Core Communications, Inc. v. F.C.C.

• Decision Date: 12 January 2010
• Docket Number: No. 08-1393.,No. 09-1046.,No. 09-1044.,No. 08-1365.,08-1365.,09-1046.,08-1393.,09-1044.
• Citation: 592 F.3d 139
• Parties: CORE COMMUNICATIONS, INC., Petitioner v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents Earthlink, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

592 F.3d 139

CORE COMMUNICATIONS, INC., Petitioner v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents Earthlink, Inc., et al., Intervenors.

No. 08-1365.

No. 09-1046.

No. 08-1393.

No. 09-1044.

United States Court of Appeals, District of Columbia Circuit.

Argued October 16, 2009.

Decided January 12, 2010.

On Petitions for Review of Orders of the Federal Communications Commission.

Michael B. Hazzard argued the cause for petitioner Core Communications, Inc. and supporting intervenors. With him on the briefs were Joseph P. Bowser, Adam D. Bowser, Joshua M. Bobeck, and Ross A. Buntrock.

Jonathan D. Feinberg argued the cause for petitioners People of the State of New York and Public Service Commission of the State of New York, intervenors Pennsylvania Public Utilities Commission and the National Association of State Utility Consumer Advocates, and amicus curiae Arizona Corporation Commission. On the briefs were John C. Graham, James Bradford Ramsay, Robin K. Lunt, David Cleveland Bergmann, Joseph Kevin Witmer, and Maureen A. Scott.

Joshua M. Bobeck, Ross A. Buntrock, and Michael B. Hazzard were on the brief for intervenors in support of petitioners. Adam D. Bowser and Joseph P. Bowser entered appearances.

Joseph R. Palmore, Deputy General Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were Richard K. Welch, Deputy Associate General Counsel, and Laurence N. Bourne, Counsel. Nancy C. Garrison and Catherine G. O'Sullivan, Attorneys, U.S. Department of Justice, and Daniel M. Armstrong III, Associate General Counsel, Federal Communications Commission, entered appearances.

Scott H. Angstreich argued the cause for intervenors in support of respondents. With him on the brief were Michael K. Kellogg, Kelly P. Dunbar, Michael E. Glover, Karen Zacharia, Christopher M. Miller, Gary L. Phillips, John T. Nakahata, Carl W. Northrop, Stephen B. Kinnaird, Timothy J. Simeone, Joseph C. Cavender, and John E. Benedict. Robert B. McKenna Jr. entered an appearance.

Before: SENTELLE, Chief Judge, WILLIAMS AND RANDOLPH, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge WILLIAMS.

WILLIAMS, Senior Circuit Judge:

When a customer accesses the internet via "dial-up," his or her call goes to a local exchange carrier ("LEC"), which commonly hands the call off to another LEC, which in turn connects the customer to an internet service provider ("ISP").¹ The ISP links the customer to the web. At least as early as 1999 the Federal Communications Commission was concerned that the regulatory procedures under which the sending LEC compensated the recipient LEC were leading to the imposition of excessive 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 regulatory regime, principally taking the form of rate caps set well below the rates that had prevailed before.

In the order under review here, In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Developing a Unified Intercarrier Compensation Regime, Intercarrier Compensation for ISP-Bound Traffic (CC Docket Nos. 96-45, 96-98, 99-68, 99-200, 01-92), FCC 08-262, 24 FCC Rcd. 6475, 2008 WL 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 engaged in interstate or foreign communication by wire" for "such communication service" be "just and reasonable," and authorizes the Commission to "prescribe such rules and regulations as may be necessary . . . to carry out the provisions of this chapter." Id. 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. No. 104-104,110 Stat. 56, 47 U.S.C. §§ 151-714 (the "1996 Act"), withdraw from the Commission whatever support § 201 might have afforded its rate cap decision. Finding no legal error in the Commission's analysis, we affirm its order.

* * *

Before the FCC imposed a rate cap system, rates for the transfer of calls from an originating LEC to the ISP's LEC were governed, in practice, by the "reciprocal compensation" provisions of the 1996 Act. That act, in the interest of opening the telephone market to competition, had imposed a number of obligations on all local exchange carriers, including a duty to "establish reciprocal compensation arrangements for the transport and termination of telecommunications." 47 U.S.C. § 251(b)(5). Reciprocal compensation arrangements require that when a customer of one carrier makes a local call to a customer of another carrier (which uses its facilities to connect, or "terminate," that call), the originating carrier must compensate the terminating carrier for the use of its facilities. See In re Core Communications, Inc., 455 F.3d 267, 270 (D.C.Cir.2006) ("Core 2006"). Subsection 251(c) imposes extra duties on "incumbent local exchange carriers" ("ILECs"). (ILECs are a subset of LECs, comprising mainly the Bell Operating Companies that succeeded to the local operations of AT & T on the occasion of the latter's dissolution as a result of an antitrust settlement. See United States v. AT & T, 552 F.Supp. 131 (D.D.C.1982). "Competitive local exchange carriers" ("CLECs") constitute the remainder of the LEC universe.) Among the § 251(c) obligations is a "duty to negotiate in good faith in accordance with [§ 252] the particular terms and conditions of agreements to fulfill the duties described in" § 251(b), including the reciprocal compensation obligations, and to provide interconnection with its own "network" for requesting telecommunications carriers. 47 U.S.C. § 251(c). Section 252 allows ILECs to satisfy their § 251 obligations by privately negotiating terms with CLECs, but also grants parties the right to refer the negotiations to state commissions for mediation or arbitration.

The Order arises out of the Commission's concern with the results of applying the reciprocal compensation system to ISP-bound traffic, a concern perhaps most clearly expressed in an order responding to our initial remand of the matter:

Because traffic to ISPs flows one way, so does money in a reciprocal compensation regime. . . . It was not long before some LECs saw the opportunity to sign up ISPs as customers and collect, rather than pay, compensation because ISP modems do not generally call anyone . . . . In some instances, this led to classic regulatory arbitrage that had two troubling effects: (1) it created incentives for inefficient entry of LECs intent on serving ISPs exclusively and not offering viable local telephone competition, as Congress had intended to facilitate with the 1996 Act; (2) the large one-way flows of cash made it possible for LECs serving ISPs to afford to pay their own customers to use their services, potentially driving ISP rates to consumers to uneconomical levels.

Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Intercarrier Compensation for ISP-Bound Traffic, 16 FCC Rcd 9151, 2001 WL 455869 (April 27, 2001) (the "ISP Remand Order") ¶ 21.

The Commission's first step into this arena was its issuance of In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Inter-carrier Compensation for ISP-Bound Traffic, 14 FCC Rcd 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 review), under which the classification of a communication as local or interstate turns on whether its origin and destination are in the same state. Because a customer's venture 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. Id. ¶ 18. As such traffic was "jurisdictionally mixed," id. ¶ 19, however, the Commission chose not to disturb state commissions' application of interconnection agreements to that traffic "pending adoption of a rule establishing an appropriate interstate compensation mechanism," id. at ¶ 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. Id. at 9.

On remand the Commission instituted substantially the same rate cap system that it defends here. See ISP Remand Order ¶ 8. But it claimed as supporting authority 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. Id. at 430. Recognizing that the Commission's rules might well have other legal bases, however, we did not vacate the order. Id. at 430, 434.

Between the ISP Remand Order and the present Order there have been several additional visits to our court. In July 2003 Core Communications, Inc. ("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, Inc. for Forbearance Under 47 U.S.C. § 160(c) from Application of the ISP Remand Order, 19 FCC Rcd 20179, ¶¶ 23-24, ¶ 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...