Rural Cellular Ass'n v. F.C.C.

• Decision Date: 11 December 2009
• Docket Number: No. 08-1285.,No. 08-1284.,08-1284.,08-1285.
• Citation: 588 F.3d 1095
• Parties: RURAL CELLULAR ASSOCIATION, et al., Petitioners v. FEDERAL COMMUNICATIONS COMMISSION And United States of America, Respondents. AT&T Inc. and Verizon, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

588 F.3d 1095

RURAL CELLULAR ASSOCIATION, et al., Petitioners v. FEDERAL COMMUNICATIONS COMMISSION And United States of America, Respondents.

AT&T Inc. and Verizon, Intervenors.

No. 08-1284.

No. 08-1285.

United States Court of Appeals, District of Columbia Circuit.

Argued October 5, 2009.

Decided December 11, 2009.

On Petitions for Review of an Order of the Federal Communications Commission.

David A. LaFuria argued the cause for petitioners. With him on the briefs were Russell D. Lukas and David L. Nace.

Donald J. Evans was on the brief for amicus curiae Corr Wireless Communications, LLC in support of petitioners.

Maureen K. Flood, Counsel, Federal Communications Commission, argued the cause for respondents. With her on the brief were Robert B. Nicholson and Kristen C. Limarzi, Attorneys, U.S. Department of Justice, Matthew B. Berry, General Counsel, Federal Communications Commission, Joseph R. Palmore, Deputy General Counsel, Richard K. Welch, Deputy Associate General Counsel, and Laurence N. Bourne, Counsel.

Helgi C. Walker argued the cause for intervenors AT & T Inc. and Verizon. With her on the brief were Michael E. Glover, Edward Shakin, Christopher M. Miller, John T. Scott III, and Gary L. Phillips.

Before: TATEL and BROWN, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge:

Petitioners—wireless telephone service providers serving primarily small and rural markets—challenge the Federal Communications Commission's (FCC or the Commission) decision to impose an interim cap on rapidly escalating subsidy payments. The universal support subsidy, intended to ensure adequate, reasonably priced service for residents of rural, sparsely populated, or hard-to-reach areas, increased by more than a billion dollars between 2001 and 2007. See FED.-STATE JOINT BD. ON UNIVERSAL SERV., CC Docket No. 98-202, UNIVERSAL SERVICE MONITORING REPORT tbl.3.2 (2008) ("UNIVERSAL SERVICE MONITORING REPORT"). Petitioners accuse the FCC of fumbling the procedural requirements of the Administrative Procedure Act (APA) in promulgating the interim order; violating the Federal Communications Act; and acting arbitrarily and capriciously.

I

A. Telecommunications Act of 1996

Since the passage of the Communications Act of 1934 (the Act), Congress has made universal service a fundamental goal of federal telecommunications regulation. Indeed, § 1 of the Act states the very purpose of the FCC is "to make available, so far as possible, to all the people of the United States ... a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges." 47 U.S.C. § 151 (as amended).

In 1996, Congress amended the Act to introduce competition into local telephone service, Telecommunications Act of 1996, Pub.L. No. 104-104, 110 Stat. 56, which had traditionally been provided through regulated monopolies, see 47 U.S.C. §§ 251, 252. At the same time, Congress also added a new universal service provision, § 254, to the Act. See id. § 254. The Telecommunications Act of 1996 established a Federal-State Joint Board on Universal Service (the Joint Board or Board) to recommend changes to the FCC's federal universal service regulations. Section 254(b) directs the Joint Board and the Commission to base policies for the preservation and advancement of universal service on six enumerated principles, plus such "other" principles as the Joint Board and the Commission may establish. Id. § 254(b)(1)-(7). Among these principles are "access ... provided in all regions of the Nation ... including low-income consumers and those in rural, insular, and high cost areas," "reasonably comparable" services and rates to those offered "in urban areas," "an equitable and nondiscriminatory contribution to the preservation and advancement of universal service," by "[a]ll providers of telecommunications services," and "specific, predictable, and sufficient Federal and State mechanisms to preserve and advance universal service." Id. § 254(b)(2)-(5). In addition, pursuant to its authority under § 254(b)(7) to adopt "other" universal service principles in the public interest, the Commission adopted a seventh "competitive neutrality" principle, which requires that "universal service support mechanisms and rules neither unfairly advantage nor disadvantage one provider over another, and neither unfairly favor nor disfavor one technology over another." In the Matter of Fed.-State Joint Bd. on Universal Serv., 12 F.C.C.R. 8776 ¶¶ 46-47, 1997 WL 236383 (1997). Another universal service provision, § 254(e), requires that federal universal service support be "explicit and sufficient to achieve" statutory purposes and restricts high-cost universal support to designated "eligible telecommunications carrier[s]" (ETCs). 47 U.S.C. § 254(e).

The Commission fulfills its mandate to provide universal service through the universal service fund (the USF). In addition to the high-cost support program, which is designed to support rural providers serving high-cost areas, the USF also supports programs for low-income customers, schools and libraries, and health care providers. See 47 C.F.R. §§ 54.415-54.605. High-cost support disbursements, however, overwhelmingly represent the largest category of USF expenditures, accounting for 61.6 percent of USF disbursements in 2007. See UNIVERSAL SERVICE MONITORING REPORT tbl.1.11. Prior to the FCC order challenged in this case, the high-cost program and the low-income program were the only two components of the USF not subject to a cap on total support.

Support for the fund comes from assessments paid by interstate telecommunications service providers. The assessments are calculated by applying a quarterly "contribution factor" to the contributors' interstate revenues, and contributors almost always pass their contribution assessments through to their customers. See Alenco Commc'ns, Inc. v. FCC, 201 F.3d 608, 620 (5th Cir.2000). Although incumbent local exchange carriers (ILECs) receive high-cost support based on their actual costs of providing service, under the Commission's "identical support rule," competitive ETCs (CETCs), mainly wireless providers, receive support for each line based not on their own costs, but rather on the same per-line support ILECs in the relevant service area receive. 47 C.F.R. § 54.307(a)(1).

B. The Order

In 2002, growth in the amount of USF support distributed under the high-cost program, particularly to CETCs, prompted the Commission to ask the Joint Board to review the Commission's high-cost support rules, specifically with respect to CETC service areas. The Board responded with several recommendations, including a recommendation to consider revisiting the identical support rule as a means for calculating support for CETCs. See In the Matter of Fed.-State Joint Bd., 19 F.C.C.R. 4257 ¶ 96, 2004 WL 369091 (2004) (recommended decision). The Board also recommended high-cost support be limited to "a single connection that provides access to the public telephone network," rather than subsidizing multiple connections for the same household or business. Id. ¶ 56. The Board concluded "supporting a single connection is more consistent with the goals of section 254 of the Act than the present system, and is necessary to preserve the sustainability of the universal service fund ... and would be competitively neutral." Id. The Board recognized, however, that restricting support to a single connection "may present significant administrative challenges." Id. ¶ 57. Thus, rather than suggesting the Commission modify its methodology for calculating high-cost support at that time, the Board recommended the Commission consider support modifications for CETCs as part of a comprehensive review of high-cost support mechanisms. See id. ¶¶ 4, 88. In any event, before the Commission could act on the Board's recommendations, Congress enacted legislation specifically prohibiting the Commission from implementing the single connection rule. Consolidated Appropriations Act, 2005, Pub.L. No. 108-447, § 634, 118 Stat. 2809 (2004).

After investigating and seeking comment on several high-cost support reform proposals, the Joint Board took action in May 2007 by recommending the Commission adopt an "interim, emergency cap" on high-cost support to CETCs. In the Matter of High-Cost Universal Serv. Support, 22 F.C.C.R. 8998, 2007 WL 1288121 (2007) (recommended decision). Noting CETC high-cost support had skyrocketed from $15 million in 2001 (the correct figure appears to be $16.9 million) to almost $1 billion in 2006—an annual growth rate of over 100 percent—the Board concluded that "without immediate action to restrain growth in competitive ETC funding, the federal universal service fund is in dire jeopardy of becoming unsustainable." Id. ¶ 4. The Board acknowledged the interim cap would not be a permanent solution to problems with the high-cost support distribution mechanisms, id. ¶ 8, committed to making recommendations on comprehensive universal service reform by November 2007, id., and sought comment on comprehensive reform in a public notice, id. ¶ 14.

The Commission issued a Notice of Proposed Rulemaking seeking comments on the proposed interim cap, see In the Matter of High-Cost Universal Serv. Support, 72 Fed.Reg. 28,936 (proposed May 23, 2007) (to be codified at 47 C.F.R. pt. 54), and after receiving and reviewing 113 sets of comments, largely adopted the Joint Board's proposal, see In the Matter of High-Cost Universal Serv. Support, 73 Fed.Reg. 37,882 (July 2, 2008) (to be codified at 47 C.F.R. pts. 32, 36, 54) (the Order). Under the interim cap, annual support for CETCs is capped at the level of support CETCs were eligible to receive in March 2008, subject to two limited exceptions. First, to the extent a CETC files cost data demonstrating its own costs "meet the support threshold in the same manner as the...