10th Circuit Questions Agency Deference, Inducements Versus Ultimatums, in Challenge to CAF Order

The judges first tackled the difference between “ratemaking” and setting a methodology. Challengers argued states have exclusive control over ratemaking, which they said the FCC impermissibly waded into when it required intercarrier compensation rates to transition to zero. The Telecom Act gives LECs the duty to establish reciprocal compensation arrangements, said NARUC General Counsel Brad Ramsay. “Reciprocal compensation” is a term of art, he said. Judge Jerome Holmes quickly interrupted, asking if Congress had defined that term. No, Ramsay responded, but federal cases say technical terms of arts should be interpreted in line with how they're used by people in the industry.

At that point, Holmes made his first of several appeals to agency authority. “What would keep the commission from reinterpreting the meaning of ‘reciprocal compensation?'” Holmes asked. They are, after all, the expert agency, Holmes said. Congress gave “broad power” to the FCC under Section 201, said Chief Judge Mary Beck Briscoe. Judge Robert Bacharach told Ramsay that, in his understanding, AT&T v. Iowa Utilities Board “explicitly rejected the argument you're making.” In that 1999 case, the Supreme Court ruled 7-1 that the FCC has authority to set pricing rules for telecom carriers’ access to LEC networks.

The order imposing a bill-and-keep regime is invalid, argued Russell Blau of Bingham McCutchen, representing NTCA. The FCC is limited to determining pricing methodologies, but in forcing carriers to ultimately transition to a fee of zero, that’s essentially ratemaking, Blau said. Bacharach asked about the FCC’s argument that this is a prototypical example of a methodology, because an LEC can simply increase the charge to its end users regardless of bill-and-keep. “The statute doesn’t say that,” Blau responded. “The FCC has to make rules consistent with the statute.”

Even assuming the FCC has the power to adopt a uniform intercarrier compensation regime that includes intrastate traffic, it can’t require a uniform rate of zero because that doesn’t provide for reciprocal compensation or mutual recovery of costs, said Covington and Burling attorney Robert Long for CenturyLink. Holmes responded with an appeal to Chevron deference: Can’t the FCC use the term “reciprocal compensation” in a broader sense, given that Congress didn’t define the term? Long responded that the FCC’s reading doesn’t provide for cost recovery by carriers. Responded Briscoe: Isn’t the main focus of the FCC to provide universal service? “Isn’t the focus more on the customer than the carrier,” asked the judge.

If Congress “specifically authorized bill-and-keep -- that is to say a zero rate -- how can we say that recognizing and implementing what Congress said … is invalid because it doesn’t involve reciprocal compensation,” asked Bacharach. “We are required under Chevron to give -- if the statute is ambiguous -- to defer to the FCC’s interpretation.”

"The petitioners are trying to block the FCC’s efforts to carry out the direction from Congress to get rid of implicit subsidies and speed the development of broadband,” said FCC attorney Richard Welch. Petitioners are asking the court to tell the FCC it “must maintain the flawed and inefficient systems of the past that have been hurting consumers,” he said.

AT&T v. Iowa Utilities Board “completely reordered” traditional divisions of authority, Welch said. Congress took away the exclusive power of the states and gave the FCC power in this area, he said. The role of states is “confined” to interpreting “federal law” and following the statute, he said: If they're don’t, they're subject to review. “I think AT&T is the answer to your question,” said Welch.

What’s left to the state commissions, asked Briscoe: Can they do anything? Of course, Welch said. They oversee the arbitration and negotiation process when carriers can’t agree, and they determine “where that handoff point is” when a long distance and local exchange carrier exchange traffic, he said. Per-mile charges can have a significant difference in intercarrier compensation rates, he said: States “still have a meaningful role.”

What about the argument that transitioning the rate down each year until it reaches zero is more akin to ratemaking than to setting a methodology, asked Bacharach. The commission had the statutory authority to begin bill-and-keep immediately, said Welch. “But that would not have been prudent.” For that reason, the commission set a phase-down period so that carriers and customers could “gradually get used to this regime,” said Welch. “And the FCC gets a lot of deference in the area of transitioning from one regime to another.”

Authority to Require Broadband Buildout

Several petitioners argued the FCC has no statutory authority to condition the receipt of universal service support on the construction of broadband facilities. Broadband provides information services, and Section 251 “unambiguously” limits USF support to telecom services, said Michael Wallace of the Mississippi law firm Wise Carter, representing Cellular South. Funds may be used to support dual use for telecom and other services, he said, but this order mandates the buildout of broadband services.

"Doesn’t it say in order for you to receive universal service funding, you have to build out,” asked Briscoe. “It doesn’t say you've got to. It just says if you want the money, you've got to build out.” Briscoe said she doesn’t know “how you get around” Section 254(e).

"We don’t dispute that they can support the provision of facilities for telecommunications services,” Wallace responded. “But they're mandating -- mandating -- recipients to provide broadband facilities.” It would have been very easy to mandate use of the money for telecom services but it’s not there; it’s mandated for broadband services and nothing else, he said: That’s contrary to what Congress ordered. “And the FCC can’t read telecommunications service broadly enough to include broadband,” Briscoe asked. It could, Wallace responded, but it has specifically declined to do so.

What about Section 254(b)(2), which said access to advanced telecom and information services should be provided throughout the country, asked Holmes. “I'm not sure why there isn’t a hook” in the statutory language to allow the commission to offer a “permissible inducement” to building out broadband, he said. What’s wrong, he asked, with the FCC creating such an inducement to try to do what Congress told the agency to do.

"There is a difference between inducement and ultimatum,” responded Wallace. The whole reason Congress set up a universal support mechanism was because, in many places, it was financially infeasible to build out telecom services without federal support, he said. To say to a company that needs the money to do the job that it needs to build broadband as well, “that goes past inducement and into ultimatum,” he said.

Doesn’t Section 706 “give the FCC all the authority it needs,” asked Briscoe. That section requires an annual inquiry to determine if broadband is being reasonably and timely deployed, and if not, to “take immediate action to accelerate deployment,” she said. Responded Wallace: That would be “a very unusual way to grab new authority.”

"The elephant in the room today is the fact that Congress never authorized the FCC to regulate” as it’s doing, said Russell Lukas of Lukas Nace. Congress drew a clear line between telecom services, subject to mandatory Title II regulation, and information services, which are “immune” from that regulation, he said. But the FCC has determined broadband is an information service, he said.

Holmes interrupted Lukas. “In terms of the whole panoply of things that come into play when you talk about regulating … that’s not going on here,” Holmes said. Regulation is telling broadband providers “what to do as it relates to the provision of broadband service. What am I missing,” said the jurist. The position of the commission is it’s not regulating broadband, he said. “Why can’t the commission impose condition on that acceptance of [USF] money” while “stopping short of regulating the activity at play,” asked Holmes. Because if the commission could simply condition the receipt of funding on performance of an action, that would “unmoor” the commission from the text of the Telecom Act, and let it get involved in all sorts of things, Lukas said.

Section 254(b)(2) requires the commission to promote nationwide access to information services, said FCC attorney Maureen Flood. “This restriction that petitioners want to impose” -- somehow limiting support to telecom services only -- would “make it very difficult if not impossible for the commission to ever achieve” the principles required in the Act, she said. If the FCC can’t require universal service recipients to deploy networks capable of both telecom and information services, “we can’t ensure that those customers will have reasonably comparable access to these services, which is required by the statute,” said Flood.

Flood acknowledged that the FCC didn’t have the cost data or resources to quantify how much it would cost for the 800 rate-of-return carriers in the U.S. to meet the specific broadband buildout requirements the agency set. So how can you make a “reasonable, predictive judgment that the subsidies are going to be sufficient,” asked Bacharach. “If a rate-of-return carrier feels that its revenues plus its USF support are insufficient,” it can reject the USF support, or it could seek a waiver, she said. In any case, 75 percent of rate-of-return carriers already have broadband infrastructure in the ground, and they have to meet the requirements only upon reasonable request, she said.

Isn’t part of determining whether the commission is operating in an arbitrary manner, asked Holmes, whether it created rules without any sense for what this imposition of broadband on carriers will do? “How can the commission exercise its expertise” that the money it’s allocated will be enough, when Flood says there’s no evidence in the record of what the already-deployed broadband is capable of, asked the judge.

The FCC reverse-engineered the requirements to determine “how much broadband can we get for $2 billion,” Flood responded. “We did not quantify the cost of pushing out or nudging out broadband,” but given the diversity of those areas, “I really don’t know how the commission could have quantified the costs,” she said: So it used its “reasonable predictive judgment.” And if the judgment was not sufficient, carriers can file a waiver, she said.

Holmes interrupted her. “The waiver program can’t solve arbitrary judgment,” he said.