NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES, PETITIONER v. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS BELLSOUTH TELECOMMUNICATIONS, INC., ET AL., INTERVENORS
No. 02-1261
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Decided June 29, 2004
Argued November 24, 2003
On Petition for Review of an Order of the Federal Communications Commission
Billy J. Gregg argued the cause for petitioner. On the brief was Michael J. Travieso.
Bills of costs must be filed within 14 days after entry of judgment. The court looks with disfavor upon motions to file bills of costs out of time.
Michael K. Kellogg argued the cause for intervenors BellSouth Telecommunications, Inc., et al. With him on the brief were Aaron M. Panner, Scott H. Angstreich, Gary L. Phillips, Jeffry A. Brueggeman, H. Richard Juhnke, Jay C. Keithley, Michael E. Glover, Edward Shakin, Joseph DiBella, and Robert B. McKenna.
Before: GINSBURG, Chief Judge, and EDWARDS and ROGERS, Circuit Judges.
Opinion for the Court filed by Chief Judge GINSBURG.
GINSBURG, Chief Judge: The National Association of State Utility Consumer Advocates (NASUCA) petitions for review of an order of the Federal Communications Commission adjusting the manner in which Local Exchange Carriers (LECs) may recover the fixed costs they incur in providing service to residential and single-line business customers. NASUCA claims the approach adopted by the Commission violates the “universal service” provisions of the
I. Background
This case challenges the Commission‘s latest attempt to phase out certain “implicit subsidies” resulting from the access fee the LECs charge interexchange carriers (IXCs) in order to recover the expenses the LECs incur to build and operate local loops — the part of the telecommunications network that runs from the LEC‘s switch to the customer‘s
When AT&T was broken up in 1984, the Commission first issued rules governing the access charges IXCs were to pay LECs for originating and terminating long-distance calls. See generally Nat‘l Ass‘n of Regulatory Util. Comm‘rs v. FCC, 737 F.2d 1095 (D.C. Cir. 1984). Those charges did not, however, cover the cost of the local loop, which the LECs instead recovered directly from end users through a flat fee per line called the Subscriber Line Charge (SLC); it is flat because the LEC‘s cost of providing the local loop is not traffic-sensitive. See In the Matter of Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure and Pricing End User Common Line Charges (Access Charge Reform Order) ¶ 24, 12 FCC Rcd 15,982, 15,998-99 (1997). Recovering the cost of the loop from end users, however, raised the prospect that customers in outlying regions, where the cost per line could be quite high, would drop their telephone service and thus compromise the objective of universal service. The Commission therefore decreed that some of the cost of the local loop would be recovered through a per-minute-use charge, known as the Carrier Common Line (CCL) charge, that IXCs would pay LECs for handling their traffic. Access Charge Reform Order ¶¶ 37, 38, at 15,998-16,000.
The Commission initially capped the SLC at $3.50 per line. Because that was significantly below the average fixed cost of the local loop, a substantial portion of the cost had to be recovered through the CCL charge, which worked a large, albeit implicit, subsidy from high- to low-volume long-distance callers.
In 1997 the Commission took a step toward “[r]ationalizing” its rate structure by “eliminat[ing] significant implicit subsidies in the access charge system.” Access Charge Reform Order ¶ 36, at 15,998. This it did by allowing greater recovery of fixed costs through flat (as opposed to traffic-sensitive) fees. The Commission did not, however, allow further recovery through the SLC, which remained capped at $3.50 per line, because it was concerned that a higher price for the basic dial tone could cause rural customers to discontinue service — “contrary to [the Commission‘s] mandate to ensure universal service.” Id. ¶ 38, at 15,999. Rather than impose an additional charge upon the end user, therefore, the Commission settled upon a “flat, per-line charge assessed on the IXC to whom [sic] the access line is presubscribed,” id., known as the presubscribed interexchange carrier charge (PICC).
Not long after introducing the PICC, the Commission realized it was not a complete solution: “Because IXCs have recovered the residential PICCs on a per-account basis, residential customers with only one line pay the same as those with two or more lines, and so pay more than the costs IXCs have incurred for providing them service.” In the Matter of Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Low-Volume Long Distance
Because a LEC recovers its local loop costs in a “cascading fashion” — first through the SLC, then the PICC, and finally the CCL charge — an increase in the SLC cap reduces by the same amount what the LEC may recover through the CCL charge and the PICC — the Commission‘s goal being to minimize and then to eliminate those charges. See In the Matter of Cost Review Proceeding for Residential and Single-Line Business Subscriber Line Charge (SLC) Caps; Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers (CALLS II) ¶ 15, 17 FCC Rcd 10,868, at 10,875-76. When they are eliminated, the LEC is permitted to “deaverage” the SLC in up to four UNE zones, CALLS I ¶ 73, at 12,989-90, that is, to calculate the average cost for each zone rather than for all zones combined. Calculating average costs in this manner “enhances the efficiency of the local telephone market by allowing prices to be tailored more easily and more accurately to reflect cost.” Id. ¶ 113, at 13,007.
Finally, in CALLS I the Commission undertook to “review any increases to residential and single-line business SLC caps above $5.00 to verify that any such increases are appropriate and reflect higher costs where they are to be applied.” ¶ 83, at 12,994. In doing that review, the Commission said it would examine “forward-looking cost information” to be provided by the LECs. Id.
The Commission completed its review in September 2001 and issued its findings in June 2002. See CALLS II. This is what the Commission found:
[E]ven the most conservative estimate of forward-looking costs [i.e., NASUCA‘s] shows that a substantial number of lines exceed both the current $5.00 SLC cap, and the ultimate $6.50 SLC cap. Thus, we determine that raising the SLC cap to the levels set forth in [CALLS I] is justified by the record in this proceeding. We also find that those increases to the SLC cap are necessary to achieve our access charge reform goals, as stated in [CALLS I], of removing implicit subsidies by moving to a more cost-causative rate structure and enabling greater opportunities for SLC deaveraging.
Id. ¶ 5, at 10,871. The Commission also pointed out that it had previously found a SLC cap of $6.50 is “affordable” for residential and single-line business customers, which finding was upheld in TOPUC, 265 F.3d at 323. Hence, the Commission concluded, “to achieve the benefits of removing implicit subsidies and allowing SLC deaveraging, while maintaining affordable residential and single-line business rates for con-
NASUCA petitions this court for review of the Commission‘s decision in CALLS II.
II. Analysis
NASUCA argues the Commission‘s decision in CALLS II violates several provisions of the 1996 Act and is “arbitrary and capricious,” in violation of the APA. See
A. 1996 Act Claims
NASUCA first argues the Commission failed to “give effect to the unambiguously expressed intent of Congress,” Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984), to remove implicit subsidies and to replace them with explicit subsidies, as expressed in
The Commission responds that an implicit subsidy from lower cost to higher cost lines was not immediately ruled out by the 1996 Act and under CALLS I is only to be phased out over time; in fact, some subsidization is “inevitable” as long as there is any rate averaging. According to the Commission, the issue in this case, properly understood, is whether its approach is “an improvement over the pre-existing situation and will provide a transition to less subsidization.” We agree.
Although the Act charges the Commission with devising “specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service,”
In CALLS II the Commission explained that an increase in the SLC cap would help LECs eliminate the PICC, ¶¶ 40-42, at 10,886-87, which the Commission had previously found to be an inefficient method of recovering the LECs’ fixed costs:
By eliminating the residential and single-line business PICCs, the CALLS Proposal establishes a straightforward, economically rational pricing structure which enables consumers to make a choice among competing providers through head-to-head comparisons and better promotes competition by sending potential entrants economically correct entry incentives.
CALLS I ¶ 78, at 12,991. Again, an increase in the SLC cap does not increase the LEC‘s revenue; rather, it merely shifts the source of the LEC‘s CMT Revenue away from the CCL charge and the PICC. CALLS II ¶¶ 5, 15, at 10,871-72, 10,875-76. Moreover, eliminating those charges is a precondition to the LEC being able to deaverage rates across UNE zones. Deaveraging was made an important objective in CALLS I, ¶¶ 113-28, at 13,007-14, and the method the Commission chose to accomplish that objective — namely, raising the SLC cap based upon the cost studies conducted for CALLS II, after having determined that doing so would not jeopardize universal service, see id. ¶ 85, at 12,995; TOPUC, 265 F.3d at 323 — was eminently reasonable.
NASUCA next argues the increase in the SLC cap allows LECs to charge SLC rates that are not “just and reasonable,” in violation of
The Commission is clearly correct. Nothing in CALLS I committed the Commission to the sea change in rate-setting urged by NASUCA, that is, immediately basing all LECs’ rates solely upon forward-looking costs. On the contrary, the Commission stated in CALLS I that it was “extending for five years” its existing approach, which would over time bring rates “toward forward-looking economic cost.” ¶ 60, at 12,984-85. As the Commission reasonably observed in the order under review, the CALLS proceedings were “not designed to change the existing method of setting SLC rates, which relies on the application of the price cap formula to CMT revenues.” CALLS II ¶ 26, at 10,879 (emphasis in original). That approach, as mentioned above, is based upon historical, not forward-looking, cost.
Finally, both in arguing the Commission violated the 1996 Act and in arguing its decision is arbitrary and capricious (see Part II.B, below), NASUCA claims no further increase in the SLC cap was necessary due to the “explicit” support provided by the $650 million Universal Service Fund. That Fund, however, is only one part of the Commission‘s overall approach to eliminating implicit subsidies. Neither in CALLS I nor in CALLS II did the Commission indicate the Universal Service Fund alone would be sufficient to achieve the Commission‘s ultimate goal of eliminating all implicit subsidies. Accordingly, NASUCA‘s invocation of the Fund does nothing to call into question the reasonableness of the Commission‘s decision.
B. APA Claims
NASUCA argues the Commission‘s decision in CALLS II is “arbitrary and capricious” because it: (1) “runs counter to the evidence” in the record; (2) “failed to articulate any explana-
In claiming the Commission‘s decision is not supported by evidence in the record, NASUCA belittles the Commission‘s finding that 33 million residential and small business lines, 30% of all such lines, have forward-looking costs in excess of $5.00. Pointing out that 78 million such lines (or 70%) must have costs at or below $5.00, NASUCA claims the Commission had no valid reason for raising the SLC cap.
The Commission explained, however, that increases in the SLC cap are appropriate if a “substantial number of lines [have] forward looking costs that exceed the current $5.00 SLC cap and the ultimate $6.50 SLC cap.” Id. ¶ 27, at 10,879. The “most conservative estimate” in the record, which was based upon NASUCA‘s own study, was that 33 million residential and small business lines had costs above $5.00, and 20 million of those lines had costs above $6.50, id. at 10,880; see also id., Attachment A, numbers the Commission deemed “substantial.”
NASUCA maintains the Commission‘s determination that 33 million lines is a “substantial” number is not entitled to deference from the court; this line-drawing exercise, it says, is “quite straightforward,” calling upon the agency for neither expertise nor discretion. That is just not correct.
In deciding to raise the SLC cap, the Commission first had to determine how much confidence to place in the various studies of forward-looking costs. Id. ¶¶ 30-38, at 10,881-85.
The Commission is necessarily entitled to substantial deference when it must draw numerical lines in order to balance two congressional policies that cannot both be fully achieved. See Sinclair Broad. Group, Inc. v. FCC, 284 F.3d 148, 162 (D.C. Cir. 2002) (setting minimum number of station owners in market to strike balance between “efficiencies of television duopolies” and “robust level of diversity” is “quintessentially [a] matter[ ] of line drawing invoking the Commission‘s expertise“); see also Cassell v. FCC, 154 F.3d 478, 485 (D.C. Cir. 1998), quoting Home Box Office, Inc. v. FCC, 567 F.2d 9, 60 (D.C. Cir. 1977) (court generally “unwilling to review line-drawing performed by the Commission unless a petitioner can demonstrate that lines drawn . . . are patently unreasonable, having no relationship to the underlying regulatory problem“).
In sum, NASUCA‘s claim that the Commission‘s decision to raise the SLC cap was arbitrary and capricious simply ignores the Commission‘s reasoning in CALLS II and the facts upon which that decision is based. The Commission‘s decision striking a balance between competing congressional directives — reducing implicit subsidies and maintaining universal service — was reasonable and was supported by substantial evidence in the record.*
For the foregoing reasons, NASUCA‘s petition for review is
Denied.