Great Lakes Commc'n Corp. v. Fed. Commc'ns Comm'n
| Decision Date | 09 July 2021 |
| Docket Number | C/w 19-1244,No. 19-1233,19-1233 |
| Citation | 3 F.4th 470 |
| Parties | GREAT LAKES COMMUNICATION CORP., et al., Petitioners v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents AT&T Corp., et al., Intervenors |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Lauren J. Coppola argued the cause for petitioners. With her on the joint briefs were G. David Carter, Dwayne D. Sam, Anthony T. Caso, John C. Eastman, Henry Goldberg, and W. Kenneth Ferree. Robert Callahan entered an appearance.
James M. Carr, Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were Michael F. Murray, Deputy Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and Andrew N. Delaney, Attorneys, Thomas M. Johnson, Jr., General Counsel, Federal Communications Commission, Ashley S. Boizelle, Deputy General Counsel, and Richard K. Welch, Deputy Associate General Counsel. Jacob M. Lewis, Associate General Counsel, and Matthew J. Dunne, Counsel, Federal Communications Commission, entered an appearance.
Timothy J. Simeone, Deepika H. Ravi, Michael J. Hunseder, James P. Young, Christopher M. Heimann, and David L. Lawson were on the joint brief of intervenors AT&T Corp., et al. in support of respondents. C. Frederick Beckner III, Jonathan E. Nuechterlein, and Christopher J. Wright entered appearances.
Before: Wilkins and Rao, Circuit Judges, and Silberman, Senior Circuit Judge.
Petitioners challenge an FCC rule that discourages competitive carriers from stimulating access fees that long-distance carriers must pay when routing calls to a local carrier. We deny the petitions because the Commission has ample statutory authority and its rule is reasonable.
As we previously described, so-called "competitive carriers" compete with legacy "incumbent carriers," who are descendants of AT&T's broken-up monopoly. See generally Comptel v. FCC , 978 F.3d 1325 (D.C. Cir. 2020). Typically, the latter own the local phone network, while the former lease or purchase at wholesale the use of the incumbent's network to deliver services.
The smaller of the incumbent carriers—operating largely in rural areas—are known as rate-of-return carriers because their prices are set by a regulatory formula based on their costs plus a profit percentage. Competitive carriers benchmark their rates to an incumbent operating in the same area, whose rates have already been approved. See Connect America Fund , Notice of Proposed Rulemaking, 26 FCC Rcd. 4569 ¶ 36 (2011). Since competitive carriers use the networks of others, they have greater geographic flexibility. And this flexibility allows them to act quickly to exploit profitable market opportunities and engage in regulatory arbitrage.
In a previous case, we described the competitive carriers’ targeting of a market niche servicing large business and government entities. Comptel, 978 F.3d at 1331. In this case, the FCC focuses on the competitive carriers’ pursuit of another market segment—toll conference centers. They host telephone conferences where multiple people call in to a meeting.
Servicing toll conference centers has been a particularly lucrative business for competitive carriers. Under existing (and congressionally-sanctioned) regulations, long-distance carriers must pay an "access fee" to local carriers that deliver calls to their recipients. The access fee covers the responsibility of tandem switching and transportation to the local carrier's end office. The more people who call into the conference center, the more profit the carrier generates, because fees exceed the marginal cost to the carrier. This provides a competitive carrier an incentive to operate in areas where the incumbents have high per-minute interstate access rates, and then to inflate the amount of traffic on its system.
Calls to rural areas are more expensive (and profitable) for technological and regulatory reasons. So competitive carriers will often route calls through rural areas and encourage toll conference centers to operate there. Indeed, some carriers operating in rural areas have had explicit agreements with call centers to share revenue from access charges—thereby stimulating conference callers to offer artificially low rates (even totally free calls).
As a result of these incentives, some sparsely populated rural areas receive a disproportionate and overwhelming number of calls. The Commission credited AT&T's observation, for instance, that twice as many calling minutes were routed in a month to Redfield, South Dakota (population 2,300) and one end office as were routed to Verizon's facilities in New York City (population 8,500,000) and 90 end offices. Similarly, Sprint explained that Iowa, with 1% of the U.S. population, accounts for 48% of Sprint's access fee payments. In addition to higher fees, the Commission notes that access stimulation may result in overloaded networks, call blocking, and dropped calls. Updating the Intercarrier Compensation Regime to Eliminate Access Arbitrage , 34 FCC Rcd. 9035 ¶¶ 15, 95, 111 (2019) (" Order ").
The long-distance carriers complained to the FCC. Under existing rules they could not charge their customers separately for such calls; long-distance rates for customers are calculated as flat rates without regard to the length of call or geographic distance. See 47 U.S.C. § 254(g) ; Connect America Fund , Report and Order, 26 FCC Rcd. 17663 ¶ 663 (" 2011 Order "). The interexchange carriers claimed, therefore, that the costs generated by the few who were making these calls to conference centers were borne by all customers.
In a 2011 rule, the FCC agreed with the long-distance carriers’ complaints. 2011 Order ¶ 675. The FCC designated carriers who exploited this regulatory loophole as "access stimulators." That designation included both competitive carriers and rate-of-return carriers who (1) had a revenue sharing agreement with a third-party based on access charges and (2) had three times as many long-distance calls coming in ("terminating") as going out ("originating").1 If designated an access stimulator, regulators would reduce the access fees that a carrier was permitted to charge. 2011 Order ¶¶ 684–86, 688–90.2
But the 2011 rule was not completely successful. Some competitive carriers continued to stimulate access fees notwithstanding the sanction. Others successfully circumvented the ban on direct revenue sharing with the conference call centers by using third parties. See Order ¶ 44 ; AT&T Corp. v. FCC , 970 F.3d 344, 351–53 (D.C. Cir. 2020).
So, in 2018, the Commission revisited the problem. It issued a Notice of Proposed Rulemaking that, importantly, inquired "whether, and if so how, to revise the current definition of access stimulation to more accurately and effectively target harmful access stimulation practices."3 The prospective sanction for a carrier determined to be an access stimulator was a complete ban on charging access fees.
The FCC released a draft order in which it stated that it would add an alternative definition of access stimulation that would not include the troubling revenue sharing agreement as an essential element. Instead, competitive—as well as rate-of-return—carriers that terminated six times the number of long-distance calls they originate would be access stimulators, even if there was no revenue sharing agreement.
After the close of the comment period, AT&T and NTCA (a trade association including rate-of-return carriers) met with the FCC and claimed that rate-of-return carriers did not engage in harmful access stimulation practices, but some would nevertheless hit the 6:1 ratio. They proposed a higher ratio—10:1—for rate-of-return carriers. That same day, the FCC released a notice of its final agenda, thereby, under the Commission's rules, preventing further responses.
The Commission adopted rules largely following those proposed in the draft order but incorporating the differentiated definitions proposed by AT&T and NTCA. In addition to the old definition of access stimulation, the Commission added a new factor. If a competitive carrier exceeded a 6:1 ratio of terminating to long-distance calls in any month, it would be labelled an access stimulator regardless of whether it had any revenue sharing agreements. Order ¶¶ 43–67. But rate-of-return carriers without a revenue sharing agreement could avoid access-stimulator status if their ratio did not exceed 10:1 for three consecutive months.4
The Commission explained its separate test for rate-of-return carriers by emphasizing their structural and economic differences from competitive carriers. Id. ¶¶ 47–55. As we previously described, the Commission noted that many rate-of-return carriers are small and rural. They have fixed offices and infrastructure serving defined communities. By contrast, many competitive carriers serve only high-volume commercial customers and can flexibly target those customers. Id. ¶ 49. And the Commission found that rate-of-return carriers may be more susceptible to seasonal fluctuations given the economics of rural communities. These considerations, coupled with the lack of evidence that rate-of-return carriers were engaging in harmful access-stimulation practices, led the Commission to adopt the separate definitions of access stimulation.
The Order prohibited an access stimulator from collecting access charges from long-distance carriers. Moreover, it also imposed responsibility on access stimulators for paying any access charges imposed by intermediate carriers (carriers between the long-distance carrier and the access-stimulating network). Order ¶¶ 17–42. The agency explained this rule would "properly align financial incentives by making the access-stimulating [carrier] responsible for paying for the part of the call path that it dictates." Order ¶ 17.
Petitioners (several competitive carriers and companies that offer conference calls) challenge the rule on three...
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