# Appendix — Core Communications, Inc. v. Federal Communications Commission

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_2344%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2010
- **Citation:** 562 U.S. 1044

## Text

{N-) 0 (

reme Court, U.S.
2) Super e D
a No. F Aus 6- 2040

IN THIDFFICE OF THE CLERK
Supreme Court of the Anited States

CORE COMMUNICATIONS, INC.,
Petitioner,
We
FEDERAL COMMUNICATIONS COMMISSION
AND UNITED STATES OF AMERICA,
Respondents.

On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the District of Columbia Circuit

APPENDIX TO THE
PETITION FOR A WRIT OF CERTIORARI
(VOLUME 1 OF IID)

CHRIS VAN DE VERG JEFFREY A. LAMKEN

General Counsel Counsel of Record
CORE COMMUNICATIONS, INC. ROBERT K. KRY
209 West Street MARTIN V. TOTARO
Suite 302 MoOLOLAMKEN LLP
Annapolis, MD 21401 The Watergate, Suite 660
(410) 216-9865 600 New Hampshire Ave., NW

Washington, D.C. 20037
(202) 556-2000
jlamken@mololamken.com

Counsel for Petitioner
Core Communications, Ine.

WILSON-EPES PRINTING Co., INC. — (202) 789-0096 — WASHINGTON, D.C. 20002

TABLE OF CONTENTS

Volume |
Appendix A — Court of Appeals Opinion in
Core Communications, Inc. v. FCC,
bu2 F oa 149 (D.C. Cir. 2010)................ la

Appendix B - Federal Communications
Commission Order in /n the Matter of
linplementation of the Local Competition
Provisions in the Telecommunications Act
of 1996, Developing a Unified Intercurrier
Compensation Regime, lntercarrier
Compensation for ISP-Bound Traffic,
24 ¥.C.C.R. 6475 (Nov. 5, 2008)...........ccccsesseoeess Da

Volume I]

Appendix b (continued) — Federal Communi
cations Commission Order in Jn the Matter
of Implementation of the Local Competz
tion Provisions in the Telecommunica-
trons Act of 1996, Developing a Unified
Intercarrier Compensation Regime,
Intercarrier Compensation for 1ISP-Bound
Traffic, 24 F.C.C.R. 6475 (Nov. 5, 2008)............. 399a

Volume II]
Appendix C -— Court of Appeals Opinion in

In re Core Communications, Inc.,

5a) F.0d 849 (D.C. Cir. 2008) ......0...0000006. 7T92u
Appendix D — Court of Appeals Opinion in

In re Core Communications, Ine.,

ee ee 009.0 CT, BOI) coccncccsccsvcccscccovescess LOR

ll

TABLE Cr CONTENTS

Continued

Appendix Ii — Court of Appeals Order in
In re Core Communications, Inc.,
No. 04-1179 (D.C. Cir. May 24, 2005)........00.... 847a

Appendix F — Court of Appeals Order in

In re Core Communications, Ince.,

No. 04-1179 (D.C. Cir. Nov. 22, 2004) .............. 848u
Appendix G — Federal Communications

Commission Order in Petition of Core

Communications, Inc. for Forbearance

Under 47 U.S.C. § 160(c) from

Application of the ISP Remand Order,

19 F.C.C.R. 20,179 (Oct. 18, 2004) ...........0ecce0ee 849a
Appendix H - Court of Appeals Opinion in

WorldCom, Inc. v. FCC, 288 F.3d 429

BR pet te UE) RARER aR ORO ne 872a

Appendix I - I’ederal Communications

Commission Order in /mplementation of

the Local Competition Provisions in the

Telecommunications Act of 1996,

Intercarrier Compensation for ISP-

Bound Traffic, 16 F.C.C.R. 9151

SPIE, Seis HHOIE EP sbincncccintanpnsscscotncesntciaenbarisetelersnesiie S82a
Appendix J — Court of Appeals Opinion in

Bell Atlantic Telephone Cos. v. FCC,

Be ee 1 EIAs GAD, BPD accescnsnsanssavenevecestacrnins 1015a

ili
TABLE OF CONTENTS—Continued
Page
Appendix K — Federal Communications
Commission Order in J/mplementation of
the Local Competition Provisions in the
Telecommunications Act of 1996, Inter-
Carrier Compensation for ISP-Bound
Traffic, 14 F.C.C.R. 3689 (Feb. 26, 1999)........ 1032a

Appendix L — Court of Appeals Order
Denying Panel Rehearing in Core
Communications, Inc. v. FCC,
No. 08-1365 (Mar. 26, 2010)........cccceecscceeseeeeeees 10854
Appendix M — Court of Appeals Order
Denying k£'n Banc Rehearing in Core
Communications, Inc. v. FCC,
No. 08-1365 (Mar, 26, 2010)............cceceseeeseseeeees 1087a

Appendix N — Relevant Statutory Provisions ...... 1089a

APPENDIX A
IN THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Nos. 08-1365, 09-1046, 08-1393, 09-1044

CORK COMMUNICATIONS, INC.,,
Petitioner,
Vv.
FEDERAL COMMUNICATIONS COMMISSION
AND UNITED STATES OF AMERICA,
Respondents.

KMARTHLINK, INC., ET AL..,
Intervenors,

ARGUED OCT. 16, 2009

DECIDED JAN. 12, 2010

On Petition for Review of Orders of the
lederal Communications Commission

scefore: SIENTELLE, Chief Judge, WILLIAMS and
RANDOLPH, Senior Circuit Judge:

Opinion for the Court filed by Senior Cireuit Judg
WILLIAMS,

WILLIAMS, Senior Circuit Judge:

When a customer accesses the internet via “dial-up,”
his or her call goes to a local exchanye carrier (“LEC”),

which commonly hands the call off to another LIC

(la)

2H

which in turn connects the customer to an internet
service provider (“ISP”).' The ISP links the customer to
the web. At least as early as 1999 the Federal Communi-
‘ations Commission was concerned that the regulatory
procedures under which the sending LEC compensated
the recipient LEC were leading to the imposition of ex-
cessive rates, and that these rates in turn were distorting
the markets for internet and telephone services. The
Commission in due course responded with an alternative
reyulatory regime, principally taking the form of rate
caps set well below the rates that had prevailed before.

In the order under review here, /n the Matter of lm
plementation of the Local Competition Prowsions in the
Tclecommunications Act of 1996, Developing a Unified
Intercarrier Compensation Regime, Intercarrier Com
pensation for ISP-Bound Traffic (CC Docket Nos. 96-45,
96-98, 99-68, 99-200, 01-92), FCC 08-262, 24 FCC Red.
6475, 2008 WI 4821547 (Nov. 5, 2008) (the “Order’), the
Commission has set forth the basis of its authority to
institute the rate cap system, namely, 47 U.S.C. § 201
That section (excerpted in an appendix to this opinion)
requires that the charges of “every common carrier en
gayed in interstate or foreign communication by wire”
‘such Communication service” he “just and reason

for ‘
able,” and authorizes the Commission to “prescribe such
rules and regulations as may be necessary ... to carry
out the provisions of this chapter.” /d. Petitioners assail
the Commission’s analysis on a variety of grounds, most
powerfully on the theory that §§ 251-252 of Title 47,
added by the Telecommunications Act of 1996, Pub. L.

Data in the record suyyest that dial-up, though being rapidly
replaced by various forms of higher-speed service, still accounts for a
non-trivial share of internet access: about 20.4% in 2007, 10.5% in
2009, and (a prediction, obviously) 4.6% in 2014, Joint Appendix 102

Da

The Commission’s first step into this arena was its
issuance of 77 the Matter of Implementation of the Local
Competition Provisions in the Telecommunications Act
of 1996, Inter-carrier Compensation for ISP-Bound
Traffic, 14 FCC Red 3689, 1999 WL 98037 (Feb. 26, 1999)
(“Declaratory Ruling’). There it applied its so-called
“end-to-end” analysis (as it does in the order under re-
view), under which the classification of a communication
as local or interstate turns on whether its origin and des-
tination are in the same state. Because a customer’s ven
ture into the web characteristically reaches servers out of
state (and often out of the country), the Commission
concluded that under the end-to-end principle dial-up
internet traffic was interstate. /d. 118. As such traffic
was “jurisdictionally mixed,” 7d. {! 19, however, the Com-
mission chose not to disturb state commissions’ applica-
tion of interconnection agreements to that traffic “pend-
ing adoption of a rule establishing an appropriate inter-
state compensation mechanism,” 7d. at 4] 21. In review of
the order in Bell Atlantic Tel/]. Cos. v. FCC, 206 F.3d 1
(D.C. Cir. 2000), we found the Commission’s conclusions
in apparent conflict with various prior statements, and
possibly with the statute; we vacated the order and
remanded the matter for its further analysis. /d. at 9.

On remand the Commission instituted substantially
the same rate cap system that it defends here. See /SP
Remand Order § 8. But it claimed as supporting author
itv 47 U.S.C. §$251(g), which required LECs to comply
with certain FCC regulations promulgated prior to the
enactment of the 1996 Act. In WorldCom, Inc. v. FCC,
288 F.3d 429 (D.C. Cir. 2002), we rejected that claim,
finding that § 251(g) was “worded simply as a transitional
device” and thus could not be relied on for authority to
promulgate new regulations. /d. at 430. Recognizing

Ou
that the Commission’s rules might well have other legal!

bases. however, we did not vaeate the order. /d. at 430,
434.

Between the JSP Remand Order and the present
Order there have been several additional visits to our
court. In July 2008 Core Communications, Ine. (“Core”)
petitioned the FCC to forbear from enforcing its rate
caps and associated provisions, a petition that the FCC
partly granted. Petition of Core Communications, 1ne.
for Forbearance Under 47 U.S.C. § 160(c) from Applica-
tion of the ISP Remand Order, 19 FCC Red 20179, 14 23-
24, 9 27, 2004 WL 2341235 (Oct. 18, 2004). We upheld the
order against challenges by both CLECs and ILECs.
Core 2006, 455 F.3d 267.

In June 2004 Core filed a petition seeking mandamus
requiring the FCC to respond to the WorldCom remand.
Based on the FCC’s representations about its efforts to
meet the remand, we denied Core’s petition “without pre-
judice to refiling in the event of significant additional de-
lay.” In re: Core Communications, Inc., No. 04-1179
(D.C. Cir. May 24, 2005). In October 2007 Core filed a
second petition, which we granted, “directling] the FCC
to explain the legal basis for its ISP-bound compensation
rules within six months of” May 5, 2008. Jn re Core
Communications, Ine., 531 F.3d 849, 850 (D.C. Cir. 2008)
(“Core 2008").

On the last permissible day, November 5, 2008, the
FCC released the current Order. Petitions for review
followed, filed by Core and by Public Service Commission
of the State of New York and National Association of
Regulatory Utility Commissioners (the “state petition-
ers”); we consolidated the petitions.

* >

Ta

As we noted at the outset, the Commission relies
primarily on § 201 for its authority to regulate ISP-bound
traffic. See Order 121. That seetion prohibits carriers
engaged in the delivery of interstate communications
from charging rates that are not “just and reasonable,”
and grants the FCC authority to preseribe regulations to
implement the 1934 Act, which include all provisions of
the 1996 Act. See AT&T Corp. v. lowa Utils. Bd., 525
U.S. 366, 377-78, 119 S. Ct. 721, 142 L. Ed. 2d 835 (1999)
(observing that “Congress expressly directed that the
1996 Act ... be inserted into the Communications Act of
1934” and ee ding that “the grant in $201(b) means .
[that] [t]he FCC has rulemaking authority to carry out
the ‘provisions of this Act,’ which inelude $$ 251 and
202"). A savings clause attached to § 251, namely § 251(4),
fortifies the Commission's position, providing: “Nothing
in this section shall be construed to limit or otherwise
affect the Commission’s authority under section 201.”
Further, all parties agree that the familiar principles of
Chevron USA v. Natural Resources Defense Council, 467
U.S. 887, 1048S. Ct. 2778, 81 L. Ed. 2d 694 (1984), apply to
the FCC’s construction of the Communications Act. State
Pet'rs Br. 8; Core Pet’r Br. 27-28; Resp. Br. 19-20.
I‘inally, except as discussed below, the petitioners accept
the end-to-end analysis and its application to ISP-bound
calls, as announced by the Commission in the Declara-
tory Ruling in 1999 (described above) and restated in the
Order, 121 & n.69.

Against the Commission's reliance on § 201, petition-
ers claim that “Congress's specific choice” on the matter
of interLEC compensation, manifested in §§ 251-252,
must trump the FCC’s “general rulemaking auteoely
under section 201." Core Interv. Br. 18. They cite Nor-
west bank Minnesota National Association v. FDIC,

sa

312 F.3d 447, 451 (D.C. Cir. 2002), for the “cardinal rule
of statutory construction ... that where both a specific
and a reneral provision cover the same subject, the
specific provision controls.” State Pet’r Br. 27.

But it is inaccurate to characterize $201 as a general
grant of authority a $$ 251-252 as a specific one.
“When ... two statutes apply to intersecting sets
either is more specific.” Hemenway v. Peabody Coal
Co., 159 F.3d 264 (7th Cir. 1998). That is the case
here. Not all inter-LEC connections are used to deliver
interstate Re ae just as not all interstate com
munications involve an inter-LEC connection. A _ local
eall to chat with a schoolmate about the evening's home-
work would not—at least under conditions typical to
day—involve interstate communications; and a conven-
tional interstate long distance call, while it will usually
involve interconnection between the long distance provid-
er anda LEC, will often not involve two LECs connect
ing direetly with each other. And, as to a LEC’s pro
vision of aecess for completion of a long-distance call, the
parties agree that the link between the LEC and the
interexchange carrier is not governed by the reciprocal
compensation regime of §251(b)(5). See State Pet’rs Br.
95-26 (citing Global NAPS, Ine. v. Verizon New Eng
land, 444 F.3d 59, 62-63 (1st Cir. 2006), in turn quoting
the FCC’s Local Competition Provisions in the Tele-
communications Act of 1996, 11 FCC Red 15499, 1996
WL 452885 (Aug. &, 1996)).

Dial-up internet traffic is special because it involves
interstate communications that are delivered through
local ae it thus simultaneously implieates the regimes

of both § 201 and of §§ 251-252. Neither regime is a sub-
set of the other. They intersect, and dial-up internet
traffic falls within that intersection. Given this overlap,

Ja
$ 251(i)’s specific saving of the Commission’s authority
under § 201 against any negative implications from $251
renders the Commission’s reading of the provisions at
least reasonable.

Petitioners next argue that because the call to the ISP
terminates locally, the FCC’s authority over interstate
communications is inapplicable. State Pet’r Br. 30-53.
Section 251(b)(5) applies to “reciprocal compensation ar
rangements for the transport and termination of telecom-
munications.” Petitioners point to the FCC’s definition
(in the Order) of “terminatfion]” as “the switching of traf-
fic that is subject to Section 251(b)(5) at the terminating
carrier’s end office switeh ... and delivery of that traffic
to the called party’s premises.” See Order 1.13; see also
47 C.F.R. §51.701(d). State Pet’rs Br. 31-382. Because
the “ealled party” in the case of dial-up Internet traffic is
the ISP, petitioners say, the §251(b)(5) telecommuniea-
tions “terminat[e]” locally and thus the FCC cannot
apply its § 201 authority over these communications.

This argument fails because it implicitly assumes in-
applieability of the end-to-end analysis, which petitioners
have not challenged. And the FCC has consistently ap-
plied that analysis to determine whether communications
are interstate for purposes of §201. Petitioners do not
dispute that dial-up internet traffic extends from the ISP
subscriber to the internet, or that the communications,
viewed in that light, are interstate. Given that ISP-
bound traffie lies at the intersection of the $201 and
$$ 251-252 regime, it has no significance for the FCC's
$201 jurisdiction over interstate communications that
these teleeommunieations might be deemed to “termi-
nat[e]” at a LEC for purposes of § 251(b)(5).

Petitioners also appear indirectly to invoke the 8th
Cireuit’s conclusion that while the FCC has authority to

10a

impose a methodology on state commissions’ exercise of
power under § 252 (they specifically note “total element
long-run incremental cost” (““TELRIC”)), it has (for cer-
tain purposes) no power to set actual prices. See State
Pet’rs Br. 33, citing Jowa Utils. Bd. v. FCC, 219 F.3d 744,
757 (8th Cir. 2000). We take no position on the issue be-
fore the 8th Circuit. It reached its finding for purposes
quite different from the present subject (FCC ratesetting
authority for a leg of an interstate communication), and it
did not address the FCC’s power to implement “just and
reasonable” rates under §201 or how that power was
affected by §§ 251-252.

Petitioners further argue that it was “arbitrary and
eapricious” for the FCC to “discriminate” against dial-up
internet traffie by requiring that LI¢Cs be compensated
pursuant to the rate cap regime when terminating such
traffic, but otherwise in accordance with state commis
sions’ appheation of the FCC’s TELRIC methodology.
Core Pet’r Br. 43-47; Core Interv. Br. 22-23. See 5
U.S.C. § 706(2)(A). Our review under the arbitrary and
capricious standard is narrow. See Core 2006, 455 F.3d
at 277. Here the agency action passes handily.

The Commission has provided a solid grounding for
the differences between the treatment of inter-LEC com-
pensation for delivery of dial-up internet traffic and the
regime generally applicable to inter-LEC compensation
under §251(b)(5). (We assume arguendo that the con-
cept of discrimination is relevant to regimes created un-
der entirely different statutory provisions.) In the con-
text to which reciprocal compensation is ordinarily ap-
plied, it noted, outgoing calls are generally balanced by
incoming ones, so that it matters relatively little how
accurately rates reflect costs. JSP Remand Order 4 69.
Such balance is utterly absent from ISP-bound traffic.

lla

Moreover, the Commission found that in fact the rates
for such traffic were so distorted that CLECs were in
effect paying ISPs to become their customers. Jd. {70 &
n.134; see also zd. 11 21. To the extent that ILECs simply
passed the costs on to their customers generally (rather
than having a separate charge for those making ISP-
bound calls), they would foree their noninternet custo-
mers to subsidize those making ISP-bound calls, and the
system would send inaccurate price signals to those using
their facilities for internet access (in effect the ISPs and
their customers) and to those not doing so. /d. (11 68, 87.
On the other hand, the Commission believed that its
“failure to act... would lead to higher rates for Internet
access, as ILECs seek to recover their reciprocal com-
pensation liability ... from their customers to call ISPs,”
id. 187, presumably meaning rates “higher” than cost,
correctly computed. Thus the continued application of
the reciprocal compensation regime to ISP-bound traffic
would “undermine[ ] the operation of competitive mar
kets.” Jd. 9 71.

Core purports to find a discrepancy between our man-
damus order and the Commission’s response. Our order
required the FCC to “explain[ ] the legal authority for the
Commission’s interim interearrier compensation rules
that exclude ISP-bound traffic from the reciprocal
compensation requirement of § 251(b)(5).” Core 2008, 531
F.3d at 862. The Order, en route to finding that § 201
authorized the Commission to impose its rate cap system
on the communications in question, also expressed its
view that they were “subject to the reciprocal compen-
sation regime in sections 251(b)(5) and 252(d)(2).”” Order
115; see also 2d. 116. Core claims that in so finding the
Commission violated our mandate.

12a
In context it is perfectly plain that our order sought
simply to have the FCC explain the reasoning underlying
its exercise of authority, not to preempt its analytical
route. The sort of argument made by Core here gives
pettifoggery a bad name.

Finally, we note the presence of a number of argu-
ments introduced outside of the petitioners’ opening
briefs. Core intervened in the appeal filed by the state
petitioners before we consolidated its separate appeal
with the latter. Together with other intervenors, Core
filed a brief raising a number of arguments that it did not
raise as petitioner. As we explained in Ji/linois Bell
Telephone Company v. FCC, 911 F.2d 776 (D.C. Cir.
1990), “An intervening party may join issue only on a
matter that has been brought before the court by another
party.” 7d. at 786 (emphasis added). While we acknow
ledged in Synovus Financial Corporation v. Board of
Governors, 952 F.2d 426 (D.C. Cir. 1991), that this rule is
prudential and “should not be applied categorically,” the
grounds that Synovus mentioned for making exceptions
are absent here. Jd. at 434. Synovus allowed an inter-
venor who lacked incentive to petition for review of the
administrative action to present an additional issue that
was “an essential predicate to [a] question” raised by
petitioners. /d. at 434 (internal quotes omitted). But
Core not only had an incentive to petition for review itself
but did so. See United States Telephone Association. v.
FCC, 188 F.3d 521, 531 (D.C. Cir. 1999) (noting that
intervenors not only failed to qualify for the Synovus ex-
ception but “present[ed] no reason why it could not have
petitioned in its own right”). And the issues Core raises
as intervenor bear “no substantive connection” to the
challenges petitioners raise in their initial briefs. Syno-
vus, 952 F.2d at 434; Cir. Rule 28(d)(2). Accordingly, we

loa

do not consider the new arguments Core raises as
intervenor. Similarly, we do not consider arguments that
first appear in petitioners’ reply briefs. See, e.g., Bd. of
Regents of the Univ. of Washington v. HPA, 86 F.3d
1214, 1221 (D.C. Cir. 1996) (“By failing to make any
specific objection until their reply brief, petitioners de-
prived the [respondents] of the opportunity to respond.
To prevent this ..., we have generally held that issues
not raised until the reply brief are waived.)

The petitions for review are

Denied.

Appendix: Text of 47 U.S.C. § 201

§ 201. Services and Charges.

(a) It shall be the duty of every common carrier
engaged vn interstate or foreign communication by wire
or radio to furnish such communication service upon
reasonable request thercfor| |; and, in accordance with
the orders of the Commission, in cases where the Com
mission, after opportunity for hearing, finds such action
necessary or desirable in the publie interest, to establish
physical connections with other carriers, to establish
through routes and charges applicable thereto and the
divisions of such charges, and to establish and provide
facilities and regulations for operating such through
routes.

(b) All charges, practices, classifications, and regula-
tions for and in connection with such communication
service, shall be just and reasonable, and any such
charge, practice, classification, or regulation that is un-
just or unreasonable is declared to be unlawful: Provid-

‘nhapter may be classified into day, nignt, repeated,

a
inrepeated, letter, commercial, press, Government, and
ucn other Cla eC a tne (ommission may decide to be
IST ind reasonable ind dillerent charge may ne maat
r the different f communicatior Lhe
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Ai ; a, PLL pire iM sé j fi Pvddet (Lviti Pee if S027 i
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APPENDIX B
BEFORE THE
PEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554

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DEVELOPING A UNIFIED INTERGCARRIER
COMPENSATION REGIME
CC DockEeT No. 01-9?

INTIERCARRIER COMPENSATION
rORISP BOUND TRAFFI

CC DockerT No. 99-6

IP-ENABLED SERVIC!
WC DocKkET No. 04-26

ORDER ON REMAND AND REPORT
AND ORDER AND FURTHER NOTICE OF
PROPOSED RULEMAKING

ADOPTED: NOVEMBER 5, 2008
RELEASED: NOVEMBER 5, 2008

Comment Date: (14 days after publi-
cation in the Federal
Reyister)

Reply Cor:ment Date: (21 days after publi-
cation in the Federal
Reyister)

By the Commission: Chairman Martin issuing
a separate statement; Commissioners
Copps, Adelstein, Tate, and McDowell
issuing a joint slatement.,

Sb) ai

19a

Mareh 24, 2000, in the Bell Atlantic decision, the D.C.
Circuit vacated certain provisions of the Declaratory
Ruling The court did not question the Commission’s
finding that ISP-bound traffic is interstate. Rather, the
court held that the Commission had not adequately ex-
plained how its end-to-end jurisdictional analysis was
relevant to determining whether a call to an ISP is sub-
ject to reciprocal compensation under section 251(b)(5).
In particular, the court noted that a LEC serving an ISP
appears to perform the function of “termination” because
the LEC delivers traffie from the calling party through
its end office switch to the called party, the ISP.”

3. On April 27, 2001, the Commission released the
ISP Remand Order, which concluded that section 251(g)
excludes ISP-bound traffic from the scope of section
251(b)(5).’ The Commission explained that section 251(z)
maintains the pre-1996 Act compensation requirements
for “exchange access, information access, and exchange
services for such access,” thereby excluding: such traffie
from the reciprocal compensation requirements that the
1996 Act imposed.” The Commission coneluded that ISP-

' Bell Atlantic, 206 F.3d at 1

’ See id. at 5.

" pee 14. at 6.

' See Intercarrier Compensotion for ISP-Bound Lrathie, CC Doeket
Nos. 96-98, 99-68, Order on Remand and Report and Order, 16 FCC
Red 9151, 9171-72, para, 4A 2001) (SP aa mand Order), renianae |
but not vacated by WorldCom, Inc. v. FCC, 288 F.3d 429, 432 (D.C.
Cir, 2002) (WorldCom) (subsequent history omitted) (holding that
section 251(g) appears to provide for the continued enforcement “of
certain pre-Act regulatory ‘interconnection restrictions and obliga
tions’”).

~ The term “1996 Act” refers to the Telecommunications Act of 1996.
Pub. L. No. 104-104, 110 Stat. 56 (1996). The term “Act” refers to
the Communications Act of 1934, as amended. 47 U.S.C. § 151 et Seq.

20a
bound traffic was “information aceess” and, therefore,
was subject instead to the Commission’s section 201
jurisdiction over interstate communications.” The Com-
mission also found “convincing evidence in the record”
that carriers had “targeted ISPs as customers merely to
take advantage of ... intercarrier payments” (including
offering free service to ISPs, paying ISPs to be their
customers, and sometimes engaging in outright fraud).
It therefore adopted an ISP payment regime in order to
“limit, if not end, the opportunity for regulatory arbi-
trage.”"" The Commission concluded that a bill-and-keep
regime might eliminate incentives for arbitrage and foree
carriers to look to their own customers for cost reeov-
ery... To avoid a flash cut to bill-and-keep, however, the
Commission adopted a compensation regime pending
completion of the Jntercarrier Compensation proceed-
ing.” Specifically, the regime adopted by the Commis-

» See ISP Remand Order, 16 FCC Red at 9175, para. 52. Thus, the
Commission affirmed its prior finding in the Declaratory Ruling
that ISP-bound traffic is jurisdictionally interstate. See id: see also
Declaratory Ruling, 14 FCC Red at 3710-03, paras. 18-20.

” See ISP Remand Order, 16 FCC Red at 9187, para. 77.

ISP Remand Order, 16 FCC Red at 9184-85, paras. 74-75. The
Commission discussed at length the market distortions and regu-
latory arbitrage opportunities created by the application of per
minute reciprocal compensation rates to TSP-bound traffic. In par-
ticular, the Commission found that requiring compensation for this
type of traffic at existing reciprocal compensation rates undermined
the operation of competitive markets because competitive LECs
were able to recover a disproportionate share of their costs from
other carriers, thereby distorting the price signals sent to their ISP
customers. See JSP Remand Order, 16 FCC Red at 9181-86, paras

67-76.

~ See ISP Remand Order, 16 FCC Red at 91458, para. 2 (citing
Developing a Unified Intercarrier Compensation Regime, CC

21a
sion consisted of: (1) a gradually declining cap on inter-
carrier compensation for ISP-bound trafic, beginning at
$.0015 per minute-of-use and declining to $.0007 per
minute-of-use; (2) a growth cap on total ISP-bound min-
utes for which a LEC may receive this compensation;
(3) a “new markets rule” requiring bill-and-keep for the
exchange of this traffic if two carriers were not ex-
changing traffic pursuant to an interconnection agree-
ment prior to the adoption of the regime; and (4) a
“mirroring rule” that gave incumbent LECs the benefit
of the rate cap only if they offered to exchange all traffic
subject to section 251(b)(5) at the same rates.”
rate caps reflected the downward trend in interearrier
compensation rates contained in then-recently negotiated
interconnection agreements.”

These

4. On May 3, 2002, the D.C. Circuit found that the
Commission had not provided an adequate legal basis for
the rules it adopted in the JSP Remand Order." Once
again, the court. did not question the Commission's find-
ing that ISP-bound traffic is jurisdictionally interstate.
Rather, the court held that section 251(g) of the Act did
not provide a basis for the Commission’s decision. The
eourt held that section 251(¢7) is simply a transiUional

Docket No. 01-92, Notice of Proposed Rulemaking, 16 FCC Red 9610
(2001) Untercarnier Compensation NPRM)).

' ISP Remand Order, 16 FCC Red at 9187-89, 9193-94, paras. 78,
80, 89. In a subsequent order, the Commission granted forbearance
to all teleeommunic¢ations carriers with respect to the growth caps
and the new markets rule. See Petition of Core Communications,
Ine. tor Forbearance Under 47 U.S.C. § 160¢e) from Application of
the ISP Renvand Order, WC Docket No. 03-171, Order, 19 FCC Red
20179 (2004) (Core Forbearance Order). Thus, onty the rate caps and
mirroring rule remain in effect. today.

* See ISP Remand Order, 16 FCC Red at 9190-91, para. SO.

See WorldCom, 288 F.3d at 429.

device that preserved ooblugations tnat pre dated the 1996
Act until the Commission adopts superseding rules, and
that there was no pre-1996 Act obligation with respect t
intercarrier compensation for ISP-bound traffic." Al-
though the court reject d the legal rationale for the eom
pensation rules, the court remanded, but did not vacate

the JSP Remand Order to the Commission, and it ob
served that “there is plainly a non-trivial likelihood that
the Commission has authority” to adopt the rules

*
Vv, the rules adopted in thi LST Ke RQ Ae Ee

According

of mandamus with the D.C. Cireuit seeking to compel the
Commission to enter an order resolving the court's re
1 in the WorldCom decision.” On July &, 2008, th:

eourt granted a writ of mandamus and directed the Com-

} ]
Ol a tina ippealable order whic explains ts iega
authority to issue the pricing rules tor ISP-bound traffic
. « + Parry) rT) ] \.. J T*| — ‘joss
adopted in the JSF Nheria) (Jade? he court directed
idop
tne Commission to rest na | Lf tL ot mandamus D\
November 5. ?%O0S8
~
f LAT os ‘
i Yy¥ y
mi) n, lc. Cy 14.4 N AUU
( “Oo | | ( it Ni r
Pe i ( on |
. .
INOVE wer | l PQ

pi EI

B. Discussion

6. In this order, we respond to the D.C. Circuit’s re-
mand order in WorldCom v. FCC," and the court's writ of
mandamus in Core Communications Ine.* Specifically,
we hold that although ISP-bound traffic falls within the
scope of section 251(b)(5), this interstate, interexchange
traffic is to be afforded different treatment from other
section 251(b)(5) traffic pursuant to our authority under
section 201 and 251(i) of the Act.

1. Scope of Section 25i(b)(5)

7. As an initial matter, we conclude that the scope of
section 251(b)(5) is broad enough to encompass ISP-
bound traffic. To be sure, we acknowledge that, in the
Local Competition First Report and Order, the Commis-
sion found that section 251(b)(5) applies only to local
traffic,” and some commenters continue to press for
such an interpretation.” As other commenters recognize,

j
«i

See 288 F.3d at 434.

See d31 °°.3d at 861-62.

Local Competition First Report and Order, 11 FCC Red at 16012-
135, para. 1033.

“* See. e.g., Suppl mental Comments of Verizon and Verizon Wire-
less at 24-32; Letter from Daniel Mitchell, Vice President, Legal and
Industry, Multonal Cable and Telecommunications Association
(NCTA), to Marlene H. Dorteh, Seeretary, FCC, CC Docket No. 01-
92 at 9 (filed Sept. 30, 2008) (NCTA Sept. 30, 2008 E’'r Parte Letter);
Verizon Jntercarrier Compensation FNPRM Comments at 38 42:
NARUC Intercarrier Compensation FNPRM Comments at 6-7;
Rural Alliance /xtercarrier Compensation FNPRMVM Comments at
144-49; Cincinnati Bell /rtercarrier Compensation FNPRM Com-
ments at 5-11; Maine Public Utilities Commission and Vermont Pub-
lic Service Board Jrtercarrier Compensation FNPRM Comments at
7; New York State Department of Publie Service /zterearrier Com
pensation FNPRM Comments at 7; Verizon and BellSouth, Supple-
mental White Paper on ISP Reciprocal Compensation, CC Docket
No. 96-98, 99-68 at 16-20 (fled July 20, 2004) (Verizon/BellSouth

24a

however, the Commission, in the /SP Remand Order, re-
considered that judgment and econeluded that it was a
mistake to read section 251(b)(5) as limited to local traf-
fic, given that “local” is not a term used in section
251(b)(5)." We recognize, as the Supreme Court noted in
AT&T Corp. v. lowa Utilities Board, that. “[i]t would be a
gross understatement to say that. the 1996 Act is not a
model of clarity.”"” Nevertheless, we find that the better
view is that section 251(b)(5) is not limited to local traffic.

8. We begin by looking at the text of the statute. Sec
tion 251(b)(5) imposes on all LECs the “duty to establish
reciprocal compensation arrangements for the transport
and termination of teleecommunications.”’ The Aet
broadly defines “telecommunications” as “the transmis-
sion, between or among points specified by the user, of

Supp. ISP White Paper); NARUC’s Initial Comments at 7 n.13 (May
23, 2004). But see, e.g., ICF Intercarrier Compensation FNPRM
Comments at 39.

” ISP Remand Order, 16 FCC Red at 9166-67, para. 35. See also,
e.g., Qwest, Legal Authority for Comprehensive Interearrier Com-
pensation Reform 2-4 (Qwest White Paper), attached to Letter from
Melissa Newman, Counsel for Qwest, to Marlene H. Dortch, Secre-
tary, FCC, CC Docket Nos. 01-92, 06-45, 99-68, WC Docket. Nos. 04-
36, 05-337, 05-194, 06-122 (filed Oct. 7, 2008) (Qwest Oct. 7, 2008 Ax
Parte Letter); Letter from Kathleen O’Brien Ham et al., Counsel for
T-Mobile, to Marlene H. Dortech, Secretary. FCC, CC Docket No. 01-
92 at 9-10 (filed Oct. 3, 2008) (T-Mobile Oct. 3, 2008 Ex Parte Letter);
Level 3 Aug. 18, 2008 Ex Parte Letter at 2, 15-18; AT&T Reply to
Comment Sought on Missoula Plan Phantom Trafhie Interim
Process Call Detail Records Proposal, CC Docket No. 01-92, Public
Notice, DA 06-2294 (WCB 2006) (Missoula Phantom. Traffic) at 35-
41; Brief from Gary M. Epstein, Counsel for ICF, to Marlene H.
Dortch, Secretary, FCC, CC Docket No. 01-92 at 29-35 (filed Oct. 5,
2004).

“a a~mprmy y ’ } >) rec ] ‘ ou
AT&T v. lowa Utils. Bd., 525 U.S. at 397.

“ 47 ULS.C. § 251(b)(5).

25a

information of the user’s choosing, without change in the
form or content of the information as sent and re-
ceived.”* Its scope is not limited geographically (“local,”
“intrastate,” or “interstate”) or to particular services
(“telephone exchange service,” telephone toll service,”
or “exchange access”). We find that the traffic we elect
to bring within this framework fits squarely within the
meaning of “teleeommunications.” We also observe that.
had Congress intended to preclude the Commission from
bringing certain types of teleeommunications traffic with-
in the section 251(b)(5) framework, it could have easily
done so by incorporating restrictive terms in section
251(b)(5). Because Congress used the term “telecom-
munications,” the broadest of the statutc’s defined terms,
we conclude that section 251(b)(5) is not limited only to
the transport and termination of certain types of tele-
communications traffic, such as local traffic.

9. In the Local Competition First Report and Order
the Commission concluded that section 251(b)(5) applies
only to local traffic, but recognized that “[uJltimately ...
the rates that local carriers impose for the transport and
termination of local traffic and for the transport and ter-
mination of long distance traffic should converge.”* In
the JSP Remand Order, the Commission reversed course
on the seope of section 251(b)(5), finding that “the phrase
‘local traffic’ created unnecessary ambiguities, and we

correct that mistake here.™ The JSP Remand Order

* 47 U.S.C. § 158(43).
™ Td. § 153(47).
" Td. § 153(48).

§
" Td. § 153(16).
* Local Competition First Report and Order, 11 FCC Red at 16012,
para. 10353.
* ISP Remand Order, 16 FCC Red at 9173, para. 46.

26a

noied that “the term ‘local,’ not being a_ statutorily
defined category, ... is not a term used in section
251(b)(5)."" = The Commission found that the scope of
section 251(b)(5) is limited only by section 251(g¢), which
temporarily grandfathered the pre-1996 Act rules gov-
erning “exchange access, information access, and ex-
change services for such access” provided to interex-
change carriers and information service providers until
“explicitly superseded by regulations prescribed by the
Commission.”” On appeal, the D.C. Circuit left intact the
Commission’s findings concerning the scope of section
251(b)(5), although it took issue with other aspects of the
ISP Remand Order."

10. We disagree with commenters who argue that
section 251(b)(5) only can be applied to traffic exchanged
between LECs, and not traffic exchanged between a
LEC and another carrier.” The Commission rejected

' Id. at 9167, para. 34.

* 47 U.S.C. § 251(g).

” See WorldCom v. FCC, 288 F.3d at 429.

See, ¢y., Supplemental Comments of Verizon and Verizon Wire
less (“The best interpretation of § 251(b)(5)}—read in light of the
text, structure, and history of the 1996 Act--is that the reciprocal
compensation obligation applies only to intraexchange (or ‘local’)
voice calls that originate on the network of one LEC (or wireless
provider) and terminate on the network of another LEC (or wireless
provider) operating in the same exchange (or, in the case of wireless
providers, the same MTA.”): Letter from Ann D. Berkowitz, Associ
ate Director, Federal Regulatory Advocacy, Verizon, to Marlene H
Dortch, Secretary, FCC, CC Docket Nos. 99-68, 96-98, Attach. at 26
(filed May 17, 2004) (attaching white paper entitled “Internet-Bound
Traffic is Not Compensable Under Sections 251(b)(5) and 252(d)(2)”)
(Verizon/BellSouth White Paper) (“By its nature, ‘reciprocal com-
pensation’ must [ ] apply to ‘teleeommunications’ exchanged between
LECs (or carriers, like CMRS providers, that the Commission

27a

that argument in the Local Competition Order, finding
that section 251(b)(5) applies to traffic exchanged by a
LEC and any other telecommunications carrier, and
adopted rules implementing that finding.” In a specific
application of that principle, the Commission concluded
that “CMRS providers will not be classified as LECs,’””
but nevertheless found that “LECs are obligated, pur-
suant to section 251(b)(5) (and the corresponding pricing
standards of section 252(d)(”)), to enter into reciprocal
compensation agreements with all CMRS providers.”
No one challenged that finding on appeal, and it has been
settled law for the past 12 years. We see no reason to
revisit that conclusion now. While section 251(b)(5) indis-
putably imposes the duty to establish reciprocal compen-
sation arrangements on ILECs alone, Congress did not
limit the class of potential beneficiaries of that obligation
to LECs.”

authorized to treat as LECs), not to traffie that is exchanged be
tween LECs and non-LECs.”) (emphasis in original).

™ See Local Competition First Report and Order, 11 FCC Red at
16013 16, paras. 1034-41, See also 47 C.F.R. 51.708(a) (“Each LEC
shall establish reciprocal compensation arrangements for transport
and termination of telecommuniecations traffic with any requesting
telecommunications carrier”); JSP Remand Order, 16 FCC Red
at, 9198-94, para. 89 n.177 (“Section 251(b)(5) applies to telecom
munications traffic between a LEC and a telecommunications car-
rier...)

“ Local Competition First Report and Order, 11 FCC Red at 15996,
para. 1005.

" Local Competition First Report and Order, 11 FCC Red at 15997,
para, 1008.

41

If Congress had intended to limit the class of potential benefi-
ciaries of LECs’ duty to establish reciprocal obligation arrange
ments, it would have said so explicitly. See 47 U.S.C. § 251(b)(3)
(deseribing the “duty to provide dialing parity to competing provid
ers of telephone exchange service and telephone toll service”).

28a

11. We also disagree with commenters who argue
that section 252(d)(2)(A)(i) limits the scope of section
251(b)(5).” Section 252(d)(2)(A)(i) provides that a state
commission “shall not consider the terms and conditions
for reciprocal compensation to be just and reasonable”
unless “such terms and conditions provide for the mutual
and reciprocal recovery by each carrier of costs asso-
ciated with the transport and termination on each car-
rier’s network facilities of calls that originate on the net-
work facilities of the other carrier.”” Verizon and others
argue that this provision necessarily excludes interex-
change traffic from the scope of section 251(b)(5), be-
cause at the time the 1996 Act was passed calls neither
originated nor terminated on an interexchange carrier’s
network.“ We reject this reasoning because it errone-
ously assumes that Congress intended the pricing stan-
dards in section 252(d)(2) to limit. the otherwise broad
scope of section 251(b)(5). We do not believe that Con-
yress intended the tail to wag the dog.

© See, e.g., Verizon/BellSouth White Paper at 41-43; New York State
Department of Public Service /ntercarrier Compensation FNPRM
Comments at 8-9; TDS Intercarrier Compensation FNPRM Com-
ments at 19 n.27; VeriSign /ntercarrier Compensation FNPRM
Comments, Attach B. at 9, 12, 26-28; Qwest /nlercarrier Compensa-
tion FNPRM Comments at 39; NASUCA J/nltercarner Compensa-
tion FNPRM Reply at 17; Leap Wireless International, Inc. /nter-
carrier Compensation F'NPRM Reply, Ex. 5 at 8.

* 47 U.S.C. § 252(d)(2)(A)(i).

* See, e.g., Maine Publie Utilities Commission and Vermont Public
Service Board /ntercarrier Compensation FNPRM Comments at 7-
8; New York State Department of Public Service /ntercarrier
Compensation FNPRM Comments at 7-10; Verizon/BellSouth Supp.
ISP White Paper at 16-20; NARUC I/ntercarner Compensation
F NPRM Initial Comments at 7 1.13.

AQ

12. Section 251(b)(5) defines the scope of traffic that

is subject to reciprocal compensation Section
252(d)(Z)(A)(1), in turn, deals with the mechanics of who

owes what to whom, it does not define the scope of traffic
to which section 251(b)(5) applies. Section 252(d)(2)(A)(i)
provides that, at a minimum, a reciprocal compensation
arrangement must provide for the recovery by each car
rier of costs associated with the transport and termi
nation on each carrier’s network of calls that originate on
the network of the other carrier.” Section 252(d)(2)(A)@)
does not address what happens when carriers exchange
traffic that originates or terminates on a third carrier’
network. This does not mean, as Verizon sugyests, that
section 251(b)(5) must be read as limited to traffic involv
ing only two carriers. Rather, it means that there is a
gap in the pricing rules in section 252(d)(2), and the Com
mission has authority under section 201(b) to adopt rule
to fill that gap.

13. We also reject Verizon’s aryument that a telecom
munications carrier that delivers traffic to an ISP is not
eligible for reciprocal compensation because the carrier
does not “terminate” telecommunications traffic at the
ISP.” In the Local Competition Order, the Commission
defined “termination” as “the switching of traffic that i
subject to section 251(b)(5) at the terminating carrier’
end office switch ... and delivery of that traffic to the
called party’s premises.”” As the D.C. Circuit sugyested
in the Bell Atlantic decision, “Calls to ISPs appear to fit
this definition: the traffie is switched by the LEC whose

17 U.S.C, & 252(d)(2)(A)G)
See. Fis : upplementa! {“Lomment Ol Ver on ana Vi } Or Wir

P
less at 34-34; Verizon/BellSouth Whité Paper at 31-32

Local Competition Order, \1 FOC! Red ut 16015 para, 1OA0

alsa 47 CFR Hl 7Ol(d

‘ i
clearly the ‘ealled part We nvres
14 Verizon al O Arye Pnwt the rere) me ts ( }
i) COmpen ation in the competitive CneckKiHst i CCTIOI
ae . whit i Wa (i¢ by Tie a i() 7 }r'¢ Phat Ocal mMmAarKe

—
=~

it’ Oper Lo compet |

ntended to limit the scope of ection ) ) y(
: — ’
rallic We do not e how this argument sheds al
; i
larnt on trie COP (*¢ on Aly] hy ) { CTI Te na aout
neluded the reference t reciprocal CompensaLion In see
bigon TT Tyee iLise CLIO? ith { )) Apple to local trall
r i
i point thal no one dispuls That does not yryesl, |
oy + } if gage , Aaa ' , ‘ ay 4 1 ‘ t» ‘4
06 F.3
1 ’
vv‘ [ if vy‘
itt io }? ( | TT) / ? ; ‘) rn
aa ct ’ yf 4 j ’ Cua ly ‘or gay { r ;
1 Verizon Wire it. At (Ode (4) Ver v\ I per al4
13 (May 17, 2004 evel 3 points out, these argument )
{ | r ;
! ected fh re rt ‘ } t ( i! re
r 1} Coircurt F | ( ] | VAELE, / j / j qr
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r tl A / West ¢ ALLA f j t A if if
| nara (}{)}) thy rom ‘ ’ ; |
grav qgisti j CLWwee f f
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creat | Th ( f il
j ‘Hh, fy tts | j
‘ ry}

joa

isdiction by expanding the applicability of national rules
to historically intrastate issues and state rules to his-
torically interstate issues.” In the Local Competition
First Report and Order, the Commission found that the
1996 Act created parallel jurisdiction for the Commission
and the states over interstate and intrastate matters
under sections 251 and 242.“ The Commission and the
states “are to address the same matters through their
parallel jurisdiction over both interstate and intrastate
matters under sections 251 and 252.”" Moreover, section
251(1) provides that “[nJothing in this section shall be con-
strued to limit or otherwise affect the Commission’s au-
thority under section 201." In the Local Competition
First Report and Order, the Commission concluded that
section 251(1) “affirms that the Commission’s preexisting
authority under section 201 continues to apply for purely
interstate activities.””"

19. In implementing sections 251 and 252 in the Local
Competition First Report and Order, the Commission's
treatment of LEC-CMRS traffic provides an instructive
example. Prior to the 1996 Act, the Commission ex-
pressly preempted “state and local regulations of the
kind of interconnection to which CMRS providers are
entitled” based on its authority under section 201 and 332
of the Act.~ Nevertheless, in the Local Competition
First Report and Order, the Commission brought LEC-

* Local ( ompetition First Report and Order, 11 FCC Red at 15544,
para. 83.
~ Td. at 15544-45, para. So.

Ii.

47 U.S.C. § 251(i).
' Local Competition First Re port and Order at 15546-47, para. 91.
= Timple mentation of Se ctions 3(n) and 332, GN Docket Na, 93-252.

Second Report and Order, 9 FUC Red 1411, 1498, para. 230 (1994).

oda
CMRS interconnection within the seetion 251 framework
as it relates to intraMTA (including interstate intraMTA)
traffic.” The Commission recognized, een that it
continued to retain separate authority over CMRS traf-

20. Courts confirmed that, in permitting LEC-CMRS

terconnection to be addressed through the seetion 251
mane rk. Commission did not in any way lose its
eee teeta or authority to regulate that
traffic under other provisions of the Act. Thus, anOvey
the Eighth Circuit invalidated the Commission’s TEL-
RIC seek: gr bane In general,” it recognized that “bec ‘ause

HHH / : > = Lf * P i See - . rm
section 332(¢)(1)(B) ) gives the I ¢ authority to order

( LO
LECs to neauiaihes) with CMRS earriers, we beheve
that the Commission has the authority to issue the rulk
Mf special concern to the CMRS providers, [including the

Ciprocal compensation rules] but only as these provi-

SIONS apply to CMRS providers. Thus, {the pricing rules

remain in full foree and effeet with respect to the
CMRS providers, and our order of vacation does not
pply to them in the CMRS conteat.”™ Subsequently, the

D.C. Cireuit held that CMRS providers were entitled t
a

Ne { { \ | \ (
= wate)
OUU0, Para. JU)
; . +)
la By opt to proceed under sections 251 1 252 y
mo tft? " ? °F W1W7 t ? tor r » > }
l lat S@C » es UPFIsal¢ OVET LOTCONT€ ( TT} S
} )} : + +
repealed DV Impilcat reject S i l
IISGiecvlor
+ 7 +}, |
We note tnat the supren \ I é ed S dat -
a .
affirmed the TE LRIC method ‘ \ { .
4
( 35 | s. 40 {){} lV 2 r( {
yyy ) I, 7 ~- ) ~
“ b L ( 120 I qd iVvoO SU i Str \]T Pe
’ f \ jy > na ry yt > ’ . ,
C al sl Ot 4 ay ‘
> + \ / ‘ r |
ALLIC a i Lie LO aa SE*4 Kar) I :
2 a s ’ . l.
pressly affirms the Commiss s rol in evolving te
min ? Matto? ? r* t r } ry ae
CUOLIIITIUPIUC aLIOMNS lat We Lp iUt \4 i¢ ( ae 2 LL it
, t Tina t +} yr ?rY) Yr 1% r) . t Fas ] '
Dales lat the ( LITLISS1|¢ Willi cont Ll¢ ( IOVEIOPD al
I I
T\?* T\?" y\y" Sahat ? ry)? ’ ’ y 2? ? CTY 4)? 1?
} LQ rl ite RJA 3KUI h « ce bt Sal [ i _ ‘. \ ra’
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+ > b+ + t. ] ‘1 +} 4 t > rrr - + + , ]
ic that Taus wit } the purview ot sectio U) CO
+ + + > ) } ¢ ; ° ¢
( led ~T |} ‘ Np? } rey
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a i ) T ? } f ’ { ’ ab
Cel ustu 1 ln re Img n this met qd \ en aetermini nethnel
il a. apaane. i il Ssdictlonall nterstats Ir net
ryt xT Thrie¢ ( I iS LKeEWILS¢' t I tf { ry - ( tel
4} T ; > + . 1 r > } o. 4 , . P :
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ira. GO (LIGFIS 1] e r oon — ¢ . 14 ;
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A aitol it . ’ ‘ ‘ *\ if . t ) Pe ' aA pa '
‘ ‘ 79 1.) ‘
4 ( ‘ ena-t t la YSIS Cable Maa service Is al nt
ch tOYrmMatllol er ( +) é ayz goa . a fer { ic
mm TK ‘ ’ . 2 ) 1407 x + } yi . re 4 ] “ J
( é rus Ky 1 l4s8o0 at 14914, pari 11 ~UUo q >
4 )
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: . . oe =
tar > > ; > QN1 Ql " > r
t at 4 I one Gude re | NCQ WI I 4 ] i a Ch); t { [
{ J) 4 ; f ~ ? J? | ’ (
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4 m r] 2 \ \ A . ,
4 Ner \WV ( ( {} \1 orandu Qpinior na Oy
T,* . »L7 14) +7 > , | ‘ 1
r,21 FCC Red 13281, 13288, para. 11 (2006). In the } Q
> , ‘ y +}. + 1}? - . ° -
ne (ommii CMV e I Ma Una Vi r services are sdalecvlo
, - q } y | ¢ " | : ?
LiV nterslale, ¢ t Ving the same ¢ i-LoO-eNnd analys reriect
| } ) 1 > {
} the) ) | () r JQ RKC $1-14 i
he eS
n yA .
‘ 4 a» : I

ova

equips the Commission with the tools necessary to keep
pace with regulatory developments and new technolo-
gies." When read together, these statutory sections pre-
serve the Commission’s authority to address new issues
that fall within its section 201 authority over interstate
traffic, including compensation for the exchange of ISP-
bound traffic. Consequently, in the JSP Remand Order,
the Commission properly exercised its authority under
section 201(b) to issue pricing rules governing the pay
ment of compensation between carriers for ISP-bound
traffic.”

22. Our result today is consistent with the D.C. Cir-
cuit’s opinion in Bell Atlantic, which concluded that the
Jurisdictional nature of traffic is not dispositive of wheth-
er reeiprocal compensation is owed under section
251(b)(5)." It is also consistent with the D.C. Circuit's
WorldCom decision, in which the court rejeeted the Com-
mission’s view that section 251(g) exeluded ISP-bound
traffic from the scope of section 241(b)(5), but made no
other findings. Finally, this result does not run afoul of
the Kighth Circuit's decision on remand from the Su
preme Court in the Jowa Utilities Board litigation, which
held that “the FCC does not have the authority to set the
actual prices for the state commissions to use” under

" See ISP Remand Order, at 9179, para. 51.

“ We thus respond to the D.C. Cireuit's remand order in Worldt "om,
288 F.3d at 434, and the court's writ of mandamus in Core Communi-
cations, 581 F.8d at 861-62, which directed the Commission to ex-
plain its legal authority to issue the pricing rules for ISP-bound
traffic adopted in the 7SP Remand Order. Specifically, we find, for
the reasons set forth here that the Commission had the authority to
adopt the pricing regime pursuant to our broad authority under see-
tion 201(b) to issue rules governing interstate traffic.

™ See Bell Atlantic, 206 F.3d at 5.

© See WorldCom, 288 F.3d at 434.

asa
section 251(b)(5).° At the time of that decision, under the
Local Competition First Report and Order, section
251(b)(5) applied only to local traffic. Thus, the Eighth
Cireuit merely held that the Commission could not set
reciprocal compensation rates for local traffic. The court
did not address the Commission’s authority to set recip-
rocal compensation rates for interstate traffic.“ In sum,
the Commission plainly has authority to establish pricing
rules for interstate traffic, including ISP-bound traffic,
under section 201(b), and that authority was preserved
by section 251(i).
3. Other Issues

23. Most commenters urge the Commission to main-
tain the compensation rules governing ISP-bound traffic
until the Commission is able to complete comprehensive
interearrier compensation reform.” These parties con-

* Jowa Utils. Bd. v. FCC, 219 F.3d 744, 757 (8th Cir. 2000) Vowa
Utils. 11), rev'd in part sub nom. Verizon v. FCC, 535 U.S. 467.

* Indeed, above, the court expressly confirmed the Commission's
independent my to set rates for CMRS traffic pursuant to
section 332 and deelined to vacate the Commission's pricing rules as
they applied in the context of CMRS service. See Jowa Utils. 1, 120
F.3d at 800 n.21.

" See, eg., Letter from Gregory J. Vogt, Counsel for CenturyTel,
Inc. to Marlene H. Dorteh, Secretary, FCC, WC Docket No. 05-337;
CC Docket Nos. 96-45, 01-92, Attach. at 10 (filed July 8, 2008) (ask-
ing the Commission to maintain the existing compromisizs reached
with respect. to ISP-bound traffic); Letter from Gary L. Phillips,
Associate General Counsel, AT&T, to Marlene H. Dortch, Secretary,
FCC, CC Docket Nos. 01-92, 96-98, 99-68 at 8 (led May 9, 2008)
(asserting that the public interest would be best served by main-
taining the existing transitional rates pending broader intercarrier
compensation reform); Letter from L. Charles Keller, Counsel for
Sage Telecom, to Marlene H. Dortch, Secretary, FCC, WC Docket
Nos. 99-68, 01-92, Attach. at 6 (Sage Telecom May 9, 2008 Ex Parte
Letter) (stating that retaining the ISP rate serves broad policy

39a
tend that a higher compensation rate would create new
opportunities for arbitrage“ and impose substantial fi-
nancial burdens on wireless companies, incumbent LECs

goals); Letter from John T. Nakahata, Counsel for Level 3 Com
munications to Marlene H. Dortch, Secretary, FCC, CC Docket Nos.
01-92, 99-68 at 1 (filed May 7, 2008) (supporting continuation of the
compensation rules); Letter from Joshua Seidmann, Vice President
of Regulatory Affairs, Independent Telephone & Telecommunica.
tions Alliance, to Marlene H. Dortch, Secretary, FCC, CC Docket
Nos. 99-68, 96-98, Attach. at 2 (filed Apr. 28, 2008) (ITTA Apr. 28,
2008 Ex Parte Letter) (asking the Commission to retain the current
$0.0007 rate for ISP-bound traffic); Letter from Donna Epps, Vice
President of Federal Regulatory Affairs, Verizon, to Marlene H.
Dortch, Secretary, FCC, CC Docket Nos. 99-68, 96-98 (filed Apr. 7,
2008) (urging the Commission to support. its earlier finding that
$0.0007 is appropriate compensation for dial-up ISP traffic); Letter
from L. Charles Keller, Counsel to Verizon Wireless, to Marlene H.
Dorteh, Secretary, FCC, CC Docket Nos. 01-92, 99-68, Attach. (filed
May 1, 2008) (Verizon Wireless May 1, 2008 Fx Parte Letter)
(describing how elimination of the existing ISP rate would create
substantial burdens on a number of carriers and state commissions):
Letter from Glenn Reynolds, Vice President, Policy, USTelecom, to
Marlene H. Dortch, Secretary, FCC, CC Docket Nos. 01-92, 99-68,
96-262, WC Docket No. 07-135 at 2 (filed Apr. 29, 2008) (USTelecom
Apr. 29, 2008 Ex Parte Letter) (noting that the Commission’s exist-
ing rules have “largely mitigated the debate around compensation
for ISP-bound traffic, but there is every reason to believe the same
problems would arise if the Commission were to reverse direction on
this issue”).

* See. e.g., USTelecom Apr. 29, 2008 Ex Parte Letter at 2: Letter
from Melissa E. Newman, Vice President, Federal Regulatory,
Qwest Communications International, Inc., to Marlene H. Dortch,
Secretary, FCC, CC Docket Nos. 99-68, 96-98, WC Docket No. 07-
135, Attach. at 3-5 (filed Apr. 25, 2008) (Qwest April 25, 2008 Ex
Parte Letter); Verizon and BellSouth, Further Supplemental White
Paper on ISP Reciprocal Compensation at 20 (Verizon/BellSouth
Further Supp. ISP White Paper), attacked to Letter from Donna
Epps, Vice President, Federal Regulatory Advocacy, Verizon, to
Marlene H. Dortch, Secretary, FCC, CC Docket Nos. 96-98, 99-68
(filed Sept. 27, 2004).

40a

and state public utility commissions.” They further claim
that the existing regime has simplified interconnection
negotiations.”

24. Inthe JSP Remand Order, the Commission found
that the one-way nature of ISP-bound traffic creates sig-
nificant arbitrage opportunities. Due to the unbalanced
nature of ISP-bound traffic, the Commission observed
that reciprocal compensation arrangements created
enormous incentives for competitive LICs to sign up
ISPs as customers." The Commission cited evidence that
competitive LECs, on average, terminated eighteen
times more traffic than they originated, resulting in an-
nual CLEC reciprocal compensation billings of approxi-
mately two billion dollars, 90 percent of which was for
[SP-bound traffic.” The Commission concluded that “the
record strongly suggests that CLECs target ISPs in
large part because of the availability of reciprocal com-
pensation payments.”™ This undermined the operation of
competitive markets because competitive LECs were
able to recover a disproportionate share of their costs
from other carriers.“ To limit arbitrage opportunities

* See, e.g., Verizon Wireless May 1, 2008 Ex Parte Letter, Attach.
” See, e.g., id. (stating that “the [mlirroring [rlule simplified wire-
less-ILEC interconnection negotiations tremendously”); Supplemen-
tal Comments of Verizon and Verizon Wireless on Intercarrier Pay-
ments for ISP-Bound Traffie and the WorldCom Remand, CC Dock-
et Nos. 01-92, 96-98, 99-68 at 38-40 (filed Oct. 2, 2008) (Supplemental
Comments of Verizon and Verizon Wireless) (indicating that Verizon
entered into multiple agreements using the $.0007 rate cap estab-
lished in the JSP Remand Order).
" Td. at 9182-83, para. 68-71,
© Td, at 9183, para. 70.
SI

Id.

™ Td. at. para. 71.

4la

that arose from “excessively high reciprocal compen-
sation rates,”” the Commission adopted a gradually de-
clining cap on intercarrier compensation for ISP-bound
traffic, beginning at $.0015 per minute of use and declin
ing to $.0007 per minute of use, the current cap.” The
Commission derived the rate caps from contemporancous
interconnection agreements, in which carriers voluntarily
agreed to rates comparable to the rate caps adopted by
the Commission.” The interconnection agreements in
cluded lower rates for unbalanced traffic than for bal-
anced traffic, and the rates declined over time, like the
rate caps.” Although the Commission made no specific
findings with regard to the actual costs associated with
delivering traffic to ISPs, it noted evidence in the record
that technological advances were reducing the costs in-
curred by carriers when handling all forms of traffic.”
The Commission also noted that “negotiated reciprocal
compensation rates continue to decline as ILI¢Cs and
CLECs negotiate new agreements.”

25. On July 14, 2003, Core Communications, Inc.
(“Core”) filed a petition pursuant to Section 10 of the
Communications Act" requesting that the Commission

™ Td. at 9185, para. 75,
” Jd. at 9187, para. 78.
’ Td. at 9190-91, para. 85.

™ Jd. at 9190, para. 84.
” Ia.
Yi ’ al 2. . ’ reerryy ™~ . . ‘~

See 47 U.S.C. § 160(a) (“T]he Commission shall forbear from ap
plying any regulation or any provision of [the Communications] Act
to a telecommunications carrier ... if the Commission determines
that (1) enforcement of such regulation or provision is not necessary
to ensure that the charges, practices, classifications or regulations
by, for, or in connection with that telecommunications carrier or tese-

42a
forbear from enforcing the rate caps and certain other
provisions set forth in the JSP Remand Order with
respect to the exchange of ISP-bound traffic between
telecommunications carriers. In 2004, the Commission
denied the petition with respect to rate caps and the mir-
roring rule, determining that Core had satisfied none of
the three prongs of the statutory test for forbearance.”
First, the Commission found that forbearance from en-
forcement of the rate caps was not consistent with the
public interest. To the contrary, the Commission con-
cluded that rate caps remained necessary to prevent
regulatory arbitrage and to promote efficient investment
in teleeommunieations services and facilities.” Second,
the Commission found limited potential for discrimina-
tion under the rate caps. The caps applied to ISP-bound
traffic only to the extent that an incumbent carrier of-
fered to exchange all traffic at the same rate under

communications service are just and reasonable, and are not unjustly
or unreasonably discriminatory; (2) enforcement of such regulation
or provision is not necessary for the protection of consumers; and
(3) forbearance from applying such provision or regulation is consis-
tent with the public interest.”).

See Petition of Core Communications, Inc. for Forbearance
Under 47 U.S.C. § 160(C) From Application of the ISP Remand
Order, 19 FCC Red 20179 (2004) (“Forbearance Order’).

® The Commission rejected as an initial matter Core’s argument
that the D.C. Circuit’s decision in WorldCom, Inc. v. FCC, 288 F.8d
429 (2002), cert. denied, 588 U.S. 1012 (2003), compelled the agency
to grant the petition, observing that the court remanded but did not
vaeate the rules adopted in the /SP Remand Order and specifically
found a “non-trivial likelihvod” that the Commission would be able to
justify the regime it adopted. See Forbearance Order, 19 FCC Red
at, 20185 para. 17 (quoting Worldcom, 288 F.3d at 434).

43a

Section 251(b)(5).” Accordingly, the Commission con-
cluded that Core had not proven that the rate caps
resulted in impermissible discrimination ayainst or be-
tween competitive carriers or services.” Finally, the
Commission found that Core had not demonstrated that
enforcement of the rate caps was not necessary for the
protection of consumers. Core advanced speculative pen-
eral claims that the caps caused artificially high rates,
had forced competitive carriers from the market, and had
deterred investment in telecommunications services, all
to consumers’ detriment. The Commission rejected these
unsupported claims, explaining that the rate caps were
designed to prevent the subsidization of dial-up Internet
access customers at the expense of consumers of basic
telephone service and to avoid regulatory arbitrage and
discrimination between services.” For these reasons, the
Commission denied Core’s petition for forbearance inso-
far as rate caps were concerned.”

26. In 2006, the D.C. Circuit affirmed our decision not
to forbear from the rate cap (and the mirroring rulc).”
The Court found reasonable the Commission's “view that.
the rate caps are necessary to prevent the subsidization
of dial-up Internet access consumers by consumers of
basic telephone service” that would occur if reciprocal
compensation rates applied to one-way ISP-bound traf-
fic.” The Court likewise rejected Core’s contention that

wa oo “fs ff ¢ , 4s . .
" See 47 U.S.C. § 251(b)(5) (imposing upon local exchange carriers
the “duty to establish reciprocal compensation arrangements for the
transport and termination of telecommunications”).

” See Forbearance Order, 19 FCC Red at 20187 para, 23.

” Td. at 20188 para. 25.

" Td. at 20189 para. 29.

In re Core Communications, Inc., 455 F.3d 267 (D.C. Cir. 2006).
” Td. at 278.

444

the rate cap was “unreasonably discriminatory,” both be
cause one-way ISP-bound calls were fundamentally dif
ferent from other forms of traffic and because the mir
“the caps apply to ISI’-bound

roring rule ensures that
traffic only if an incumbent LEC offers to exchange all
Section 251(b)(5) traffic at the same rate.”"” T*inally, the
Court concluded that the Commission’s concern that the
rate cap was necessary to prevent “regulatory arbitrage’

{

and ‘distorted economic incentives’” was reasonable.”
27. The policy justifications provided by the Com

mission in 2001 for the rules at issue here have not been
questioned by any court. In addition, the policy justifica

tions provided by the Commission for refusing to forbear
from enforcement of these rules were upheld by the D.C.
Circuit in 2006. We therefore disagree with parties who
supvesl that the Commission, in responding to the D.C,
Circuit’s remand in WorldCom, must offer detailed new
justifications for the ISP intercarrier payment regime;”
[wle have already offered our justifications for that re

gime. Moreover, both the WorldCom remand and Core
writ of mandamus focused on the issue of legal authority.
We also reject arguments that the Commission unlaw

fully delegated its authority in the /SP Remand Order
and arguments that the Commission addressed previ

ously in the Core Forbearance Order.”

” Id. (citing Forbearance Order, 19 FCC Red at 20187, para, 2%
™ Td. at 279,

™ See Letter from Michael B. Hazzard, Counsel to Core Communi
cations, to Marlene H. Dorteh, FCC, CC Docket Nos. 99-68, 01-92,
Attach. at 20-26 (May 14, 2008)

™ See Core May 14, 2008 Response at 18 & n&, 19-20. The
Commission did not delegate its authority in the 7S? Remand Order,
but rather provided options that were not mandatory, See, eg. (SP
Remand Order, 16 FCC Red at 9193, para, 89. Additionally, Core

il, REPORT AND ORDER REFORM OF TIIGI
COST UNIVERSAT, SERVICE SUPPOTCU

sett

47a

munications carrier (ETC) to receive high-cost universal!
service support.'” ETCs may be incumbent. LECs, or
non-ineumbent LECs, which are referred to as “com
petitive ETCs."™ Under the existing high-cost support
distribution mechanism, incumbent LEC ETCs receive
high-cost support for their intrastate services based on
their costs.'” Competitive TCs receive support for each
line based on the support the incumbent LIEC would re-
ceive for that line in the service area." This support to
competitive ETCs is known as “identical support.” The
Commission’s universal service high-cost support rules
do not distinguish between primary and secondary lines;
therefore, high-cost support may go to a single end user
for multiple connections.'"“ Further, the Commission's
rules result in subsidizing multiple competitors in the
same high-cost area.

N

110 land a me! > Ye P rT. ° » why. °
© 47 ULS.C. § 254(e). The statutory requirements for ITC designa

tion are set out in section 214(e) of the Act. 47 U.S.C. § 214(e).

'' See 47 C.F.LR. § 54.5 (“A ‘competitive eligible teleeommunications
carrier’ is a carrier that meets the definition of ‘eligible telecom
munications carrier’ below and does not meet. the definition of an
‘incumbent loeal exchange earrier’ in § 51.5 of this chapter.”).

'S Non-rural incumbent LEC ETCs receive support for their intra
state supported services based on the forward-looking economic cost
of providing the services. 47 C.EF_R. § 54.309. Rural incumbent LEC
ETCs receive support based on their loop costs, as compared to a
national average. 47 C.IF'.R. Part 36, sbpt. F; 47 C.PLR. § 54.305.
Incumbent LEC ETCs that serve study areas with 50,000 or fewer
lines receive support based on their local switehing costs. 47 C.FLR.
§ 54.301. Additionally, incumbent LEC E'TCs that are subject to
price cap or rate-of-return regulation receive interstate access sup-
port based on their revenue requirements. 47 C.F.R. Part. 54, sbpts.
J, K.

"S47 C.FLR. § 54.307(a).

114

See Universal Service First Report and Order, 12 FCC Red at
&S28-30, paras. 94-96.

48a

33. High-cost support for competitive ETCs has
grown rapidly over the last several years, placing extra-
ordinary pressure on the federal universal service fund.”
In 2001, high-cost universal service support totaled ap-
proximately $2.6 billion.’ By 2007, the amount of high-
eost support had grown to approximately $4.3 billion per
year." In recent years, this growth has been due mostly
to increased support provided to competitive ETCs,
which receive high-cost support based on the per-line
support that the incumbent LECs receive pursuant to
the identical support rule. Competitive ETC support, in
the six years from 2001 through 2007, has grown from
under $17 million to $1.18 billion—an annual growth rate

115 > 7 . ‘ Z
Support for the fund derives from assessments paid by providers

of interstate telecommunications services and certain other provid-
ers of interstate teleeommunieations. See 47 C.F.R. § 54.706. Fund
contributors are permitted to, and almost always do, pass those
assessments though to their end-user customers. See 47 C.F.R.
§ 54.712. Fund assessments paid by contributors are determined by
applying the quarterly contribution factor to the contributors’ contri-
bution base revenues. In the second quarter of 2007, the contri-
bution factor reached 11.7 pereent, which is the highest level since its
inception. See Proposed Second Quarter 2007 Universal Service
Contribution Factor, CC Docket. No. 96-45, Publie Notice, 22 FCC
Red 5074, 5077 (OQMD 2007). The eontribution factor has sinee de-
clined to 11.4% in the fourth quarter of 2008. Proposed Fourth
Quarter 2008 Universal Service Contribution Factor, CC Docket
No. 96445, Public Notice, DA 08-2091 (OMD 2008).

'’ See FCC, UNIVERSAL SERVICE MONITORING REPORT, tbl. 3.2
(2007) (2007 UNIVERSAL SERVICE MONITORING REPORT), available
at http://hraun-foss.fee.ov/edoes_publie/attachmateh/DOC-279226
Al.pdf.

' UNIVERSAL SERVICE ADMINISTRATIVE COMPANY, 2007 ANNUAL
REPORT 48 (2007) (USAC 2007 ANNUAL REPORT), available at
http://www.usac.org/ res/documents/about/pdf/usae. annual-report-
2007.pdf.

49a
of over 100 percent.'" This “funded competition” has
grown significantly in a large number of rural, insular, or
high-cost areas; In some study areas more than 20 eom-
petitive ETCs currently receive support.”

34. ‘To address the growth in competitive ETC sup-
port, the Joint Board recommended an interim eap on the
amount of high-cost suppert available to competitive
KTCs, pending comprehensive high-cost universal ser-
vice reform.'’ ‘The Commission adopted this reeom-
mendation on May 1, 2008."

35. For the past several years, the Joint Board and
the Commission have been exploring ways to reform the
Commission's high-cost program. In the most reeent
high-cost support comprehensive reform efforts, the

Lis

2007 UNIVERSAL SERVICE MONITORING REPORT at tbl. 3.2;
USAC 2007 ANNUAL REPORT at 45.

See USAC Quarterly Administrative Filings for 2008, Fourth
Quarter (4Q) Appendices, HC038—-Rural Study Areas with Compe-
tition—4Q2008, available at http://www.usac.org/about/govern
ance/fee-filings/2008/Q4/11C036020-Co20 Rural Se20Study %20Areas%
Z20Owith e20Competition20-%2041Q2008.xls (showing 24 competitive
KTCs in the study area of incumbent LIC lowa Telecom North
(study area code 351167), and 22 competitive ETCs in the study area
of incumbent LEC lowa Telecom Systems (study area code 351170)).
™ High-Cost Universal Service Support; Federal-State Joint Board
on Universal Service, WC Docket No. 05-337, CC Docket No. 96-45,
Recommended Decision, 22 FCC Red 8998, 8999-9001, paras. 4-7 (JB
2007) Urterim Cap Recommended Decision).

" Interim Cap Recommended Decision, 22 FCC Red at 8999-9001,
paras. 4-7; Interon Cap Order, 23 FCC Red at 8834. As recom
mended by the Joint Board, the Commission capped competitive
kK’ TC support for each state. /rterim Cap Recommended Decision,
22 FCC Red at 9002, para. 9; /nterim Cap Order, 23 FCC Red at
SS46, paras. 26 28. The Commission set the eap at the level of sup-
port competitive E'TCs were eligible to receive during March 2008.
Interim Cap Order, 23 FCC Red at 8850, para. 38.

50a

Joint Board issued a recommended decision on Novem-
ber 20, 2007.'* The Universal Service Joint Board's re-
eommended decision included several reeommendations
to address the growth in high cost support and to reform
the high cost mechanisms. Specifically, the Universal
Service Joint Board recommended that the Commission
should: (1) deliver high-cost support through a provider
of last resort fund, a mobility fund, and a broadband
fund; (2) eap the high-cost fund at $4.5 billion, the ap-
proximate level of 2007 high-cost support; (8) reduce
the existing funding mechanisms during a_ transition
period; (4) add broadband and mobility to the list. of ser-
vices eligible for support under section 254 of the Act;*
(5) eliminate the identical support rule; and (6) “explore
the most appropriate auction mechanisms to determine
high-cost universal service support.”

36. On January 29, 2008, the Commission released
the Joint Board Comprehensive Reform NPRM, seeking
comment. on the Joint Board's Comprehensive Reform

E22 ‘ . ° ) ye uN
{ omprehens iv Reform Recommended TD) cision, 22 FCC Red
20477.
123 : o») WAG
Comprehensive Reform Recommended Decision, 22 FCC Red at
20478, pura. 1.
vs ‘ ° ? "1 wv
( om prehe RSLVE Reform Recommended Decision, 22 FCC Red at
2048081, para. 11.
125 ’ . ) “ye a
Comprehensive Reform Recommended Decision, 22 FCC Red at
20484, para. 26.
“ Comprehensive Reform Reconomended Decision, 22 FCC Red at
20484, para. 27
17 . Sy NN
( omprehens2ve Reform Recommended Decision, 22 FCC Red at
20481-82, paras. 12-18.
Is pv ; : : ] hyde ce @ OB f
Comprehensive Reform Recommended Decision, 22 FCC Red at
20486, para. 35.

22 FCC Red at

=
~

| Feu Y . ) j
Comprehensive Reform Recommended Deci

20478, paras. 1-6

Ala

Recommended Decision.” Pursuant to seetion 251(a)(2),
the Commission “shall complete any proceeding to imple
ment subsequent recommendations from any Joint Board
on universal service within one year after receiving such
recommendations.”

BK. Discussion
We have carefully reviewed the Joint Board's
Comprehensive Reform Recommended Decision and the
comments that were filed in response to the Commis
sion’s Joint Board Comprehensive Reform NPRM. We
thank the Joint Board and its staff for them hard work tn
studying these difficult issues and in developing their
recommendations. We choose not to implement these
recommendations at this time, however.
Hl. FURTHER NOTICE OF PROPOSED RULE-

MAKING

as. In enacting the Aet, Congress sought to introduce
competition into local telephone service, whieh tradition-
ally was provided through regulated monopolies. Recog
nizing that in introducing such competition, it was threat
ening the implicit subsidy system that had traditionally
supported universal service, it directed the Commission
to reform its universal service program to make support

130 oy fy ’ : ¥ : ’ ra . ,
High-Cost Universal Service Support; Federal-State Joint Board

on Universal Service, WC Doeket No. 05 387, CC Docket No. 96-15,
Notice of Proposed Rulemaking, 23 FCC Red 1467 (2008) (/dentical
Support NPRM); High-Cost Universal Service Supvort; Federal
State Joint Board on Universal Service, WC Doeket No. 05-337, CC
Docket No. 96-45, Notice of Proposed Rulemaking, 28 FCC Red 1495
(2008) (Reverse Auctions NPRM); Joint Board Comprehensive
Reform NPRM, 23 FCC Red 1581 (colleetively the High-Cost Re
form NPRMs).

131 - To ‘ - or »
47 U.S.¢ eS. PAA AL )

explicit and sustainable in the face of developing competi-
tion.

.

39. The communications landscape has undergone
many fundamental changes that were seareely antici-
pated when the 1996 Act was adopted. The Internet was
only briefly mentioned in the 1996 Act,'~ but now has
come into widespread use, with broadband Internet ac
cess Service increasingly viewed as a necessity. Consist-
ent with this trend, carriers are converting from cireuit-
switched networks to IP-based networks. These changes
have benefited consumers and should be encouraged.
Competition has resulted in dramatically lower prices for
telephone service, and the introduction of innovative
broadband products and serviees has fundamentally
changed the way we communicate, work, and obtain our
education, news, and entertainment. At the same time,
however, these developments have challenged the out-
dated regulatory assumptions underlying our universal
service and interecarrier compensation regimes, foreing
us to reassess our existing approaches. We have seen un-
precedented growth in the universal service fund, driven
in significant part by increased support for competitive
KTCs. The growth of competition also has eroded the
universal service contribution base as the prices for inter
state and international services have dropped. Finally,
we have seen numerous competitors exploit arbitrage op
portunities ereated by a patchwork of above-cost inter-
carrier compensation rates.

10. We seek comment today on three specifie pro-
posals. The first, attached as Appendix A, is the Chair
man’s Draft Proposal circulated to the Commission on
October 15, 2008, which was placed on the Commission’s

See 47 U.S.C. § 230; 47 U.S.C. § 157 nt.

, Ooa

agenda for a vote on November 4, 2008. This item subse-
quently was removed from the Agenda on November 3,
2008." The second, attached as Appendix B, is a Narrow
Universal Service Reform Proposal circulated to the
Commission on October 31, 2008. The third, attached as
Appendix C, is a draft Alternative Proposal first cireu-
lated by the Chairman on the evening of November 5,
2008. Appendix C incorporates changes proposed in the
ex parte presentations attached as Appendix D. We note
that members of industry, Congress, and the general
public have urged the Commission to seek comment. on
these proposals.

41. We seek particular comment on two questions.
First, should the additiona! cost standard utilized under
§ 252(d)(2) of the Act be: (i) the existing TELRIC stan
dard; or Gi) the incremental cost standard described in
the draft order? Second, should the terminating rate for
all § 251(b)(5) traffie be set as: (i) a single, statewide rate;
or (il) asingle rate per operating company?

IV. PROCEDURAL MATTERS

A. Ex Parte Presentations

42. The rulemaking this Further Notice initiates shall
be treated as a “permit-but-disclose” proceeding in aecor-
dance with the Commission's ex parte rules." Persons
making oral ea parte presentations are reminded that
memoranda summarizing the presentations must contain
summaries of the substance of the presentations and not
merely a listing of the subjects discussed. More than a
one or two sentence deseription of the views and argu

™ See http://hraunfoss.fee.gov/edoes publie/attachmateh/DOC-2865
32A1.pdf,

Li ad ‘ . . ‘
47 ¢ FR. 8 1.200 ef se (j.

o4a
ments presented generally is required.'” Other require-
ments pertaining to oral and written presentations are
set forth in section 1.1206(b) of the Commission’s rules."

B. Comment Filing Procedures

43. Pursuant to sections 1.415 and 1.419 of the Com-
mission’s rules,'” interested parties may file comments
and reply comments regarding the Further Notice on or
before the dates indicated on the first page of this docu-
ment. All filings should refer to CC Docket Nos. 96-45,
96-98, 99-68, 99-200, 01-92 and WC Docket Nos. 03-109,
(4-36, 05-337, and 06-122. Comments may be filed using:
(1) the Commission’s Electronic Comment Filing System
(ECF); (2) the Federal Government’s e-Rulemaking
Portal, or; (3) by filing paper copies. See Electronic Fil-
ing of Documents in Rulemaking Proceedings, 63 FR
24121 (1998).

44, Electronic Filers: Comments may be filed elec-
tronieally using the Internet by accessing the ECFS:
http://www.fee.gov/egb/ecls/ or the Federal e-Rulemak-
ing Portal: http:/Awww.regulations.gov. Iilers should fol-
low the instructions provided on the website for submit-
ting comments.

45. ECFS filers must transmit one electronic copy of
the comments for CC Docket Nos. 96-45, 96-98, 99-68, 99-
200, 01-92 and WC Docket Nos. 03-109, 04-36, 05-337, and
06-122, respectively. In completing the transmittal
screen, filers should include their full name, U.S. Postal
Service mailing address, and the applicable docket num.
ber. Parties may also submit an electronic comment by
Internet e-mail. To get filing instructions, filers should
See 47 C.F.R. § 1.1206(b)(2).

' 47 C.F.R. § 1.1206(b).
"47 C.F.R. §§ 1.415, 1.419.

5da

send an e-mail to ecfs@fee.gov, and include the following
words in the body of the message, “get form.” A sample
form and directions will be sent in response.

46. Paper Filers: Parties who choose to file by paper
must file an original and four copies of each filing. Fil-
inys can be sent by hand or messenger delivery, by com-
mercial overnight courier, or by first-class or overnigiit
U.S. Postal Service mail (although we continue to experi-
ence delays in receiving U.S. Postal Service mail). All fil-
ings must be addressed to the Commission’s Secretary,
Marlene H. Dorteh, Office of the Secretary, Federal
Communications Commission, 445 12th Street, S.W.,
Washington, D.C. 20554.

47. The Commission’s contractor will receive hand-
delivered or messenger-delivered paper filings for the
Commission’s Secretary at 2386 Massachusetts Avenue,
N.E., Suite 110, Washington, D.C. 20002. The filing
hours at this location are 8:00 a.m. to 7:00 p.m. All hand
deliveries must be held together with rubber bands or
fasteners. Any envelopes must be disposed of before
entering the building.

48. Commercial overnight mail (other than U.S.
Postal Service Express Mail and Priority Mail) must be
sent to 9300 East Hampton Drive, Capitol Heights, MD
20743.

49. U.S. Postal Service first-class, Express, and Pri-
ority mail should be addressed to 445 12th Street, S.W.,
Washington D.C. 20554. Parties should send a copy of
their filings to Victoria Goldberg, Pricing Policy Division,
Wireline Competition Bureau, Federal Communications
Commission, Room 5-A266, 445 12th Street, S.W.,
Washington, D.C. 20554, and to Jennifer McKee, Tele-
communications Access Policy Division, Wireline Compe-
tition Bureau, Federal Communications Commission,

56a

Room 5-A423, 445 12th Street, S.W., Washington, D.C.
20554, or by e-mail to epdeopies@fce.gov. Parties shall
also serve one copy with the Commission’s copy contrac-
tor, Best Copy and Printing, Inc. (BCPI), Portals II, 445
12th Street, S.W., Room CY-B402, Washington, D.C.
20554, (202) 488-5300, or via e-mail to fee@bepiweb.com

50. Documents in CC Docket Nos. 96-45, 96-98, 99-68,
99-200, 01-92 and WC Docket Nos. 03-109, 04-36, 05-337,
and 06-122 will be available for public inspection and
copying during business hours at the FCC Reference
Information Center, Portals II, 445 12th Street S.W.,
Room CY-A257, Washington, D.C. 20554. The docu-
ments may also be purchased from BCPI, telephone
(202) 488-5300, facsimile (202) 488-5563, TTY (202) 488-
5562, e-mail fee@bepiweb.com.

C. Initial Regulatory Flexibility Analysis

51. As required by the Regulatory Flexibility Act of
1980," the Commission has prepared an Initial Regula-
tory Flexibility Analysis (IRFA) of the possible signifi-
cant economic impact on small entities of the policies and
rules addressed in this document. The IRFA is set forth
as Appendix E. Written public comments are requested
on this IRFA. Comments must be identified as re-
sponses to the IRFA and must be filed by the deadlines
for comments on the Notice previded on or before the
dates indicated on the first page of this Notice.

D. Paperwork Reduction Act

52. This document contains proposed new or modified
information collection requirements. The Commission,
as part of its continuing effort to reduce paperwork bur-
dens, invites the general public and the Office of Manage-
ment and Budget (OMB) to comment on the information

™® See 5 U.S.C. § 603.

57a
collection requirements contained in this document, as
required by the Paperwork Reduction Act of 1995, Public
Law 104-18. In addition, pursuant to the Small Business
Paperwork Relief Act of 2002, Public Law 107-198,'" we
seek specific comment on how we might “further reduce
the information collection burden for small business con-
cerns with fewer than 25 employees.”

E. Accessible Formats

53. ‘l’o request materials in accessible formats for
people with disabilities (Braille, large print, electronic
files, audio format), send an e-mail to fec504@f{cec.gov or
call the Consumer & Governmental Affairs Bureau at
202-418-0530 (voice) or 202-418-0482 (TTY). Contact the
FCC to request reasonable accommodations for filing
comments (accessible format documents, sign language
interpreters, CART, etc.) by e-mail: I'CC504@fcc.pov;
phone: 202-418-0530 or TTY: 202-418-0432.

KF. Congressional Review Act

54. ‘The Commission will include a copy of this
ORDER ON REMAND AND REPORT AND ORDER
AND FURTHER NOTICE OF PROPOSED RULE-
MAKING in a report to be sent to Congress and the
Government Accountability Office pursuant to the Con-
gressional Review Act. See 5 U.S.C. § 801(a)(1)(A).

V. ORDERING CLAUSES

99. Accordingly, IT IS ORDERED that, pursuant to
sections 1-4, 201-209, 214, 218-220), 224, 251, 252, 254,
303(r), 332, 408, 502, and 508 of the Communications Act
of 1934, as amended, and Scctions 601 and 706 of the
Telecommunications Act of 1996, 47 U.S.C. §§ 151-154,
157 nt, 201-209, 214, 218-220, 224, 251, 252, 254, 303(r),

See 44 U.S.C. § 3506(c)(4).

58a
332, 403, 502, 503, and sections 1.1, 1.411-1.429, and
1.1200-1.1216 of the Commission’s rules, 47 C.F-.R.
§$ 1.1, 1.411-1.429, 1.1200-1.1216, the ORDER ON
t{HMAND AND REPORT AND ORDER AND FUR
THER NOTICE OF PROPOSED RULEMAKING
ARE ADOPTED.

56. IT IS FURTHER ORDERED, in light of the
opinion of the United States Court of Appeals for the
District of Columbia Circuit in WorldCom wv. FCC, 288
Ke8d 429 (D.C. Cir. 2002), we consider our obligations
met from the writ of mandamus issued in /n re Core
Communications, Inc. on Petition for Writ of Manda
mus to the Federal Communications Commission, DA
Cir. No. 07-1446 (decided July 8, 2008)

57. IT IS FURTHER ORDEREICD that this FUR
THER NOTICE OF PROPOSED RULEMAKING
SHALL BECOME EFFECTIVE on the date of publica
tion of the text of a summary thereof in the Federal
Repister, pursuant to 47 C.F. R. §§ 1.4, 1.18.

58. IT IS FURTHER ORDERED that this ORDER
ON REMAND AND REPORT AND ORDER SHALL
BE EFFECTIVE upon release,

59. IT IS FURTHER ORDERED that the Commi
sion’s Consumer & Governmental Affairs Bureau, Ref
erence Information Center, SHALL SEND a copy of this
ORDER ON REMAND AND REPORT AND ORDER
AND FURTHER NOTICE OF PROPOSED RULE
MAKING, including the Initial Regulatory [I lexibility
Analysis, to the Chief Counsel for Advocacy of the Small

Jusiness Administration.

MORLRAL COMMUNICATIONS COMMIT 1()!
i (¢ ()> 7

APPENDIX A
HAIRVMAN’'S DRAFT PROore

bla
IP-E-NABLED SERVICES
WC DOCKET No. 04-36

NUMBERING RESOURCE OPTIMIZATION
CC DOCKET NO. 99-200

ORDER ON REMAND AND REPORT
AND ORDER AND FURTHER NOTICE OF PRO-
POSED RULEMAKING

Adopted: “Insert Adopted Date”
Released: “Insert Release Date”

Comment Date: |XX days after publi-
cation in the Federal
Register |

Reply Comment Date: [XX days after publi-
cation in the Federal

Register |

Heading
I. INTRODUCTION

62a

TABLE OF CONTENTS

Paragraph #

Il. REFORM OF HIGH-COST UNIVER-

SAL SERVICE SUPPORT
A.
B,

Background
Discussion
l.

be

o.

Cj

Controlling the Growth of the

OREN © WN serene ccseaieenntceoccmssin

Conditioning Support on Offering
Broadband Internet. Aecess Ser-

a. Definition of Broadband In-

ternet Access ServiCe...........c...c..cces.s

b. Broadband Internet Access

Service Obligations .................:cccecee

Incumbent LECs’ Commitment

ed CF r Fev oon cciceccccoscccseccaccsesscctcces

Reverse Auctions tor Study Are-

as Unserved by Broadband....................
Sa, 5 ee on Orne
1h BRN FU oc ccs cack cacisencosamsernecenrancss
e. Auctioned Support ..................ccceeee
d. Selecting a Winning Bid....................
e. Bidder Qualifications 0... eee

Competitive Eligible Telecom-

FUNTVICMEIOTAS COGTTICTS. occesicccasacveiavescsscccesess
FN raisons ese rricsrerertscces

b. Certification by Existing

CONMPOTIIIVG BE TB oacissvciccincscsessecdscess

‘

ec. Calculation of Support............eeeeeee

COOTER RRO OOH EH ETHER TEETH HEE HEHE

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aces 24

20

acon 28

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51

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baiees 53

632
6. Build-Out Milestones and Moni-
toring, Compliance, and Iinforce-

FROIN «0 s.00s0eccendenesneeeeseasbsevecaunegemiininennintiannnnEE o7
Il. BROADBAND FOR’ LIFELINE

LINK UP CUSTOMERS :......:.c.5eeeeeee 64
A. BCR QT OUI onvccecccsccucscevassserepesstnaciatn 65
TS. LISCUBSION .xcascevessenceeiaerenenvessnavunvonssseenanieaann 71

Ll. Available FUNGI co.ccicsscscccecstpustaeeeneeee 77
2. Eligible Services and Equipment ............0..... SO
3. Selection Criteria. .....
Comprehensive Reform Recommended Decision, 22 FCC Red at

20481-82, paras. 12-18.

- Comprehensive Reform Recommended Decision, 22 FCC Red at

20486, para. 35.

33 Y ° as ’ : ‘pe Vite. »
Comprehensive Reform Recommended Decision, 22 FCC Red at

20478, paras. 1-6.

34 ° Y y ° Y ’ + a] Y ° ) ?
High-Cost Universal Service Support; Federal-State Joint Board

on Universal Service, WC Docket No. 05-337, CC Docket No. 96-45,

Notice of Proposed Rulemaking, 23 'CC Red 1467 (2008) (/dentical

Support NPRM); High-Cost Universal Service Support; Federal-

State Joint Board on Universal Service, WC Docket No. 05-337, CC

Docket No. 96-45, Notice of Proposed Rulemaking, 23 FCC Red 1495

(2008) (Reverse Auctions NPRM); High-Cost Universal Service

Support; Federal-State Joint Board on Universal Service, WC

Docket No. 05-337, CC Docket No. 96-45, Notice of Proposed Rule-

7ba

Commission sought comment on the Commission’s rules
governing the amount of high-cost universal service sup-
port provided to competitive ETCs.* It tentatively con-
eluded that the Commission should eliminate the identi-
eal support rule.“ The Commission also tentatively con-
cluded that support to a competitive ETC should be
based on the competitive ETC’s own costs of providing
the supported services, and it sought comment on how
the support should be calculated, the reporting obliga-
tions to be applied, and whether the Commission should
cap such support at the level of the incumbent LEC’s
support.’ In the Reverse Auctions NPRM, the Commis-
sion tentatively concluded that reverse auctions offer
several potential advantages over current high-cost
mechanisms and sought comment on whether they
should be used as the disbursement mechanism to deter-
mine the amount of high-cost universal service support
for ETCs serving rural, insular, and high-cost areas, and
it sought comment on how to implement reverse auctions
for this purpose.“ The Commission also sought comment
on a number of specific issues regarding auctions and
auction design.” The Commission also released the Joint
Board Comprehensive Reform NPRM, seeking comment
on the Joint Board’s Comprehensive Reform Recorm-
mended Decision and incorporating by reference the
Identical Support NPRM and the Reverse Auctions

making, 23 FCC Red 1531 (2008) (Joint Board Comprehensive Re-
form NPRM) (collectively the High-Cost Reform NPRMs).

© Identical Support NPRM, 23 FCC Red at 1468, para. 1.

* Identical Support NPRM, 23 FCC Red at 1468, para. 1.

" Tdentical Support NPRM, 23 FCC Red at 1473-78, paras. 12-25.

* Reverse Auctions NPRM, 23 FCC Red at 1495, para. 1.

© Reverse Auctions NPRM, 23 FCC Red at 1500-12, paras. 10-50.

T7va

NPRM. The discussion that follows represents our re
sponse to the Joint Board’s Comprehensive Reform Rec-
ommended Decision, pursuant to section 254(a)(2)."

B. Discussion

12. Today we comprehensively reform the high-cost
universal service support mechanism, and take steps to
ensure that broadband Internet access service is de-
ployed quickly to all areas of the country, including rural
and insular areas. The steps we take today will provide
certainty to providers as to the levels of support available
to them in providing supported services and broadband
Internet access service to all customers within the sup-
ported areas. This will assist providers in creating busi-
ness plans to deploy services in currently unserved areas
and will ensure efficiency in the deployment. of services to
these areas. Specifically, we are defining the level of
high-cost support available to providers that commit to
offer broadband to all customers within a service area.
Support in incumbent LEC service areas will be set at
the total amount of high-cost support disbursed to the
incumbent LEC E'lC in December 2008 on an annualized
basis. Ineumbent LEC ETCs will continue to receive
this level of support if they commit to offer broadband
Internet access services to all customers within the ser
vice area within five years. If an incumbent IL.EC does
not make this broadband commitment for a particular
service area, the support will be transitioned to the win-

* Joint Board Comprehensive Reform NPRM, 23 FCC Red at 1531,
para. 1.

“ 47 U.S.C. § 254(a)(2). Pursuant to that section, the Commission
shall complete any proceeding to implement a Joint Board recom.
mendation within one year after receiving it. The Commission has
acted on the Comprehensive Reform Recommended Decision prior
to the November 20, 2008 one-year statutory deadline.

78a

ning bidder of a reverse auction that will commit to de-
ploy broadband throughout the service area within ten
years, and to take on carrier of last resort obligations.
Competitive ETCs will receive high-cost support, based
on their own costs as compared to the relevant high-cost
support thresholds, so long as they, too, commit to offer
broadband Internet access service to all customers in
their service areas within five years. While ensuring that
broadband Internet access service is made available to
customers in rural and high-cost areas, we also cap the
overall size of the high-cost mechanism to protect. cus-
tomers in all areas of the nation from increasing univer-
sal service contribution assessments.

13. The requirements that we adopt. for disbursement
of high-cost universal service support. do not. apply to
providers operating in Alaska, Hawaii, or any U.S. Terri-
tories and possessions.” We find that these areas have
very different attributes and related cost issues than do
the continental states.“ For this reason, we are exempt

* Providers operating in U.S. Territories and possessions, such as
Puerto Rico and Guam, are not. subject to the high-cost support re-
quirements adopted in this order. See Letter from Earl Comstock,
Comstock Consulting LLC, to Marlene Dortch, Secretary, FCC, CC
Docket No. 96-45, WC Docket. No. 05-377 at 1 (dated Oct. 15, 2008)
(asking the Commission to recognize the higher costs and lower in
come levels in Puerto Rico in any reform efforts it may take); Letter
from Eric N. Votaw, Vice President-—Marketing & Regulatory, GTA
Telecom, Ine., to Marlene H. Dortch, Secretary, FCC, CC Docket
Nos. 99-68, 96-45, WC Docket No. 05-337 at 1-2 (filed Oct. 24, 2008)
(asking the Commission to recognize that Guam’s costs are higher
than the continental United States and that Guam should be treated
separately, along with Alaska and Hawaii, for reform purposes).

8 E.g., Verizon Comme'ns, Inc., Transferor, and América Movil,
S.A. de C.V., Transferee, WT Docket No. 06-113, Memorandum
Opinion and Order and Declaratory Ruling, 22 FCC Red 6195, 6211,
para. 36 (2007) (Verizon/Ameérica Movil Transfer Order) (describing

79a

ing providers in Alaska, Hawaii and U.S. Territories or
possessions from the high-cost support requirements and
rules adopted herein, and we will address them in a sub

sequent proceeding.”
1. Controlling the Growth of the High-Cost

Fund

14. Consistent with the recommendation of the Joint
Board, we cap the total amount of high-cost universal
service support.” As the Joint Board recognized, high-
cost support currently accounts for more than half of to

“difficult to serve terrain and dramatic urban/rural differences” in
Puerto Rico); Jntegration of Rates and Services for Provision of
Communications by Authorized Common Carriers between the Con-
tiquous States and Alaska, Hawaii, Puerto Rico and the Virgin Is-
lands, CC Docket No. 83-1376, Supplemental Order Inviting Com-
ments, 4 FCC Red 396, 396, paras. 7-8 (1989) (Rates and Services
Integration Order) (describing the unique market conditions and
structure in Alaska); Letter from Brita D. Strandberg, Counsel for
General Communication, Inc., to Marlene H. Dortch, Secretary,
FCC, CC Docket Nos. 01-92, 96-45, WC Docket No. 05-337 at 2
(Oct. 3, 2008) (discussing Alaska’s particular service needs and net-
work architecture).

“Cf The Establishment of Policies and Service Rules for the
Broadcasting-Satellite Service at the 17.38-17.7 GHz Frequency Band
and at the 17.7-17.8 GHz Frequency Band Internationally, and at
the 24.75-25.25 GHz Frequency Band for Fixed Satellite Services
Providing Feeder Links to the Broadcasting-Satellite Service and
for the Satellite Services Operating Bi-directionally tn the 17.3-17.8
GHz Frequency Band, 1B Docket No. 06 123, Report and Order and
Further Notice of Proposed Rulemaking, 22 FCC Red 8842, 8860,
para. 47 (2007) (Poltcies and Service Rules for the Broadcasting-
Satellite Service Order) (“The Commission is committed to establish-
ing policies and rules that will promote service to all regions in the
United States, particularly to traditionally underserved areas, such
as Alaska and Hawaii, and other remote areas.”).

a5 + ° . oa rm rar
Comprehensive Reform Recommended Decision, 22 FCC Red at
20478, 20481, 20484, paras. 2, 11, 26.

SOa
tal federal universal service support.” Since 1997, when
the Commission implemented the universal service re-
quirements of section 254 of the Act, high-cost support
has inereased by 240 percent.“ Although, earlier this
year, we took an initial step to address high-cost fund
growth by capping support to competitive ETCs, that cap
was an interim, emergency measure, pending a closer ex-
amination of the steps necessary to achieve comprehen-
sive reform.“ Many commenters have urged the Com-
mission to cap the overall amount. of high-cost support,
rather than limiting the cap only te competitive ETCs.*

* Comprehensive Reform Recommended Decision, 22 FCC Red at
20484, para. 26. In 2007, total federal universal service disburse-
ments amounted to approximately $6.95 billion. Of that amount, ap-
proximately $4.29 billion, 62%, was disbursed as high-cost support.
USAC 2007 ANNUAL REPORT? at 51.

7 See 2007 UNIVERSAL SERVICE MONITORING REPORT at 3-14, tbl.
3.1 (high-cost support in 1997 was approximately $1.26 billion, com-
pared with approximately $4.29 billion in 2007). Even taking into
account the fact that additional interstate support mechanisms, In

terstate Access Support (IAS) and Interstate Common Line Support
(ICLS), were created in 2000 and 2001, respectively, high-cost sup-
port has still increased by more than 45%, from approximately $2.94
billion in 2002 to its current level of approximately $4.29 billion. Jd.

* See Interim Cap Order, 23 FCC Red at 8834, para. 1.

* See CenturyTel High-Cost Reform NPRMs Comments at 18 (ex-
isting high-cost support mechanisms should be frozen at the study
area level or on a statewide basis to provide funding certainty and
encourage investment); Chinook High-Cost Reform NPRMs Com-
ments, Attach. at 5-6 (any cap on universal service support should
apply to all ETCs, including incumbent LECs); Connecticut Dep’t of
Pub. Util. Control High-Cost Reform NPRMs Comments at 5 (sup-
porting a cap on high-cost support set at the 2007 level); Florida PSC
High-Cost Reform NPRMs Comments at 2 (supporting the recom-
mendation to cap the overall size of the high-cost fund); Information
‘Technology Industry Council (ITI) High-Cost Reform NPRMs Com-
ments at 7 (an overall cap should be applied to control the size of the
high-cost mechanism); NCTA High-Cost Reform NPRMs Com-

Sla

Although other commenters oppose the adoption of a eap
on the total amount of high-cost support or on the
amount of support available to incumbent LEC ETCs,”
we find that, to manage the high-cost support mechanism
effectively, we must control its growth, and that capping
support in the manner discussed below will provide spe-
cific, predictable, and sufficient support to preserve and
advance universal service.”

ments at 19 (the Joint Board’s proposal to cap the overall size of the
high-cost mechanism is “a welcome dose of fiscal responsibility”);
National Consumer Law Center Joint Board Comprehensive Re-
form NPRM Comments at 2-8 (supporting the Joint Board’s pro-
posal to cap the overall high-cost fund); Verizon/Verizon Wireless
High-Cost Reform NPRMs Comments at 2-3, 6-9 (Commission
should cap the overall high-cost fund).

” See Frontier High-Cost Reform NPRMs Comments at 6-7; JSI
High-Cost Reform NPRMs Comments at 6; Montana Telecom-
munications Ass’n High-Cost Reform NPRMs Comments at 21-22;
NECA High-Cost Reform NPRMs Comments at 17-20; TCA High-
Cost Reform NPRMs Comments at 10-11; TDS High-Cost Reform
NPRMs Comments at 8-9; Missouri Small Telephone Company
Group (MSTC) High-Cust Reform NPRMs Reply at 5-7; Utah Rural
Telecom Ass'n High-Cost Reform NPRMs Reply at 5.

"" 47 U.S.C. § 254(b)(5); see CenturyTel High-Cost Reform NPRMs
Comments at 18; Comeast High-Cost Reform NPRMs Comments at
3, 11; Florida PSC High-Cost Reform NPRMs Comments at 8-9;
National Consumer Law Center Joint Board Comprehensive Re-
form NPRM Comments at 2; NCTA High-Cost Reform NPRMs
Comments at 4-6; New Jersey Division of Rate Counsel High-Cost
Reform NPRMs Comments at 52-54; Oregon PUC High-Cost Re
form NPRMs Comments at 2-3; Sprint Nextel High-Cost Reform
NPRMs Comments at 3; USTelecom High-Cost Reform NPRMs
Comments at 2; Verizon/Verizon Wireless High-Cost Reform
NPRMs Comments at 7; New Jersey Division of Rate Counsel High
Cost Reform NPRMs Reply at 64-65; Sprint Nextel High-Cost Re-
form NPRMs Reply at 8-9; State Commissioners //igh-Cost Reform
NPRMs Reply at 2; Texas Office of Public Utility Counsel Joint
Board Comprehensive Reform NPRM Reply at 2; Virgin Mobile

2 «
Ona

15. We find it necessary to cap the high-cost mecha-
nism as a first step toward fulfilling our statutory obliga-
tion to create specific, predictable and sufficient universal
service support mechanisms.” As the United States
Court of Appeals for the Fifth Cireuit held in Alenco:
“[t]he agency’s broad discretion to provide sufficient uni-
versal service funding includes the decision to impose
cost controls to avoid excessive expenditures that will de-
tract from universal service.” The Alenco court also
found that “excessive funding may itself violate the suffi-
ciency requirements,”™ and the United States Court of
Appeals for the Tenth Circuit has stated that “excessive
subsidization arguably may affect the affordability of
telecommunications services, thus violating the principle
in [section] 254(b)(1).”” Given the excessive growth in
high-cost sunport, we find it necessary to cap this
mechanism te ensure that unsubsidized users who contri-
bute to the fund are not harmed by excessive subsid-
ization.

High-Cost Reform NPRMs Reply at 3-4. The Commission has al
ready implemented caps on the schools and libraries and rural health
care universal service mechanisms. Universal Service First Report
and Order, 12 FCC Red at 9054, 9140, paras. 529, 704 (establishing a
$2.25 billion annual cap for the schools and libraries mechanism and
a $400 million annual cap for the rural health care mechanism); see
also 47 C.F.R. §§ 54.507(a), 54.623(a).

*“ 47 U.S.C, § 254(b)(5); see also Universal Service First Report. and
Order, 12 FCC Red at 9054, 9140, paras. 529, 704.

™ Alenco Comme’ns, Inc. v. FCC, 201 F.3d 608, 620-21 (Sth Cir.
2000) (Alenco).

™ Alenco, 201 F.3d at 620.

~ Qwest Comme’ns Int'l Inc. v. FCC, 398 F.3d 1222, 1234 (10th Cir.
2005).

S3a

16. Therefore, we take several steps to limit the
growth of high-cost support. First, we cap the overall
high-cost fund at the total amount of high-cost support
disbursed by the Universal Service Administrative Com-
pany (USAC) for December 2008 on an annualized basis,
net of any prior or past period adjustments. Although we
agree with the Joint Board’s recommendation to cap the
high-cost mechanism, rather than set such a cap at the
2007 level of high-cost support as the Joint Board rec-
ommended, we find it is more appropriate to set the cap
at the level of support disbursed by USAC in December
2008 on an annualized basis. Furthermore, we freeze
each incumbent LEC ETC’s individual, annual high-cost
support at the amount of support, on a lump sum basis,
that the ETC received in December 2008 annualized, net
of any prior or past period adjustments, on a study area
or service area basis.”

17. As discussed below, we also eliminate the identi-
cal support rule for competitive ETCs. Competitive
ETCs’ support levels will be based on their costs as com
pared to the relevant high-cost support mechanism
benchmarks, and frozen at the amount of support, on a

” Pursuant Lo section 214(e)(5) of the Act, the term “service area” is
used to refer to the geographic area established by a state commis-

sion or this Commission for the purpose of determining universal
service obligations and pport mechanisms. 47 U.S.C. § 214(e)(5).
For a rural telephone company, section 214(e)(5) states that “service

area” shall mean the rural company’s “study area” unless and until
the Commission and the states establish a different definition of ser

vice area for such company. /d. In this order, we use the terms “ser-
vice arca” and “study area” interchangeably. Nothing in this order
is meant to change any redefinitions of service area previously est

ablished by the Commission and/or the state commissions.

84a
lump sum basis, that the competitive ETC received in
2008 on a study area basis.”

18. Consistent with section 254(b)(5) of the Act, we
find that capping high-cost support in this manner will
enable ETCs to predict the specific level of support that
they will receive should they choose to participate in the
program.” To the extent that an incumbent LEC ETC
determines that it cannot offer broadband Internet ac-
cess service throughout its service area at the specified
level of support, as discussed below, that particular study
area will be deemed an “Unserved Study Area,” and we
will conduct a reverse auction to determine the entity ca-
pable of meeting our service requirements and the
amount of support to provide for that area. In fact,
through the reverse auction process, it will be the bid-
ders, not the Commission, that determine how much sup-
port they would need to offer service. Finally, as dis-
cussed below, if the reverse auction process does not
yield a winning bidder, the Commission will reexamine
whether it needs to take further action with regard to
this situation, should it arise.

2. Conditioning Support on Offering Broad-
band Internet Access Service

19. The broadband era is here. Those of us who have
broadband Internet access service use it to communicate,
to work, to get vital information, to be educated, and to
be entertained. Broadband Internet access service—a
novelty at the time of the passage of the 1996 Act—is
now mainstream. Yet some Americans still lack access to
this vital service, and as Commissioner Copps has said,
“does America at the beginning of the 21st century be-

” See infra paras. 53-56.
* 47 U.S.C. § 254(b)(5).

85a
come technologically stagnant or the leader of the Digital
Age’ For me, the answer to that question depends in
some significant measure upon whether we succeed in
bringing high-speed, high-value broadband and an open
Internet to all Americans ... rural as wel! as urban folks

9959

20. Today, we modify our high-cost support system
fundamentally to spur deployment and ensure that all
Americans have access to broadband. Specifically, we
make offering broadband Internet access service a condi
tion of being eligible to receive high-cost support. As we
explain below, we will require all incumbent L.ECs to cer
tify whether or not they will commit to offering broad
band Internet access throughout their supported study
areas in five years.” Those who make that commitment

” Remarks of Commissioner Michael J. Copps, Pike & Fischer's
Broadband Policy Summit IV, Washington, DC GJune 12, 2008),
available at http://hraunfoss.fec.gov/edoes_public/attachmatch/DOC
-282890A1.pdf.

” See supra note 56 (explaining use of the terms “study area” and
“service area” in this order). We understand the concern of com
menters who point out the need for more granular information on
broadband availability. See Comprehensive Reform Recommended
Decision, 22 CC Red at 20481, para. 13; see also Comeast High
Cost Reform NPRMs Comments at 13-16; GCI High-Cost Reform
NPRMs Comments at 34-36; NCTA High-Cost Reform NPRMs
Comments at 20; New Jersey Rate Counsel High-Cost Reform
NPRMs Comments at 21-22; New York State PSC Joint Board
Comprehensive Reform NPRM Comments at 1, 5-6; TCA //igh-Cost
Reform NPRMs Comments at 11-12; USTelecom //igh-Cost Reform
NPRMs Comments at 36; Embarq //igh-Cost Reform NPRMs Re
ply at 8-10. The Commission has recently undertaken a major effort
to gather more specific and granular data about broadband sub
seribership and availability, See Development of Natrionuide Broad
band Data to Evaluate Reasonable and Timely Deployment of Ad
vanced Services to All Americans, lmprovement of Wireless Broad-
band Subscribership Data, and Development of Duta on Intercon

86a

will continue to receive their current levels of support.
xisting competitive ETCs likewise will have the oppor
tunity to commit to offering broadband Internet access
service throughout their supported service areas, and will
be eligible to receive high-cost support based on their ae
tual costs. Auction winners, as well, must commit to of-
fering broadband Internet access service throughout
their supported areas as a condition of receiving even ini-
tial support. In other words, all E'TCs are subject to the
same basic obligation—to offer broadband Internet. ac-
cess throughout their supported service areas. We also
explain the obligations related to this condition, including
carrier-of-last-resort-type obligations.

21. We believe that imposing this condition on the re-
ceipt of high-cost support is fully consistent with and in
deed promotes Conyress’s overall objectives as stated in
section 254 of the Communications Act and section 706 of
the 1996 Act.” Seetion 254(b)(2) of the Act instructs the

nected Voice over Internet Protocol (VoIP) Subscribership, WC
Docket No, 07.38, Report and Order and Further Notice of Proposed
Rulemaking, 28 FCC Red 9691, 9708-09, paras. 34-35 (2008) (Broad

band Data Gathering Order) (seeking comment on, among other
things, adopting a national broadband mapping program). We be

lieve our refined broadband data gathering program will help all of
us better assess where our broadband availability needs are great

est. lor purposes of implementing the broadband deployment pro-
gram of this order, we ask incumbent LECs to identify where they
will and will not commit to broadband availability, thus identifying
where we need to proceed to a reverse auction.

" 47 U.S.C. §§ 157 nt, 254. Some commenters suggest that adding
broadband Internet access service to the list of “supported services”
would be inconsistent with section 254(¢)(1) of the Act because
broadband Internet access service is an information service, not a
telecommunications service. See SouthernLINC High-Cost Reform
NPRMs Comments at 30-31; Verizon/Verizon Wireless High-Cost
Reform NPRMs Comments at 31-32; SouthernLINC J/ligh-Cost Re

esi
Act as just deseribed and also advances Conpress's ob
jective stated in section 706 of the 1996 Act to “encourage
the deployment on a reasonable and timely basis of ad
vanced telecommunications capability to all Americans
We also see no reason why conditioning the receipt of
high-cost support on offering: broadband Internet acce:
service is not permissible under the Commission's au
thority to promulgate peneral rules related to universal
service,”

22. Broadband Internel Access As a Cond. oan to
Recevwing High-Cost Support. Consistent with the objec
tives of sections 254 and 706 as just deseribed, all PC:
must offer broadband Internet access serviee to all cu
tomers in their supported serviee areas as a condition of
receiving, universal service high-cost support. Since the
Commission adopted universal service rules in response
to the 1996 Act, broadband Internet access service ha
evolved into a eritical service for American consumer:
The importance of this evolution is reflected inp Con
press’s recent finding that “{t}he deployment and adop
tion Of broadband technology has resulted inp enhanced
economic development and public safety for communitie:
across the Nation, improved heath care and cducation
opportunities, and a better quality of life for all Ameri
cans, fand| [clontinued progress in the deployment and

AV U.S.C. 44 157 nt, 2A
“ ‘The Commission has previously Considered imposing, conditions on
the receipt of high-cost support. See Universal Serowee Firat Report
and Order, 12 VOC ed at Bash, para. 8. And of course, today
recjapents of high cost support must comply with many oblpation
that are not explicitly spelled outon the statute. bor example, to be
desiynated as an ETC, an applieant must demonstrate that wt ba
back-up power See Federal State Joint Board on Universal Ses
vice, OC Docket No. 9645, Report and Order, 20 FOC Red 6971
O382, para, 29 (2005) (AVC Designation Order)

SYa

adoption of broadband technology is vital to ensuring
that our Nation remains competitive and continues to
ereate business and job growth.””’ The majority of con-
sumers who use broadband Internet access service today
rely on it for telework, access to banking services, inter-
action with government, entertainment, shopping, access
to news and other information, and so many other uses.”
Broadband Internet access plays a special role in rural
areas, reducing the burdens of distance.” For example,
high-speed connections to the Internet allow children in
rural areas to have access to the same information as
school children in urban areas. Telemedicine networks
sroadband Data Improvement Act, Pub. L. No. 100-385, 122 Stat.
4096, § 102(1)-(2) (2008),
" A recent survey finds that, compared to Internet users with dial-
up service at home, those with broadband service at home are far
more likely to engage in 14 different types of Internet-related activi
ties on a typical day. These activities include using an online search
engine, checking for weather reports, getting news, visiting a state
or local government Web site, obtaining job information, watching a
video, and downloading a podeast. The daily use of a search engine,
for example, is reported by 57% of the broadband users as compared
to only 26% of the dial-up users. See JOHN B. HORRIGAN, PEW
INTERNET & AMERICAN LIFE PROJECT, HOME BROADBAND ADOP-
TION 2008 at 19 (2008) (2008 PEW BROADBAND ADOPTION STUDY),
avadable at http://www.pewinternet.org/pdfs/PIP Broadband 2008.

pdf.

For example, the California Broadband Task Force Report finds
broadband service critical to expanding job opportunities for rural
residents. It observes, for example, that broadband has facilitated
the use of “homeshoring,” or the use of home-based workers for pro
viding customer service, instead of requiring employees to adhere to
a strict work schedule at a centralized location. This report also
finds that broadband offers farmers better access to market. infor-

mation and allows them to expand their potential customer base. Sec
l’INAL REPORT OF THE CALIFORNIA BROADBAND TASK FORCE at 13
(Jan. 2008) (CALIFORNIA 2008 BROADBAND REPORT), available ul
http://www.calink.ca.gov/taskforcereport/.

90a

made possible by broadband Internet access service also
save lives and improve the standard of healthcare in
sparsely populated, rural areas that may lack access to
the breadth of medical expertise and advanced medica!
technologies available in other areas.” Broadband ser-
vice also enables the sharing of critical, time-sensitive in-
formation with first responders, government officials,
and health care providers, thereby improving the gov-
ernment’s ability to provide a comprehensive and cohe-
sive response to a public health crisis in coordination.”

23. Despite the advances in broadband technology
and the deployment of infrastructure to accommodate
higher bandwidth speeds, ubiquitous broadband availab-
ility does not exist throughout the nation—especially for
those consumers in rural areas.” In March 2008, the

® See Rural Health Care Support Mechanism, WC Docket No. 02

60, Order, 21 FCC Red 11111, 11112, para. 5 (2006); see also
SUSANNAH FOX, PEW INTERNET & AMERICAN LIFE PROJECT, THE
ENGAGED E-PATIENT POPULATION at 1 (2008) (finding that home
broadband users are twice as likely as home dial-up users to do
health research on a typical day), avazlable at http:/Mwww.pewinter
net.org/pdfs/PIP_Health Aug08.pdf.

"A recent report to Congress concludes that “[mJodern broadband
communications networks and applications present an enormous
opportunity to radically improve the manner in which emergency
information is shared by health officials. Broadband services enable
bandwidth intensive information such as video, pictures, and graph-
ics to be transmitted faster and in a more reliable and secure man-
ner.” JOINT ADVISORY COMMITTEE ON COMMUNICATIONS CAPA.
BILITIES OF EMERGENCY MEDICAL AND PUBLIC HEALTH CARE FA
CILITIES, REPORT TO CONGRESS 2 (Feb. 4, 2008), available at
http://energyeommeree.house.gov/Press_ 110/JAC.Report. FINAL%

20Jan.3.2008. pdf.

™ See, e.g., Cellular South High-Cost Reform NPRMs Comments at
10; see also generally 2008 PEW BROADBAND ADOPTION STUDY at L1-

ie.

Jla

Commission’s most recent data revealed that more than
half of the households in the United States now subscribe
to a high-speed service provider and at least one high-
speed service provider is providing service in excess of
200 kbps in at least one direction in 99.9 percent of zip
codes in the country.” The broadband subscription rate
is much lower in rural areas, however. A 2008 survey
finds that the percentage of rural households subscribing
to broadband service is only 38 percent—well below the
57 percent and 60 percent subscription rates found in ur
ban and suburban areas, respectively.” This survey con-
cludes that the lack of broadband availability very likely
accounts for some of this disparity.” Moreover, this con-
clusion is consistent with the results of residential sur
veys in several states." We find that making the offering

* See FCC, HIGH-SPEED SERVICES FOR INTERNET ACCESS: STA
rUS AS OF DECEMBER 31, 2006, tbl 15 (2007), availahle at http:/
hraunfoss.fee.gov/edoes public/2ittachmatch/DOC-280906AL pdf.

See 2008 PEW BROADBAND ADOPTION STUDY at 3-4. The survey
was conducted by phone from April 8, 2008 to May 11, 2008 among
2,251 American adults,

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_2344%3A2. Public record. Not legal advice.