Texas Office of Pub. Util. Counsel v. FCC

• Decision Date: 10 September 2001
• Docket Number: No. 00-60434,00-60434
• Citation: 265 F.3d 313
• Parties: (5th Cir. 2001) TEXAS OFFICE OF PUBLIC UTILITY COUNSEL; NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION; UNITED STATES OF AMERICA, Respondents
• Court: U.S. Court of Appeals — Fifth Circuit

Page 313

265 F.3d 313 (5th Cir. 2001)

TEXAS OFFICE OF PUBLIC UTILITY COUNSEL; NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION; UNITED STATES OF AMERICA, Respondents.

No. 00-60434

UNITED STATES COURT OF APPEALS FIFTH CIRCUIT

September 10, 2001

REVISED OCTOBER 1, 2001

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On Petition for Review of a Final Order of the Federal Communications Commission

Before EMILIO M. GARZA and PARKER, Circuit Judges, and ELLISON,^* District Judge.

EMILIO M. GARZA, Circuit Judge:

This petition for review of the CALLS Order¹ represents the latest challenge to the Federal Communication Commission's implementation of the Telecommunications Act of 1996, Pub.L. No. 104-04, 110 Stat. 56 (codified as amended in scattered sections of title 47, United States Code) ("1996 Act"). The Texas Office of Public Utility Counsel ("TOPUC") and the National Association of State Utility Consumer Advocates ("NASUCA"), along with intervenor Consumer Federation of America ("CFA") (collectively, "Petitioners"), claim that the CALLS Order violates the procedural requirements of the Administrative Procedure Act, 5 U.S.C. § 706(2)(A) as well as the substantive provisions of the 1996 Act. We affirm the CALLS Order in most respects, but we remand for further analysis the portions regarding the $650 million Universal Service Fund and the X-Factor.

I

We must briefly review the regulatory regime of the telephone industry to better understand the issues presented in this petition. The telephone industry is comprised of two sets of carriers. Local exchange carriers ("LECs") provide local basic telephone service, while interexchange carriers ("IXCs") offer long-distance service. Since the divestiture of AT&T in 1984, robust competition has existed in the long-distance market with IXCs trying to recruit new customers and lure subscribers from each other. On the other hand, LECs until recently had natural monopolies on local service in their respective regions, because they own the network infrastructure necessary to make telephone calls. The prohibitive capital costs involved in laying out a separate infrastructure deterred potential competitors from entering the local service market. The 1996 Act made competition in the local basic service market one of its main goals. Congress prodded incumbent local exchange carriers ("ILECs")--that is, LECs like the Baby Bells which own the infrastructure-- to provide cost-based use of their network to companies that wanted to enter the local service market. In return, Congress allowed ILECs, which had previously been barred from offering long-distance service in their home regions, to enter that market.

The 1996 Act's provision of allowing LECs to use ILECs' infrastructure resembled an arrangement already shared by IXCs and ILECs: IXCs rely on ILECs' network to originate and terminate long-distance calls. More technically, the IXCs use the "local loop," which refers to telephone wires running from a person's telephone to the local telephone switch. Whenever someone makes a long-distance phone call, he or she taps into the local network, where the call is then routed between a LEC local switch and an IXC switch. The costs incurred by the ILECs in providing the use of this infrastructure are called "loop costs."

Two sources of revenues allow the ILECs to recover the loop costs. First, all end-users of basic local service pay a flat Subscriber Line Charge ("SLC") that appears in their monthly telephone bills. Prior to the CALLS Order, the FCC capped the SLC at $3.50 per month: ILECs can charge less than $3.50 per month, but it cannot levy an access charge above that amount. The SLC alone is insufficient to defray the loop costs entirely. Thus, the FCC assesses an access charge against IXCs, which in turn usually pass down these costs to end-users. At first, the FCC levied a traffic-sensitive fee called the Common Carrier Line Charge ("CCL") against IXCs. The FCC later replaced the CCL with the flat-rate Presubscribed Interexchange Carrier Charge ("PICC"). See Access Charge Reform Order, Price Cap Reform Performance Review for Local Exchange Carriers, Transport Structure and Pricing, End User Common Line Charges, CC Docket Nos. 96-262, 94-1, 91-213 and 95-72, First Report and Order, FCC 97-158, 62 Fed. Reg. 31867 (released May 16, 1997) ("Access Charge Reform Order"). The FCC determined that high-volume long-distance callers did not financially burden the network more than low-volume callers, but were nevertheless being penalized by a traffic-sensitive CCL charge. The FCC believed that the flat-rate PICC more accurately represented the true costs incurred by long-distance callers.

In addition to fostering competition in the local telephone service market, the 1996 Act had another key goal of continuing the provision of affordable universal service to all Americans. Traditionally, the phone bills of poor and rural customers have been implicitly subsidized by rate manipulation. High-volume long-distance callers and urban residents pay artificially higher phone bills to subsidize and support universal service for others. Congress recognized that these implicit subsidies could not continue under the market-based regime ushered in by the 1996 Act. In a competitive market, a carrier that subsidizes rural or poor customers by charging below-cost rates while billing above-cost rates to urban customers will be undercut by a competitor offering at-cost rates to urban end-users. Congress wanted to continue subsidizing universal service, but in a way more consistent with the market-oriented reforms. The 1996 Act thus required that the implicit subsidy system of rate manipulation be replaced with explicit subsidies for universal service. To implement the goals of the 1996 Act, the FCC issued a series of orders.

The FCC first issued its Access Charge Reform Order. As noted before, the order abolished the traffic-sensitive CCL fees assessed against IXCs, and replaced them with the flat-rate PICC. By ensuring that access charges more accurately reflected the actual costs incurred, the FCC hoped that it would facilitate the shift to a competitive market. The order also increased the SLC cap for multi-line business customers on the assumption that they could afford such a price increase. It, however, did not increase the SLC cap for primary residences and single-line businesses. Several IXCs petitioned for review of the Access Charge Reform Order, alleging, among other things, that the failure to increase the SLC cap on primary residential and single-line businesses amounted to new implicit subsidies. The Eighth Circuit upheld the Access Charge Reform Order in part on the ground that the 1996 Act's commitment to universal access constrained the FCC from raising the SLC price-cap on other lines. See Southwestern Bell Tel. Co. v. FCC, 153 F.2d 523 (8th Cir. 1998) (citing 47 U.S.C. § 254(b)'s statement of affordable universal access). Noting that the order was a transitional plan only, the court further upheld the FCC's decision to rely on market forces rather than on comprehensive cost analysis in changing its access charge policy.

The FCC also issued In re Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd. 8776 (1997) ("Universal Service Order"). This order emphasized that implicit subsidies for universal service should be gradually removed from interstate access charges, and replaced with an explicit universal service fund derived from percentage-based fees levied against telecommunications carriers. This Circuit remanded parts of the order, but we upheld the requirement that LECs must reduce access charges by an amount commensurate with the money received for the explicit universal service fund. See Tex. Office of Pub.Util. Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999) ("TOPUC I").

Finally, the FCC addressed the issue of the "X-Factor" in its In the Matter of Price Cap Performance Review for Local Exchange Carriers, CC Docket 96-262, Fourth Report and Order, 12 FCC Rcd 16,642 (1997) ("Price Cap Review"). FCC had annually reduced LECs' price-caps by imposing what it dubbed the X-Factor, a percentage number that represented the LECs' increase in productivity minus the rate of inflation. By lowering the price-caps (and hence the amount that LECs could charge consumers), the X-Factor pressured LECs to become more efficient and to lower their costs. In effect, the X-Factor passed down the savings from the LECs' increased productivity to the consumers. In its Price Cap Review, the FCC raised the X-Factor to 6.5 percent. On petition for review, the D.C. Circuit found the increase to be arbitrary and capricious because the FCC did not provide sufficient evidence of increased productivity by the LECs to warrant the 6.5 percent figure. See United States Tel. Ass'n v. FCC, 188 F.3d 521 (D.C. Cir. 1999) ("USTA"). It remanded this issue back to the FCC.

While revisiting the two remanded orders from USTA and TOPUC I, the FCC considered and adopted the CALLS Order, a five-year transitional plan intended to help resolve the thorny issues of access charges. This order originates from the work of the Coalition for Affordable Local and Long Distance Service ("CALLS"), a group of major IXCs and ILECs. Although ILECs and IXCs traditionally have held opposing views on telecommunications reform, they worked together in jointly presenting the CALLS proposal. The FCC conducted a notice-and-comment proceeding pursuant to the Administrative Procedure Act ("APA") by soliciting public comments on the proposal and receiving dozens of comments. After making some changes, the FCC submitted a modified CALLS proposal, and again solicited comments but on an abbreviated schedule. Several weeks later, the FCC issued the final CALLS Order.

The CALLS Order promulgates four...