Rural Cellular Ass'n v. Fed. Commc'ns Comm'n

Decision Date13 July 2012
Docket NumberNo. 11–1094.,11–1094.
Citation685 F.3d 1083,56 Communications Reg. (P&F) 458
PartiesRURAL CELLULAR ASSOCIATION and Universal Service for America Coalition, Petitioners v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents National Association of State Utility Consumer Advocates and Verizon, Intervenors.
CourtU.S. Court of Appeals — District of Columbia Circuit

OPINION TEXT STARTS HERE

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

Todd D. Daubert argued the cause for petitioners. With him on the briefs were Jennifer A. Morrissey, J. Isaac Himowitz, Richard P. Bress, Matthew A. Brill, and Katherine I. Twomey.

Maureen K. Flood, Counsel, Federal Communications Commission, argued the cause for respondents. With her on the briefs were Robert B. Nicholson and Kristen C. Limarzi, Attorneys, U.S. Department of Justice, Austin C. Schlick, General Counsel, Federal Communications Commission, Peter Karanjia, Deputy General Counsel, Richard K. Welch, Deputy Associate General Counsel, and James M. Carr, Counsel.

Before: TATEL and GARLAND, Circuit Judges, and GINSBURG, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge GINSBURG.

GINSBURG, Senior Circuit Judge:

The Rural Cellular Association and the Universal Service for America Coalition (together the RCA) petition for review of an Order of the Federal Communications Commission amending the “interim cap rule,” which limits at 2008 levels the amount of support available to competitive eligible telecommunications carriers (CETCs) through the High–Cost Universal Service Support Program. In the order under review, the Commission amended the interim cap rule to provide that when a carrier relinquishes its status as an eligible communications carrier, the cap on the support available in that carrier's state is reduced by the amount the relinquishing carrier would have received had it retained its status. The RCA argues the Order violates the Communications Act of 1934 as amended by the Telecommunications Act of 1996 (together the Act), violates the Commission's regulations, and is arbitrary and capricious for failure to explain how it ensures the “sufficient” level of support for CETCs required by the Act. For the reasons set out in Part II, we deny the petition for review.

I. Background

Prior to the passage of the Telecommunications Act of 1996, the Commission used implicit subsidies to implement the mandate in the Communications Act of 1934 to “make available, so far as possible ... a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges,” 47 U.S.C. § 151. The Commission and state telephone regulators effected an implicit cross-subsidy by setting rates in rural areas below cost and setting rates in urban areas above cost. This system was unsustainable, however, in the competitive environment ushered in by the Telecommunications Act of 1996. The Congress therefore directed the Commission to replace the system of implicit subsidies with explicit ones, euphemistically referred to as “specific, predictable, and sufficient ... mechanisms to preserve and advance universal service.” 47 U.S.C. § 254(b)(5). The Commission established several such “mechanisms,” including the High–Cost Program at issue in this case. 47 C.F.R. § 54.101.

In order to fund the new explicit subsidies, the Congress required “every telecommunications carrier that provides interstate telecommunication services” to “contribute, on an equitable and nondiscriminatory basis” to those mechanisms. 47 U.S.C. § 254(d). The Commission has promulgated a series of regulations to implement this statutory mandate.

First, in order to calculate the costs of the High–Cost Program, the regulations require the Universal Service Administration Company (USAC), which runs the Program, to submit each quarter “its projections of demand for the federal universal support mechanisms” and “its projections of administrative expenses.” 47 C.F.R. § 54.709(a)(3). The Commission may approve or, within 14 days, may set aside the USAC's projections and “set projections of demand and administrative expenses at amounts that the Commission determines will serve the public interest.” Id.

Second, in order to determine the aggregate amount to be collected from all telecommunications carriers, the regulations require the USAC to “calculate the quarterly contribution factor” based upon “the ratio of total projected quarterly expenses of the universal service support mechanisms to the total projected collected end-user interstate and international telecommunications revenues.” Id. § 54.709(a)(2). Each telecommunications carrier's quarterly assessment is then determined by applying this contribution factor to that carrier's end-user revenue. Should contributions for a particular quarter exceed the disbursements plus the USAC's administrative costs for that quarter, the “excess payments will be carried forward,” thereby reducing the contribution factor for the subsequent quarter. Id. § 54.709(b).

Section 254(e) of the Act provides universal service support may be disbursed only to an “eligible telecommunications carrier.” 47 U.S.C. § 254(e). Both an incumbent local exchange carrier (ILEC) and a new market entrant may receive universal service support upon being designated an ETC by the Commission or by a state regulator. The amount of support going to an ILEC is indexed to a portion of its total costs of serving the relevant area. 47 C.F.R. § 54.301. The amount of support available to a CETC, before the changes at issue in this case, was calculated according to the “identical support rule”: The per-line costs of the ILEC in the area were multiplied by the number of lines the CETC had in service. 47 C.F.R. § 54.307(a)(1).

The Commission adopted the identical support rule for ease of administration, Fed.-State Joint Bd. on Universal Serv., 17 FCC Rcd. 22,642, ¶ 7 (2002), but the result was an explosive growth in universal support disbursements to CETCs through the High–Cost Program. Total disbursements through the Program increased to $4.3 billion in 2007 from $2.6 billion in 2001, while disbursements to CETCs alone increased to $1.18 billion from a mere $17 million.

Several factors contributed to this dramatic increase. First, to the extent consumers kept their wireline service provided by the ILEC when they purchased wireless service from a CETC, the increase in support to the CETC was not offset by a decrease in support to the ILEC. Second, although many consumers did give up their wireline service, a decrease in the number of lines serviced by an ILEC does not decrease the ILEC's cost proportionally because the provision of wireline services involves very large fixed and relatively small variable per-line costs; hence, the ILEC's cost-per-line increases as it loses customers. Under the identical support rule, this increased the support-per-line for a CETC even as the number of lines it had in service increased and its costs per-line went down. Third, because the identical support rule provided support to CETCs on the basis of the number of lines they had in service, regardless of the cost of providing those lines, the rule amplified a CETC's incentive to increase the number of its lines in areas it could serve at the least cost rather than to expand service into the more costly and therefore more needful areas.

In May 2008 the Commission adopted an “interim, emergency cap” on universal service support payments to CETCs through the High–Cost Program. High Cost Universal Support, 23 FCC Rcd. 8834, 8834 (2008) (hereinafter the Interim Cap Order ). The Interim Cap Order limited “total annual [CETC] support for each state ... [to] the level of support that [CETCs] ... were eligible to receive during March 2008 on an annualized basis.” Id. The Commission directed the USAC to “calculate the support each [CETC] would have received under the existing (uncapped) per-line identical support rule,” and then to decrease this support by a “state reduction factor” equal to the ratio of the state's capped support to the state's uncapped support. Id. at 8846. The Interim Cap Order thus reduced by a fixed percentage the universal service support received by each CETC in any given state. In order to ensure the interim cap rule satisfied the statutory direction that support be “sufficient ... to preserve and advance universal service”, the Commission allowed a CETC to receive up to the full amount it would have received under the uncapped identical support rule if it submitted “cost data demonstrating that its costs meet the support threshold in the same manner as the [ILEC].” Id. at 8848.

The RCA filed a petition for review of the Interim Cap Order, which this court denied in Rural Cellular Association v. FCC, 588 F.3d 1095, 1100 (D.C.Cir.2009)( Rural Cellular I ). As relevant here, we rejected the RCA's argument the Commission unreasonably interpreted its statutory mandate to provide “sufficient” universal service support by limiting disbursements in order to protect the long-term sustainability of the Program. Id. at 1102. The court also rejected the RCA's argument the Commission misinterpreted the Act as requiring “sufficient, but not excessive” support, which according to the petitioners would “elevate[ ] the Commission's own goal of preserving the solvency of the [Program] over Congress's directive in [47 U.S.C.] § 254(b)(5) that the fund provide support that is ‘sufficient’ to meet the needs of preserving and advancing universal service.” Id. The court noted the safety valve in the Interim Cap Order undermined the RCA's claim the level of support would not be sufficient; a CETC for which the capped amount would be insufficient had only to submit cost data to receive greater support. Id. at 1104.

In September 2010, the Commission clarified how the Interim Cap Order applies to universal service support...

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