement III 1997.

5

at low cost—e.g., customers in high-density areas—

could be expected to reduce those customers’ rates to

close to cost. As a consequence, the implicit subsidies

from those customers to customers in high-cost areas

could be expected to diminish.

Congress addressed such concerns in 47 U.S.C. 254,

titled “Universal service,” which was designed to pre-

serve and advance universal service in a competitive

environment. Section 254 codified the FCC’s policy of

providing federal universal-service support for low-

income consumers and consumers in high-cost areas. 47

U.S.C. 254(b)(3), (e) and (j). Section 254 also created a

new program to provide discounted telecommunications

and information services to schools, libraries, and rural

health-care facilities. 47 U.S.C. 254(b)(6) and (h).

Congress directed that a Federal-State Joint Board

be established, pursuant to 47 U.S.C. 410(c), to recom-

mend changes to the FCC in federal universal-service

policies. 47 U.S.C. 254(a)(1). The FCC, in turn, was dir-

ected to promulgate universal-service rules, “includ-

[ing] a definition of the services that are supported by

Federal universal service support mechanisms and a

specific timetable for implementation,” by May 1997. 47

U.S.C. 254(a)(2).

Congress set forth several “principles” to guide the

FCC and the Joint Board in that process. First, Con-

gress stated that “[q]uality services should be available

at just, reasonable, and affordable rates.” 47 U.S.C.

254(b)(1). Second, Congress stated that “[a]ecess to

advanced telecommunications and information services ~

should be provided in all regions of the nation.” 47

U.S.C. 254(b)(2). Third, Congress stated that “[cJon-

sumers in all regions of the Nation, including low-

income consumers and those in rural, insular, and high

cost areas,” should have access to telecommunications

6

and information services that are “reasonably com-

parable to those services provided in urban areas” and

“at rates that are reasonably comparable” to those in

urban areas. 47 U.S.C. 254(b)(3). Fourth, Congress

stated that “laJll providers of telecommunications

services should make an equitable and nondiscri-

minatory contribution to the preservation and advance-

ment of universal service.” 47 U.S.C. 254(b)(4). Fifth,

Congress stated that “[t]here should be specific, pre-

dictable and sufficient Federal and State mechanisms to

preserve and advance universal service.” 47 U.S.C.

254(b)(5). And, finally, Congress stated that schools,

libraries, and rural health-care facilities “should have

access to advanced telecommunications services.” 47

U.S.C. 254(b)(6).

3. In August 1996, the FCC adopted rules imple-

menting the local-competition provisions of the 1996

Act. In re Implementation of Local Competition Pro-

visions in the Telecomms. Act of 1996, 11 F.C.C.R.

15,499 (1996). Among other things, the FCC estab-

lished a pricing methodology, based on forward-looking

economic costs, that state public utility commissions are

to use in determining the prices that an incumbent local

exchange carrier may charge competitors to lease the

incumbent’s network elements or to interconnect with

the incumbent’s network. The prices set under that

methodology reflect the incumbent’s long-run economic

cost of providing network elements, assuming that the

incumbent acts rationally to provide service in an

efficient manner; those prices also reflect a reasonable

share of the incumbent’s joint and common costs, an

economic rate of depreciation that reflects the true

changes in economic value of an asset, and a reasonable

return on investment that reflects the risks incurred by

investors, including the risks of increased competition.

7

See id. at 15,848-15,849, 15,851-15,854, 15,856. The FCC

explained that a pricing methodology based on forward-

looking costs, which approximates prices in a

competitive market, would encourage efficient

competitive entry into traditionally monopolistic

markets. Jd. at 15,844.

The Eighth Circuit invalidated the FCC’s pricing

rules (along with certain other rules) on the ground that

the 1996 Act gives state public utility commissions, not

the FCC, general jurisdiction to interpret the pricing

provisions of Sections 251 and 252. Jowa Utils. Bd. v.

FCC, 120 F.3d 753, 794-800 (8th Cir. 1997). This Court,

however, reversed the Eighth Circuit’s jurisdictional

ruling, holding that the FCC has statutory authority to

establish pricing standards. AT&T Corp. v. Iowa Utils.

Bd., 525 U.S. 366, 376-385 (1999). The Court remanded

the case to the Eighth Circuit to address (among other

things) the substantive validity of the FCC’s pricing

methodology based on forward-looking costs. /d. at

397. Those remand proceedings are pending.

4. In May 1997, the FCC released its initial order

concerning implementation of the universal-service

provisions of Section 254. See In re Federal-State Joint

Bd. on Universal Service, 12 F.C.C.R. 8776 (1997)

(Universal Service Order). The rules adopted in the

Universal Service Order, which generally reflect the

recommendations of the Federal-State Joint Board,

address federal universal-service pregrams for low-

income customers, for customers in high-cost areas

(e.g., rural or isolated areas), and for schools, libraries,

and rural health-care facilities.

a. The FCC adopted rules regarding who must

contribute to universal service, who may receive

universal-service support, and which services are elig-

ible for support. The FCC required all telecommuni-

8

cations carriers (as well as certain other providers

of telecommunications services) to contribute to

universai-service support in proportion to their share

of end-user telecommunications revenues. Universal

Service Order, 12 F.C.C.R. at 8797-8798 (AT&T Pet.

App. 158a). The FCC rejected arguments that certain

carriers, such as paging: providers, should be exempted

from the contribution requirement or permitted to

make reduced contributions. /d. at 9188-9189. The

FCC also rejected arguments that the federal preemp-

tion provisions of 47 U.S.C. 332(¢c)(3)(A) preclude States

from requiring universal-service contributions from

providers of commercial mobile radio services. 12

F.C.C.R. at 9181.

The FCC determined that federal universal-service

subsidies would be available for telecommunications

services, internal connections, and Internet access pro-

vided to eligible schools, libraries, and rural health-care

facilities. Universal Service Order, 12 F.C.C.R. at 8794

(AT&T Pet. App. 152a). The FCC concluded that only

telecommunications carriers could receive federal sub-

sidies for providing telecommunications services to

such entities. The FCC also concluded, however,

that the 1996 Act did not prohibit, and public policy

interests favored, permitting any provider, including a

non-telecommunications carrier, to receive federal sub-

sidies for providing internal connections or Internet

access to such entities. Jd. at 9086-9089.

b. The FCC determined that it had jurisdiction to

calculate a carrier’s federal universal-service contribu-

tions based on both its interstate (including inter-

national) revenues and its intrastate revenues. Uni-

versal Service Order, 12 F.C.C.R. at 9192- 9197 (AT&T

Pet. App. 210a-221la). The FCC then decided that

carriers’ contributions to the universal-service program

i)

for schools, libraries, and rural health-care providers

should be assessed based on their intrastate as well as

interstate revenues. The FCC reasoned that, because

the States did not have programs to subsidize service to

those entities, carriers could be required to contribute

to the federal program based on their total revenues.

Id. at 9203 (AT&T Pet. App. 231a-232a). In contrast,

the FCC decided to determine carriers’ contributions to

the universal-service programs for low-income con-

sumers and consumers in high-cost areas based solely

on interstate revenues. Jd. at 9200 (AT&T Pet. App.

226a).

The FCC separately decided, however, that carriers

could recover their universal-service contributions for

schools, libraries, and rural health-care providers only

through their rates for interstate services. Universal

Service Order, 12 F.C.C.R. at 9199 (AT&T Pet. App.

224a). The FCC explained that otherwise “carriers

would recover the portion of their intrastate contri-

butions attributable to intrastate services through

increases in rates for basic residential dialtone service.”

Id. at 9203 (AT&T Pet. App. 232a).

ce. The FCC determined that the amount of federal

universal-service support for carriers providing service

to high-cost areas should be based, in part, on the

forward-looking economic costs of providing such

service. Universal Service Order, 12 F.C.C.R. at 8899.

The FCC explained that a methodology based on

forward-looking costs would “send the correct signals

for entry, investment, and innovation” and would there-

by encourage efficient competitive market entry. Jbid.

The FCC stated that forward-looking costs could be

determined, at the State’s election, based either on

“state-conducted forward-looking economic cost studies

approved by the Commission” or on “cost models devel-

10

oped by the Commission, in consultation with the Joint

Board.” [bid.

The FCC stated that rural carriers serving high-cost

areas would continue to receive federal universal-

service support under the existing mechanisms until

the FCC, working with the Joint Board, had an op-

portunity to develop a model that could reliably reflect

such carriers’ forward-looking costs. Universal Service

Order, 12 F.C.C.R. at 8792-8793 (AT&T Pet. App. 148a-

149a), 8935. The FCC noted that the various models

that had been submitted for its consideration were not

yet capable of doing so. Id. at 8909- 8910.

After the issuance of the Universal Service Order,

the FCC implemented a multi-phase process to develop

a model based on forward-looking costs to determine

the amount of federal universal-service support for non-

rural carriers serving high-cost areas. See In re

Federal-State Joint Bd. on Universal Service, 12

F.C.C.R. 18,514 (1997) (Further Notice of Proposed

Rulemaking). That process was completed in Novem-

ber 1999. See In re Federal-State Joint Bd. on Uni-

versal Service, CC Docket No. 96-45, FCC 99-306

(adopted Oct. 21, 1999) (Ninth Report and Order),

appeal pending sub nom. U.S. West v. FCC, No. 99-9546

(10th Cir. filed Dec. 10, 1999); Jn re Federal-State Joint

Bd. on Universal Service, CC Docket No. 96-45, FCC

99-304 (adopted Oct. 21, 1999) (Tenth Report and

Order), appeal pending sub nom. U.S West v. FCC, No.

99-9547 (10th Cir. filed Dec. 10, 1999).

4. A number of parties challenged the Universal

Service Order. Those challenges were consolidated in

the Fifth Circuit, which affirmed in part and reversed

1]

in part. GTE Pet. App. 1a-98a.° We discuss only those

portions of the court’s opinion that are challenged in the

petitions for certiorari.

a. The court of appeals rejected Celpage’s claim that

Section 254, as applied to paging providers, violates the

Origination Clause, U.S. Const. Art. I, § 7, Cl. 1, which

requires that “[aJll Bills for raising Revenue shall

originate in the House of Representatives.” GTE Pet.

App. 50a-52a. The court concluded that Section 254 is

not a “Bill{] for raising Revenue,” under the standard

articulated in United States v. Munoz-Flores, 495 U.S.

385, 398 (1990). The court explained that “universal

service contributions are part of a particular program

supporting the expansion of, and increased access to,

the public institutional telecommunications network”—

a program from which “[eJach paging carrier directly

benefits” through the creation of “a larger and larger

network.” GTE Pet. App. 5la. The court reasoned

that the design of the universal-service program, which

“exact[s] payments from those companies benefiting

from the provision of universal service,” prevents those

payments from being classified as “revenue” within the

meaning of the Origination Clause. [bid.

The court of appeals observed that Celpage had not

raised a Taxing Clause claim in its initial brief. “There-

fore,” said the court, “we will not consider it.” GTE

Pet. App. 49a-50a.

The court of appeals also rejected Celpage’s conten-

tion that the States’ authority to assess universal-

service contributions from providers of commercial

mobile radio services (CMRS) is preempted by 47

U.S.C. 332(¢c)(3)(A), which states, in pertinent part, that

¢ All citations of the Fifth Circuit’s opinion will be to GTE’s

Appendix.

12

“no State or local government shall have any authority

to regulate the entry of or the rates charged by any

commercial mobile service * * * except that this

paragraph shall not prohibit a State from regulating the

other terms and conditions of commercial mobile

services.” GTE Pet. App. 57a-62a. The court held that

Section 332(¢c)(8)(A) bars States only from regulating

the rates and entry of CMRS providers, not from re-

quiring CMRS providers to contribute to state

universal-service programs. GTE Pet. App. 60a-6la.

The court explained that such a construction of Section

332(c)(3)(A) gives full effect to Section 254(f), which

authorizes States to require universal-service contri-

butions from “[e]very telecommunications carrier that

provides intrastate telecommunications services.” GTE

Pet. App. 61a.

b. The court of appeals generally affirmed the FCC’s

determinations regarding federal universal-service

support for carriers serving high-cost areas. The court,

applying the methodology of Chevron U.S.A. Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837,

842-845 (1984), determined that Section 254 is ambigu-

ous as to whether the FCC may calculate such support

based on carriers’ forward-looking costs. The court

concluded that the FCC’s decision to use such a meth-

odology was reasonable and, consequently, was per-

missible under Chevron. GTE Pet. App. 15a-17a. The

court noted that this Court has consistently refused

to foreclose ratemaking alternatives that could benefit

consumers and investors, id. at 15a n.12 (quoting

Duquesne Light Co. v. Barasch, 488 U.S. 299, 316

(1989))—and, indeed, that the Court has upheld the use

of similar cost models that were not based on historical

costs, ibid. (citing Mobil Oil Exploration & Producing

13

S.E., Inc. v. United Distrib. Cos., 498 U.S. 211, 224-225

n.5 (1991)).

The court of appeals rejected GTE’s contention that

the FCC’s decision to use a methodology based on

forward-looking costs violated the Takings Clause. The

court explained that, under Duquesne Light, a party

cannot successfully attack a cost methodology without

showing that the methodology will produce an un-

reasonable rate. The court found that GTE had

failed to make such a showing. GTE Pet. App. 19a

n.14. Distinguishing Brooks-Scanlon Co. v. Railroad

Comm'n, 251 U.S. 396 (1920), the court observed that

the FCC is not “requiring the [incumbent local ex-

change carriers] to remain open or to charge low rates.”

GTE Pet. App. 19a n.14.

c. Finally, the court of appeals held that the FCC

lacked statutory jurisdiction to calculate carriers’

universal-service contributions based on their intra-

state revenues as well as their interstate revenues.

GTE Pet. App. 92a-94a. The court stated that the

FCC’s exercise of such jurisdiction violated the “broad

language” of Section 2(b) of the 1934 Act, 47 U.S.C.

152(b), which provides that, with certain exceptions,

“nothing in this [Act] shall be construed to apply or to

give the Commission jurisdiction with respect to * * *

charges, classifications, practices, services, facilities, or

regulations for or in connection with intrastate com-

munication service.” GTE Pet. App. 92a-93a. The court

concluded that “the inclusion of intrastate revenues in

the calculation of universal service contributions easily

constitutes a ‘charge . . . in connection with intrastate

communication service’” within the meaning of that

statute. Jd. at 98a. The court further concluded that

Section 254 was not a sufficiently unambiguous grant of

14

authority to the FCC to regulate intrastate matters to

overcome Section 152(b). bid.

ARGUMENT

The claims raised by petitioners Celpage (in No. 99-

1072) and GTE (in No. 99-1244) are without merit. We

agree with petitioner AT&T (in No. 99-1249) that the

court of appeals erred in prohibiting the FCC from

including carriers’ intrastate revenues in the assess-

ment base for the federal universal-service programs

for schools, libraries, and rural health-care facilities.

But we did not ourselves seek certiorari because, on

balance, we concluded that the court’s decision on that

issue is not so significant as to warrant this Court’s

review. We adhere to that judgment now. We there-

fore urge that all three petitions be denied.

1. a. Celpage principally contends (Pet. 12-21) that

47 U.S.C. 254, the universal-service provision of the

1996 Act, and the FCC’s Universal Service Order vio-

late the Taxing Clause, U.S. Const. Art I, § 8, because |

the universal-service assessments are a “tax” that may |

be imposed only by Congress, and not by the FCC. The

court of appeals declined to reach that claim, however,

because Celpage did not raise the claim in a timely

manner. See GTE Pet. App. 49a-50a (“Celpage * * *

does not raise a Taxing Clause claim until its reply

brief. Therefore, we will not consider it.”). The claim is

therefore unsuited for the Court’s consideration. See

Pennsylvania Dep't of Corrections v. Yeskey, 524 U.S.

206, 212-213 (1998); Delta Air Lines, Inc. v. August, 450 |

U.S. 346, 362 (1981); Adickes v. S.H. Kress & Co., 398 |

U.S. 144, 147 n.2 (1970).* :

|

3. The court of appeals did not, as Celpage suggests (Pet. 12

n.15), excuse Celpage’s failure to raise a timely Taxing Clause

claim. The court merely observed in a footnote that, “[e]ven if

—————S —”~—O

15

In any event, Celpage’s Taxing Clause claim, even if

properly presented, would not warrant review for two

reasons. First, the universal-service assessments are

not a tax, but a fee paid by members of the tele-

communications industry to assure the availability of

“[q]uality services” at “just, reasonable, and affordable

rates” in “all regions of the Nation.” 47 U.S.C. 254(b)(1)

and (2). See United States v. Munoz-Flores, 495 U.S.

385, 399 (1990) (distinguishing, for Origination Clause

purposes, between a tax provision and a “special assess-

ment provision [that] was passed as part of a particular

program to provide money for that program”). The

Taxing Clause thus is not implicated here. |

Second, even if the universal-service assessments

could be categorized as a “tax,” this Court has recog-

nized that Congress may “delegate discretionary

authority under its taxing power” to federal agencies.

Skinner v. Mid-America Pipeline Co., 490 U.S. 212, 221

(1989). Such delegations are “subject to no consti-

tutional scrutiny greater than that * * * applied to

other nondelegation challenges.” Jd. at 223. Section

254 does not contravene ordinary non-delegation prin-

ciples, because Congress did not leave the FCC without

any “intelligible guidelines for [the universal-service]

assessments.” Id. at 224. In Section 254(b), Congress

established a set of “universal service principles” to be

applied by the FCC and the Joint Board. And, in

Section 254(d), Congress made clear that “[e]very tele-

communications carrier that provides interstate tele-

communications services shall contribute, on an

equitable and non-discriminatory basis, to the specific,

predictable, and sufficient mechanisms established by

Ceipage’s Taxing Clause argument were properly before us,” the

argument would lack merit. GTE Pet. App. 49a-50a n.52.

16

the Commission to preserve and advance universal

service.” See generally Mistretta v. United States, 488

U.S. 361, 378 (1989) (noting that this Court has upheld

“without deviation” since 1935 “Congress’ ability to

delegate power under broad standards”).

b. Celpage also contends (Pet. 19, 21) that Section

254 violates the Origination Clause, U.S. Const. Art. 1,

$7, Cl. 1, because the 1996 Act originated in the Senate,

not the House of Representatives. As this Court has

explained, however, “a statute that creates a particular

governmental program and that raises revenue to

support that program, as opposed to a statute that

raises revenue to support Government generally, is not

a ‘Billl] for raising Revenue’ within the meaning of

the Origination Clause.” Munoz-Flores, 495 U.S. at

398. That is so even where the “assessments are not

collected for the benefit of the payors” because “the

beneficiaries of the bill are not relevant.” Jd. at 400.

Celpage nonetheless insists that an assessment must

be considered the product of a “revenue bill” if no close

relationship exists between the payors and benefi-

ciaries. The court of appeals, which accepted Celpage’s

argument on that point (see GTE Pet. App. 52a n.56),

found that such a relationship exists here. As the court

explained, “Congress designed the universal service

scheme to exact payments from those companies bene-

fiting from the provision of universal service.” /d. at

dla. Celpage and other paging carriers, as entities

engaged in the business of providing telecommuni-

cations services, “directly benefit[] from [the] larger

and larger network” that is created, in part, as a result

of the universal-service program. /bid.*

* The court of appeals’ rejection of the Origination Clause

claim is not, as Celpage asserts (Pet. 18-19, 21), inconsistent with

£

17

Contrary to Celpage’s suggestion, the mere fact that

universal-service contributions are reflected in the

federal budget does not mean that the contributions

derive from a “Bill[] for raising Revenue.” As the court

of appeals observed, the relevant issue is not the nature

of the government’s “accounting designations,” but

“whether the funds are ‘part of a particular program to

provide money for that program.’” GTE Pet. App. 50a-

dla (quoting Munoz-Flores, 495 U.S. at 399): see also

Edye v. Robertson (Head Money Cases), 112 U.S. 580,

996 (1884). The universal-service contributions are part

of such a program and, consequently, do not implicate

the Origination Clause.

any decision of this Court. In National Cable Telemsion Ass'n v.

United States, 415 U.S. 336 (1974), a statute expressly required the

FCC to determine fees based, in part, on “the value to the reci-

pient.” Jd. at 340. Section 254, in contrast, does not require the

FCC to base a carrier's contributions to the universal-service pro-

gram on the value of the benefits that the carrier receives from the

program. Cf. Skinner, 490 U.S. at 224 (rejecting a broader

constitutional reading of National Cable Television). In Dane v.

Jackson, 256 U.S. 589 (1921), the Court did not distinguish be-

tween user fees and taxes, but instead considered whether a

State’s method of distributing income-tax collections violated the

Takings Clause, which Celpage has not invoked. In United States

v. United States Shoe Corp., 523 U.S. 360 (1998), the Court con-

fined its holding to the special considerations raised by the Export

Clause. The Court distinguished, and left undisturbed, decisions

arising under other constitutional provisions. See zd. at 367-369.

Nor is the court of appeals’ decision in tension with Thomas v.

Network Solutions, Inc., 176 F.3d 500 (D.C. Cir. 1999). In that

case, the D.C. Circuit assumed, without deciding, that a particular

assessment Was a tax rather than a fee (id. at 506), and then con-

cluded that Congress had, in any event, authorized the agency to

make the assessment (id. at 506-507).

The Congressional Budget Office report cited by Celpage

confirms that universal-service contributions are used only to

18

ec. Celpage contends (Pet. 22, 26) that, because

Section 254 “provides no guidance as to who must pay

these universal service assessments, or the amount

owed,” “the entire ‘statutory program is unconsti-

tutionally vague.” See Pet. iii (questions presented)

(directing the vagueness challenge to “the Universal

Service statute”). Celpage’s vagueness claim, like its

Taxing Clause claim, is inappropriate for the Court’s re-

view. Celpage raised no vagueness challenge to Section

254 below. The court of appeals consequently did not

address any such challenge.*

Section 254 is not, moreover, unconstitutionally

vague. As noted above, Congress articulated a set of

“universal service principles,” 47 U.S.C. 254(b), and

directed the FCC to design a universal-service program

consistent with those principles, 47 U.S.C. 254(a). In

addition, Congress specifically provided that “lelvery

telecommunications carrier that provides interstate

telecommunications services shall contribute, on an

equitable and nondiscriminatory basis, to the specific,

predictable, and sufficient mechanisms established by

the Commission to preserve and advance universal

service.” 47 U.S.C. 254(d). The statute leaves no

ambiguity as to whether Celpage, which indisputably

provides “interstate telecommunications service,” is

required to make such contributions. That Congress

left it to the FCC to fill in certain details—for example,

support the universal-service program. The contributions are not

treated as general revenues of the federal government. Celpage

Pet. App. 142-143.

* The only vagueness challenge that the court of appeals

identified was directed at the FCC's administrative procedures for

assessing contributions. GTE Pet. App. 56a. The court did not

identify or address any claim that Section 254 itself is unconstt-

tutionally vague.

_—.

19

the precise services to receive universal-service

Support and the precise levels of support to be

provided—does not render Section 254 unconsti-

tutionally vague. It is well settled that Congress may

leave statutory “gap[s] for the agency to fill.” Chevron

U.S.A. Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837, 843 (1984). Such gaps do not make a

statute unconstitutional.

2. Celpage renews its claim (Pet. 26-30) that 47

U.S.C. 332(¢)(3)(A) precludes States from requiring

commercial mobile radio service (CMRS) providers to

contribute to state universal-service programs.’ That

claim lacks merit. Such claims have been rejected by

the D.C. Circuit and the Tenth Circuit as well as by the

Fifth Circuit in this case. See Cellular Telecomms.

Indus. Ass’n v. FCC, 168 F.3d 1332 (D.C. Cir. 1999);

Sprint Spectrum v. State Corp. Comm’n, 149 F.3d 1058

(10th Cir. 1998).

As the court of appeals explained (GTE Pet. App.

61a), the plain language of Section 332(¢)(3)(A) pre-

cludes the States only from “regulat[ing] the entry of

or the rates charged by” CMRS providers. It explicitly

* Section 332(¢)(3)(A) provides. in relevant part:

[N]o State or local government shall have any 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 im-

posed by a State commission on all providers of telecommuni-

cations services necessary to ensure the universal availabilit y

of telecommunications services at affordable rates.

20

exempts from preemption other types of state

regulation—i.e., regulation of “the other terms and

conditions of commercial mobile services,” 47 U.S.C.

332(c)(3)(A)—including regulation requiring CMRS

providers to contribute to state universal-service

programs. Such a construction of Section 332(c)(3)(A)

is, as the court of appeals recognized (GTE Pet. App.

61a), consistent with the unqualified mandate of Section

254(f) that “[e]very telecommunications carrier that

provides intrastate telecommunications services shall

contribute” to state universal-service programs. See

Cellular Telecomms. Indus. Ass’n, 168 F.3d at 1336

(Section 254(f) “is strong support for the proposition”

that States may require CMRS providers to contribute

to universal service).

That construction does not, as Celpage contends (Pet.

29), render superfluous the second sentence of Section

332(c)(3)(A), which allows more extensive state regu-

lation where commercial mobile services “are a sub-

stitute for land line telephone exchange service for a

substantial portion of the communications within [a]

State.” 47 U.S.C. 332(c)(3)(A). As the court of appeals

recognized (GTE Pet. App. 60a), that sentence simply

“clarifies the ability of states to regulate rates and

entry in the name of universal service” in certain cir-

cumstances; in contrast, “the ‘other terms and con-

ditions clause’ [of the first sentence of Section

332(c)(3)(A)] opens the door to all -other universal

service regulation,” whether or not the condition stated

in the second sentence is satisfied.

3. GTE contends (Pet. 15-30) that the Takings

Clause precludes the FCC’s choice of a forward-looking

cost methodology in determining the amount of federal

universal-service support for carriers serving high-cost

areas. GTE does not claim to have suffered any actual

ceed ele

21

taking. Instead, concerned that such carriers may not

be as well compensated under a methodology based on

forward-looking costs as under a methodology based on

historical costs, GTE argues (Pet. 17, 19) that “the

principle of constitutional avoidance” requires a

“narrowing construction of the Act” that would prevent

any consideration of forward-looking costs. The court

of appeals correctly rejected that argument.®

GTE would be entitled to invoke the “principle of

constitutional avoidance” in this context only if, among

other things, the FCC’s choice of a methodology based

on forward-looking costs would necessarily subject

incumbent local exchange carriers to regulatory takings

in the future. See United States v. Riverside Bayview

Homes, Inc., 474 U.S. 121, 128 n.5 (1985) (declining to

apply the principle of constitutional avoidance in the

absence of any “identifiable set of instances in which

[the regulatory action] will necessarily or even prob-

ably constitute a taking”). As this Court has explained,

“[ijt is not theory, but the impact of the rate order

which counts,” because “{t ]he Constitution protects the

utility from the net effect of the rate order on its

property.” Duquesne Light Co. v. Barasch, 488 U.S.

299, 314 (1989) (emphasis added) (quoting FPC v. Hope

* GTE claims (Pet. 12) that the FCC’s approach “assume(|s]

* "a hypothetical, ideally efficient network.” That is not

entirely accurate. The FCC has explained that an appropriate

model for determining forward-looking costs must take into

account the location of an incumbent local exchange carrier’s

existing wire centers, see Universal Serwce Order, 12 F.C.C.R. at

S913, even though a “hypothetical, ideally efficient” carrier might

have arranged those wire centers differently. As the court of

appeals recognized (GTE Pet. App. 18a), the FCC “departed from

its general ‘most efficient’ methodology” in ways that benefit GTE

and other incumbent local exchange carriers.

ee ,”,ddT Qo

22

Natural Gas Co., 320 U.S. 591, 602 (1944)); accord id. at

317 (Sealia, J., concurring). Accordingly, “lif the total

effect of the rate order cannot be said to be unrea-

sonable, judicial inquiry . . . is at an end.” /d. at 310.

“The fact that the method employed to reach that result

may contain infirmities is not then important.” /bid.

There is no reason to assume that the FCC’s

forward-looking cost methodology will produce con-

fiscatory results in any context. A local exchange

carrier’s costs, rates, and ultimate profits are not

determined by the FCC alone. It is the State, and not

the FCC, that requires a carrier to serve customers in

high-cost areas. It is likewise the State, not the FCC,

that determines the rates that the carrier may charge

its customers. See Universal Service Order, 12

F.C.C.R. at 8785 (“The Commission * * * does not

have control over the local rate-setting process.”); 47

U.S.C. 152(b). And the States have traditionally borne

a large share of the responsibility for universal-service

support for carriers serving high-cost areas. The

dispute presented here concerns only the FCC’s choice

of methodology for determining the federal share of

such support. GTE fails to explain how the FCC’s

choice of one methodology over another would trigger a

chain of events that would necessarily cause the States

to take measures that would have confiscatory results

for local exchange carriers.”

* Even considered in isolation, the FCC's choice of a

methodology based on forward-looking costs may not, in appli-

cation, necessarily disadvantage local exchange carriers at all,

much less threaten to constitute a taking. GTE does not attempt

to demonstrate that the FCC’s new methodology, which was

finalized after the Universal Service Order at issue here, will cause

GTE’s affiliates to receive a smaller amount of explicit federal

23

Moreover, even if, contrary to Duquesne, a regu-

lator’s general methodology for setting rates could be a

proper subject of a Takings Clause challenge, GTE’s

challenge still would fail. As this Court has noted, “[a]t

one time, it was thought that the Constitution required

‘ates to be set according to the actual present value of

the assets employed in the public service,” an approach

that “mimics the operation of the competitive market.”

Duquesne, 488 U.S. at 308 (emphasis added) (citing

Smyth v. Ames, 169 U.S. 466 (1898)). That approach is

similar to the FCC’s approach here. Although this

Court ultimately determined that such a “fair value”

approach is not constitutionally required, that approach

has always been a permissible form of ratemaking,

which has the salutary effect of “givling] utilities strong

incentive to manage their affairs well and to provide

efficient service to the public.” /d. at 309. The courts

have routinely upheld ratemaking orders that denied a

utility full recovery of its historical costs. See, e.g., id.

at 312-314 (denying a utility the recovery of prudently

incurred historical expenditures); Mobil Oil Explora-

tion & Producing S.E., Inc. v. United Distrib. Cos., 498

U.S. 211, 224- 225 & n.5 (1991); Market St. Ry. v.

Railroad Comm’n, 324 U.S. 548, 553-554, 564-568

(1945),"°

universal-service support than they received under the prior

methodology based on historical costs.

” GTE argues (Pet. 16) that Duquesne holds that “when

methodologies are changed, the end result of the new system must

still * * * provide an adequate rate of return on the full

investment as measured under the old system.” No such issue was

presented in Duquesne. Instead, the Court, after observing that

“/a/t all relevant times, Pennsylvania’s rate system has been

predominantly but not entirely based on historical cost,” found that

“it has not been shown that the rate orders as modified * * * fail

24

GTE erroneously contends that the court of appeals’

approval of the FCC's methodology is inconsistent with

Brooks-Scanlon Co. v. Railroad Comm'n, 251 U.S, 396

(1920), which GTE invokes for the proposition that

courts must constitutionally scrutinize the rates for

each aspect of a utility’s operations, That proposition is

inconsistent with the rule—adopted in Hope Natural

Gas and reaffirmed in Duquesne—that the appropriate

constitutional inquiry begins and ends with “the total

effect of the rate order.” Duquesne, 488 U.S. at 310;

Hope Natural Gas, 820 U.S, at 602; see In re Valuation

Proceedings Under $§ 808(¢) and 3806 of the Regional

to give a reasonable rate of return on equity given the risks under

such a regume” 488 US. at 315 (emphases added). The Court also

emphasized that “[t}he adoption of a single theory of valuation as a

constitutional requirement would be inconsistent” with long-

standing precedent. /d. at 316.

GTE also invokes (Pet. 15-16) the Court’s observation in

Duquesne That “a State's decision to arbitrarily switch back and

forth between methodologies in a way which required investors to

bear the risk of bad investments at some times while denying them

the benefit of good investments at others would raise serious

constitutional questions.” 488 U.S. at 315. But the FCC has not

“switchted| back and forth between methodologies.” Nor did

the FCC act “arbitrarily” in adopting a methodology based on

forward-looking costs, which the FCC concluded was necessary

given Congress's decision in the 1996 Act to open local tele-

communications markets Co competition. Moreover, although the

new methodology requires incumbent local exchange carriers to

bear “the risk of bad investments” Gust as they did under a

historical cost methodology, which typically excludes costs that

were not prudently incurred, see, eg, NEPCO Mun. Rate Comm.

Vv. FERC, 668 F.2d 1827, 1882-1883 (D.C. Cir. 1981), the new

methodology does not deny such carriers “the benefit of good in-

vestments.” It merely gives carriers an incentive to operate

efficiently to ensure a reasonable profit. See Universal Service

Order, 12 F-CLCLR. at SS99-8901, S9YTS-89 14.

nanan

Ae Pe Sale Ohh OR ae oo a

25

Rail Reorganization Act, 489 F. Supp. 1351, 1357

n.l2 (Spee. Court 1977) (Friendly, J.) (observing that

Brooks-Scanlon’s statement that “a carrier cannot be

compelled to carry on even a branch of business at a

loss,” 251 U.S, at 399, “is not the law”).'' GTE’s reliance

on Brooks-Scanion also is unavailing for the additional

reasons identified by the court of appeals. See GTE Pet.

App. 19a n.14 (“Unlike the situation in Brooks-Scanlon,

the circumstance here is that the regulatory entity

setting the rules, the FCC, is not requiring the

[incumbent local exchange carriers] to remain open or

to charge low rates, thereby forcing them to operate at

i permanent loss.”). )

Finally, GTE asserts (Pet. 25-26) that the decision of

the Fifth Circuit, in deferring to the FCC’s imple-

mentation of Section 254, conflicts with decisions of

other circuits that have declined to defer to agency

action that raised grave constitutional concerns. This

case is readily distinguishable because, as the Fifth

Circuit recognized, the Universal Service Order pre-

sents no such concerns. As this Court observed in Hope

Natural Gas, an agency's “order does not become sus-

pect by reason of the fact that it is challenged.” 320

"In any event, GTE’s argument proves too much. Histor

cally, state regulators allowed local exchange carriers to charge

some customers for intrastate service at rates far above cost so

that the carriers could charge other customers at rates below cost,

The implication of GTe’s argument is that the traditional system,

which is only now being phased out, is pervasively unconsti-

tutional. Although GTE argues (Pet. 22-23) that competition is

altering the constitutional analysis by eroding the protected status

of incumbent local exchange carriers as regulated monopolies, such

arguments are properly presented to the States, which decide

which intrastate carriers must serve which customers and at which

rates.

26

U.S. at 602. Indeed, the order, as “the product of expert

judgment,” “carries a presumption of validity.” /bid.

In sum, the court of appeals’ disposition of GTE’s

Takings Clause claim is correct and does not conflict

with any decision of this Court or any other court of

appeals. The petition therefore raises no issue that

warrants the Court’s review. GTE requests that, at a

minimum, its petition be held pending the Eighth

Circuit’s decision on remand in Jowa Utilities Board.

In that case, GTE and other incumbent local exchange

carriers have challenged, on Takings Clause and other

grounds, the FCC’s adoption of a methodology based on

forward-looking costs to determine carrier-to-carrier

‘ates under Sections 251 and 252 for interconnection

and unbundled access to an incumbent’s network

elements. If the Eighth Circuit were to rule in GTE’s

favor, that case would warrant this Court’s review,

-because invalidation of the FCC’s pricing rules

implementing Sections 251 and 252 would cause dis-

array in the telecommunications indusiry.” If the

Kighth Circuit were to rule for GTE on the takings

issue before the date on which this Court would other-

Wise act on the petitions in this case, GTE’s petition in

‘- Before this Court issued its decision in Jowa Utilities Board,

the Eighth Circuit stayed the FCC’s pricing rules for inter-

connection and unbundled access. While the stay was in effect, the

vast majority of state commissions independently implemented the

pricing provisions of Sections 251 and 252 by adopting a forward-

looking cost methodology in that context. The federal courts have

consistently upheld that choice of methodology, rejecting claims

that the methodology violates the Takings Clause. See, e.g., GTE

South Inc. v. Morrison, 6 F. Supp. 2d 517, 526-530 (E.D. Va. 1998),

affd on other grounds, 199 F.3d 733 (4th Cir. 1999); Southwestern

Bell Tel. Co. v. AT&T Communications, No. A9T-CA-13255, 1998

WL 657717, at *10-*13 (W.D. Tex. Aug. 31, 1998).

5

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3

i

27

this case might appropriately be held pending this

Court’s review of the Eighth Circuit’s decision. But

there is no reason to suppose that the Eighth Circuit

will rule in GTE’s favor, much less that the Eighth

Circuit will do so based on the Takings Clause. The

mere possibility of a future circuit conflict is insufficient

to justify holding a petition in a case that does not

warrant plenary review. For that reason, we submit

that the Court should deny GTE’s petition outright

if, by the time this Court considers the petition, the

Kighth Circuit has not ruled in GTE’s favor on its

takings claim.

4. AT&T challenges (Pet. 13-23) the court of appeals’

holding that the FCC lacks jurisdiction to include a

carrier’s intrastate revenues (together with its inter-

state revenues) in the assessment base used to deter-

mine its contribution to the universal-service program

for schools, libraries, and rural health-care facilities.

We agree that the holding is incorrect, essentially for

the reasons stated in AT&T’s petition. In Jowa

Utilities Board, this Court held that, under 47 U.S.C.

201(b), the FCC’s regulatory jurisdiction embraces the

substantive scope of the Communications Act, including

the provisions added in 1996, even where the Act ex-

pressly grants concurrent jurisdiction to the States.

See 525 U.S. at 377-380. Here, in including intrastate

revenues in the assessment base, the FCC was imple-

menting Section 254, which authorizes the FCC, after

consultation with the Federal-State Joint Board, to

define the scope of universal service, see 47 U.S.C.

254(c), and requires contributions to universal service

to be made by all telecommunications providers, both

interstate and intrastate, see 47 U.S.C. 254(b)(5), (d)

and (f). Universal service has always focused on ensur-

ing affordable local telephone service for customers

28

who have low incomes or who live in high-cost areas.

There is thus no meaningful respect in which Section

254 could be said not to “apply” to intrastate matters.

Under Jowa Utilities Board, the FCC has jurisdiction

to implement Section 254 by establishing an effective

universal-service program, without regard to the for-

mal “interstate” or “intrastate” character of the mat-

ters being regulated.

Nonetheless, we concluded that the Fifth Circuit’s

jurisdictional error does not present a question of

national significance that warrants this Court’s inter-

vention. Strictly construed, the court’s jurisdictional

holding is confined to a determination that the FCC

may not include intrastate revenues in its assessment

base for the universal-service programs for schools,

libraries, and rural health-care facilities. The court did

not consider whether the FCC had jurisdiction to do so

with respect to the other universal-service programs—

i.e., the programs for low-income consumers and high-

cost consumers—because the FCC had determined not

to include intrastate revenues in the assessment bases

for those programs. See AT&T Pet. App. 226a, “be

court’s holding disadvantages carriers, such as AT&T,

that provide predominantly interstate services. But

the court’s decision does not clearly purport to divide

universal service into discrete interstate and intrastate

spheres and to preclude the FCC from exercising any

jurisdiction in the latter.

Indeed, as AT&T observes (Pet. 19), any such cate-

gorical division would be untenable, because Congress

did not intend to strip the FCC of its longstanding

authority to assist in subsidizing universal service,

which, as noted, has traditionally focused on the pro-

vision of affordable local telephone service. Unlike

AT&T (see Pet. 21), we do not read the decision below

29

to hold otherwise. Despite isolated language sug-

gesting that the FCC may lack the authority “to fund

intrastate universal services” (GTE Pet. App. 94a), the

court of appeals separately affirmed that the FCC may

use federal universal-service contributions to subsidize

intrastate services, even where the FCC is not required

to do so, and that the FCC may attach conditions to

such contributions (GTE Pet. App. 87a). To be sure, in

other portions of the opinion not directly challenged

here, the court compounded its error by invalidating

additional FCC rules on jurisdictional grounds. See,

e.g., GTE Pet. App. 36a-44a (no-disconnect rule). In

our view, however, the court’s jurisdictional analysis is

sufficiently unclear that it is unlikely to have appreci-

able persuasive force beyond this case. So limited, the

court’s decision does not threaten the basic integrity of

the federal government’s universal-service programs.

If the decision is given broader significance, however,

this Court’s intervention may become necessary.

18 Although AT&T blames “the Fifth Circuit’s sweeping

‘jurisdictional’ rulings” (Pet. 20) for the invalidation of FCC rules

governing a carrier’s eligibility for universal-service support, the

Fifth Circuit purported not to “reach the states’ jurisdictional

challenges” on that point (GTE Pet. App. 29a), ostensibly basing

its decision on the text of 47 U.S.C. 214(e)(2). But see GTE Pet.

App. 30a n.32 (citing 47 U.S.C. 152(b)).

3% 30

CONCLUSION

The petitions for a writ of certiorari should be denied.

Respectfully submitted.

SETH P. WAXMAN

Solicitor General

CHRISTOPHER J. WRIGHT

General Counsel

JONATHAN E. NUECHTERLEIN

Deputy General Counsel

JOHN E. INGLE

Deputy Associate General

Counsel

LISA S. GELB

Counsel

Federal Communications

Commission

MARCH 2000