                                                                      FILED
                                                          United States Court of Appeals
                                                                  Tenth Circuit

                                                                 May 23, 2014
                                  PUBLISH                    Elisabeth A. Shumaker
                                                                 Clerk of Court
                   UNITED STATES COURT OF APPEALS

                          FOR THE TENTH CIRCUIT


      IN RE: FCC 11-161                        No. 11-9900


DIRECT COMMUNICATIONS CEDAR              Consolidated Case Nos.:
VALLEY, LLC, a Utah limited liability    11-9581, 11-9585, 11-9586, 11-9587,
company; TOTAH COMMUNICATIONS,           11-9588, 11-9589, 11-9590, 11-9591, 11-
INC., an Oklahoma corporation; H & B     9592, 11-9594, 11-9595, 11-9596, 11-
COMMUNICATIONS, INC., a Kansas           9597, 12-9500, 12-9510, 12-9511, 12-
Corporation; MOUNDRIDGE                  9513, 12-9514, 12-9517, 12-9520, 12-
TELEPHONE COMPANY, a Kansas              9521, 12-9522, 12-9523, 12-9524, 12-
corporation; PIONEER TELEPHONE           9528, 12-9530, 12-9531, 12-9532, 12-
ASSOCIATION, INC., a Kansas              9533, 12-9534, 12-9575
corporation; TWIN VALLEY
TELEPHONE, INC., a Kansas corporation;
PINE TELEPHONE COMPANY, INC., an
Oklahoma corporation; PENNSYLVANIA
PUBLIC UTILITY COMMISSION;
CHOCTAW TELEPHONE COMPANY;
CORE COMMUNICATIONS, INC.;
NATIONAL ASSOCIATION OF STATE
UTILITY CONSUMER ADVOCATES;
NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION d/b/a
NTCA-THE RURAL BROADBAND
ASSOCIATION; CELLULAR SOUTH,
INC.; AT&T INC.; HALO WIRELESS,
INC.; THE VOICE ON THE NET
COALITION, INC.; PUBLIC UTILITIES
COMMISSION OF OHIO; TW
TELECOM INC.; VERMONT PUBLIC
SERVICE BOARD; TRANSCOM
ENHANCED SERVICES, INC.; THE
STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS;
CENTURYLINK, INC.; GILA RIVER
INDIAN COMMUNITY; GILA RIVER
TELECOMMUNICATIONS, INC.;
ALLBAND COMMUNICATIONS
COOPERATIVE; NORTH COUNTY
COMMUNICATIONS CORPORATION;
UNITED STATES CELLULAR
CORPORATION; PR WIRELESS, INC.;
DOCOMO PACIFIC, INC.; NEX-TECH
WIRELESS, LLC; CELLULAR
NETWORK PARTNERSHIP, A LIMITED
PARTNERSHIP; U.S. TELEPACIFIC
CORP.; CONSOLIDATED
COMMUNICATIONS HOLDINGS, INC.;
NATIONAL ASSOCIATION OF
REGULATORY UTILITY
COMMISSIONERS; RURAL
TELEPHONE SERVICE COMPANY,
INC.; ADAK EAGLE ENTERPRISES
LLC; ADAMS TELEPHONE
COOPERATIVE; ALENCO
COMMUNICATIONS, INC.;
ARLINGTON TELEPHONE COMPANY;
BAY SPRINGS TELEPHONE
COMPANY, INC.; BIG BEND
TELEPHONE COMPANY, INC.; THE
BLAIR TELEPHONE COMPANY;
BLOUNTSVILLE TELEPHONE LLC;
BLUE VALLEY TELE-
COMMUNICATIONS, INC.; BLUFFTON
TELEPHONE COMPANY, INC.; BPM,
INC., d/b/a Noxapater Telephone
Company; BRANTLEY TELEPHONE
COMPANY, INC.; BRAZORIA
TELEPHONE COMPANY; BRINDLEE
MOUNTAIN TELEPHONE LLC; BRUCE
TELEPHONE COMPANY, INC.; BUGGS
ISLAND TELEPHONE COOPERATIVE;
CAMERON TELEPHONE COMPANY,
LLC; CHARITON VALLEY
TELEPHONE CORPORATION;
CHEQUAMEGON COMMUNICATIONS

                                  2
COOPERATIVE, INC.; CHICKAMAUGA
TELEPHONE CORPORATION;
CHICKASAW TELEPHONE
COMPANY; CHIPPEWA COUNTY
TELEPHONE COMPANY; CITIZENS
TELEPHONE COMPANY; CLEAR
LAKE INDEPENDENT TELEPHONE
COMPANY; COMSOUTH
TELECOMMUNICATIONS, INC.;
COPPER VALLEY TELEPHONE
COOPERATIVE; CORDOVA
TELEPHONE COOPERATIVE;
CROCKETT TELEPHONE COMPANY,
INC.; DARIEN TELEPHONE
COMPANY; DEERFIELD FARMERS'
TELEPHONE COMPANY; DELTA
TELEPHONE COMPANY, INC.; EAST
ASCENSION TELEPHONE COMPANY,
LLC; EASTERN NEBRASKA
TELEPHONE COMPANY; EASTEX
TELEPHONE COOP., INC.; EGYPTIAN
TELEPHONE COOPERATIVE
ASSOCIATION; ELIZABETH
TELEPHONE COMPANY, LLC;
ELLIJAY TELEPHONE COMPANY;
FARMERS TELEPHONE
COOPERATIVE, INC.; FLATROCK
TELEPHONE COOP., INC.; FRANKLIN
TELEPHONE COMPANY, INC.;
FULTON TELEPHONE COMPANY,
INC.; GLENWOOD TELEPHONE
COMPANY; GRANBY TELEPHONE
LLC; HART TELEPHONE COMPANY;
HIAWATHA TELEPHONE COMPANY;
HOLWAY TELEPHONE COMPANY;
HOME TELEPHONE COMPANY (ST.
JACOB, ILL.); HOME TELEPHONE
COMPANY (MONCKS CORNER, SC);
HOPPER TELECOMMUNICATIONS
LLC; HORRY TELEPHONE
COOPERATIVE, INC.; INTERIOR

                                  3
TELEPHONE COMPANY; KAPLAN
TELEPHONE COMPANY, INC.; KLM
TELEPHONE COMPANY; CITY OF
KETCHIKAN, ALASKA, d/b/a KPU
Telecommunications; LACKAWAXEN
TELECOMMUNICATIONS SERVICES,
INC.; LAFOURCHE TELEPHONE
COMPANY, LLC; LA HARPE
TELEPHONE COMPANY, INC.;
LAKESIDE TELEPHONE COMPANY;
LINCOLNVILLE TELEPHONE
COMPANY; LORETTO TELEPHONE
COMPANY, INC.; MADISON
TELEPHONE COMPANY;
MATANUSKA TELEPHONE
ASSOCIATION, INC.; MCDONOUGH
TELEPHONE COOPERATIVE; MGW
TELEPHONE COMPANY, INC.; MID
CENTURY COOPERATIVE.; MIDWAY
TELEPHONE COMPANY; MID-MAINE
TELECOM LLC; MOUND BAYOU
TELEPHONE & COMMUNICATIONS,
INC.; MOUNDVILLE TELEPHONE
COMPANY, INC.; MUKLUK
TELEPHONE COMPANY, INC.;
NATIONAL TELEPHONE OF
ALABAMA, INC.; ONTONAGON
COUNTY TELEPHONE COMPANY;
OTELCO MID-MISSOURI LLC;
OTELCO TELEPHONE LLC;
PANHANDLE TELEPHONE
COOPERATIVE, INC.; PEMBROKE
TELEPHONE COMPANY, INC.;
PEOPLES TELEPHONE CO.; PEOPLES
TELEPHONE COMPANY; PIEDMONT
RURAL TELEPHONE COOPERATIVE,
INC.; PINE BELT TELEPHONE
COMPANY, INC.; PINE TREE
TELEPHONE LLC; PIONEER
TELEPHONE COOPERATIVE, INC.;
POKA LAMBRO TELEPHONE

                                 4
COOPERATIVE, INC.; PUBLIC
SERVICE TELEPHONE COMPANY;
RINGGOLD TELEPHONE COMPANY;
ROANOKE TELEPHONE COMPANY,
INC.; ROCK COUNTY TELEPHONE
COMPANY; SACO RIVER TELEPHONE
LLC; SANDHILL TELEPHONE
COOPERATIVE, INC.; SHOREHAM
TELEPHONE LLC; THE SISKIYOU
TELEPHONE COMPANY; SLEDGE
TELEPHONE COMPANY; SOUTH
CANAAN TELEPHONE COMPANY;
SOUTH CENTRAL TELEPHONE
ASSOCIATION; STAR TELEPHONE
COMPANY, INC.; STAYTON
COOPERATIVE TELEPHONE
COMPANY; THE NORTH-EASTERN
PENNSYLVANIA TELEPHONE
COMPANY; TIDEWATER TELECOM,
INC.; TOHONO O'ODHAM UTILITY
AUTHORITY; UNITEL, INC.; WAR
TELEPHONE LLC; WEST CAROLINA
RURAL TELEPHONE COOPERATIVE,
INC.; WEST TENNESSEE TELEPHONE
COMPANY, INC.; WEST WISCONSIN
TELCOM COOPERATIVE, INC.;
WIGGINS TELEPHONE ASSOCIATION;
WINNEBAGO COOPERATIVE
TELECOM ASSOCIATION; YUKON
TELEPHONE CO., INC.; ARIZONA
CORPORATION COMMISSION;
WINDSTREAM CORPORATION;
WINDSTREAM COMMUNICATIONS,
INC.,

          Petitioners,

v.

FEDERAL COMMUNICATIONS
COMMISSION; UNITED STATES OF

                                 5
AMERICA,

            Respondents,

and

SPRINT NEXTEL CORPORATION;
LEVEL 3 COMMUNICATIONS, LLC;
CENTURYLINK, INC.; CONNECTICUT
PUBLIC UTILITIES
REGULATORY AUTHORITY;
INDEPENDENT TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
WESTERN TELECOMMUNICATIONS
ALLIANCE; NATIONAL EXCHANGE
CARRIER ASSOCIATION, INC.;
ARLINGTON TELEPHONE COMPANY;
THE BLAIR TELEPHONE COMPANY;
CAMBRIDGE TELEPHONE COMPANY;
CLARKS TELECOMMUNICATIONS
CO.; CONSOLIDATED TELEPHONE
COMPANY; CONSOLIDATED TELCO,
INC.; CONSOLIDATED TELECOM,
INC.; THE CURTIS TELEPHONE
COMPANY; EASTERN NEBRASKA
TELEPHONE COMPANY; GREAT
PLAINS COMMUNICATIONS, INC.; K.
& M. TELEPHONE COMPANY, INC.;
NEBRASKA CENTRAL TELEPHONE
COMPANY; NORTHEAST NEBRASKA
TELEPHONE COMPANY; ROCK
COUNTY TELEPHONE COMPANY;
THREE RIVER TELCO; RCA - The
Competitive Carriers Association; RURAL
TELECOMMUNICATIONS GROUP,
INC.; T-MOBILE USA, INC., CENTRAL
TEXAS TELEPHONE COOPERATIVE,
INC.; VENTURE COMMUNICATIONS
COOPERATIVE, INC.; ALPINE
COMMUNICATIONS, LC; EMERY
TELCOM; PEÑASCO VALLEY

                                          6
TELEPHONE COOPERATIVE, INC.;
SMART CITY TELECOM; SMITHVILLE
COMMUNICATIONS, INC.; SOUTH
SLOPE COOPERATIVE TELEPHONE
CO., INC.; SPRING GROVE
COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC;
VIRGINIA STATE CORPORATION
COMMISSION OF THE STATE OF
KANSAS; MONTANA PUBLIC
SERVICE COMMISSION; VERIZON
WIRELESS; VERIZON; AT&T INC.;
COX COMMUNICATIONS, INC.;
NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION d/b/a
NTCA-THE RURAL BROADBAND
ASSOCIATION; INDEPENDENT
TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
NATIONAL EXCHANGE CARRIER
ASSOCIATION, INC. (NECA),
COMCAST CORPORATION; VONAGE
HOLDINGS CORPORATION; RURAL
TELECOMMUNICATIONS GROUP,
INC.; NATIONAL CABLE &
TELECOMMUNICATIONS
ASSOCIATION; CENTRAL TEXAS
TELEPHONE COOPERATIVE, INC.;
VENTURE COMMUNICATIONS
COOPERATIVE, INC.; ALPINE
COMMUNICATIONS, LC; EMERY
TELCOM; PEÑASCO VALLEY
TELEPHONE COOPERATIVE, INC.;
SMART CITY TELECOM; SMITHVILLE

                                 7
COMMUNICATIONS, INC.; SOUTH
SLOPE COOPERATIVE TELEPHONE
CO., INC.; SPRING GROVE
COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC,

      Intervenors.

STATE MEMBERS OF THE FEDERAL-
STATE JOINT BOARD ON UNIVERSAL
SERVICE,


      Amicus Curiae.


                PETITIONS FOR REVIEW OF ORDERS OF THE
                 FEDERAL COMMUNICATIONS COMMISSION
                          (FCC Nos. 11-161, 12-47)



Argued for Petitioners:

James Bradford Ramsay, National Association of Regulatory Utility Commissioners,
Washington, D.C., Russell Blau, Bingham McCutchen LLP, Washington, D.C., Robert
Allen Long, Jr., Covington & Burling, Washington, D.C., Michael B. Wallace, Wise
Carter Child & Caraway, Jackson, Mississippi, Pratik A. Shah, Akin Gump Strauss Hauer
& Feld LLP, Washigton, D.C, Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, Joseph K. Witmer, Pennsylvania Public Utility Commission,
Harrisburg, Pennsylvania, Christopher F. Van de Verg, Annapolis, Maryland, Lucas M.
Walker, Molo Lamken, Washington, D.C., Don L. Keskey, Public Law Resource Center
PLLC, Lansing, Michigan, Harvey Reiter, Stinson Leonard Street LLP, Washington,


                                          8
David Bergmann, Columbus, Ohio, E. Ashton Johnston, Communications Law Counsel,
P.C., Washington, D.C., Heather M. Zachary, Wilmer Cutler Pickering Hale and Dorr
LLP, Washington, D.C., and W. Scott McCollough, McCollough Henry, Austin, Texas.

Argued for Respondents:

Richard K. Welch, James M. Carr, and Maureen Katherine Flood, Federal
Communications Commission, Washington, D.C.

Argued for Respondents-Intervenors:

Scott H. Angstreich, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.,
Washington, D.C., Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo,
P.C., and Samuel L. Feder, Jenner & Block LLP, Washington, D.C.

Appearances for Petitioners:

David R. Irvine, Salt Lake City, Utah, and Alan L. Smith, Salt Lake City, Utah, for Direct
Communications Cedar Valley, LLC, Totah Communications, Inc., H&B
Communications, Inc., The Moundridge Telephone Company, Pioneer Telephone
Association, Inc., Twin Valley Telephone, Inc., and Pine Telephone Company, Inc.

Bohdan R. Pankiw, Kathryn G. Sophy, Shaun A. Sparks, and Joseph K. Witmer,
Pennsylvania Public Utility Commission, Harrisburg, Pennsylvania, for Pennsylvania
Public Utility Commission.

Benjamin H. Dickens, Jr. and Mary J. Sisak, Blooston, Mordkofsky, Dickens, Duffy &
Prendergrast, LLP, and Craig S. Johnson, Johnson & Sporleder, Jefferson City, Missuori,
for Choctaw Telephone Company.

James Christopher Falvey and Charles Anthony Zdebski, Eckert Seamens Cherin &
Mellott, Washington, D.C., for Core Communications, Inc.

David Bergmann, Columbus, Ohio, Paula Marie Carmody, Maryland’s Office of People’s
Counsel, Baltimore, Maryland, and Christopher J. White, New Jersey Division of Rate
Counsel, Office of the Public Advocate, Newark, New Jersey, for National Association of
State Utility Consumer Advocates.

Russell Blau and Tamar Elizabeth Finn, Bingham McCutchen LLP, Washington, D.C.,
for National Telecommunications Cooperative Association d/b/a NTCA-The Rural



                                            9
Broadband Association, U.S. TelePacific Corp., and Western Telecommunications
Alliance.

Rebecca Hawkins and Michael B. Wallace, Wise Carter Child & Caraway, Jackson,
Mississippi, David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, for Cellular South Inc.

Daniel T. Deacon, Kelly P. Dunbar, Jonathan E. Nuechterlein, and Heather M. Zachary,
Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., and Christopher M.
Heimann and Gary L. Phillips, AT&T Services, Inc., Washington, D.C., for AT&T Inc.

W. Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent, II,
Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and Steven
H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Halo Wireless, Inc.

Jennifer P. Bagg and E. Ashton Johnston, Communications Law Counsel, P.C., and
Donna M. Lampert, Lampert, O’Connor & Johnston, P.C., Washington, D.C., and Glenn
Richards, Pillsbury Winthrop Shaw Pittman, Washington, D.C., for The Voice on the Net
Coalition, Inc.

John Holland Jones, Office of the Ohio Attorney General, Columbus, Ohio, for Public
Utilities Commission of Ohio.

Thomas Jones, David Paul Murray, and Nirali Patel, Willkie, Farr & Gallagher LLP,
Washington, D.C., for tw telecom inc.

Bridget Asay, Office of the Attorney General for the State of Vermont, Montpelier,
Vermont, for Vermont Public Service Board.

W. Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent, II,
Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and Steven
H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Transcom Enhanced
Services, Inc.

Robert A. Fox, Kansas Corporation Commission Topeka, Kansas, for The State
Corporation Commission of the State of Kansas.

Yaron Dori, Robert Allen Long, Jr., Gerard J. Waldron, Mark Mosier, and Michael
Beder, Covington & Burling, Washington, D.C., for CenturyLink, Inc.




                                           10
John Boles Capehart, Akin Gump Strauss Hauer & Feld, Dallas, Texas, Sean Conway,
Patricia Ann Millett, and James Edward Tysse, Akin Gump Strauss Hauer & Feld,
Washington, D.C., and Michael C. Small, Akin Gump Strauss Hauer & Feld,
Washington, D.C., for Gila River Indian Community and Gila River
Telecommunications, Inc.

Don L. Keskey, Lansing Michigan, forAllband Communications Cooperative.

Roger Dale Dixon, Jr., Law Offices of Dale Dixon, Carlsbad, California, for North
County Communications Corporation.

David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,
Virginia, for United States Cellular Corporation.

David LaFuria, Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez &
Sachs, LLP, McLean, Virginia, for Petitioners PR Wireless, Inc. and Docomo Pacific,
Inc., Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, for Petitioners Nex-Tech Wireless, LLC, and Cellular Network
Partnership, A Limited Partnership.

Russell Blau, Bingham McCutchen LLP, Washington, D.C., for Consolidated
Communications Holdings, Inc.

James Bradford Ramsay and Holly R. Smith, National Association of Regulatory Utility
Commissioners, Washington, D.C., for National Association of Regulatory Utility
Commissioners.

David Cosson, Washington, D.C., H. Russell Frisby, Jr., Dennis Lane, and Harvey Reiter,
Stinson Leonard Street LLP, Washington, D.C., for Rural Independent Competitive
Alliance, Rural Telephone Service Company, Inc., Adak Eagle Enterprises LLC, Adams
Telephone Cooperative, Alenco Communications, Inc., Arlington Telephone Company,
Bay Springs Telephone Company, Big Bend Telephone Company, The Blair Telephone
Company, Blountsville Telephone LLC, Blue Valley Tele-communications, Inc., Bluffton
Telephone Company, Inc., BPM, Inc., Brantley Telephone Company, Inc., Brazoria
Telephone Company, Brindlee Mountain Telephone LLC, Bruce Telephone Company,
Inc., Buggs Island Telephone Cooperative, Cameron Telephone Company, LLC, Chariton
Valley Telephone Corporation, Chequamegon Communications Cooperative, Inc.,
Chickamauga Telephone Corporation, Chicksaw Telephone Company, Chippewa County
Telephone Company, Clear Lake Independent Telephone Company, Comsouth
Telecommunications, Inc., Copper Valley Telephone Cooperative, Cordova Telephone
Cooperative, Crockett Telephone Company, Inc., Darien Telephone Company, Deerfield


                                           11
Famers’ Telephone Company, Delta Telephone Company, Inc., East Ascention
Telephone Company, LLC, Eastern Nebraska Telephone Company, Eastex Telephone
Coop., Inc., Egyptian Telephone Cooperative Association, Elizabeth Telephone
Company, LLC, Ellijay Telephone Company, Farmers Telephone Cooperative, Inc.,
Flatrock Telephone Coop., Inc., Franklin Telephone Company, Inc., Fulton Telephone
Company, Inc., Glenwood Telephone Company, Granby Telephone Company LLC, Hart
Telephone Company, Hiawatha Telephone Company, Holway Telephone Company,
Home Telephone Company (St. Jacob Illinois), Home Telephone Company (Moncks
Corner, South Carolina), Hopper Telecommunications LLC., Horry Telephone
Cooperative, Inc., Interior Telephone Company, Kaplan Telephone Company, Inc., KLM
Telephone Company, City of Ketchikan, Alaska, Lackawaxen Telecommunications
Services, Inc., Lafourche Telephone Company, LLC, La Harpe Telephone Company,
Inc., Lakeside Telephone Company, Lincolnville Telephone Company, Loretto
Telephone Company, Inc., Madison Telephone Company, Matanuska Telephone
Association, Inc., McDonough Telephone Coop., MGW Telephone Company, Inc., Mid
Century Cooperative, Midway Telephone Company, Mid-Maine Telecom, LLC, Mound
Bayou Telephone & Communications, Inc., Mondville Telephone Company, Inc.,
Mukluk Telephone Company, Inc., National Telephone of Alabama, Inc., Ontonagon
County Telephone Company, Otelco Mid-Missouri LLC, Otelco Telephone LLC,
Panhandle Telephone Cooperative, Inc., Pembroke Telephone Company, Inc., People’s
Telephone Company, Peoples Telephone Company, Piedmont Rural Telephone
Cooperative, Inc., Pine Belt Telephone Company, Inc., Pine Tree Telephone LLC,
Pioneer Telephone Cooperative, Inc., Poka Lambro Telephone Cooperative, Inc., Public
Service Telephone Company, Ringgold Telephone Company, Roanoke Telephone
Company, Inc., Rock County Telephone Company, Saco River Telephone LLC, Sandhill
Telephone Cooperative, Inc., Shoreham Telephone LLC, The Siskiyou Telephone
Company, Sledge Telephone Company, South Canaan Telephone Company, South
Central Telephone Association, Star Telephone Company, Inc., Stayton Cooperative
Telephone Company, The North-Eastern Pennsylvania Telephone Company, Tidewater
Telecom, Inc., Tohono O’Odham Utility Authority, Unitel, Inc., War Telephone LLC,
West Carolina Rural Telephone Cooperative, Inc., West Tennessee Telephone Company,
Inc., West Wisconsin Telecom Cooperative, Inc., Wiggins Telephone Association,
Winnebago Cooperative Telecom Association, Yukon Telephone Co., Inc.

Maureen A. Scott, Wesley Van Cleve, and Janet F. Wagner, Arizona Corporation
Commission, Legal Division, Phoenix, Arizona, for Arizona Corporation Commission.

Jeffrey A. Lamken and Lucas M. Walker, Molo Lamken, Washington, D.C.,
for Windstream Communications, Inc., and Windstream Corporation.

Appearances for Respondents:


                                         12
Laurence Nicholas Bourne, James M. Carr, Maureen Katherine Flood, Jacob Matthew
Lewis, Joel Marcus, Matthew J. Dunne, and Richard K. Welch, Federal Communications
Commission, Washington, D.C., for the Federal Communications Commission.

Robert Nicholson and Robert J. Wiggers, United States Department of Justice,
Washington, D.C., for United States of America.

Appearances for Intervenors:

Thomas J. Moorman, Woods & Aitken LLP, Washington, D.C. and Paul M. Schudel,
Woods & Aitken LLP, Lincoln, Nebraska, for Arlington Telephone Company, The
Blair Telephone Company. Cambridge Telephone Company, Clarks
Telecommunications Co., Consolidated Telco, Inc., Consolidated Telephone
Company, Inc., Consolidated Telecom, Inc., The Curtis Telephone Company,
Eastern Nebraska Telephone Company, Great Plains Communications, Inc., K. &
M. Telephone Company, Inc., Nebraska Central Telephone Company, Northeast
Nebraska Telephone Company, Rock County Telephone Company and Three River
Telco.

Yaron Dori, Robert Allen Long, Jr., Gerard J. Waldron, Mark Mosier, and Michael
Beder, Covington & Burling, Washington, D.C., for CenturyLink, Inc.

Gerard J. Duffy, Benjamin H. Dickens, Jr., Robert M. Jackson, and Mary J. Sisak,
Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP, Washington, D.C., for 3
Rivers Telephone Cooperative, Inc. , Venture Communications Cooperative, Inc., Alpine
Communications, LC, Emery Telcom, Peñasco Valley Telephone Cooperative, Inc.,
Smart City Telecom, Smithville Communications, Inc., South Slope Cooperative
Telephone Co., Inc., Spring Grove Communications, Star Telephone Company, Walnut
Telephone Company, and West River Cooperative Telephone Company, Inc.

Ivan C. Evilsizer, Evilsizer Law Office, Helena, Montana, for Ronan Telephone
Company and Hot Springs Telephone Company.

Helen E. Disenhaus and Ashton Johnston, Lampert, O’Connor & Johnston, P.C.,
Washington, D.C., for Hypercube Telecom, LLC.

Raymond L. Doggett, Jr., Virginia State Corporation Commission, Richmond, Virginia,
for Virginia State Corporation Commission.




                                          13
Dennis Lopach, Montana Public Service Commission, Helena, Montana, for Montana
Public Service Commission.

Christopher M. Heimann and Gary L. Phillips, AT&T Services, Inc., Washington, D.C.,
and Daniel T. Deacon, Kelly P. Dunbar, Jonathan E. Nuechterlein, and Heather M.
Zachary, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., for AT&T Inc.

J.G. Harrington and David E. Mills, Cooley, LLP, Washington, D.C., for Cox
Communications, Inc.

Scott H. Angstreich, Joshua D. Branson, Brendan J. Crimmins, Kellogg, Huber, Hansen,
Todd, Evans & Figel, P.L.L.C., Washington, D.C., and Michael E. Glover and
Christopher M. Miller, Arlington, Virginia, for Verizon and Verizon Wireless.

Russell Blau, Bingham McCutchen LLP, Washington, D.C., for National
Telecommunications Cooperative Association, d/b/a NTCA-The Rural Broadband
Association.

Clare Kindall, Office of the Attorney General Energy Department, New Britain,
Connecticut, for Connecticut Public Utilities Regulatory Authority.

Samuel L. Feder and Luke C. Platzer, Jenner & Block LLP, Washington, D.C., for
Comcast Corporation.

Christopher J. Wright, Wiltshire & Grannis, LLP, Washington, D.C., for Level 3
Communications, LLC, Vonage Holdings Corp., and Sprint Nextel Corporation.

Rick C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National
Cable & Telecommunications Association, Washington, D.C., and Ernest C. Cooper,
Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky &
Popeo, P.C., Washington, D.C., for National Cable & Telecommunications Association.

Genevieve Morelli, The Independent Telephone & Telecommunications Alliance,
Washington, D.C., for Independent Telephone & Telecommunications Alliance.

Gerard J. Duffy, Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP,
Washington, D.C., for Western Telecommunications Alliance.

Gregory Jon Vogt, Law Offices of Gregory J. Vogt, PLLC, Alexandria, Virginia, and
Richard A. Askoff, Sr., National Exchange Carrier Association, Inc., Whippany, New
Jersey for National Exchange Carrier Association.


                                          14
Craig Edward Gilmore, L. Charles Keller, and David H. Solomon, Wilkinson, Barker,
Knauer, LLP, Washington, D.C., for T-Mobile USA, Inc.

Caressa Davison Bennet, Kenneth Charles Johnson, Anthony Veach, and Daryl Altey
Zakov, Bennet & Bennet, Bethesda, Maryland, for Rural Telecommunications Group,
Inc. and Central Telephone Cooperative, Inc.

Appearances for Amicus Curiae:

James Hughes Cawley, Pennsylvania Public Utility Commission, Harrisburg,
Pennsylvania, and James Bradford Ramsay, National Association of Regulatory Utility
Commissioners, Washington, D.C., for State Members of the Federal-State Joint Board
on Universal Service.

Counsel on the briefs:

David Cosson, H. Russell Frisby, Jr., Dennis Lane, Harvey Reiter, Don L. Keskey,
Maureen A. Scott, Wesley Van Cleve, Janet F. Wagner, Russell D. Lukas, David A.
LaFuria, Todd B. Lantor, Rebecca Hawkins, Michael B. Wallace, Yaron Dori, Robert
Allen Long, Jr., Gerard J. Waldron, Benjamin H. Dickens, Jr., Mary J. Sisak, Craig S.
Johnson, James C. Falvey, Charles A. Zdebski, David R. Irvine, Alan Lange Smith,
Patricia A. Millet, James Edward Tysse, Sean T. Conway, John Boles Capehart, Michael
C. Small, James Bradford Ramsay, Holly R. Smith, David Bergmann, Paula Marie
Carmody, Christopher J. White, Russell Blau, Tamar Finn, Roger Dale Dixon, Jr.,
Bohdan R. Pankiw, Kathryn G. Sophy, Joseph K. Witmer, Shaun A. Sparks, John H.
Jones, Robert A. Fox, Jennifer P. Bagg, E. Ashton Johnston, Donna N. Lampert, Glenn
Richards, W. Scott McCollough, Steven H. Thomas, Bridget Asay, David P. Murray,
Thomas Jones, and Nirali Patel on the Joint Preliminary Brief.

Don L. Keskey, Maureen A. Scott, Wesley Van Cleave, Janet F. Wagner, Robert Allen
Long, Jr., Gerard J. Waldron, Yaron Dori, Mark W. Mosier, Benjamin H. Dickens, Jr.,
Mary J. Sisak, Craig S. Johnson, Clare E. Kindall, James C. Falvey, Charles A. Zdebski,
Patricia A. Millett, James E. Tyesse, Sean Conway, John B. Capehart, Michael C. Small,
Robert A. Fox, R. Dale Dixon, Paula M. Carmody, David C. Bergmann, Christopher J.
White, Russell Blau, Tamar Finn, Bohdan R. Pankiw, Kathryn G. Sophy, Joseph K.
Witmer, Shaun A. Sparks, John H. Jones, Raymond L. Doggett, Jr., David Cosson, H.
Russell Frisby, Jr., Dennis Lane and Harvey Reiter, on the Joint Intercarrier
Compensation Principal Brief and Reply Brief.




                                           15
James C. Falvey, Charles A. Zdebski, Russell Blau, Tamar Finn, R. Dale Dickson, Jr.,
David Cosson, H. Russell Frisby, Jr., Dennis Lane, Harvey Reiter on the Additional
Intercarrier Compensation Issues Principal Brief and Reply Brief.

David Cosson, H. Russell Frisby, Jr., Dennis Lane, Harvey Reiter, Don L. Keskey,
Maureen A. Scott, Wesley Van Cleve, Janet F. Wagner, Rebecca Hawkins, Michael B.
Wallace, Benjamin H. Dickens, Jr., Mary J. Sisak, Craig S. Johnson, David R. Irvine,
Alan Lange Smith, Patricia A. Millet, James Edward Tysse, Sean T. Conway, John Boles
Capehart, Michael C. Small, James Bradford Ramsay, David Bergmann, Paula Marie
Carmody, Christopher J. White, Russell Blau, Tamar Finn, Bohdan R. Pankiw, Kathryn
G. Sophy, Joseph K. Witmer, Shaun A. Sparks, Holly Rachel Smith, and Bridget Asay,
on the Joint Universal Service Fund Principal Brief and Reply Brief.

David Cosson, H. Russell Frisby, Jr., Harvey Reiter, Don L. Keskey, Maureen A. Scott,
Wesley Van Cleve, Janet F. Wagner, James Bradford Ramsay, Russell Blau, Tamar Finn,
and Bridget Asay, Elisabeth H. Ross, Robert Allen Long, Jr., Gerard J. Waldron, Yaron
Dori, Michael P. Beder, Benjamin H. Dickens, Jr., and Holly Rachel Smith, on the
Additional Universal Service Fund Issues Principal Brief.

Russell D. Lukas, David A. LaFuria, and Todd B. Lantor, on the Wireless Carrier
Universal Service Fund Principal Brief and Reply Brief.

Christopher M. Heimann, Gary L. Phillips, Peggy Garber, Heather M. Zachary, and
Daniel T. Deacon, on the AT&T Inc. Principal Brief and Reply Brief.

E. Ashton Johnston, Jennifer P. Bagg, and Glenn S. Richards, on the Voice on the Net
Coalition, Inc. Principal Brief and Reply Brief.

Steven H. Thomas, and W. Scott McCollough, on the Transcom Principal and Reply
Briefs.

Michael C. Small, Patricia A. Millett, James E. Tysse, Sean T. Conway, John B.
Capehart, on the Tribal Carriers Principal Brief.

Paula M. Carmody, Christopher J. White, and David C. Bergmann, on the National
Association of State Utility Consumer Advocates Principal Brief and Reply Brief.

Thomas J. Moorman, Paul M. Schudel, Genevieve Morelli, Gregory J. Vogt, Richard A.
Askoff, Ivan C. Evilsizer, Benjamin H. Dickens, Jr., Mary J. Sisak, Robert M. Jackson,
Gerard J. Duffy, Russell M. Blau, Tamar E. Finn on Incumbent Local Exchange Carrier
Intervenors’ Brief and Reply Brief in Support of Petitioners.


                                          16
Jeffrey A. Lamken and Lucas M. Walker, on the Windstream Principal Brief and Reply
Brief.

William J. Baer, Robert B. Nicholson, Robert J. Wiggers, Joel Marcus, Richard K.
Welch, Laurence N. Bourne, James M. Carr, Maureen K. Flood, and Matthew J. Dunne,
on the briefs for Respondents.

James H. Cawley on the Amicus Brief of the State Members of the Federal-State Joint
Board on Universal Service in Support of Petitioners.

Heather M. Zachary and Kelly P. Dunbar, Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C., Cathy Carpino, Gary L. Phillips, and Peggy Garber, AT&T Services,
Inc., Washington, D.C., Scott H. Angstreich, Brendan J. Crimmins, and Joshua D.
Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., and
Michael E. Glover, Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington,
Virginia, J.G. Harrington and David E. Mills, Cooley, LLP, Washington, D.C., and Rick
C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National Cable &
Telecommunications Association, Washington, D.C., Christopher J. Wright, Timothy J.
Simeone, and Brita D. Strandberg, Wiltshire & Grannis, LLP, Washington, D.C., Ernest
C. Cooper, Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris,
Glovsky & Popeo, P.C., Washington, D.C., L. Charles Keller, and David H. Solomon,
Wilkinson, Barker, Knauer, LLP, Washington, D.C., and Brendan Kasper, Vonage
Holdings Corporation, Holmdel, New Jersey, on the Intervenors Supporting Respondents
in Response to the Joint Intercarrier Compensation Brief.

Christopher J. Wright and Timothy J. Simeone, Wiltshire & Grannis, LLP, Washington,
D.C., Jonathan E. Nuechterlein, Heather M. Zachary and Kelly P. Dunbar, Wilmer Cutler
Pickering Hale and Dorr LLP, Washington, D.C., Cathy Carpino, Gary L. Phillips, and
Peggy Garber, AT&T Services, Inc., Washington, D.C., Scott H. Angstreich, Brendan J.
Crimmins, and Joshua D. Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel,
P.L.L.C., Washington, D.C., and Michael E. Glover, Christopher M. Miller, and Curtis L.
Groves, Verizon, Arlington, Virginia, and Rick C. Chessen, Neal M. Goldberg, Jennifer
McKee, and Steven F. Morris, National Cable & Telecommunications Association,
Washington, D.C., Ernest C. Cooper, Robert G. Kidwell, and Howard J. Symons, Mintz,
Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Washington, D.C., L. Charles Keller, and
David H. Solomon, Wilkinson, Barker, Knauer, LLP, Washington, D.C., on the
Intervenors’ Brief in Support of the Response of the Respondents to the Additional
Intercarrier Compensation Issues Brief.




                                          17
Scott H. Angstreich, Brendan J. Crimmins, and Joshua D. Branson, Kellogg, Huber,
Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., and Michael E. Glover,
Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington, Virginia, Heather M.
Zachary and Kelly P. Dunbar, Wilmer Cutler Pickering Hale and Dorr LLP, Washington,
D.C., Cathy Carpino, Gary L. Phillips, and Peggy Garber, AT&T Services, Inc.,
Washington, D.C., Robert Allen Long, Jr., Gerard J. Waldron, Yaron Dori, and Michael
Beder, Covington & Burling, Washington, D.C., Howard J. Symons, Robert G. Kidwell,
and Ernest C. Cooper, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Washington,
D.C., Rick C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris,
National Cable & Telecommunications Association, Washington, D.C., Christopher J.
Wright, and Brita D. Strandberg, Wiltshire & Grannis, LLP, Washington, D.C., Brendan
Kasper, Vonage Holdings Corporation, Holmdel, New Jersey, on the Intervenors’ Brief
Supporting Respondents Re: The Joint Universal Service Fund Principal Brief.

Samuel L. Feder and Luke C. Platzer, Jenner & Block, LLP, Washington, D.C.,
J.G. Harrington and David E. Mills, Cooley, LLP, Washington, D.C., Christopher J.
Wright and John T. Nakahata, Wiltshire & Grannis, LLP, Washington, D.C., Rick C.
Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National Cable &
Telecommunications Association, Washington, D.C., E. Ashton Johnson and Helen E.
Diesenhaus, Lampert, O’Connor & Johnston, P.C., Washington, D.C., Ernest C. Cooper,
Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky &
Popeo, P.C., Washington, D.C., on the Final Brief of Intervenors in Support of Federal
Respondents in Response to the AT&T Principal Brief.

Russell M. Blau and Tamar E. Finn, Bingham McCutchen, LLP, Washington, D.C., on
the Brief of Intervenor National Telecommunications Cooperative Association in Support
of the FCC’s Response to the Voice on the Net Coalition, Inc. Brief.

Heather M. Zachary and Kelly P. Dunbar, Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C., Cathy Carpino, Gary L. Phillips, and Peggy Garber, AT&T Services,
Inc., Washington, D.C., Scott H. Angstreich, Brendan J. Crimmins, and Joshua D.
Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., and
Michael E. Glover, Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington,
Virginia, on the Brief of Intervenors Supporting Respondents in Response to the Brief of
the National Association of State Utility Consumer Advocates.

David E. Mills and J.G. Harrington, Cooley, LLP, Washington, D.C., Howard J. Symons,
Robert G. Kidwell, and Ernest C. Cooper, Mintz Levin Cohn Ferris Glovsky and Popeo,
P.C., Washington, D.C., Scott H. Angstreich, Brendan J. Crimmins, and Joshua D.
Branson, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C.,
Michael E. Glover, Christopher M. Miller, and Curtis L. Groves, Verizon, Arlington,


                                          18
Virginia, Rick Chessen, Neal M. Goldberg, Steven Morris, and Jennifer McKee, The
National Cable & Telecommunications Association, Washington, D.C., on the Brief of
Intervenors Supporting Respondents in Response to the Windstream Principal Brief.



Before BRISCOE, Chief Judge, HOLMES and BACHARACH, Circuit Judges.


BRISCOE, Chief Judge.



       In late 2011, the Federal Communications Commission (FCC or Commission)

issued a Report and Order and Further Notice of Proposed Rulemaking (Order)

comprehensively reforming and modernizing its universal service and intercarrier

compensation systems. Petitioners, each of whom were parties to the FCC’s rulemaking

proceeding below, filed petitions for judicial review of the FCC’s Order. The Judicial

Panel on Multidistrict Litigation consolidated the petitions in this court.

       In the Joint Universal Service Fund Principal Brief, Additional Universal Service

Fund Issues Principal Brief, Wireless Carrier Universal Service Fund Principal Brief, and

Tribal Carriers Principal Brief, petitioners assert a host of challenges to the portions of the

Order revising how universal service funds are to be allocated to and employed by

recipients. After carefully considering those claims, we find them either unpersuasive or

barred from judicial review. Consequently, we deny the petitions to the extent they are

based upon those claims.




                                              19
                                   Table of Contents
I. Glossary

II. Background
       A. Introduction
       B. Distinction between telecommunications service providers and
          information-service providers
       C. The FCC’s pre-Order regulatory framework for telephone services
       D. The deficiencies identified by the FCC regarding its pre-Order regulatory
           framework
       E. The FCC’s National Broadband Plan
       F. The FCC’s Notice of Inquiry and Notice of Proposed Rulemaking
       G. The FCC’s Report and Order of November 18, 2011
       H. This litigation

III. Standards of review
       A. The Chevron standard
       B. The arbitrary and capricious standard
       C. The de novo standard

IV. Universal Service Fund Issues
      A. Joint Universal Service Fund Principal Brief
            1. Did the FCC’s broadband requirement exceed its authority under
                47 U.S.C. § 254?
            2. Did the FCC act arbitrarily in simultaneously imposing the
                broadband requirement and reducing USF support?
            3. Does the FCC’s use of auctions to distribute USF violate § 214(e)?
            4. Was the FCC’s decision to reduce USF support in areas with
                “artificially low” end user rates unlawful or arbitrary?
            5. Does the Order unlawfully deprive rural carriers of a reasonable
                opportunity to recover their prudently-incurred costs?
            6. Do the FCC’s regression and SNA rules have unlawful
                retroactive effects?
            7. Did the FCC disregard evidence that allocating USF to rural
                price cap carriers by competitive bidding would reduce service
                quality?
            8. Does eliminating USF support for the highest-cost areas defeat
                the very purpose of universal service?
            9. Is the FCC’s decision to eliminate high-cost support to RLECs,
                where an unsubsidized competitor offers voice and broadband to



                                           20
                all of the RLECs’ customers in the same study area, unlawful and
                unsupported by substantial evidence?
            10. Did the FCC arbitrarily fail to explain how its new definition of
                supported telecommunications services took into account the four
                factors it was required to consider under § 254(c)(1)?
            11. Did the FCC arbitrarily disregard comments that the Order’s
                 incremental USF support provisions would duplicate or
                 undermine state-initiated plans for broadband deployment?
            12. Did the Order unlawfully make changes not contained in the
                FCC’s proposed rule that could not reasonably have been
               anticipated by commenters?
     B. Additional Universal Service Fund Issues Principal Brief
            1. The FCC’s decision to limit USF support for broadband
                deployment to price-cap ILECs
            2. Did the FCC violate the mandatory referral duty imposed by 47
                U.S.C. § 410(c)?
            3. Did the FCC irrationally refuse to modify service obligations for
                carriers to whom it denied USF support?
            4. Is the Order, as applied to Allband and similarly-situated small
                rural carriers, unconstitutional under due process principles and
                as a bill of attainder, and/or does it violate the Act, principles of
                estoppel and contract law?
     C. Wireless Carrier Universal Service Fund Principal Brief
            1. Does the FCC lack authority to redirect USF support to
                broadband or to regulate broadband?
            2. Must the USF portions of the Order be vacated?
            3. Did the FCC act arbitrarily and capriciously in reserving CAF II
                support for ILECs?
            4. Did the FCC act arbitrarily and capriciously in repealing the
                identical support rule and adopting a single-winner reverse
                auction?
            5. Did the FCC act arbitrarily and capriciously in setting the
                Mobility II budget at $500 million?
            6. Did the FCC fail to respond to comments calling for a separate
                mobility fund for insular areas?
     D. Tribal Carriers Principal Brief
            1. Did the FCC act arbitrarily and capriciously in prescribing
              funding cuts for tribal carriers?
V. Conclusion




                                             21
                          I. Glossary

1996 Act              Telecommunications Act of 1996

Act (or 1934 Act)     Communications Act of 1934

APA                   Administrative Procedure Act

ARC                   Access Recovery Charge

Joint Board           Federal-State Joint Board on Universal Service

CAF                   Connect America Fund

CETC                  Competitive Eligible Telecommunications Carrier

COLR                  Carrier of Last Resort

ETC                   Eligible Telecommunications Carrier

FCC (or Commission)   Federal Communications Commission

HCLS                  High Cost Loop Support

IAS                   Interstate Access Support

ICC                   Intercarrier Compensation

ICLS                  Interstate Common Line Support

ILEC                  Incumbent Local Exchange Carrier

IP                    Internet Protocol

JA                    Joint Appendix

LEC                   Local Exchange Carrier

Mobility Fund         CAF Mobility Fund

NPRM                  Notice of Proposed Rulemaking


                               22
PSTN   Public Switched Telephone Network

RLEC   Rate-of-Return ILEC

SA     Supplemental Joint Appendix

SNA    Safety Net Additive

USF    Universal Service Fund

VoIP   Voice over Internet Protocol

WCB    FCC’s Wireline Competition Bureau




                23
                                      II. Background

       A. Introduction

       For nearly eighty years, the FCC has regulated interstate communications. When

it was first created by way of the Communications Act of 1934 (the 1934 Act or the Act),

the FCC’s regulatory activities were focused on “communication[s] by wire and radio.”

47 U.S.C. § 151. The FCC’s regulatory oversight subsequently expanded to include

telephone service. Most recently, the FCC was charged by Congress with developing a

“[N]ational [B]roadband [P]lan,” American Recovery and Reinvestment Act of 2009,

Pub. L. No. 111-5, § 6001(k)(1), 123 Stat. 115, 515, the purpose of which is “to ensure

that all people of the [U]nited [S]tates have access to broadband capability and [to]

establish benchmarks for meeting that goal,” id. § 6001(k)(2), 123 Stat. at 516.

       In a statement issued on March 16, 2010, the FCC concluded that Congress’s

stated goals for the National Broadband Plan could not be achieved unless the FCC

“comprehensively reformed” its existing regulatory system for telephone service. JA at 2.

On February 9, 2011, the FCC issued a Notice of Proposed Rulemaking (NPRM)

“propos[ing] to fundamentally modernize the [FCC]’s Universal Service Fund (USF or

Fund) and intercarrier compensation (ICC) system.” Id. at 284 (NPRM ¶ 1). After

receiving and considering comments in response to the NPRM, the FCC on November

18, 2011 issued a Report and Order and Further Notice of Proposed Rulemaking (Order).

The Order, and the reforms it proposes, are the subject of this litigation.




                                             24
       B. Distinction between telecommunications service providers and
       information-service providers

       The 1934 Act, as amended by the Telecommunications Act of 1996 (the 1996

Act), “subjects all providers of ‘telecommunications servic[e]’ to mandatory common-

carrier regulation, [47 U.S.C.] § 153(44).” Nat’l Cable & Telecomm. Ass’n v. Brand X

Internet Servs., 545 U.S. 967, 973 (2005). “Telecommunications service” is defined as

“the offering of telecommunications for a fee directly to the public . . . regardless of the

facilities used.” 47 U.S.C. § 153(46). In turn, “[t]elecommunications” is “the

transmission, between or among points specified by the user, of information of the user’s

choosing, without change in the form or content of the information as sent and received.”

47 U.S.C. § 153(43). “Telecommunications carrier[s]” are defined as “provider[s] of

telecommunications services.” 47 U.S.C. § 153(44).

       Notably, the 1934 Act, as amended by the 1996 Act, does not regulate

information-service providers. “[I]nformation service” is defined as “the offering of a

capability for generating, acquiring, storing, transforming, processing, retrieving,

utilizing, or making available information via telecommunications . . . .” 47 U.S.C. §

153(20). In March 2002, the FCC formally “concluded that broadband Internet service

provided by cable companies is an ‘information service’ but not a ‘telecommunications

service’ under the [1934] Act, and therefore not subject to mandatory Title II common-

carrier regulation.” Nat’l Cable, 545 U.S. at 977-78. In June 2005, the Supreme Court

held that this “conclusion [wa]s a lawful construction of the [1934] Act under Chevron



                                              25
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81

L.Ed.2d 694 (1984), and the Administrative Procedure Act.” Nat’l Cable, 545 U.S. at

974.

       C. The FCC’s pre-Order regulatory framework for telephone services

       The pre-Order regulatory system for telephone service, which was developed by

the FCC over decades, was revised by the FCC in accordance with the 1996 Act. The

1996 Act, which “fundamentally restructure[d] local telephone markets,” AT&T Corp. v.

Iowa Util. Bd., 525 U.S. 366, 370 (1999), “sought to introduce competition to local

telephone markets” while simultaneously “preserving universal service.” Qwest Corp. v.

FCC, 258 F.3d 1191, 1196 (10th Cir. 2001) (Qwest Corp.). “Universal service” was

defined in the 1996 Act “[a]s an evolving level of telecommunications services that the

[FCC] shall establish periodically under [§ 254 of the 1996 Act], taking into account

advances in telecommunications and information technologies and services.” 47 U.S.C. §

254(c)(1). In other words, the 1996 Act “anticipate[d] . . . that in the future other types of

telecommunications m[ight] become necessary for the nation to remain at the forefront of

technological development,” and, consequently, it “outlin[ed] a process for the FCC to

adjust [the definition of ‘universal service’] as new technologies ar[o]se.” Wireless

World, LLC v. Virgin Islands Pub. Servs. Comm’n, No. Civ. A. 02-0061STT at *7 n.7

(D. Virgin Islands 2008).

       The FCC implemented “high-cost universal service support . . . to help ensure that

consumers ha[d] access to telecommunications services in areas where the cost of


                                              26
providing such services would otherwise be prohibitively high.” JA at 2. This “high-cost

[universal service] support [wa]s provided through a complicated patchwork of programs

. . . in which the types of support a carrier receive[d] depend[ed] on the size and

regulatory classification of the carrier.” Id. at 3. More specifically, “[t]he federal high-

cost support mechanism include[d] five major components,” id.:

       1) “High-cost loop support [that] provide[d] support for intrastate network
       costs to rural incumbent local exchange carriers (LECs) in service areas
       where the cost to provide service exceed[ed] 115 percent of the national
       average,” id.;

       2) “Local switching support [that] provide[d] intrastate support for
       switching costs for companies that serve[d] 50,000 or fewer access lines,”
       id.;

       3) “High-cost model support [that] provide[d] support for intrastate network
       costs to non-rural incumbent LECs in states where the cost to provide
       service in non-rural areas exceed[ed] two standard deviations above the
       national average cost per line,” id.;

       4) “Interstate access support (IAS) [that] provide[d] support for price cap
       carriers to offset certain reductions in interstate access charges,” id.; and

       5) “Interstate common line support (ICLS) [that] provide[d] support to rate-
       of-return carriers, to the extent that subscriber line charge (SLC) caps d[id]
       not permit such carriers to recover their interstate common line revenue
       requirements,” id.

This system, often referred to as the intercarrier compensation or ICC system, was

“designed for an era of separate long-distance companies[,] . . . high per-minute charges,

and [little] competition . . . among telephone companies . . . .” Id. at 396 (Order ¶ 9).




                                              27
       D. The deficiencies identified by the FCC regarding its pre-Order
       regulatory framework

       In devising its National Broadband Plan, the FCC noted what it perceived as

deficiencies in its pre-Order regulatory framework. To begin with, “only voice [wa]s a

supported service” under this framework, and “there [wa]s no requirement to provide

broadband service to consumers, nor [wa]s there any mechanism to ensure that support

[wa]s targeted toward extending broadband service to unserved areas.” Id. at 3. Further,

“some of the . . . high-cost programs d[id] not provide support in an economically

efficient manner.” Id. “In addition, several programs provide[d] support based on an

incumbent carrier’s embedded costs, whether or not a competitor provide[d], or could

provide, service at a lower cost.” Id.1 Thus, “only non-rural high-cost support [wa]s

based on forward-looking economic cost, as determined by the [FCC]’s voice telephony

cost model.”2 Id. at 4. As a result, “[i]n 2009, the [FCC] disbursed almost $4.3 billion in

high-cost support, of which $331 million was calculated on the basis of forward-looking

costs.” Id. at 6-7.




       1
         The FCC defined “embedded costs” as “the costs that the incumbent LEC
incurred in the past and that are recorded in the incumbent LEC’s book of accounts.” 47
C.F.R. § 51.505(d)(1) (1997). Prior to the 1996 Act, “explicit federal universal service
support was based on embedded costs.” JA at 3. Despite its intention to abandon
embedded cost support following enactment of the 1996 Act, the FCC ultimately allowed
it to remain in place “for rural carriers pending more comprehensive reform.” Id. at 4.
       2
         The FCC’s cost model was based upon ten criteria and was intended to “estimate
the cost of providing service for all businesses and households within a geographic
region.” JA at 4-5 (internal quotation marks omitted).

                                            28
       E. The FCC’s National Broadband Plan

       “On March 26, 2010, the [FCC] delivered to Congress [its] National Broadband

Plan.” Id. at 7. “The National Broadband Plan estimated that 14 million people living in

seven million housing units in the United States currently do not have access to terrestrial

broadband infrastructure capable of meeting this target, described as ‘the broadband

availability gap.’” Id. Consequently, the National Broadband Plan “recommend[ed] the

creation of a Connect America Fund [(CAF)] to address the broadband availability gap in

unserved areas and to provide any ongoing support necessary to sustain service in areas

that require public funding, including those areas that already may have broadband.” Id.

The National Broadband Plan outlined five principles that the CAF should adhere to,3 and

it recommended that the FCC “create a fast-track program in CAF for providers to receive

targeted funding for new broadband construction in unserved areas, and create a Mobility

Fund to provide one-time support for deployment of 3G networks, to bring all states to a

minimum level of 3G (or better) mobile service availability.” Id. at 7 (internal quotation

marks omitted). “The National Broadband Plan [also] recommend[ed] that the [FCC]

direct public investment toward meeting an initial national broadband availability target

       3
        The five principles included: (1) providing funding only in geographic areas
where there is no private sector business case to provide broadband and high-quality
voice-grade service; (2) allowing at most only one subsidized provider of broadband per
geographic area; (3) making the eligibility criteria for obtaining broadband support from
CAF company- and technology-agnostic so long as the service provided meets the FCC’s
specifications; (4) identifying ways to drive funding to efficient levels to determine the
firms that will receive CAF support and the amount of support they will receive; and (5)
making CAF support recipients accountable for its use and subject to enforceable
timelines for achieving universal access. JA at 7.

                                             29
of 4 Mbps of actual download speed and 1 Mbps of actual upload speed.” Id. at 7. In

addition, the National Broadband Plan recommended that the FCC’s “long range goal

should be to replace all of the legacy High-Cost programs with a new program that

preserves the connectivity that Americans have today and advances universal broadband

in the 21st century.” Id. (internal quotation marks omitted). In other words, the National

Broadband Plan proposed “cap[ping] and cut[ting] the legacy high-cost programs and”

shifting the “realize[d] savings . . . to targeted investment in broadband infrastructure.”

Id. at 9.

        F. The FCC’s Notice of Inquiry and Notice of Proposed Rulemaking

        On April 21, 2010, the FCC issued a Notice of Inquiry and Notice of Proposed

Rulemaking (Notice of Inquiry). The Notice of Inquiry sought “comment on three

discrete groups of issues.” Id. at 8. First, the Notice of Inquiry sought “comment on use

of a model as a competitively neutral and efficient tool for helping [the FCC] to quantify

the minimum amount of universal service support necessary to support networks that

provide broadband and voice service, such that the contribution burden that ultimately

falls on American consumers is limited.” Id. Second, the Notice sought “comment on

potential approaches to providing such targeted funding on an accelerated basis in order

to extend broadband networks in unserved areas, such as a competitive procurement

auction.” Id. Third, the Notice sought “comment on specific proposals to cap and cut the

legacy high-cost programs [for voice services] and realize savings that c[ould] be shifted

to targeted investment in broadband infrastructure.” Id. at 8-9.


                                              30
       The FCC subsequently “received over 2,700 comments, reply comments, and ex

parte filings totaling over 26,000 pages, including hundreds of financial filings from

telephone companies of all sizes, including numerous small carriers that operate in the

most rural parts of the nation.” Id. at 398 (Order ¶ 12). The FCC “held over 400

meetings with a broad cross-section of industry and consumer advocates.” Id. The FCC

also “held three open, public workshops, and engaged with other federal, state, Tribal,

and local officials throughout the process.” Id.

       G. The FCC’s Report and Order of November 18, 2011

       On November 18, 2011, the FCC released its 752-page Order. Id. at 390. The

Order stated that “[t]he universal service challenge of our time is to ensure that all

Americans are served by networks that support high-speed Internet access—in addition to

basic voice service—where they live, work, and travel.” Id. at 395 (Order ¶ 5). In turn,

the Order stated that the “existing universal service and intercarrier compensation systems

[we]re based on decades-old assumptions that fail[ed] to reflect today’s networks, the

evolving nature of communications services, or the current competitive landscape.” Id. at

396 (Order ¶ 6). In light of these factors, the Order purported to “comprehensively

reform[] and modernize[] the universal service and intercarrier compensation systems to

ensure that robust, affordable voice and broadband service, both fixed and mobile, [we]re

available to Americans throughout the nation.” Id. at 394 (Order ¶ 1).

       The Order summarized the key components of the universal service reform the

FCC would be implementing. Because the vast majority of Americans “that lack access


                                              31
to residential fixed broadband at or above the [FCC]’s broadband speed benchmark live

in areas served by price cap carriers,” i.e., “Bell Operating Companies and other large and

mid-sized carriers,” the FCC stated that it “w[ould] introduce targeted, efficient support

for broadband in two phases” for these areas. Id. at 400 (Order ¶ 21). Phase I of this

plan, intended “[t]o spur immediate broadband buildout,” would freeze “all existing high-

cost support to price cap carriers” and make “an additional $300 million in CAF funding

. . . available.” Id. (Order ¶ 22). “Frozen support w[ould] be immediately subject to the

goal of achieving universal availability of voice and broadband, and subject to obligations

to build and operate broadband-capable networks in areas unserved by an unsubsidized

competitor over time.” Id. Phase II of the plan “w[ould] use a combination of a forward-

looking broadband cost model and competitive bidding to efficiently support deployment

of networks providing both voice and broadband service for five years.” Id. (Order ¶ 23).

       With respect to rate-of-return carriers, which “serve[d] less than five percent of

access lines in the U.S.,” but received “total support from the high-cost fund . . .

approaching $2 billion annually,” the Order imposed substantial reforms. Id. at 401

(Order ¶ 26). In particular, any such carriers “receiving legacy universal service support,

or CAF support to offset lost ICC revenues,” were required to “offer broadband service

meeting initial CAF requirements . . . upon their customers’ reasonable requests.” Id.

The Order noted that, because of “the economic challenges of extending service in the

high-cost areas of the country served by rate-of-return carriers, this flexible approach




                                              32
[would] not require rate-of-return companies to extend service to customers absent such a

request.” Id.

       The Order indicated that a CAF Mobility Fund would be created to “promot[e] the

universal availability” of “mobile voice and broadband services.” Id. at 402 (Order ¶ 28).

Phase I of the CAF Mobility Fund would “provide up to $300 million in one-time support

to immediately accelerate deployment of networks for mobile voice and broadband

services in unserved areas.” Id. at 402. This support, the Order indicated, would “be

awarded through a nationwide reverse auction.” Id. Phase II of the Mobility Fund would

“provide up to $500 million per year in ongoing support” in order to “expand and sustain

mobile voice and broadband services in communities in which service would be

unavailable absent federal support.” Id. Included in this $500 million annual budget was

“ongoing support for Tribal areas of up to $100 million per year.” Id. Phase II also

anticipated “eliminat[ing] the identical support rule that determines the amount of support

for mobile, as well as wireline, competitive ETCs [(eligible telecommunications

carriers)],” id. (Order ¶ 29), and the creation of a “Remote Areas Fund” designed “to

ensure that Americans living in the most remote areas in the nation, where the cost of

deploying traditional terrestrial broadband networks is extremely high, can obtain

affordable access through alternative technology platforms, including satellite and

unlicensed wireless services,” id. (Order ¶ 30).

       The Order also indicated that the FCC was reforming its intercarrier compensation

rules, including “adopt[ing] a uniform national bill-and-keep framework as the ultimate


                                             33
end state for all telecommunications traffic exchanged with a LEC.” Id. at 403 (Order ¶

34). “Under bill-and-keep,” the Order noted, “carriers look first to their subscribers to

cover the costs of the network, then to explicit universal service support where

necessary.” Id. Relatedly, the Order noted that the FCC was “abandon[ing] the calling-

party-network-pays model that dominated ICC regimes of the last century.” Id.

However, the Order noted, “states will have a key role in determining the scope of each

carrier’s financial responsibility for purposes of bill-and-keep, and in evaluating

interconnection agreements negotiated or arbitrated under the framework in sections 251

and 252 of the Communications Act.” Id.

       H. This litigation

       Petitioners, who were parties to the FCC’s rulemaking proceeding below, each

filed petitions for judicial review of the Order. After the Judicial Panel on Multidistrict

Litigation consolidated the petitions in this court, we held oral argument on the petitions

on November 19, 2013.

                                  III. Standards of review

       The issues raised by petitioners in their respective briefs implicate three different

standards of review: the Chevron standard, which applies to all of the issues in which

petitioners assert that the FCC acted contrary to its statutory authority; the arbitrary and

capricious standard, which applies to petitioners’ challenges to rules implemented by the

FCC in its Order; and the de novo standard of review that applies to the constitutional

issues raised by petitioners.


                                              34
       A. The Chevron standard

       In “review[ing] an agency’s construction of [a] statute which it administers,” the

first question for the court is “whether Congress has directly spoken to the precise

question at issue.” Chevron, 467 U.S. at 842. “If the intent of Congress is clear, that is

the end of the matter,” id., and both the agency and the court “must give effect to the

unambiguously expressed intent of Congress,” id. at 843. “If, however, . . . the statute is

silent or ambiguous with respect to the specific issue, the question for the court is whether

the agency’s answer is based on a permissible construction of the statute.” Id. This court

gives deference to the agency’s interpretation so long as that interpretation is not

arbitrary, capricious, or manifestly contrary to the statute. Id. at 844.

       B. The arbitrary and capricious standard

       The Administrative Procedure Act (APA) directs us to “hold unlawful and set

aside agency action, findings and conclusions found to be . . . arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

Under the arbitrary and capricious standard, “a reviewing court may not set aside an

agency rule that is rational, based on consideration of the relevant factors and within the

scope of the authority delegated to the agency by the statute.” Motor Vehicle Mfrs. Ass’n

of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). “The

scope of review under the ‘arbitrary and capricious’ standard is narrow and a court is not

to substitute its judgment for that of the agency.” Id. “Nevertheless, the agency must

examine the relevant data and articulate a satisfactory explanation for its action including


                                              35
a rational connection between the facts found and the choice made.” Id. (internal

quotation marks omitted). A reviewing court must “uphold a decision of less than ideal

clarity if the agency’s path may reasonably be discerned.” Id. (internal quotation marks

omitted).

       C. The de novo standard

       The APA also compels us to “set aside agency action, findings and conclusions

found to be . . . contrary to constitutional right.” 5 U.S.C. § 706(2)(B). “Because

constitutional questions arising in a challenge to agency action under the APA fall

expressly within the domain of the courts, we review de novo whether agency action

violated a claimant’s constitutional rights.” Copar Pumice Co. v. Tidwell, 603 F.3d 780,

802 (10th Cir. 2010) (internal quotation marks omitted).

                            IV. Universal Service Fund Issues

       In the Joint Universal Service Fund Principal Brief, Additional Universal Service

Fund Issues Principal Brief, Wireless Carrier Universal Service Fund Principal Brief, and

Tribal Carriers Principal Brief,4 petitioners assert various challenges to the portions of the



       4
         Petitioners filed twelve sets of briefs in this action: one joint preliminary brief,
four briefs addressing universal service fund issues, and seven briefs addressing
intercarrier compensation issues. In addition, intervening local exchange carriers filed a
brief in support of the petitioners. For ease of reference and citation, we have assigned a
number to each of these twelve briefs. The four briefs addressed in this opinion have
been assigned the following numbers:
        Brief 3 - Joint Universal Service Fund Principal Brief;
        Brief 4 - Additional Universal Service Fund Issues Principal Brief;
        Brief 5 - Wireless Carrier Universal Service Fund Principal Brief; and
        Brief 9 - Tribal Carriers Principal Brief.

                                              36
Order revising how universal service funds are to be allocated to and employed by

recipients. We proceed to address each of those briefs and the issues raised therein.

A. Joint Universal Service Fund Principal Brief

       1. Did the FCC’s broadband requirement exceed its authority under 47
       U.S.C. § 254?

       Petitioners argue that the FCC’s “continued classification of broadband Internet

access service as an ‘information service’ is fatal to” the FCC’s condition that “USF

support recipients . . . provide broadband Internet access to consumers on reasonable

request.” Pet’r Br. 3 at 11. More specifically, petitioners argue that the FCC, in requiring

USF support recipients to provide broadband Internet access to consumers upon

reasonable request, exceeded its authority under 47 U.S.C. § 254 in two ways. First,

petitioners argue that the Act “expressly dictates that supported services are limited to an

‘evolving level of telecommunications services.’” Id. (italics in brief). “But the Order,”

petitioners argue, “unlawfully mandates that carriers provide non-supported information

services to receive USF support.” Id. at 11-12. Second, petitioners argue that, although

the Act expressly provides that USF support is to go exclusively to telecommunications

carriers for the purpose of providing “telecommunications services,” the Order

“unlawfully gives USF support to entities that are not telecommunications carriers to

provide non-telecommunications services.” Id. at 11.




                                             37
       a) Relevant statutory language

       In addressing petitioners’ arguments, we begin by quoting at length the statutory

language at issue. The primary statute upon which petitioners rely, 47 U.S.C. § 254,

provides, in pertinent part, as follows:

       (b) Universal service principles. The [Federal-State] Joint Board[, which
       was created in subsection (a) by the 1996 Act,] and the Commission shall
       base policies for the preservation and advancement of universal service on
       the following principles:
               (1) Quality and rates. Quality services should be available at just,
               reasonable, and affordable rates.
               (2) Access to advanced services. Access to advanced
               telecommunications and information services should be provided in
               all regions of the Nation.
               (3) Access in rural and high-cost areas. Consumers in all regions of
               the Nation, including low-income consumers and those in rural,
               insular, and high cost areas, should have access to
               telecommunications and information services, including
               interexchange services and advanced telecommunications and
               information services, that are reasonably comparable to those
               services provided in urban areas and that are available at rates that
               are reasonably comparable to rates charged for similar services in
               urban areas.
               (4) Equitable and nondiscriminatory contributions. All providers of
               telecommunications services should make an equitable and
               nondiscriminatory contribution to the preservation and advancement
               of universal service.
               (5) Specific and predictable support mechanisms. There should be
               specific, predictable and sufficient Federal and State mechanisms to
               preserve and advance universal service.
               (6) Access to advanced telecommunications services for schools,
               health care, and libraries. Elementary and secondary schools and
               classrooms, health care providers, and libraries should have access to
               advanced telecommunications services as described in subsection
               (h).
               (7) Additional principles. Such other principles as the Joint Board
               and the Commission determine are necessary and appropriate for the



                                            38
       protection of the public interest, convenience, and necessity and are
       consistent with this Act.

(c) Definition. (1) In general. Universal service is an evolving level of
telecommunications services that the Commission shall establish
periodically under this section, taking into account advances in
telecommunications and information technologies and services. The Joint
Board in recommending, and the Commission in establishing, the definition
of the services that are supported by Federal universal service support
mechanisms shall consider the extent to which such telecommunications
services—
        (A) are essential to education, public health, or public safety;
        (B) have, through the operation of market choices by customers,
        been subscribed to by a substantial majority of residential customers;
        (C) are being deployed in public telecommunications networks by
        telecommunications carriers; and
        (D) are consistent with the public interest, convenience, and
        necessity.
(2) Alterations and modifications. The Joint Board may, from time to time,
recommend to the Commission modifications in the definition of the
services that are supported by Federal universal service support
mechanisms.
(3) Special services. In addition to the services included in the definition of
universal service under paragraph (1), the Commission may designate
additional services for such support mechanisms for schools, libraries, and
health care providers for the purposes of subsection (h).

(d) Telecommunications carrier contribution. Every telecommunications
carrier that provides interstate telecommunications services shall contribute,
on an equitable and nondiscriminatory basis, to the specific, predictable,
and sufficient mechanisms established by the Commission to preserve and
advance universal service. The Commission may exempt a carrier or class
of carriers from this requirement if the carrier’s telecommunications
activities are limited to such an extent that the level of such carrier’s
contribution to the preservation and advancement of universal service
would be de minimis. Any other provider of interstate telecommunications
may be required to contribute to the preservation and advancement of
universal service if the public interest so requires.

(e) Universal service support. After the date on which Commission
regulations implementing this section take effect, only an eligible


                                      39
       telecommunications carrier designated under section 214(e) [47 U.S.C. §
       214(e)] shall be eligible to receive specific Federal universal service
       support. A carrier that receives such support shall use that support only for
       the provision, maintenance, and upgrading of facilities and services for
       which the support is intended. Any such support should be explicit and
       sufficient to achieve the purposes of this section.

47 U.S.C. § 254(b), (c), (d), (e).

       The terms “telecommunications,” “telecommunications carrier,” and

“telecommunications service,” which are used in § 254 and throughout the Act, are

defined in the following manner:

       (50) Telecommunications. The term “telecommunications” means the
       transmission, between or among points specified by the user, of information
       of the user’s choosing, without change in the form or content of the
       information as sent and received.

       (51) Telecommunications carrier. The term “telecommunications carrier”
       means any provider of telecommunications services, except that such term
       does not include aggregators of telecommunications services (as defined in
       section 226 [47 USCS § 226]). A telecommunications carrier shall be
       treated as a common carrier under this Act only to the extent that it is
       engaged in providing telecommunications services, except that the
       Commission shall determine whether the provision of fixed and mobile
       satellite service shall be treated as common carriage.

       ***

       (53) Telecommunications service. The term “telecommunications service”
       means the offering of telecommunications for a fee directly to the public, or
       to such classes of users as to be effectively available directly to the public,
       regardless of the facilities used.

47 U.S.C. § 153(50), (51), (53). Notably, “telecommunications service” is treated

distinctly under the Act from “information service,” which is defined under the Act as

“the offering of a capability for generating, acquiring, storing, transforming, processing,


                                             40
retrieving, utilizing, or making available information via telecommunications . . . .” 47

U.S.C. § 153(24).

       b) Is the FCC prohibited from imposing the broadband requirement?

       Petitioners argue that § 254 unambiguously bars the FCC from conditioning USF

funding on recipients’ agreement to provide broadband internet access services. Pet’r Br.

3 at 12. In support, petitioners begin by noting that § 254(c)(1) “explicitly defines

‘universal service’ as ‘an evolving level of telecommunications services’ the [FCC] is to

establish, ‘taking into account advances in telecommunications and information

technologies and services.’” Id. at 12 (quoting 47 U.S.C. § 254(c)(1); emphasis added in

brief). In turn, petitioners note that “‘telecommunications services’ are common carrier

services under Title II of the Act, distinct from ‘information services’ defined in 47

U.S.C. § 153(24), and the [FCC] has declined to classify [broadband] services such as

Voice over Internet Protocol (‘VoIP’), as telecommunications services.” Id. In

particular, petitioners note that the FCC previously determined “that bundled broadband

internet access is an ‘information service,’ not a ‘telecommunications service,’” and that

this determination “was upheld [by the Supreme Court] as a permissible choice under

Chevron.” Id. at 14 n. 7 (citing Nat’l Cable & Telecomm. Ass’n v. Brand X Internet

Servs., Inc., 545 U.S. 967 (2005)).

       Notwithstanding these facts, petitioners argue, the FCC concluded that, because

“consumers are increasingly obtaining voice services” not from traditional methods “but

through services like VoIP,” “its ‘authority to promote universal service . . . does not


                                             41
depend on whether VoIP services are telecommunications services or information

services.’” Id. at 13 (quoting JA at 412 (Order ¶ 63)). “And,” petitioners assert, “based

on this conclusion, [the FCC] lumps supported telecommunications services with VoIP to

create a new ‘voice telephony service’ classification and orders USF recipients to provide

bundled Internet access, an information service, ‘on reasonable request’ as a condition of

continued USF support.” Id. at 13-14 (internal citations omitted).

       Petitioners argue “that Section 254(c)(1)’s limits are unambiguous and deny the

FCC the authority it claims.” Id. at 14. More specifically, petitioners argue that the FCC,

“[h]aving declined [previously] to define broadband Internet access or VoIP as

telecommunications services, . . . is not then empowered to include them on the list of

supported services simply because advancing the availability of broadband is a desirable

goal.” Id. Petitioners further argue that “[a]ny doubt on this score is dispelled by

subsection (3) of Subsection 254(c).” Id. at 15. Section 245(c)(3), petitioners note,

authorizes the FCC to “designate additional services for support mechanisms for schools,

libraries and health care providers.” 47 U.S.C. § 254(c)(3). Petitioners argue that,

“[i]nterpreting the term ‘additional services,’ as the FCC has, to mean services in addition

to telecommunications services, leads, inescapably, to the conclusion that Section

254(c)(3) creates a limited ‘schools, libraries and hospitals’ exception to the requirement

that USF be used only to support ‘telecommunications services.’” Pet’r Br. 3 at 15.

“Under the doctrine of expressio unius est exclusio alterius (‘the express mention of one

thing excludes all others’),” petitioners argue, “the inclusion of this authorization in


                                              42
Section 254(c)(3) to support non-telecommunications services in specified circumstances

precludes an interpretation authorizing the FCC to compel use of USF support to provide

broadband Internet access, a non-telecommunication service, in others.” Id. at 15-16

(italics in original).

       The FCC, in its response, does not dispute that it has previously declined to

classify broadband services, including VoIP, as “telecommunications services.” But it

does not view this, or anything else in § 254(c)(1)’s definition of “universal service,” as a

limitation on its authority to require recipients of USF funds to expend some of those

funds to deploy networks capable of providing voice and broadband services. As it noted

in the Order, it believes its “authority to promote universal service in this context does not

depend on whether interconnected VoIP services are telecommunications services or

information services under the . . . Act.”5 JA at 412 (Order ¶ 63). Rather, the FCC

contends “that section 254(e) of the Act allow[s] it to . . . ‘require carriers receiving

federal universal service support to invest in modern broadband-capable networks.’”

FCC Br. 3 at 13 (quoting JA at 413-414 (Order ¶ 65)). The FCC explains that Congress,

by referring in § 254(e) “to ‘facilities’ and ‘services’ as distinct items for which federal

universal service funds may be used, . . . granted [the FCC] the flexibility not only to



       5
         The FCC concluded that “[i]f interconnected VoIP services are
telecommunications services, [its] authority under section 254 to define universal service
after ‘taking into account advances in telecommunications and information technologies
and services’ enables [it] to include interconnected VoIP services as a type of voice
telephony service entitled to federal universal service support.” JA at 412 (Order ¶ 63
n.67).

                                              43
designate the types of telecommunications services for which support would be provided,

but also to encourage the deployment of the types of facilities that will best achieve the

principles set forth in section 254(b) and any other universal service principle that the

[FCC] may adopt under section 254(b)(7).” JA at 413 (Order ¶ 65).

       The FCC further asserts that, under section 254(b), it possesses authority to create

inducements, such as linking the receipt of USF funds to the requirement of deploying

voice and broadband networks, to ensure that the universal service policies outlined in

section 254(b) are achieved. Id.

       Thus, the resolution of this issue hinges, in substantial part, on the interpretation of

two subsections of § 254: subsection (c)(1) and subsection (e). Addressing these

subsections in order, it is beyond dispute that subsection (c)(1) expressly authorizes the

FCC to define “periodically” the types of telecommunications services that are

encompassed by “universal service” and thus “supported by Federal universal service

support mechanisms.” Further, there is no question that the FCC, to date, has interpreted

the term “telecommunications services” to include only telephone services and not VoIP

or other broadband internet services. All that said, however, nothing in the language of

subsection (c)(1) serves as an express or implicit limitation on the FCC’s authority to

determine what a USF recipient may or must do with those funds. More specifically,

nothing in subsection (c)(1) expressly or implicitly deprives the FCC of authority to direct

that a USF recipient, which necessarily provides some form of “universal service” and

has been deemed by a state commission or the FCC to be an eligible telecommunications


                                              44
carrier under 47 U.S.C. § 214(e), use some of its USF funds to provide services or build

facilities related to services that fall outside of the FCC’s current definition of “universal

service.” In other words, nothing in the statute limits the FCC’s authority to place

conditions, such as the broadband requirement, on the use of USF funds.

       That leaves § 254(e), the second sentence of which the FCC asserts authorizes it to

direct that USF recipients provide broadband Internet access to customers upon

reasonable request. The threshold question we must address, under Chevron, is whether

Congress in § 254(e) “has directly spoken to the precise question at issue,” 467 U.S. at

842, i.e., did Congress in the second sentence of § 254(e) delegate authority to the FCC to

identify precisely what a recipient of USF funds must do with those funds, id. at 844.

       As noted above, the second sentence of subsection (e) provides that “[an eligible

telecommunications] carrier [designated under 47 U.S.C. § 214(e)] that receives [Federal

universal service] support shall use that support only for the provision, maintenance, and

upgrading of facilities and services for which the support is intended.” 47 U.S.C. §

254(e). Quite clearly, this language does not explicitly delegate any authority to the FCC.

But the question remains whether this language can reasonably be construed, as the FCC

suggests, as an implicit grant of authority to specify what a USF recipient may or must do

with the funds?

       Upon careful examination, we conclude that the FCC’s interpretation of § 254(e) is

not “arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 U.S. at

844. Congress clearly intended, by way of the second sentence of § 254(e), to mandate


                                              45
that USF funds be used by recipients “only for the provision, maintenance, and upgrading

of facilities and services for which the support is intended.” And it seems highly unlikely

that Congress would leave it to USF recipients to determine what “the support is

intended” for. Instead, as the FCC suggests, it is reasonable to conclude that Congress

left a gap to be filled by the FCC, i.e., for the FCC to determine and specify precisely how

USF funds may or must be used. And, as the FCC explained in the Order, carriers “that

benefit from public investment in their networks must be subject to clearly defined

obligations associated with the use of such funding.” JA at 418 (Order ¶ 74).

       The FCC also, in our view, reasonably concluded that Congress’s use of the terms

“facilities” and “service” in the second sentence of § 254(e) afforded the FCC “the

flexibility not only to designate the types of telecommunications services for which

support would be provided, but also to encourage the deployment of the types of facilities

that will best achieve the principles set forth in section 254(b).” Id. at 412-13 (Order ¶

64). Indeed, the FCC’s interpretation “ensures that the term[s] [‘facilities’ and services’]

carr[y] meaning, as each word in a statute should.” Ransom v. FIA Card Servs., N.A.,

131 S.Ct. 716, 724 (2011).

       To be sure, petitioners argue that the concluding phrase of the second sentence of §

254(e), which reads “for which the support is intended,” must be interpreted as a limit on

the FCC’s authority and effectively requires USF funds to be used, whether for

“facilities” or “services,” only in relation to “universal service,” which, petitioners again

note, the FCC has never expressly defined to include broadband or VoIP services. Pet’r


                                              46
Br. 3 at 22-23. But that is not the only, or even the most sensible, interpretation of the

phrase “for which the support is intended.” Indeed, petitioners’ proposed interpretation

relies on the implicit assumption that USF funds were intended solely to support the

provision of universal service. Had Congress intended such a result, however, it clearly

could have said so in a more precise manner. For example, the concluding phrase could

have read “for universal service” (rather than “for which the support is intended”).

Because Congress instead chose to utilize broader language, it was certainly reasonable

for the FCC to have concluded that the language was intended as an implicit grant of

authority to the FCC to flesh out precisely what “facilities” and “services” USF funds

should be used for. And the FCC’s interpretation, we note, is consistent both with §

254(c)(1)’s express grant of authority to the FCC to periodically redefine “universal

service” and § 254(b)’s express charge to the FCC to “base policies for the preservation

and advancement of universal services on” a specific set of controlling principles outlined

by Congress.

       That leads to one final point regarding the FCC’s interpretation of the second

sentence of § 254(e). The FCC concluded, in pertinent part, that Congress, “[b]y

referring [in the second sentence of § 254(e)] to ‘facilities’ and ‘services’ as distinct items

for which [USF] funds may be used, . . . granted the [FCC] the flexibility not only to

designate the types of telecommunications services for which support would be provided,

but also to encourage the deployment of types of facilities that will best achieve the

principles set forth in section 254(b) and any other universal service principle that the


                                              47
[FCC] may adopt under section 254(b)(7).” JA at 412 (Order ¶ 64). This interpretation,

in our view, is reasonable because it “consider[s] the operation of the statute as a whole.”

Adoptive Couple v. Baby Girl, 133 S.Ct. 2552, 2573 (2013). Section 254(b) clearly states

that the FCC “shall base policies for the preservation and advancement of universal

service” on six specific principles outlined by Congress (in subsections (b)(1) through

(7)), as well as on “[s]uch other principles as . . . the [FCC] determine[s] are necessary

and appropriate for the protection of the public interest, convenience, and necessity and

are consistent with th[e] Act.” By interpreting the second sentence of § 254(e) as an

implicit grant of authority that allows it to decide how USF funds shall be used by

recipients, the FCC also acts in a manner consistent with the directive in § 254(b) and

allows itself to make funding directives that are consistent with the principles outlined in

§ 254(b)(1) through (7).

       Thus, in sum, we conclude that petitioners are wrong in arguing that § 254

unambiguously bars the FCC from conditioning USF funding on recipients’ agreement to

provide broadband internet access services.

       c) Is the FCC prohibited from providing USF support to entities that do not
       provide telecommunications services?

       Petitioners also assert that the FCC exceeded the authority granted to it under §

254 by “extending USF support to non-ETCs for provision of broadband Internet access,

a non-telecommunications service.” Pet’r Br. 3 at 1. In support, petitioners note that §

254(e) “provides that only ‘eligible telecommunications carriers,’ i.e., those



                                              48
telecommunications carriers designated [by the FCC or a state commission] under Section

214, ‘shall be eligible to receive specific Federal universal service support.’” Id. at 17

(quoting 47 U.S.C. § 254(e)). “To ensure that USF support is limited to

telecommunications carriers providing telecommunications service,” petitioners assert,

Section 254(e) also provides that “‘[a] carrier that receives such support shall use that

support only for the provision, maintenance, and upgrading of facilities and services for

which the support is intended.’” Id. (quoting § 254(e)). In turn, petitioners argue, “[t]he

[FCC’s] broadband condition is unlawful because it does not limit support to

telecommunications carriers or require that USF be used for telecommunications

services.” Id. “Instead,” they argue, “it provides USF support for ‘voice telephony

service,’ which it called ‘a technically neutral approach, allowing companies to provision

voice service over any platform, including the PSTN and IP networks.’” Id. at 17-18

(internal citation omitted). Thus, petitioners argue, “[w]hile [USF] recipients must

provide ‘voice telephony service,’ they are not required to provide telecommunications

service subject to common carrier regulations under Title II of the Communications Act.”

Id. at 18 (emphasis in original; internal citation omitted). “Instead,” petitioners argue, “a

[USF] recipient may provide voice telephony service as VoIP, which the FCC has

declined to classify as a telecommunications service.” Id.

       The FCC, acting under the express authority granted to it under § 254(c)(1), chose

in the Order “to simplify how [it] describe[d],” JA at 411 (Order ¶ 62), the types of

telecommunications services that are encompassed by “universal service” and thus


                                              49
“supported by Federal universal service support mechanisms,” 47 U.S.C. § 254(c)(1).

Prior to the Order, the FCC had defined those services “in functional terms (e.g., voice

grade access to the PSTN, access to emergency services).” JA at 411 (Order at ¶ 62). In

the Order, the FCC chose instead to employ “a single supported service designated as

‘voice telephony service.’” Id. The FCC indicated that its primary justification for

adopting this designation was the fact that “consumers are [increasingly] obtaining voice

services not through traditional means but instead through interconnected VoIP providers

offering service over broadband networks.” Id. at 412 (Order ¶ 63). Although petitioners

do not expressly challenge the FCC’s decision in this regard, they contend that the FCC

has used this new, simpler classification to provide funding to what they claim are entities

that do not provide telecommunications services.

       The fact remains, however, that in order to obtain USF funds, a provider must be

designated by the FCC or a state commission as an “eligible telecommunications carrier”

under 47 U.S.C. § 214(e). See 47 U.S.C. § 254(e) (“only an eligible telecommunications

carrier designated under section 214(e) . . . shall be eligible to receive specific Federal

universal service support.”). And, under the existing statutory framework, only “common

carriers,” defined as “any person engaged as a common carrier for hire . . . in interstate or

foreign communication by wire or radio or in interstate or foreign radio transmission of

energy,” 47 U.S.C. § 153(10), are eligible to be designated as “eligible

telecommunications carriers,” 47 U.S.C. § 214(e). Thus, under the current statutory

regime, only ETCs can receive USF funds that could be used for VoIP support.


                                              50
Consequently, there is no imminent possibility that broadband-only providers will receive

USF support under the FCC’s Order, since they cannot be designated as “eligible

telecommunications carriers.” As a result, we agree with the FCC that the petitioners’

argument “will not be ripe for judicial review unless and until a state commission (or the

FCC) designates . . . an entity” that is not a telecommunications carrier as “an ‘eligible

telecommunications carrier’” under § 214(e). FCC Br. 3 at 5.



       (d) Does Section 706 of the Act, 47 U.S.C. § 1302, serve as an independent
       grant of authority to the FCC to impose the broadband requirement?

       In a related attack on the FCC’s broadband requirement, petitioners argue that

Section 706 of the Act, 47 U.S.C. § 1302, does not, contrary to the conclusion reached by

the FCC in the Order, serve as an independent grant of authority to the FCC.

       Section 706 of the 1996 Act, entitled “Advanced telecommunications incentives,”

provides, in pertinent part, as follows:

       (a) In general. The Commission and each State commission with
       regulatory jurisdiction over telecommunications services shall encourage
       the deployment on a reasonable and timely basis of advanced
       telecommunications capability to all Americans (including, in particular,
       elementary and secondary schools and classrooms) by utilizing, in a manner
       consistent with the public interest, convenience, and necessity, price cap
       regulation, regulatory forbearance, measures that promote competition in
       the local telecommunications market, or other regulating methods that
       remove barriers to infrastructure investment.

       (b) Inquiry. The Commission shall, within 30 months after the date of
       enactment of this Act [enacted Oct. 10, 2008], and annually thereafter,
       initiate a notice of inquiry concerning the availability of advanced
       telecommunications capability to all Americans (including, in particular,


                                             51
      elementary and secondary schools and classrooms) and shall complete the
      inquiry within 180 days after its initiation. In the inquiry, the Commission
      shall determine whether advanced telecommunications capability is being
      deployed to all Americans in a reasonable and timely fashion. If the
      Commission’s determination is negative, it shall take immediate action to
      accelerate deployment of such capability by removing barriers to
      infrastructure investment and by promoting competition in the
      telecommunications market.

      ***

      (d) Definitions. For purposes of this subsection:
             (1) Advanced telecommunications capability. The term “advanced
             telecommunications capability” is defined, without regard to any
             transmission media or technology, as high-speed, switched,
             broadband telecommunications capability that enables users to
             originate and receive high-quality voice, data, graphics, and video
             telecommunications using any technology.

47 U.S.C. § 1302.

      In the Order, the FCC interpreted Section 706 as providing it with “independent

authority . . . to fund the deployment of broadband networks.” JA at 414 (Order ¶ 66).

The FCC explained the basis for its decision as follows:

          66. . . . In section 706, Congress recognized the importance of
      ubiquitous broadband deployment to Americans’ civic, cultural, and
      economic lives and, thus, instructed the Commission to “encourage the
      deployment on a reasonable and timely basis of advanced
      telecommunications capability to all Americans.” Of particular importance,
      Congress adopted a definition of “advanced telecommunications capability”
      that is not confined to a particular technology or regulatory classification.
      Rather, “‘advanced telecommunications capability’ is defined, without
      regard to any transmission media or technology, as high-speed, switched,
      broadband telecommunications capability that enables users to originate and
      receive high-quality voice, data, graphics, and video communications using
      any technology.” Section 706 further requires the Commission to
      “determine whether advanced telecommunications capability is being
      deployed to all Americans in a reasonable and timely fashion” and, if the


                                            52
Commission concludes that it is not, to “take immediate action to accelerate
deployment of such capability by removing barriers to infrastructure
investment and by promoting competition in the telecommunications
market.” The Commission has found that broadband deployment to all
Americans has not been reasonable and timely and observed in its most
recent broadband deployment report that “too many Americans remain
unable to fully participate in our economy and society because they lack
broadband.” This finding triggers our duty under section 706(b) to
“remov[e] barriers to infrastructure investment” and “promot[e]
competition in the telecommunications market” in order to accelerate
broadband deployment throughout the Nation.

   67. Providing support for broadband networks helps achieve section
706(b)’s objectives. First, the Commission has recognized that one of the
most significant barriers to investment in broadband infrastructure is the
lack of a “business case for operating a broadband network” in high-cost
areas “[i]n the absence of programs that provide additional support.”
Extending federal support to carriers deploying broadband networks in
high-cost areas will thus eliminate a significant barrier to infrastructure
investment and accelerate broadband deployment to unserved and
underserved areas of the Nation. The deployment of broadband
infrastructure to all Americans will in turn make services such as
interconnected VoIP service accessible to more Americans.

    68. Second, supporting broadband networks helps “promot[e]
competition in the telecommunications market,” particularly with respect to
voice services. As we have long recognized, “interconnected VoIP service
‘is increasingly used to replace analog voice service.’” Thus, we previously
explained that requiring interconnected VoIP providers to contribute to
federal universal service support mechanisms promoted competitive
neutrality because it “reduces the possibility that carriers with universal
service obligations will compete directly with providers without such
obligations.” Just as “we do not want contribution obligations to shape
decisions regarding the technology that interconnected VoIP providers use
to offer voice services to customers or to create opportunities for regulatory
arbitrage,” we do not want to create regulatory distinctions that serve no
universal service purpose or that unduly influence the decisions providers
will make with respect to how best to offer voice services to consumers.
The “telecommunications market” — which includes interconnected VoIP
and by statutory definition is broader than just telecommunications services
— will be more competitive, and thus will provide greater benefits to


                                     53
consumers, as a result of our decision to support broadband networks,
regardless of regulatory classification.

    69. By exercising our authority under section 706 in this manner, we
further Congress’s objective of “accelerat[ing] deployment” of advanced
telecommunications capability “to all Americans.” Under our approach,
federal support will not turn on whether interconnected VoIP services or the
underlying broadband service falls within traditional regulatory
classifications under the Communications Act. Rather, our approach
focuses on accelerating broadband deployment to unserved and underserved
areas, and allows providers to make their own judgments as to how best to
structure their service offerings in order to make such deployment a reality.

   70. We disagree with commenters who assert that we lack authority
under section 706(b) to support broadband networks. While 706(a) imposes
a general duty on the Commission to encourage broadband deployment
through the use of “price cap regulation, regulatory forbearance, measures
that promote competition in the local telecommunications market, or other
regulating methods that remove barriers to infrastructure investment,”
section 706(b) is triggered by a specific finding that broadband capability is
not being “deployed to all Americans in a reasonable and timely fashion.”
Upon making that finding (which the Commission has done), section 706(b)
requires the Commission to “take immediate action to accelerate”
broadband deployment. Given the statutory structure, we read section
706(b) as conferring on the Commission the additional authority, beyond
what the Commission possesses under section 706(a) or elsewhere in the
Act, to take steps necessary to fulfill Congress’s broadband deployment
objectives. Indeed, it is hard to see what additional work section 706(b)
does if it is not an independent source of authority.

   71. We also reject the view that providing support for broadband
networks under section 706(b) conflicts with section 254, which defines
universal service in terms of telecommunications services. Information
services are not excluded from section 254 because of any policy judgment
made by Congress. To the contrary, Congress contemplated that the federal
universal service program would promote consumer access to both
advanced telecommunications and advanced information services “in all
regions of the Nation.” When Congress enacted the 1996 Act, most
consumers accessed the Internet through dial-up connections over the
PSTN, and broadband capabilities were provided over tariffed common
carrier facilities. Interconnected VoIP services had only a nominal presence


                                     54
in the marketplace in 1996. It was not until 2002 that the commission first
determined that one form of broadband — cable modem service — was a
single offering of an information service rather than separate offerings of
telecommunications and information services, and only in 2005 did the
Commission conclude that wireline broadband service should be governed
by the same regulatory classification. Thus, marketplace and technological
developments and the Commission’s determinations that broadband
services may be offered as information services have had the effect of
removing such services from the scope of the explicit reference to
“universal service” in section 254(c). Likewise, Congress did not exclude
interconnected VoIP services from the federal universal service program;
indeed, there is no reason to believe it specifically anticipated the
development and growth of such services in the years following the
enactment of the 1996 Act.

    72. The principles upon which the Commission “shall base policies
for the preservation and advancement of universal service” make clear that
supporting networks used to offer services that are or may be information
services for purposes of regulatory classifications is consistent with
Congress’s overarching policy objectives. For example, section 254(b)(2)’s
principle that “[a]ccess to advanced telecommunications and information
services should be provided in all regions of the Nation” dovetails
comfortably with section 706(b)’s policy that “advanced
telecommunications capability [be] deployed to all Americans in a
reasonable and timely fashion.” Our decision to exercise authority under
Section 706 does not undermine section 254’s universal service principles,
but rather ensures their fulfillment. By contrast, limiting federal support
based on the regulatory classification of the services offered over broadband
networks as telecommunications services would exclude from the universal
service program providers who would otherwise be able to deploy
broadband infrastructure to consumers. We see no basis in the statute, the
legislative history of the 1996 Act, or the record of this proceeding for
concluding that such a constricted outcome would promote the
Congressional policy objectives underlying sections 254 and 706.

   73. Finally, we note the limited extent to which we are relying on
section 706(b) in this proceeding. Consistent with our longstanding policy
of minimizing regulatory distinctions that serve no universal service
purpose, we are not adopting a separate universal service framework under
section 706(b). Instead, we are relying on section 706(b) as an alternative
basis to section 254 to the extent necessary to ensure that the federal


                                     55
       universal service program covers services and networks that could be used
       to offer information services as well as telecommunications services.
       Carriers seeking federal support must still comply with the same universal
       service rules and obligations set forth in sections 254 and 214, including the
       requirement that such providers be designated as eligible to receive support,
       either from state commissions or, if the provider is beyond the jurisdiction
       of the state commission, from this Commission. In this way, we ensure that
       our exercise of section 706(b) authority will advance, rather than detract
       from, the universal service principles established under section 254 of the
       Act.

JA at 414-18 (Order ¶¶ 66-73) (internal footnotes omitted).

       Petitioners offer a number of arguments in opposition to the FCC’s conclusions.

First, petitioners assert that the FCC previously concluded, in a 1998 order entitled In re

Deployment of Wireline Servs. Offering Advanced Telecomms. Capability, 13 F.C.C.R.

24,012, 24,047, ¶ 77 (1998) (In re Deployment), that Section 706 “does not constitute an

independent grant of authority.” That prior conclusion, petitioners assert, is still binding

and is directly contrary to the conclusion reached by the FCC in the Order at issue.

       The problem with petitioners’ argument, however, is that the FCC’s conclusion in

the 1998 order was confined to interpreting Section 706(a). See In re Deployment, 13

F.C.C.R. at 24,046-24,048. The 1998 order made no mention of, let alone attempted to

interpret, Section 706(b). And, as outlined above, it is Section 706(b) that the FCC

concludes in the Order provides it with independent authority relevant to this case. Thus,

petitioner’s argument fails.

       Petitioners next take issue with the FCC’s conclusion, in ¶ 70 of the Order, that “it

is hard to see what additional work section 706(b) does if it is not an independent source



                                             56
of authority.” According to petitioners, “[s]ubsection (b) . . . is not redundant at all.”

Pet’r Br. 3 at 25. More specifically, petitioners assert that subsection (a) imposes a

general duty on the FCC without mandating any specific action, and that subsection (b),

in turn, “mandates ‘immediate action’ if the FCC reaches a negative determination on

‘whether advanced telecommunications capability is being deployed to all Americans in a

reasonable and timely fashion.’” Id. (quoting 47 U.S.C. § 1302(b)). “This language,”

petitioners argue, “tells the FCC to put the powers it has to ‘immediate action’ but does

not purport to grant any new powers.” Id. at 26.

       We reject petitioners’ arguments. To be sure, both section 706(a) and section

706(b) focus on “the deployment . . . of advanced telecommunications capability to all

Americans.” Further, both sections make reference, in terms of achieving such

deployment, to the removal of “barriers to infrastructure investment.” But that is where

the similarities end. As noted, section 706(a) is a general directive stating that the FCC

“shall encourage the deployment . . . of advanced telecommunications capability to all

Americans . . . by utilizing . . . price cap regulation, regulatory forbearance, measures that

promote competition in the local telecommunications market, or other regulating methods

that remove barriers to infrastructure investment.” The FCC has concluded “that section

706(a) gives [it] an affirmative obligation to encourage the deployment of advanced

services, relying on [its] authority established elsewhere in the [1996] Act.” In re

Deployment, 13 F.C.C.R. at 24,046 (¶74). In other words, the FCC has concluded that

section 706(a) is “not . . . an independent grant of authority, but rather, . . . a direction to


                                               57
the [FCC] to use the forbearance [and other] authority granted elsewhere in the Act.” Id.

at 24,047 (¶76).

       In contrast, section 706(b) requires the FCC to perform two related tasks. First,

the FCC must conduct an annual inquiry to “determine whether advanced

telecommunications capability is being deployed to all Americans in a reasonable and

timely fashion.” Second, and most importantly for purposes of this appeal, if the FCC’s

annual “determination is negative,” it is required to “take immediate action to accelerate

deployment of such capability by removing barriers to infrastructure investment and by

promoting competition in the telecommunications market.” Unlike section 706(a),

section 706(b) does not specify how the FCC is to accomplish this latter task, or

otherwise refer to forms of regulatory authority that are afforded to the FCC in other parts

of the Act. As the FCC concluded in the Order, section 706(b) thus appears to operate as

an independent grant of authority to the FCC “to take steps necessary to fulfill Congress’s

broadband deployment objectives,” and “it is hard to see what additional work section

706(b) does if it is not an independent source of authority.” JA at 416 (Order ¶ 70).

       Lastly, petitioners argue that section 706(b), even if it does function as an

independent source of authority for the FCC, cannot allow the FCC to ignore the

limitations that section 254 imposes on the use of USF funds. Pet’r Br. 3 at 27. In

support, petitioners repeat their previous argument that “[s]ection 254 expressly limits the

availability of USF support to telecommunications carriers and defines

‘telecommunications services’ as the only services eligible for support.” Id. For the


                                             58
reasons we have outlined above, however, that argument is without merit. In other words,

section 254 does not limit the use of USF funds to “telecommunications services.” Thus,

to the extent the FCC relies on section 706(b) as support for its broadband requirement,

section 706(b) is not contrary to section 254.

       In sum, then, we conclude that the FCC reasonably construed section 706(b) as an

additional source of support for its broadband requirement.

       2. Did the FCC act arbitrarily in simultaneously imposing the broadband
       requirement and reducing USF support?

       Petitioners next complain that the FCC’s broadband requirement was “impose[d]

. . . in the face of a net reduction to USF and related intercarrier compensation revenues

for rural carriers.” Pet’r Br. 3 at 29 (emphasis in original). They argue, in turn, that

“[t]his ‘do more with less’ directive flies in the face of Congress’s interrelated

requirements under Section 254(b) that the FCC use USF to keep quality service

‘affordable,’ that consumers in high cost areas receive services comparable to those

available to their urban counterparts at ‘reasonably comparable’ rates, that USF support

mechanisms be ‘predictable and sufficient’ to preserve and advance universal service, and

that telecommunications service providers contribute equitably to achieve that objective.”

Id. (citing 47 U.S.C. §§ 254(b)(1), (3), (5)). And, they argue, the FCC “made no attempt

to measure whether reduced support, coupled with the added costs of the broadband

obligation, will allow carriers to meet the universal service objectives of Section 254(b).”

Id. at 30.



                                              59
      As previously noted, § 254(b) provides as follows:

      (b) Universal service principles. The [Federal-State] Joint Board[, which
      was created in subsection (a) by the 1996 Act,] and the Commission shall
      base policies for the preservation and advancement of universal service on
      the following principles:
              (1) Quality and rates. Quality services should be available at just,
              reasonable, and affordable rates.
              (2) Access to advanced services. Access to advanced
              telecommunications and information services should be provided in
              all regions of the Nation.
              (3) Access in rural and high-cost areas. Consumers in all regions of
              the Nation, including low-income consumers and those in rural,
              insular, and high cost areas, should have access to
              telecommunications and information services, including
              interexchange services and advanced telecommunications and
              information services, that are reasonably comparable to those
              services provided in urban areas and that are available at rates that
              are reasonably comparable to rates charged for similar services in
              urban areas.
              (4) Equitable and nondiscriminatory contributions. All providers of
              telecommunications services should make an equitable and
              nondiscriminatory contribution to the preservation and advancement
              of universal service.
              (5) Specific and predictable support mechanisms. There should be
              specific, predictable and sufficient Federal and State mechanisms to
              preserve and advance universal service.
              (6) Access to advanced telecommunications services for schools,
              health care, and libraries. Elementary and secondary schools and
              classrooms, health care providers, and libraries should have access to
              advanced telecommunications services as described in subsection
              (h).
              (7) Additional principles. Such other principles as the Joint Board
              and the Commission determine are necessary and appropriate for the
              protection of the public interest, convenience, and necessity and are
              consistent with this Act.

47 U.S.C. § 254(b).




                                           60
       This is not the first time we have analyzed § 254(b). In Qwest Corp., we noted

that “[t]he plain text of the statute . . . indicates a mandatory duty on the FCC” to “base its

universal policies on the principles listed in § 254(b).” 258 F.3d at 1200. “However,” we

emphasized, “each of the principles in § 254(b) internally is phrased in terms of

‘should,’” which “indicates a recommended course of action, but does not itself imply the

obligation associated with ‘shall.’” Id. Consequently, we held, “the FCC must base its

policies on the principles, but any particular principle can be trumped in the appropriate

case.” Id. In other words, “the FCC may exercise its discretion to balance the principles

against one another when they conflict, but may not depart from them altogether to

achieve some goal.” Id.

       a) Does the Order fail to ensure that USF support for rural carriers is
       sufficient to preserve and advance universal service?

       Petitioners argue that the FCC failed to ensure that USF support for rural carriers is

“‘sufficient’ . . . to achieve Congress’s goals.” Pet’r Br. 3 at 30. “The overarching

problem,” petitioners assert, “is that the [FCC] improperly limited its analysis to whether,

without reform [i.e., a fixed budget], USF support would be excessive.” Id. at 31

(emphasis in original). As a result, petitioners assert, “[t]he Order leaves unanalyzed

whether reduced USF support will be sufficient to preserve and enhance traditional voice

services.” Id.

       The term “sufficient” is mentioned in both § 254(b)(5) (“There should be specific,

predictable and sufficient Federal and State mechanisms to preserve and advance



                                              61
universal service.”) and § 254(e) (“Any such support should be . . . sufficient to achieve

the purposes of this section.”). The Fifth Circuit has concluded, however, that “§ 254(b)

[simply] identifies a set of principles and does not lay out any specific commands for the

FCC,” and that “[e]ven § 254(e), which is framed as a direct, statutory command, is

ambiguous as to what constitutes ‘sufficient’ support.” Texas Office of Public Util.

Counsel v. FCC, 183 F.3d 393, 425 (5th Cir. 1999). Consequently, the Fifth Circuit

concluded, a reviewing court need “not consider the language an expression of

Congress’s ‘unambiguous intent’ allowing Chevron step-one review,” and instead need

only “review [the FCC’s] interpretation for reasonability under Chevron step-two.” Id. at

425-26. Because we agree with the Fifth Circuit, we need determine in this case only that

the FCC’s “sufficiency” analysis was not arbitrary, capricious, or manifestly contrary to

the statute.

       At the outset, we note that the FCC’s counsel conceded at oral argument that the

FCC, in preparing the Order and establishing the amount of USF funding, made no

attempt to determine the precise cost for each potential USF recipient to fulfill the

broadband requirement. According to the FCC’s counsel, that would have been

exceedingly difficult to do, given the fact that there are approximately eight hundred rate-




                                             62
of-return carriers in the United States.6 Instead, the FCC chose a different strategy for

achieving the goal of budgetary “sufficiency.”7

       In setting the overall budget for the Connect America Fund (CAF), the FCC

expressed a “commitment to controlling the size of the universal service fund,” and,

consequently, it “sought comment on setting an overall budget for the CAF such that the

sum of the CAF and any existing legacy high-cost support mechanisms . . . in a given

year would remain equal to current funding levels.” JA at 437 (Order ¶ 121). “[A] broad

cross-section of interested stakeholders . . . agreed” with this proposal, “with many urging

the [FCC] to set that budget at $4.5 billion per year, the estimated size of the program in

fiscal year (FY) 2011.” Id. (Order ¶ 122). After considering these comments, the FCC

concluded that the “establish[ment] [of] a defined budget for the high-cost component of


       6
       As discussed below, even objectors to the FCC’s proposed budget failed to offer
the FCC details of their individual circumstances.
       7
          The dissent, relying on Qwest Corp., effectively rejects the FCC’s strategy and
takes it to task for not “estimat[ing] . . . the cost of its new broadband requirements on the
industry as a whole.” Dissent at 5. But Qwest, though useful for its general analysis of §
254(b), does not provide a relevant point of comparison when it comes to assessing
whether the Order in this case achieves the goal of budgetary “sufficiency.” That is
because Qwest dealt with a cost model employed by the FCC for purposes of determining
universal service funding for non-rural telecommunications carriers in areas “where the
average cost of providing service exceeded [a] national benchmark defined in terms of the
average cost across the nation.” 258 F.3d at 1197. Necessarily, a cost model is intended
to estimate, with some degree of accuracy, the costs of a product or project. In contrast,
the Order at issue in this case never purported, nor was it statutorily required, to estimate
the costs of broadband deployment, either per carrier or for the industry as a whole.
        We also, in any event, question how the FCC could have “estimate[d] . . . the cost
of its new broadband requirements on the industry as a whole” when, as the dissent itself
concedes, the FCC “could not have determined the cost of the broadband condition for
each carrier seeking relief through the Universal Service Fund.” Dissent at 5.

                                             63
the universal service fund” would “best ensure that [it] ha[d] in place ‘specific,

predictable, and sufficient’ funding mechanisms to ensure [its] universal service

objectives.” Id. (Order ¶ 123). In reaching this conclusion, the FCC expressed concern

that, “were the CAF to significantly raise the end-user cost of services, it could undermine

[the FCC’s] broader policy objectives to promote broadband and mobile deployment and

adoption.” Id. at 438 (Order ¶ 124). And, consistent with many of the comments it

received, the FCC “establish[ed] an annual funding target, set at the same level as [its]

current estimate for the size of the high-cost program for FY 2011, of no more than $4.5

billion.”8 Id. (Order ¶ 125). The FCC found “that amount [was not] excessive given” its

decision to “expand the high-cost program in important ways to promote broadband and

mobility; facilitate intercarrier compensation reform; and preserve universal voice

connectivity.” Id. “At the same time,” the FCC found that “a higher budget [was not]

warranted, given the substantial reforms [it was] adopt[ing] to modernize [its] legacy

funding mechanisms to address long-standing inefficiencies and wasteful spending.” Id.

The FCC also noted that it would need “to evaluate the effect of these reforms before

adjusting [its] budget,” id., and it specifically stated that it “anticipate[d] . . . revisit[ing]

and adjust[ing] accordingly the appropriate size of each of [its] programs by the end of

the six-year period, based on market developments,” id. at 399 (Order ¶ 18).



       8
         Of this amount, “approximately $4 billion . . . will be divided between areas
served by price cap carriers and areas served by rate-of-return carriers, with no more than
$1.8 billion available annually for price cap territories . . . and up to $2 billion available
annually for rate-of-return territories.” JA at 438 (Order ¶ 126).

                                                 64
       After establishing this overall budget, the FCC stated that it intended to “step away

from distinctions based on whether a company is classified as a rural carrier or a non-

rural carrier” and to “establish two pathways for how support is determined—one for

companies whose interstate rates are regulated under price caps, and the other for those

whose interstate rates are regulated under rate-of-return.” Id. at 440 (Order ¶ 129). The

FCC then proceeded to allocate portions of the overall CAF budget to these two groups of

carriers.

       Turning first to price cap carriers, the FCC noted that they serve “[m]ore than 83

percent of the approximately 18 million Americans who lack access to fixed broadband.”

Id. at 439 (Order ¶ 127). The FCC outlined a two-phase framework for distributing CAF

funds to these carriers. “CAF Phase I,” the FCC explained, would “freeze support under

[its] existing high-cost support mechanisms . . . for price cap carriers and their rate of

return affiliates,” and would also, in order “to spur the deployment of broadband in

unserved areas, . . . allocate up to $300 million in additional support to such carriers.” Id.

(Order ¶ 128). The distribution of this additional, or “incremental support,” the FCC

stated, would be “distribute[d] . . . using a simplified forward-looking cost estimate” that

was not objected to by any party. Id. at 442 (Order ¶ 133); see id. at 442-43 (Order ¶

134). The FCC emphasized that this incremental support was not intended to cover the

full costs of broadband deployment:

       We acknowledge that our existing cost model, on which our distribution
       mechanism for CAF Phase I incremental funding is based, calculates the
       cost of providing voice service rather than broadband service, although we


                                              65
       are requiring carriers to meet broadband deployment obligations if they
       accept CAF Phase I incremental funding. We find that using estimates of
       the cost of deploying voice service, even though we impose broadband
       deployment obligations, is reasonable in the context of this interim support
       mechanism. First, this interim mechanism is designed to identify the most
       expensive wire centers, and the same characteristics that make it expensive
       to provide voice service to a wire center (e.g., lack of density) make it
       expensive to provide broadband service to that wire center as well. Using a
       cost estimation function based on our existing model will help to identify
       which wire centers are likely to be the most expensive to provide broadband
       service to, even if it does not reliably identify precisely how expensive those
       wire centers will be to serve. Second, and related, our funding threshold is
       determined by our budget limit of $300 million for CAF Phase I
       incremental support rather than by a calculation of what amount we expect
       a carrier to need to serve that area. That is, this interim mechanism is not
       designed to “fully” fund any particular wire center—it is not designed to
       fund the difference between (i) the deployment cost associated with the
       most expensive wire center in which we could reasonably expect a carrier to
       deploy broadband without any support at all and (ii) the actual estimated
       deployment cost for a wire center. Instead, the interim mechanism is
       designed to provide support to carriers that serve areas where we expect that
       providing broadband service will require universal service support.

Id. at 444 (Order ¶ 137 n.220). In short, the FCC stated, its objective for CAF Phase I

was not “to identify the precise cost of deploying broadband to any particular location,”

but instead “to identify an appropriate standard to spur immediate broadband deployment

to as many unserved locations as possible, given [its] budget constraint.”9 Id. at 445

       9
        For purposes of CAF Phase I incremental funding, the FCC found “that a one-
time support payment of $775 per unserved location for the purpose of calculating
broadband deployment obligations for companies that elect[ed] to receive additional
support [wa]s appropriate.” JA at 445 (Order ¶ 139). In arriving at this amount, the FCC
“considered broadband deployment projects undertaken by a mid-sized price cap carrier
under the BIP program,” id. (Order ¶ 140), “data from the analysis done as part of the
National Broadband Plan,” id. (Order ¶ 141), its own “analysis using the ABC plan cost
model, which calculate[d] the cost of deploying broadband to unserved locations on a
census block basis,” id. at 444-45 (Order ¶ 142), and “estimates of the per-location cost of
extending broadband to unserved locations” placed in the record by several carriers, id. at

                                             66
(Order ¶ 139). Relatedly, the FCC noted that it “expect[ed] that carriers w[ould]

supplement incremental support with their own investment.”10 Id. at 446 (Order ¶ 144).

       The FCC’s Order also “adopt[ed] Phase II of the Connect America Fund” for

price-cap carriers, which established “a framework for extending broadband to millions of

unserved locations over a five-year period, . . . while sustaining existing voice and

broadband services.” Id. at 452 (Order ¶ 156). “Within the total $4.5 billion annual

[CAF] budget, [the FCC] set the total annual CAF budget for areas currently served by

price cap carriers at no more than $1.8 billion for a five-year period.” Id. (Order ¶ 158).

The FCC concluded that this amount “represent[ed] a reasonable balance” of several

considerations, including its “universal service mandate to unserved consumers residing

in [price cap] communities,” and its need “to balance many competing demands for

universal service funds.” Id. And the FCC “adopt[ed] the following methodology for

providing CAF support in price cap areas” during CAF Phase II:

       First, the Commission will model forward-looking costs to estimate the cost
       of deploying broadband-capable networks in high-cost areas and identify at
       a granular level the areas where support will be available. Second, using
       the cost model, the Commission will offer each price cap LEC annual
       support for a period of five years in exchange for a commitment to offer
       voice across its service territory within a state and broadband service to
       supported locations within that service territory, subject to robust public
       interest obligations and accountability standards. Third, for all territories


445 (Order ¶ 143).
       10
        The Order emphasized that price cap carriers were free to decline CAF Phase I
incremental support, in which case they would be under no obligation to satisfy the
broadband conditions outlined in the Order. JA at 444 (Order ¶ 138); id. at 447 (Order ¶
144).

                                             67
       for which price cap LECs decline to make that commitment, the
       Commission will award ongoing support through a competitive bidding
       mechanism.

Id. at 454-55 (Order ¶ 166).

       The FCC then turned to rate-of-return carriers and, as with price cap carriers,

established a new funding framework. To begin with, the FCC allocated “approximately

$2 billion per year” to rate-of-return carriers, an amount “approximately equal to current

levels.” Id. at 465 (Order ¶ 195). In doing so, the FCC expressed its belief “that keeping

rate-of-return carriers at approximately current support levels in the aggregate during

th[e] transition [to a more incentive-based form of regulation] appropriately balance[d]

the competing demands on universal service funding and the desire to sustain service to

consumers and provide continued incentives for broadband expansion as [it] improve[d]

the efficiency of rate-of-return mechanisms.” Id.

       Along with setting this annual budget for rate-of-return carriers, the FCC

“implement[ed] a number of reforms to eliminate waste and inefficiency and improve

incentives for rational investment and operation by rate-of-return LECs.” Id. These

included: (1) establish[ing] parameters for what actual unseparated loop and common line

costs carriers [could] seek recovery for under the federal universal service program,” id.

(Order ¶ 196); (2) “reduc[ing] . . . high-cost loop support to the extent that a [rural]

carrier’s local rates [we]re below a specified urban local rate floor,” id. at 466 (Order ¶

197); (3) eliminating safety net additive support received as a result of line loss, id.

(Order ¶ 198); (4) eliminating local switching support, id. (Order ¶ 199); (5)


                                              68
“eliminat[ing] support for rate-of-return companies in any study area that is completely

overlapped by an unsubsidized competitor,” id. (Order ¶ 200); and (6) “adopt[ing] a rule

that support in excess of $250 per line per month will no longer be provided to any

carrier,” id. (Order ¶ 201).

       In a section of the Order entitled “Public Interest Obligations of Rate-of-Return

Carriers,” the FCC announced its requirement “that [rate-of-return] recipients use their

support in a manner consistent with achieving universal availability of voice and

broadband.” Id. at 467 (Order ¶ 205). But, the FCC emphasized, “rather than

establishing a mandatory requirement to deploy broadband-capable facilities to all

locations within their service territory, [it would] continue to offer a more flexible

approach for these smaller carriers.” Id. (Order ¶ 206). In particular, the FCC

emphasized that “rate-of-return carriers w[ould] not necessarily be required to build out to

and serve the most expensive locations within their service area,” id. at 468 (Order ¶

207), nor would they be subject to “intermediate build-out milestones or increased speed

requirements for future years,” id. at 467-68 (Order ¶ 206). Thus, the relative cost of

providing broadband service to a particular location is a relevant factor in determining

whether a customer’s request to a rate-of-return carrier for broadband service is

reasonable. And, as the FCC’s counsel emphasized at oral argument, the Order leaves it

to rate-of-return carriers in the first instance to determine whether a customer’s request

for broadband service is reasonable.




                                              69
       In a separate section discussing the “Connect America Fund in Remote Areas,” the

Order expressly “exempted the most remote areas, including fewer than 1 percent of all

American homes, from the home and business broadband service obligations that

otherwise apply to CAF recipients.” Id. at 564-65 (Order ¶ 533). The Order also noted

that “universal service revenues account for [only] approximately 30 percent of the

typical rate-of-return carrier’s total revenues,” and it concluded that the intercarrier

compensation reforms outlined in the Order “w[ould] provide rate-of-return carriers with

access to a new explicit recovery mechanism in [the Connect American Fund], offering a

source of stable and certain revenues that the [prior] intercarrier system c[ould] no longer

provide.” Id. at 496-97 (Order ¶ 291).

       The Order also, in a section entitled “Impact of these Reforms on Rate-of-Return

Carriers and the Communities They Serve,” addressed the likely impact of its proposed

reforms on rate-of-return carriers and the communities served by those carriers. To begin

with, the Order concluded that its intercarrier compensation reforms and set budget would

“provide greater certainty and a more predictable flow of revenues [to those carriers] than

the status quo.” Id. at 495 (Order ¶ 286). The Order in turn opined “that carriers that

invest and operate in a prudent manner w[ould] be minimally affected by th[e] Order.”

Id. at 496 (Order ¶ 289). In support, the Order concluded “that nearly 9 out of 10 rate-of-

return carriers w[ould] see reductions in high-cost universal service receipts of less than

20 percent annually, . . . approximately 7 out of 10 w[ould] see reductions of less than 10




                                              70
percent,” and “almost 34 percent w[ould] see an increase in high-cost universal service

receipts.” Id. (Order ¶ 290).

       Lastly, the Order noted that “various parties . . . ha[d] argued that reductions in

current support levels would threaten their financial viability, imperiling service to

consumers in the areas they serve[d].” Id. at 566 (Order ¶ 539). The FCC determined it

could not “evaluate those claims absent detailed information about individualized

circumstances,” and thus “conclude[d] that they [we]re better handled in the course of a

case-by-case review.”11 Id. Consequently, the Order authorizes “any carrier negatively

affected by the universal service reforms” adopted in the Order “to file a petition for

waiver that clearly demonstrates that good cause exists for exempting the carrier from

some or all of those reforms, and that waiver is necessary and in the public interest to

ensure that consumers in the area continue to receive voice service.” Id.

       In sum, the FCC determined that budgetary “sufficiency” for price cap and rate-of-

return carriers could be achieved through a combination of measures, including, but not

limited to: (1) maintaining current USF funding levels while reducing or eliminating

waste and inefficiencies that existed in the prior USF funding scheme; (2) affording



       11
         Although the dissent asserts that “[t]he sufficiency of the budget was challenged
in the FCC proceedings,” it cites to only two objections contained in the record. Dissent
at 3. And, as it turns out, only one of those two (from tribal carrier Gila River
Telecommunications, Inc.) offered any details of the costs of complying with the
broadband requirement (and in that regard, Gila cited only one extreme example, rather
than outlining its average or overall costs of broadband deployment). See JA at 4094
(“Costs of deploying fiber-to-the-home have been as high as $12,000 for a single
residence.”).

                                             71
carriers the authority to determine which requests for broadband service are reasonable;

(3) allowing carriers, when necessary, to use the waiver process; and (4) conducting a

budgetary review by the end of six years. And, relatedly, the FCC quite clearly rejected

any notion that budgetary “sufficiency” is equivalent to “complete” or “full” funding for

carrying out the broadband and other obligations imposed upon carriers who are

voluntary recipients of USF funds. In our view, these determinations were not arbitrary,

capricious, or manifestly contrary to the directives outlined in § 254. To contrary, the

FCC’s determinations, particularly when considered in light of the other statutory

directives the FCC was charged with achieving, were reasonable and sufficient to survive

scrutiny under Chevron step-two analysis.

       b) Does the Order fail to ensure service and rate comparability between
       rural and urban areas?

       According to petitioners, the FCC “acknowledges it has not investigated what

broadband service or rate levels are offered in either rural or urban areas.” Pet’r Br. 3 at

33. Petitioners argue, in turn, that the FCC “cannot possibly confirm that its policies

enable rural carriers to provide broadband service ‘at rates reasonably comparable to rates

charged for similar services in urban areas,’ Section 254(b)(3), if it has failed to

determine the urban rate and service levels to which rural rates and service are to be

compared.” Id. at 33-34.

       We reject petitioners’ arguments, however, because they ignore the FCC’s efforts

to accurately assess urban rates and satisfy its statutory obligations. In the Order, the



                                              72
FCC noted that it “ha[d] never compared broadband rates for purposes of section

254(b)(3).” JA at 435 (Order ¶ 113). Consequently, the FCC “directed [its Wireline

Competition Bureau and its Wireless Telecommunications Bureau] to develop a specific

methodology for defining that reasonable range, taking into account that retail broadband

service is not rate regulated and that retail offerings may be defined by price, speed, usage

limits, if any, and other elements.” Id. The FCC also sought “comment on how

specifically to define a reasonable range.” Id. Relatedly, the FCC “delegate[d] to the

Wireline Competition Bureau and Wireless Telecommunications Bureau the authority to

conduct an annual survey of urban broadband rates, if necessary, in order to derive a

national range of rates for broadband service.” Id. at 435 (Order ¶ 114). “By conducting

[its] own survey,” the FCC concluded, it “w[ould] be able to tailor the data specifically to

[its] need to satisfy [its] statutory obligation.” Id.

       c) Does the Order’s establishment of a budget cap, without widening the
       contribution base, fail to protect affordability or ensure equitable fund
       contributions?

       Petitioners argue that the Order’s imposition of a USF budget cap, “[w]ithout

widening the contribution base, . . . will do nothing to ensure affordability.” Pet’r Br. 3 at

34. “The problem,” according to petitioners, “is that telecommunications voice revenues

are declining.” Id. As a result, they argue, “[e]ven a fixed budget will have to be

recovered from fewer customers, whose individual charges will go up (become less

affordable), unless the contribution base is widened.” Id. at 34-35 (emphasis in original).

In turn, petitioners argue that, even assuming that the FCC acted within its authority in


                                               73
imposing the broadband mandate, “it is inequitable to exempt telecommunications

providers who also offer broadband from being required to contribute to universal service

from the revenues they receive for such services, particularly since rural carriers

assuming a broadband obligation will incur added costs.” Id. at 35. And, they argue, it is

not enough for the FCC to “decide at some unspecified future date . . . whether to expand

its contribution base.” Id.

       Two points are clear from the Order and the parties’ briefs. First, the Order

concluded that the existing contribution framework (which is comprised of assessments

paid by interstate telecommunications service providers) was sufficient to satisfy the

annual USF budget established in the Order. Second, the FCC chose to address potential

changes to the contribution framework in a separate proceeding. More specifically, the

FCC in a separate rulemaking docket has sought comment on proposals to reform and

modernize how USF contributions are assessed and recovered. See Universal Service

Contribution Methodology; A National Broadband Plan for Our Future, 27 FCC Rcd

5357, 5358 (2012).

       As the FCC correctly notes in its appellate response brief, 47 U.S.C. § 154(j)

affords it the discretion to “conduct its proceedings in such manner as will best conduce

to the proper dispatch of business and to the ends of justice.” FCC Br. 3 at 68. And we

agree with the FCC that its decision to address USF contributions not in the Order, but

rather in a separate proceeding, falls well within that discretion.




                                              74
       d) Does the FCC’s “regression rule” violate § 254’s predictability
       requirement?

       Petitioners next take issue with what they describe as the Order’s “regression

rule.”12 According to petitioners, the regression rule is inconsistent with § 254(b)(5)’s

mandate that “[t]here should be specific, predictable and sufficient Federal and State

mechanisms to preserve and advance universal service.” 47 U.S.C. § 254(b)(5). More

specifically, petitioners assert that “[t]he Order’s regression rule . . . contravenes this

mandate in three respects: (1) it delegates authority to devise a rule limiting USF support

to its Wireline Competition Bureau (‘WCB’) in violation of its own rules and then

compounds the uncertainty thereby created by (2) leaving the WCB unbounded discretion

to devise the rule and subsequently (3) to revise it without abiding by APA notice and

comment procedures.” Pet’r Br. 3 at 36-37. The end result, petitioners argue, is

unpredictability because “a carrier simply cannot know from year to year which

investment or expenses will be supported and which will not,” and thus will be “at a loss

as to how to make business plans for the future.” Id. at 38.

       The “regression rule” referred to by petitioners, as best we can tell, is part of the

FCC’s new “benchmarking rule” for limiting the reimbursable capital and operating

expenses in the formula used to determine high-cost loop support (HCLS) for rate-of-

return carriers. See FCC Br. 3 at 41. The benchmarking rule was adopted by the FCC in

the Order to “ensur[e] that companies do not receive more support than necessary to serve

       12
          Notably, petitioners fail to identify in their briefs where the so-called “regression
rule” is discussed in the Order.

                                               75
their communities,” JA at 468 (Order ¶ 210), and to “create structural incentives for rate-

of-return companies to operate more efficiently and make prudent expenditures,” id. at

469 (Order ¶ 210). The benchmarking rule is based on the FCC’s “proposed . . .

regression analyses to estimate appropriate levels of capital expenses and operating

expenses for each incumbent rate-of-return study area and limit expenses falling above a

benchmark based on this estimate.” Id. (Order ¶ 212). “Th[is] methodology,” the Order

stated, “will generate caps, to be updated annually, for each rate-of-return company.” Id.

at 470 (Order ¶ 214).

       The FCC, in the Order, “delegate[d] authority to the Wireline Competition Bureau

to implement a methodology.” Id. at 469 (Order ¶ 210). In doing so, the Order “set forth

in” an attached Further Notice of Proposed Rulemaking “a specific methodology for

capping recovery for capital expenses and operating expenses using quantile regression

techniques and publicly available cost, geographic and demographic data.” Id. at 470

(Order ¶ 216). The FCC “invite[d] public input . . . on that methodology.” Id. at 471

(Order ¶ 471). On April 25, 2012, the Wireline Competition Bureau completed its

assigned task and finalized the benchmarking methodology after considering the record

compiled in response to the Further Notice of Proposed Rulemaking. FCC Br. 3 at 42.

       According to the FCC, the challenges that petitioners now pose to the

benchmarking and regression rules were never raised by petitioners during the

administrative process. In particular, the FCC asserts, “[p]etitioners did not raise these

contentions before the [FCC] in a petition for reconsideration.” Id. at 43. Consequently,


                                             76
the FCC asserts, the contentions must be considered waived pursuant to 47 U.S.C. §

405(a).

       Section 405(a) authorizes a party to file with the FCC a motion for reconsideration

of “an order, decision, report, or action” of the FCC. 47 U.S.C. § 405(a). “[F]iling a

petition for reconsideration before the [FCC] is ‘a condition precedent to judicial review .

. . where the party seeking such review . . . relies on questions of fact or law upon which

the [FCC] . . . has been afforded no opportunity to pass.’” See Globalstar, Inc. v. FCC,

564 F.3d 476, 483 (D.C. Cir. 2009) (quoting § 405(a)). “Thus, even when a petitioner has

no reason to raise an argument until the FCC issues an order that makes the issue

relevant, the petitioner must file a petition for reconsideration with the [FCC] before it

may seek judicial review.” Id. at 484 (internal quotation marks omitted). In short, then, §

405(a) requires that the FCC be given an “opportunity to pass” on an issue before the

issue is raised in federal court. Id. at 479. If the FCC has not been given such an

opportunity, the issue is deemed waived for purposes of federal court review. Id.

       In their reply brief, petitioners assert that “[t]he illegality of [the regression rule]’s

delegation was in fact raised in [the] Petition for Reconsideration and Clarification of the

National Exchange Carrier Association, Inc., et al.” Pet’r Reply Br. 3 at 20 n.8. A review

of the Joint Appendix confirms that the National Exchange Carrier Association (NECA),

an entity that is not a petitioner or intervenor in this appeal, did, in fact, move for

reconsideration of the FCC’s adoption of the use of annual regression analysis.

Petitioners have not identified with specificity, however, which statements in the NECA’s


                                               77
petition for reconsideration they believe related to the arguments they now seek to assert.

Having conducted our own review of the NECA’s petition for reconsideration, we note

that two sentences therein specifically addressed the FCC’s “use of a regression analysis.”

JA at 4087. The first sentence stated: “By firmly adopting the use of regression analysis

before giving parties the ability to consider whether this approach truly works or whether

other constraints might yield better result, the [FCC] has ventured down a path that could

limit cost recovery in unworkable or unlawful ways.” Id. The second, and immediately

following sentence, stated: “The [FCC] should accordingly reconsider its conclusion to

utilize a regression analysis to develop the new caps, and should state instead that it will

examine a regression analysis approach . . . , subject to adequate notice and comment,

before it adopts and implements a particular form of investment or operating expense

constraint.” Id. (emphasis in original). The NECA’s petition for reconsideration also, in

reference to the FCC’s “decision to change the caps each year based upon a refreshed

‘run’ of the regression analyses,” complained that “this dynamic capping does nothing to

restore predictability to the high-cost program but instead only exacerbates uncertainty.”

Id. Lastly, the NECA’s petition for reconsideration asserted in a footnote that the FCC’s

“decision to delegate to the Wireline Competition Bureau the authority to establish

regression-based constraints raises serious legal concerns as well.”13 Id. n.22.

       13
         The NECA’s petition for reconsideration did not otherwise specify the purported
“serious legal concerns.” Instead, it simply cited to a “Letter from Michael R. Romano,
NTCA, to Marlene H. Dortch, FCC, WC Docket No. 10-90, et al. (filed Oct. 21, 2011) at
2.” Notably, petitioners in this appeal have not themselves cited to the “Letter from
Michael R. Romano,” nor have they cited to where in the record this document can be

                                             78
       We conclude that none of these statements in the NECA’s petition for

reconsideration are sufficiently specific to encompass the petitioners’ arguments that the

FCC’s regression rule “(1) . . . delegates authority to devise a rule limiting USF support to

its Wireline Competition Bureau . . . in violation of its own rules and then compounds the

uncertainty thereby created by (2) leaving the WCB unbounded discretion to devise the

rule and subsequently (3) to revise it without abiding by APA notice and comment

procedures.” Pet’r Br. 3 at 36-37. Consequently, we deem these arguments waived since

the FCC was never given an opportunity pass on them prior to this appeal. See

Globalstar, 564 F.3d at 484 (holding that, when a party complains of a technical or

procedural mistake, the party must raise the precise claim before the FCC).

       We are persuaded, however, that petitioners’ general attack on the predictability of

the FCC’s regression rule was sufficiently raised in the NECA’s petition for

reconsideration and thus is subject to judicial review. But, that said, we agree with the

FCC that there is no merit to this attack. To begin with, the method to be utilized by the

WCB in arriving at the annual HCLS disbursement amounts is far from unpredictable.

The Order circumscribed the WCB’s authority by “set[ting] forth . . . parameters of the

methodology that the [WCB must] use to limit payments from HCLS.”14 JA at 471


found. And our own examination indicates that the October 21, 2011 “Letter from
Michael R. Romano” was not included in the Joint Appendix. Consequently, we
conclude that the NECA’s reference to “serious legal concerns” was simply too vague to
have alerted the FCC to the specific concerns now asserted by petitioners.
       14
         These parameters “require that companies’ costs be compared to those of
similarly situated companies,” “that statistical techniques should be used to determine

                                             79
(Order ¶ 217). In turn, the Order requires the WCB “[e]ach year” to “publish in a public

notice the updated capped values that will be used.” Id. (Order ¶ 218). Together, we

believe, these measures are sufficient to satisfy § 254(b)(5)’s predictability requirement.

See Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608, 622 (5th Cir. 2000) (concluding that

“[t]he methodology governing subsidy disbursements” was predictable because it was

“plainly stated and made available to” carriers). Relatedly, we agree with the FCC that

nothing in the Act guarantees that HCLS disbursements will be the same from year to

year. Nor does the Act guarantee “predictable market outcomes” or “protection from

competition.” Alenco, 201 F.3d at 622.

       3. Does the FCC’s use of auctions to distribute USF violate § 214(e)?

       Petitioners contend that the FCC’s use of auctions to distribute USF violates 47

U.S.C. § 214(e). According to petitioners, “Congress,” by way of § 214(e), “expressly

gave State commissions the job of deciding who would receive universal service support

and where supported services would be advertised and provided by the carrier.” Pet’r Br.

3 at 40 (emphasis in original). More specifically, petitioners assert, § 214(e) “provides

that only ETCs may receive USF support and that, with narrow exceptions, only states

may designate ETCs and their service areas.” Id. at 39. And, they assert, “[o]nce an ETC

is designated by a state commission to serve a particular service area under Section



which companies shall be deemed similarly situated,” a “non-exhaustive list of variables
that may be considered” by the WCB, and a grant of authority to the WCB “to determine
whether other variables . . . would improve the regression analysis. JA at 471 (Order ¶
217).

                                             80
214(e)(2), it is eligible to receive funding and must offer and advertise the supported

services throughout its service area.” Id.

       Petitioners complain that “[t]he Order contravenes this statutory scheme in two

respects.” Id. (italics in original). “First,” petitioners assert, the Order “adopted various

competitive bidding mechanisms to distribute USF support, and provided that the [FCC]

will define the geographic areas to be auctioned off.” Id. at 39-40. “Second,” petitioners

assert, “the FCC created an entirely new ‘conditional designation,’ nowhere mentioned in

the statute, that will require state commissions to conditionally designate ‘ETCs’ before

auctions to distribute Mobility Fund support are concluded.” Id. at 40.

       To properly address petitioners’ arguments, it is useful to begin with the language

of § 214(e). That section, entitled “Provision of universal service,” provides, in pertinent

part, as follows:

       (1) Eligible telecommunications carriers. A common carrier designated as
       an eligible telecommunications carrier under paragraph (2), (3), or (6) shall
       be eligible to receive universal service support in accordance with section
       254 [47 USCS § 254] and shall, throughout the service area for which the
       designation is received—
               (A) offer the services that are supported by Federal universal service
               support mechanisms under section 254(c) [47 USCS § 254(c)], either
               using its own facilities or a combination of its own facilities and
               resale of another carrier’s services . . . ; and
               (B) advertise the availability of such services and the charges
               therefor using media of general distribution.
       (2) Designation of eligible telecommunications carriers. A State
       commission shall upon its own motion or upon request designate a common
       carrier that meets the requirements of paragraph (1) as an eligible
       telecommunications carrier for a service area designated by the State
       commission. * * *



                                              81
       (3) Designation of eligible telecommunications carriers for unserved areas.
       If no common carrier will provide the services that are supported by Federal
       universal support mechanisms under section 254(c) [47 USCS 254(c)] to an
       unserved community or any portion thereof that requests such service, the
       Commission, with respect to interstate services or an area served by a
       common carrier to which paragraph (6) applies, or a State commission, with
       respect to intrastate services, shall determine which common carrier or
       carriers are best able to provide such service to the requesting unserved
       community or portion thereof and shall order such carrier or carriers to
       provide such service for that unserved community or portion thereof. * * *
       ***
       (6) Common carriers not subject to State commission jurisdiction. In the
       case of a common carrier providing telephone exchange service and
       exchange access that is not subject to the jurisdiction of a State commission,
       the Commission shall upon request designate such a common carrier that
       meets the requirements of paragraph (1) as an eligible telecommunications
       carrier for a service area designated by the Commission consistent with
       applicable Federal and State law. * * *

47 U.S.C. § 214(e).

       As the FCC notes in its response brief, its Order “reformed the distribution of

high-cost universal service support, [but] left intact the state commissions’ authority to

designate ETCs and their service areas.” FCC Br. 3 at 63. In particular, the Order

“decline[d] to adopt the structure of the [existing] competitive ETC rules, which

provide[d] support for multiple providers in an area.” JA at 506 (Order ¶ 316). In the

FCC’s view, “that structure . . . led to duplicative investment by multiple competitive

ETCs in certain areas at the expense of investment that could be directed elsewhere,

including areas that are not currently served.” Id. In place of the existing system, the

FCC adopted, in pertinent part, “a competitive bidding mechanism” that “award[s]

support based on the lowest per-unit bid amounts submitted in a reverse auction, subject



                                             82
to the constraint . . . that there will be no more than one recipient per geographic area, so

as to make the limited funds available go as far as possible.”15 Id. at 507 (Order ¶ 321).

       Notably, the Order emphasized that “[c]arriers seeking federal support must still

comply with the same universal service rules and obligations set forth in sections 254 and

214, including the requirement that such providers be designated as eligible to receive

support, either from state commissions or, if the provider is beyond the jurisdiction of the

state commission, from th[e] [FCC].” Id. at 418 (Order ¶ 73). In other words, “parties

that seek to participate in the auction must be ETCs in the areas for which they will seek

support at the deadline for applying to participate in the auction.” Id. at 525 (Order ¶

389). The Order “decline[d] to adopt the alternative of allowing parties to bid for support

prior to being designated an ETC.” Id. at 526 (Order ¶ 392). Relatedly, the Order

recognized that “the states have primary jurisdiction to designate ETCs; the [FCC]

designates ETCs where states lack jurisdiction.” Id. at 525 (Order ¶ 390 n.662). Lastly,

the Order concluded that “nothing in the statute compels that every party eligible for

support actually receives it.” Id. at 507 (Order ¶ 318).

       The key flaw in petitioners’ argument, as the FCC correctly notes in its response

brief, is that “it conflates eligibility for subsidies with the right to receive subsidies.”



       15
         For price cap areas, the Order indicated that the FCC would “offer each price cap
LEC annual support for a period of five years in exchange for a commitment to offer
voice across its service territory, subject to robust public interest obligations and
accountability standards.” JA at 454 (Order ¶ 166). However, “for all territories for
which price cap LECs decline to make that commitment, the [FCC] will award ongoing
support through” the reverse auction process. Id.

                                               83
FCC Br. 3 at 62. To be sure, § 214(e) authorizes state commissions to decide which

entities will be designated as ETCs and, relatedly, to determine the service areas served

by those ETCs.16 But nothing in § 214(e) gives authority to the state commissions to

allocate USF funds, nor does § 214(e) give a designated ETC the absolute right to receive

USF funds. Rather, as the language of § 214(e)(1) makes clear, “[a] common carrier

designated as an eligible telecommunications carrier under paragraph (2), (3), or (6) shall

be eligible to receive universal service support in accordance with section 254 [47 USCS

§ 254].” 47 U.S.C. § 214(e) (emphasis added). Had Congress intended designated ETCs

to automatically receive USF funds, it could and should have omitted the phrase “be

eligible to” from the language of § 214(e)(1).

       4. Was the FCC’s decision to reduce USF support in areas with
       “artificially low” end user rates unlawful or arbitrary?

       Petitioners contend that the FCC’s decision to reduce USF support in areas with

“artificially low” end user rates was both unlawful and arbitrary.

       The portion of the Order being challenged by petitioners is a section entitled

“Reducing High Cost Loop Support for Artificially Low End-User Rates.” Therein, the

Order “adopt[ed] a rule,” applicable “to both rate-of-return carriers and price cap

companies,” “to limit high-cost support where end-user rates do not meet a specified local

       16
         States will continue to define the larger geographic regions for ETC status, and
the FCC will use the smaller parts of these regions (through census blocks) to determine
the existence and level of financial support. JA at 812-13 (Order ¶¶ 1191-92); see id. at
455 (Order ¶ 167), 459 (Order ¶ 179). Thus, states will continue to define the service
areas for ETCs, while the FCC will decide (on a census block basis) the zones within
those areas that are eligible for support through competitive bidding.

                                             84
floor.” JA at 476 (Order ¶ 235). In doing so, the Order noted there was “evidence in the

record” indicating that “there [were] a number of carriers with local rates that [we]re

significantly lower than rates that urban consumers pay.” Id. at 477 (Order ¶ 235). “For

example,” the Order noted, there were “two carriers in Iowa and one carrier in Minnesota

[that] offer[ed] local residential rates below $5 per month.” Id. The Order concluded that

Congress did not “intend[] to create a regime in which universal service subsidizes

artificially low local rates in rural areas when it adopted the reasonably comparable

principle in section 254(b); rather, [the Order concluded], it [wa]s clear from the overall

context and structure of the statute that its purpose [wa]s to ensure that rates in rural areas

not be significantly higher than in urban areas.” Id. (emphasis in original). Relatedly, the

Order concluded:

       It is inappropriate to provide federal high-cost support to subsidize local
       rates beyond what is necessary to ensure reasonable comparability. Doing
       so places an undue burden on the Fund and consumers that pay into it.
       Specifically, we do not believe it is equitable for consumers across the
       country to subsidize the cost of service for some consumers that pay local
       service rates that are significantly lower than the national urban average.

Id. at 478 (Order ¶ 237).

       The Order stated that the FCC would “phase in [a] rate floor in three steps,

beginning with an initial rate floor of $10 for the period July 1, 2012 through June 30,

2013 and $14 for the period July 1, 2013 through June 30, 2014.” Id. (Order ¶ 239).

“Beginning July 1, 2014,” the Order stated, “and in each subsequent calendar year, the




                                              85
rate floor will be established after the Wireline Competition Bureau completes an updated

annual survey of voice rates.” Id.

       Petitioners argue that “the de facto effect of the Order” is that the FCC is setting

local rates. Pet’r Br. 3 at 41 (italics in original). “And,” they argue, “since local rate

setting is exclusively the province of state commissions under the Act, 47 U.S.C. §

152(b), the Order unlawfully usurps a power reserved to the states.” Id. (italics in

original). “The perverse result of” this portion of the Order, petitioners argue, is that to

avoid depriving local carriers of needed USF support, states must raise some local rates

above levels they would have deemed reasonable.” Id. at 41-42.

       The FCC asserts, however, and we agree, that we are not bound to examine the

“practical effect” of an agency order. Cable & Wireless P.L.C. v. FCC, 166 F.3d 1224,

1230 (D.C. Cir. 1999). As the District of Columbia Circuit has noted, “no canon of

administrative law requires [a reviewing court] to view the regulatory scope of agency

actions in terms of their practical or even foreseeable effects.” Id. As the District of

Columbia Circuit noted, “[o]therwise, [a reviewing court] would have to conclude, for

example, that the Environmental Protection Agency regulates the automobile industry

when it requires states and localities to comply with national ambient air quality

standards, or that the Department of Commerce regulates foreign manufacturers when it

collects tariffs on foreign-made goods.” Id. Thus, we summarily reject the petitioners’

argument regarding the practical effect of the Order’s new rate floors.




                                              86
       In any event, to the extent the Order encourages states to adjust local rates to

ensure that they are not excessively low in comparison to urban rates, that appears to be

permissible under, and indeed is consistent with, the universal service principles outlined

in the Act. As we noted in Qwest Corp., “the FCC may not simply assume that the states

will act on their own to preserve and advance universal service.” 258 F.3d at 1204.

Rather, the FCC “remains obligated to create some inducement . . . for the states to assist

in implementing the goals of universal service,” i.e., in this case to ensure that rural rates

are not artificially low. Id. The portion of the Order at issue appears to serve that

purpose by encouraging states to set rural rates that are least comparable to urban rates.

       Petitioners also argue that this portion of the Order is arbitrary and capricious in

two respects. First, they argue, it “fails to give adequate consideration to . . . comments

explaining that the rural and urban basic services at issue may not be comparable.” Pet’r

Br. 3 at 42. Second, they argue that the Order failed to consider “the fact that rate[s] may

have been kept low by state funds, placing no burden on the federal USF fund.” Id.

(emphasis in original).

       Addressing these arguments in order, the record on appeal indicates that the

Missouri Small Telephone Company Group (MSTCG), in response to the FCC’s Notice

of Proposed Rulemaking, filed initial comments with the FCC regarding the proposed

benchmark rule. The MSTCG stated, in pertinent part: “Because rural calling scopes are

smaller, many rural subscribers incur greater long distance charges to place calls to

schools, health care facilities, and government offices.” JA at 2284. “As a result,” the


                                              87
MSTCG asserted, “the total bills for rural customers (including both local and long

distance calling) may be comparable to or higher than the bills of urban customers, and

the proposal to establish a nationwide benchmark does not take into account local calling

scopes.” Id. “Therefore,” MSTCG argued, “the FCC may wish to consider establishing a

separate rural benchmark.” Id.

      As far as we can determine, the FCC did not expressly respond to these comments

in the Order. In its appellate response brief, the FCC asserts that the MSTCG’s comment

was “‘unsupported by any data’ showing that rural customers actually pay as much, or

more, for telecommunications services than their urban counterparts by incurring greater

long distance charges.” FCC Br. 3 at 58 (quoting Vt. Pub. Serv. Bd. v. FCC, 661 F.3d 54,

63 (D.C. Cir. 2011)). “Thus,” the FCC argues, “it [wa]s not a significant comment that

warranted a response from the agency.” Id.

      It is well established that “agencies need not respond to every comment.” Vt. Pub.

Serv. Bd., 661 F.3d at 63. In particular, “[c]omments must be significant enough to step

over a threshold requirement of materiality before any lack of agency response or

consideration becomes of concern.” Vt. Yankee Nuclear Power Corp. v. NRDC, 435

U.S. 519, 553 (1978) (internal quotation marks omitted). Here, the three sentence-

comment offered by MSTCG, though not necessarily frivolous, was entirely speculative.

As the FCC now notes, the MSTCG offered virtually no evidence in support of the

comment. Instead, the MSTCG merely surmised that there might be a difference between

urban and rural areas in what it uniquely deemed “local calling scopes.” Given the


                                             88
speculative nature of the comment and the complete lack of supporting evidence, we

conclude that the FCC did not act arbitrarily or capriciously in failing to address the

comment in the Order.

       As for petitioners’ argument that the FCC failed to consider “the fact that rate[s]

may have been kept low by state funds,” this claim was never presented to the FCC.

Consequently, the claim is waived. See 47 U.S.C. § 405(a).

       5. Does the Order unlawfully deprive rural carriers of a reasonable
       opportunity to recover their prudently-incurred costs?

       Petitioners argue that the Order unlawfully deprives rural carriers of a reasonable

opportunity to recover their prudently-incurred costs. In support, petitioners assert that

“they are required to continue to provide current services and, at considerable additional

expense, to provide broadband service as well.” Pet’r Br. 3 at 43. “At the same time,”

they assert, “their ICC revenue streams are being narrowed and their USF support will be

capped, reduced or eliminated outright (depending on their regulatory status).” Id. In

turn, petitioners argue that “[i]t would be one thing if the [FCC] had tied the reductions in

USF support to a determination that the individual carriers had imprudently incurred

costs, or that they were recovering the costs of investments not ‘used and useful’ in

delivering regulated services, or that these costs could somehow be recovered from end

users without violating the statutory universal service principle calling for rural service

rates to be reasonably comparable with those in urban areas.” Id. at 44. “But,” they

assert, “the FCC made none of these findings.” Id. at 45. Lastly, petitioners acknowledge



                                             89
that the Order contains a waiver provision, but they argue that that provision applies only

in narrow circumstances and does not reflect “[t]he constitutional test,” which they assert

“is whether the carrier has been afforded a reasonable opportunity to recover its costs.”

Id.

         The FCC asserts, in response, that all of this amounts to an “unsubstantiated

takings claim” that “is not ripe.” FCC Br. 3 at 39. The FCC notes that the Order made

clear that if “any rate-of-return carrier can effectively demonstrate that it needs additional

support to avoid constitutionally confiscatory rates, the [FCC] will consider a waiver

request for additional support.” JA at 498 (Order ¶ 294). The FCC thus argues that “[n]o

takings claim is ripe until a party has invoked that process and been denied.” FCC Br. 3

at 39.

         In their reply brief, petitioners deny asserting a takings claim. Pet’r Reply Br. 3 at

15. Instead, they assert, their argument is that “the Order was arbitrary and inconsistent

with the statutory requirement of ‘sufficient support’ because it will not provide them a

reasonable opportunity to recover prudently incurred costs.” Id. (italics in original). The

problem, however, is that these arguments were not clearly framed at all in petitioners’

opening brief. Indeed, their opening brief made no mention of the Order being arbitrary

(in fact, the discussion did not use the word “arbitrary” at all), nor did they clearly assert

that the Order violated a statutory requirement of “sufficient support.” Instead, the

arguments in petitioners’ opening brief made reference to a “constitutional test” for

“whether [a] carrier has been afforded a reasonable opportunity to recover its costs,” Pet’r


                                               90
Br. 3 at 45, and also cited to a Supreme Court takings case, id. at 43 (citing Duquesne

Light Co. v. Barasch, 488 U.S. 299, 307-08 (1989)). Thus, we would be well within our

discretion to invoke our longstanding rule that a party waives issues and arguments raised

for the first time in a reply brief.17 See Reedy v. Werholtz, 660 F.3d 1270, 1274 (10th

Cir. 2011).

       In any event, however, it is clear to us that the FCC did not act arbitrarily in

implementing changes to the USF mechanisms. Notably, the Order includes a section

expressly discussing the “Impact of These Reforms on Rate-of-Return Carriers and the

Communities They Serve.” JA at 495. In that section, the FCC concluded that its

“intercarrier compensation reforms” would provide rate-of-return carriers with “greater

certainty and a more predictable flow of revenues than the status quo.” Id. (Order ¶ 286).

The FCC further noted that the Order’s “package of universal service reforms [wa]s

targeted at eliminating inefficiencies and closing gaps in [the] system, not at making

indiscriminate industry-wide reductions.” Id. at 496 (Order ¶ 287). Relatedly, the FCC

noted that its “reforms w[ould] not affect all carriers in the same manner or in the same

magnitude,” but it expressed confidence “that carriers that invest and operate in a prudent

manner will be minimally affected.” Id. (Order ¶ 289). In support, the FCC stated that its

“analysis show[ed] that nearly 9 out of 10 rate-of-return carriers w[ould] see reductions in

high-cost universal service receipts of less than 20 percent annually, . . . approximately 7



       17
        The FCC has moved to strike these arguments on the grounds that they were not
adequately raised in petitioners’ opening brief.

                                              91
out of 10 w[ould] see reductions of less than 10 percent, . . . almost 34 percent . . .

w[ould] see no reductions whatsoever, and more than 12 percent . . . w[ould] see an

increase in high-cost universal service receipts.” Id. (Order ¶ 290). The FCC also

“reject[ed] the sweeping argument that the rule changes . . . would unlawfully necessarily

affect a taking.” Id. at 497 (Order ¶ 293). And it emphasized “that carriers have no

vested property interest in USF.” Id. More specifically, it noted “there [wa]s no statutory

provision or Commission rule that provides companies with a vested right to continued

receipt of support at current levels, and we are not aware of any other, independent source

of law that gives particular companies an entitlement to ongoing USF support.” Id. at 498

(Order ¶ 293). Lastly, the FCC concluded that “carriers ha[d] not shown that elimination

of USF support w[ould] result in confiscatory end-user rates.” Id. (Order ¶ 294). In

reaching this conclusion, the FCC noted that, “[t]o the extent that any rate-of-return

carriers can effectively demonstrate that it needs additional support to avoid

constitutionally confiscatory rates, the Commission will consider a waiver request for

additional support.” Id.

       Nothing about this analysis is remotely arbitrary or capricious. Rather, we

conclude the FCC’s analysis is both reasoned and reasonable. Further, the FCC’s

analysis is entirely consistent with the overarching universal service principles outlined in

47 U.S.C. § 254(b), including the principle that “[t]here should be specific, predictable

and sufficient Federal and State mechanisms to preserve and advance universal service.”

47 U.S.C. § 254(b)(5).


                                              92
       6. Do the FCC’s regression and SNA rules have unlawful retroactive
       effects?

       Petitioners argue that “the FCC’s regression and SNA [(Safety Net Additive)]

rules,” “by limiting recovery of costs lawfully incurred pursuant to federal and state law

before the Order was adopted,” “violate the strong judicial presumption against

retroactive rulemaking.” Pet’r Br. 3 at 46 (italics in original). According to petitioners,

prior to the Order they incurred “capital and operating expenses . . . to comply with the

ETC [eligible telecommunications carrier] provisions of Section 214(e) of the Act, Rural

Utilities Service (‘RUS’) loan covenants and/or state Carrier of Last Resort (‘COLR’)

requirements.” Id. And, they assert, under the pre-Order regulatory scheme, they were

able to receive SNA support to compensate them for those expenses.

       The SNA support petitioners refer to is considered to be a “component” of high-

cost loop support (HCLS). JA at 401 (Order ¶ 27). HCLS, which was established by the

FCC in 1997 during its implementation of the 1996 Act, “provides support for the ‘last

mile’ of connection for rural companies in service areas where the cost to provide this

service exceeds 115% of the national average cost per line.” Universal Service

Administrative Company, High Cost, http://www.usac.org/hc/legacy/incumbent-

carriers/step01/hcl.aspx (last visited Dec. 16, 2013). SNA, like HCLS generally, was

“available to rural price-cap and rate-of-return carriers and competitive carriers providing

service in the areas of these rural companies.” Universal Service Administrative

Company, http://www.usac.org/hc/legacy/incumbent-carriers/step01/sna.aspx (last visited



                                             93
Dec. 16, 2013). “SNA support [wa]s support ‘above the cap’ for carriers that ma[d]e

significant investment in rural infrastructure in years in which HCL support [wa]s

capped.” Id. It “[wa]s intended to provide rural carriers with the appropriate incentives

to invest in the network infrastructure serving their communities.” Id.

       Beginning in early 2010, however, the FCC began notifying carriers “that [it]

intended to undertake comprehensive universal service reform in the near term.” JA at

485 (Order ¶ 252 n.409). And in the Order, the FCC “conclude[d] the [SNA] [wa]s not

designed effectively to encourage additional significant investment in

telecommunications plant.” Id. at 484 (Order ¶ 250). Instead, the FCC concluded, “[t]he

majority of incumbent LECs that currently are receiving the [SNA] qualified in large part

due to significant loss of lines, not because of significant increases in investment, which

is contrary to the intent of the rule.” Id. (Order ¶ 249).

       Consequently, the Order “phase[s] out the [SNA] over time.” Id. at 401 (Order ¶

27). In particular, during “CAF Phase I,” effective January 1, 2012, the Order “freeze[s]

support under [the] existing high-cost support mechanisms,” including HCLS and SNA,

“for price cap carriers and their rate-of-return affiliates.” Id. at 439 (Order ¶ 128). CAF

Phase I, the Order stated, “set[s] the stage for a full transition to a system where support

in price cap territories is determined based on competitive bidding or the forward-looking

costs of a modern multi-purpose network.” Id. at 440 (Order ¶ 129). And, as we have

already discussed, the Order adopted a new “benchmarking rule” for limiting the

reimbursable capital and operating expenses in the formula used to determine high-cost


                                              94
loop support (HCLS) for rate-of-return carriers. FCC Br. 3 at 41. This benchmarking

rule was based on the FCC’s “proposed . . . regression analyses to estimate appropriate

levels of capital expenses and operating expenses for each incumbent rate-of-return study

area and limit expenses falling above a benchmark based on this estimate.” JA at 469

(Order ¶ 212).

       Petitioners now argue that “[t]he [Order’s] regression and SNA rules violate the

presumption against retroactive rulemaking because each ‘takes away or impairs vested

rights’ or ‘attaches new legal consequences to events completed before its enactment.’”

Pet’r Br. 3 at 47 (quoting Arkema, Inc. v. EPA, 618 F.3d 1, 16 (D.C. Cir. 2010)).

Alternatively, petitioners argue that “even if reasonable and prudent expenditures made

pursuant to federal and state law are not deemed to entail a vested right to federal support,

they render the regression and SNA rules invalid as arbitrary and capricious under the

‘secondary retroactivity’ standard . . . because they ‘alter[] future regulation in a manner

that makes worthless substantial past investment incurred in reliance upon the prior

rule.’” Id. (quoting Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 220 (1988)

(Scalia, J., concurring)).

       We reject petitioners’ arguments. “Retroactive rules ‘alter[] the past legal

consequences of past actions.’” Mobile Relay Assoc. v. FCC, 457 F.3d 1, 11 (D.C. Cir.

2006) (quoting Bowen, 488 U.S. at 219 (Scalia, J., concurring); emphasis in Bowen).

“[A]n agency order that alters the future effect, not the past legal consequences of an

action, or that upsets expectations based on prior law, is not retroactive.” Id. (internal


                                              95
quotation marks omitted). Consequently, the Order in this case, which makes only

prospective changes to the reimbursement framework, including the elimination of SNA,

is not retroactive. “To conclude otherwise would hamstring not only the FCC in its

[telecommunications] management, but also any agency whose decision affects the

financial expectations of regulated entities.” Id. As the District of Columbia Circuit

noted in Mobile Relay, “[i]t is often the case that a business will undertake a certain

course of conduct based on the current law, and will then find its expectations frustrated

when the law changes.” Id. “This has never been thought to constitute retroactive

lawmaking, and indeed most economic regulation would be unworkable if all laws

disrupting prior expectations were deemed suspect.” Id.

       “Secondary activity—which occurs if an agency’s rule affects a regulated entity’s

investment made in reliance on the regulatory status quo before the rule’s

promulgation—will be upheld if it is reasonable, i.e., if it is not arbitrary or capricious.”

Id. (internal quotation marks omitted); see Bowen, 488 U.S. at 220 (Scalia, J.,

concurring)(suggesting that “[a] rule that has unreasonable secondary retroactivity . . .

may for that reason be ‘arbitrary’ or capricious’ and thus invalid.”). Our review of the

Order in this case persuades us that the FCC’s elimination of the SNA rule and its

adoption of the new benchmarking rule was neither arbitrary nor capricious. As outlined

above, the FCC considered in detail the rationale for the SNA rule and concluded, for

reasons detailed at length in the Order, that a new framework needed to be created and

enacted. Because the FCC’s actions in this regard were neither arbitrary nor capricious,


                                              96
that is sufficient to overcome the petitioners’ objection grounded on the theory of

secondary retroactivity.

       7. Did the FCC disregard evidence that allocating USF to rural price cap
       carriers by competitive bidding would reduce service quality?

       Petitioners assert that the FCC, “[i]n adopting an auction mechanism” for the

allocation of USF to rural price cap carriers, “has arbitrarily either ignored entirely or

failed adequately to address arguments and evidence that the auction approach would

result in a ‘race to the bottom,’ where bidders need only meet minimum service standards

inadequate to . . . satisfy future customer needs.” Pet’r Br. 3 at 49. Although petitioners

concede that the Order acknowledged their arguments, they assert that the Order “never

tackled them,” which, they argue, is “a hallmark of arbitrary agency action.” Id. at 50

(emphasis in original; citing Motor Vehicle Mfrs. Ass’n of the United States v. State

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).

       The FCC responds that “[t]his claim is not ripe for judicial review, because the

FCC did not ‘adopt[] an auction mechanism’ for price cap carriers in the Order,” but

“[r]ather . . . merely sought comment on how best to design and implement such a

mechanism in the attached FNPRM [(Further Notice of Proposed Rulemaking)].” FCC

Br. 3 at 54. The FCC in turn argues that it “addressed the ‘arguments’ that it allegedly

‘ignored’ by seeking comment on them in that FNPRM.” Id. Lastly, the FCC argues

that, “[u]ntil [it] adopts an auction mechanism based on the record developed under the

outstanding FNPRM, the Court will not be able to determine whether [it] adequately



                                              97
responded to petitioners’ arguments that competitive bidding will degrade service and

disadvantage small carriers.” Id. at 55.

       Our review of the Order confirms the FCC’s arguments. The Order, in Section

XVII, entitled “FURTHER NOTICE OF PROPOSED RULEMAKING,” expressly

“adopt[ed] a framework for USF reform in areas served by price cap carriers where

support will be determined using a combination of a forward-looking broadband cost

model and competitive bidding to efficiently support deployment of networks providing

both voice and broadband service over the next several years.” JA at 812 (Order ¶ 1189).

The Order explained this framework:

       In each state, each incumbent price cap carrier will be asked to undertake a
       state-level commitment to provide affordable broadband to all high-cost
       locations in its service territory in that state, excluding locations served by
       an unsubsidized competitor, for a model-determined efficient amount of
       support. In areas where the incumbent declines to make that commitment,
       we will use a competitive bidding mechanism to distribute support in a way
       that maximizes the extent of robust, scalable broadband service and
       minimizes total cost. This FNPRM addresses proposals for this competitive
       bidding process, which we refer to here as the CAF auction for price cap
       areas. The FNPRM proposes program and auction rules, consistent with the
       goals of the CAF and the [FCC]’s broader objectives for USF reform.

Id. The Order then proceeded to outline, in detail, how the proposed auction process

would work and the performance requirements that successful bidders would be required

to meet. Notably, the Order sought comment on all of these details.

       Although petitioners’ opening brief cites to various points in the Order where the

FCC purportedly recounted and then briefly responded to arguments in opposition to the

proposed auction process, those cited portions deal with the FCC’s “discussion of a


                                             98
different auction mechanism for [dispersing Mobility Fund Phase I funds to] wireless

carriers.” FCC Br. 3 at 54; see JA at 502-04 (Order ¶¶ 306-11).

        We therefore conclude that petitioners’ challenges to the FCC’s proposed auction

mechanism for price-cap carriers are not yet ripe for review.



        8. Does eliminating USF support for the highest-cost areas defeat the very
        purpose of universal service?

        Petitioners complain that the Order delays indefinitely, and thereby effectively

eliminates, support for remote, so-called “extremely high-cost areas,” and thus defeats the

very purpose of universal service. Pet’r Br. 3 at 52.

        We begin our analysis of this claim by outlining the Order’s treatment of universal

funding for “extremely high-cost” service areas. The Order, in pertinent part, “adopt[s]

Phase II of the Connect America Fund: a framework for extending broadband to millions

of unserved locations over a five-year period, including households, businesses, and

community anchor institutions, while sustaining existing voice and broadband services.”

JA at 452 (Order ¶ 156). The primary focus of CAF Phase II is to provide “increased

support to areas served by price cap carriers.” Id. (Order ¶ 159). Those areas, the Order

noted, accounted for “more than 83 percent of the unserved locations in the nation” in

2010, but only “receive[d] approximately 25 percent of high-cost support.” Id. (Order ¶

158).




                                             99
       “CAF Phase II will have an annual budget of no more than $1.8 billion,” which

will be distributed “us[ing] a combination of competitive bidding and a new forward-

looking model of the cost of constructing modern multi-purpose networks.” Id. “Using

th[is] [forward-looking] model,” the FCC “will estimate the support necessary to serve

areas where costs are above a specified benchmark, but below a second ‘extremely high-

cost’ benchmark.” Id. The FCC “delegate[d] to the Wireline Competition Bureau the

responsibility for setting the extremely high-cost threshold in conjunction with adoption

of a final-cost model.” Id. at 456 (Order ¶ 169).

       Relatedly, the Order created a “Remote Areas Fund” intended “to ensure that the

less than one percent of Americans living in remote areas where the cost of deploying

traditional terrestrial broadband networks is extremely high can obtain affordable

broadband.” Id. at 819 (Order ¶ 1224). The Remote Areas Fund, the Order indicated,

will receive “$100 million in annual CAF funding to maximize the availability of

affordable broadband in such areas.” Id. at 455 (Order ¶ 168). In the FNPRM portion of

the Order, the FCC “s[ought] comment on how best to utilize” the Remote Areas Fund.

Id. The Order proposed that the “universal service goals [could be fulfilled in extremely

high-cost areas] by taking advantage of services such as next-generation broadband

satellite service or wireless internet service provider (WISP).” Id. The Order also sought

“comment on how to structure the Remote Areas Fund.” Id. at 820 (Order ¶ 1225). In

doing so, the Order proposed several alternative structures, including “a portable




                                            100
consumer subsidy,” id., “a competitive bidding process,” id. at 820 (Order ¶ 1226), and “a

competitive proposal evaluation process,” id. (Order ¶ 1227).

       As the FCC notes in its response brief, until the Remote Areas Fund distribution

rules “are in place, extremely high-cost areas will continue to receive support under

existing mechanisms for price cap and rate-of-return carriers.” FCC Br. 3 at 64 (citing JA

at 442 (Order ¶¶ 133 (freezing support for price-cap carriers), 195 (maintaining support

for rate-of-return carriers)).

       In light of these undisputed facts, it is readily apparent that the Order neither

“indefinitely” delays distribution of the Remote Areas Fund, nor effectively denies USF

funding to extremely high-cost areas.18 Further, any specific challenges that petitioners

may seek to assert against the manner in which the Remote Areas Fund is distributed are

not yet ripe.

       9. Is the FCC’s decision to eliminate high-cost support to RLECs, where an
       unsubsidized competitor offers voice and broadband to all of the RLECs’
       customers in the same study area, unlawful and unsupported by substantial
       evidence?




       18
          In their reply brief, petitioners offer two new arguments. First, they assert that
“the FCC’s rule provides that if a census block in a price cap service area exceeds the
alternative technology threshold by even one dollar, the area is removed from Phase II
support entirely and instead relegated to a separate remote areas fund.” Pet’r Reply Br. 3
at 24. Second, and relatedly, they complain that the FCC failed to respond to
“[c]ommenters [who] offered an alternative in which the alternative technology threshold
would serve as a cap on support instead of an absolute limit.” Id. Because we generally
“decline to consider arguments not raised in [an appellant’s] opening brief,” United States
v. Ford, 613 F.3d 1263, 1272 n.2 (10th Cir. 2010), we shall grant the FCC’s motion to
strike these arguments.

                                             101
       Petitioners argue that “[t]he Order’s directive that high cost support to RLECs be

phased out as unnecessary where unsubsidized competitors offer voice and broadband to

all of an RLEC’s residential and business customers in the same study area is unlawful

and unsupported by substantial evidence.” Pet’r Br. 3 at 54. According to petitioners,

“unsubsidized competitors have no obligation either to continue providing voice or

broadband service to existing customers or to serve new ones once the RLEC’s support is

eliminated, much less an obligation to provide services comparable in quality and prices

to those enjoyed by customers of urban telecommunications carriers.” Id. “The Order,”

petitioners argue, “disregards entirely evidence that the moment the rural carrier loses its

USF support . . . , consumers are at risk.” Id. at 55-56 (italics in original).

       At issue here is a section of the Order entitled “Elimination of Support in Areas

with 100 Percent Overlap.” JA at 493. In the first paragraph of that section, entitled

“Background,” the FCC explained that “in many areas of the country, universal service

provides more support than necessary to achieve [the FCC’s] goals by subsidizing a

competitor to a voice and broadband provider that is offering service without

governmental assistance.” Id. (Order ¶ 280; internal quotation marks omitted). In the

ensuing paragraphs, entitled “Discussion,” the FCC “adopt[ed] a rule to eliminate

universal service support where an unsubsidized competitor — or a combination of

unsubsidized competitors — offers voice and broadband service throughout an incumbent

carrier’s study area, and [sought] comment on a process to reduce support where such an

unsubsidized competitor offers voice and broadband service to a substantial majority, but


                                              102
not 100 percent of the study area.” Id. at 494 (Order ¶ 281). The FCC thus “exclude[d]

from the CAF areas that are overlapped by an unsubsidized competitor.” Id. The FCC

also announced its intent to discontinue its “current levels of high-cost support to rate-of-

return companies where there is overlap with one or more unsubsidized competitors.” Id.

More specifically, the FCC “adopt[ed] a rule to phase out all high-cost support received

by incumbent rate-of-return carriers over three years in study areas where an unsubsidized

competitor — or a combination of unsubsidized competitors — offers voice and

broadband service at” certain specified speeds “for 100 percent of the residential and

business locations in the incumbent’s study area.” Id. 494-95 (Order ¶ 283).

       In announcing these rules, the FCC “recognize[d] that there [we]re instances where

an unsubsidized competitor offer[ed] broadband and voice service to a significant

percentage of the customers in a particular study area (typically where customers are

concentrated in a town or other higher density sub-area), but not to the remaining

customers in the rest of the study area, and that continued support may be required to

enable the availability of supported voice services to those remaining customers.” Id. at

494 (Order ¶ 282). “In those cases,” the FCC concluded, “there should be a process to

determine appropriate support levels.” Id. “The FNPRM” thus sought “comment on the

methodology and data for determining overlap.” Id. at 495 (Order ¶ 284). The Order also

“direct[ed] the Wireline Competition Bureau to publish a finalized methodology for

determining areas of overlap.” Id.




                                             103
       Although petitioners complain that the Order “disregards entirely evidence that the

moment the rural carrier loses its USF support (because there is an unsubsidized

competitor offering to serve all its customers), consumers are at risk,” Pet’r Br. 3 at 55-

56, they fail to cite to any such evidence in the record. In any event, the purported “risks”

cited by the petitioners appear, at best, speculative, and, at worst, nonexistent. Indeed, as

the FCC notes in its response brief, it “made a very different predictive judgment”

regarding the effects of its decision: “that an ‘unsubsidized competitor’ — which, by

definition, is a facilities-based provider that is not eligible for support yet serves the

incumbent LEC’s entire geographic service area — would have an incentive to recover its

investment by continuing to serve every possible customer.” FCC Br. 3 at 60. We agree

with the FCC that this predictive judgment was “entirely reasonable.” Id.

       Further, as the FCC also points out, both it and the state commissions possess

authority under 47 U.S.C. § 214(e)(3) (“Designation of eligible telecommunications

carriers for unserved areas”) to order one or more carriers “to provide . . . service for [an]

unserved community or portion thereof.” And any carrier(s) ordered to do so must in turn

satisfy the requirements to be designated an ETC under § 214(e)(1). 47 U.S.C. §

214(e)(3). Thus, to the extent that a currently served area would become “unserved,” the

FCC possesses authority to remedy that situation.

       10. Did the FCC arbitrarily fail to explain how its new definition of
       supported telecommunications services took into account the four factors it
       was required to consider under § 254(c)(1)?




                                              104
       Petitioners next assert that “[s]ection 254(c)(1) of the Act requires the FCC, in

consultation with the [Federal-State] Joint Board [on Universal Service], to consider four

specific factors in establishing its definition of supported telecommunications services,

namely the extent to which such telecommunications services (a) are essential to

education, public health, or safety, (b) have been freely purchased by a substantial

majority of residential customers, (c) are actually being publicly deployed by

telecommunications carriers and (d) are in the public interest.”19 Pet’r Br. 3 at 56. “But,”

they argue, “with the exception of brief references . . . to the first, third and fourth factors,

the Order fails to discuss how its new ‘voice telephony service’ definition takes any of

these factors into account.” Id. (italics in original). “That failure,” they argue, “was

arbitrary.” Id.

       What petitioners ignore or overlook, however, is that the FCC’s new “voice

telephony service” definition was intended by the FCC merely “to simplify how [it]

describe[s] the various supported services that [it] historically has defined in functional

terms (e.g., voice grade access to the PSTN, access to emergency services) into a single

supported service.” JA at 411 (Order ¶ 62). In other words, the FCC was not, in adopting

its new “voice telephony service” definition, adding new services that would be




       19
        The header to this argument in petitioners’ opening brief makes reference to the
FCC’s “new definition of supported information services.” Pet’r Br. 3 at 56. But the
FCC clearly did not classify “voice telephony service” as an “information service.”

                                              105
“supported by Federal universal service support mechanisms.”20 47 U.S.C. § 254(c)(1).

Thus, under the wording of the statute, it was unnecessary for the FCC to review in detail,

or at all, the four factors listed § 254(c)(1)(A) through (D).

       11. Did the FCC arbitrarily disregard comments that the Order’s
       incremental USF support provisions would duplicate or undermine state-
       initiated plans for broadband deployment?

       Petitioners argue that, assuming the FCC possesses authority to impose its

broadband requirement, the FCC nevertheless failed to consider petitioner’s argument

“that it was arbitrary and discriminatory to distribute USF support only to carriers in

states who [have done] nothing to promote broadband, while carriers in states with

extensive broadband development commitments . . . get nothing to upgrade what they

have done.” Pet’r Br. 3 at 57.

       In the Order, the FCC noted that “[c]arriers have been steadily expanding their

broadband footprints, funded through a combination of support provided under current

mechanisms and other sources, and we expect such deployment will continue.” JA at 444

(Order ¶ 137). The FCC in turn stated that it “intend[ed] for CAF Phase I to enable

additional deployment beyond what carriers would otherwise undertake absent this

reform.” Id. In other words, the FCC explained, “CAF Phase I incremental support [wa]s

designed to provide an immediate boost to broadband deployment in areas that are

       20
         To be sure, the Order recognized interconnected VoIP as a form of “telephony
voice service.” But, as the Order noted, interconnected VoIP is simply a nontraditional
method that consumers are increasingly using to obtain voice services. JA at 412 (Order
¶ 63). Thus, the service at issue (i.e., “voice service”) is unchanged; only the delivery
method is new.

                                             106
unserved by any broadband provider.” Id. In a related footnote, the FCC stated that its

“distribution mechanism for CAF Phase I incremental funding [wa]s . . . designed to

identify the most expensive wire centers, and [that] the same characteristics that make it

expensive to provide voice service to a wire center . . . make it expensive to provide

broadband service to that wire center as well.” Id. (Order ¶ 137 n.220). Thus, the FCC’s

“interim mechanism [wa]s designed to provide support to carriers that serve areas where

[the FCC] expects that providing broadband service will require universal service

support.” Id.

       Although it is apparent that petitioners disagree with the policy judgments made by

the FCC regarding how to allocate CAF Phase I funds, we conclude that the FCC’s

decision was neither arbitrary nor capricious. In particular, it is clear from the above-

quoted provisions of the Order that the FCC was focused on promoting universal service

to the areas most in need, rather than allocating additional funds to areas that were already

served by broadband providers.

       12. Did the Order unlawfully make changes not contained in the FCC’s
       proposed rule that could not reasonably have been anticipated by
       commenters?

       Petitioners argue that “[k]ey provisions in the Order were not part of the proposed

rule” and that, “because Petitioners had no reasonable opportunity to comment on these

rule changes[,] the Order violated Sections 553(b) and (c) of the APA,” i.e., the APA’s

notice-and-comment requirements. Pet’r Br. 3 at 58. In particular, petitioners point to

“the ARC rules,” id., the “dual process for ICC revenue recovery for price cap carriers


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and rate-of-return carriers,” id. at 59, and the decision to “give[] price cap carriers an

exclusive right of first refusal . . . to receive $300 million in CAF Phase I funding for

unserved areas,” id.

       According to the FCC, however, this issue “was not presented to [it] either before

[it] issued the Order or on reconsideration once [it] allegedly acted without notice.” FCC

Br. 3 at 65. In their reply brief, petitioners do not dispute that they failed to present the

issue to the FCC. Instead, they assert that they were not required to present this issue to

the FCC because 47 U.S.C. § 405(a) does not apply to claims of lack of APA notice.

Pet’r Reply Br. 3 at 28. Alternatively, they argue, “this Court has denied the FCC’s

request to stay proceedings while reconsideration petitions are pending, . . . and the

FCC’s history of sitting on pending reconsideration petitions would have made a

reconsideration request futile anyway.” Id.

       As we have previously discussed, 47 U.S.C. § 405(a), which authorizes a party to

file with the FCC a motion for reconsideration of “an order, decision, report, or action” of

the FCC, essentially requires, in part, that the FCC be given an “opportunity to pass” on

an issue before the issue is raised in federal court. See Globalstar, 564 F.3d at 479. The

District of Columbia Circuit has “strictly construed § 405(a), holding that [it] generally

lack[s] jurisdiction to review arguments that have not first been presented to the [FCC].”

Id. at 483 (internal quotation marks omitted; brackets added). “Thus,” it has held, “even

when a petitioner has no reason to raise an argument until the FCC issues an order that

makes the issue relevant, the petitioner must file a petition for reconsideration with the


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[FCC] before it may seek judicial review.” Id. (internal quotation marks omitted;

brackets added). Notably, the District of Columbia Circuit has adhered to this strict

construction rule even in instances “[w]hen . . . a party complains of only a technical or

procedural mistake, such as an obvious violation of a specific APA requirement.” Id. at

484 (internal quotation marks omitted). In other words, even in cases involving only a

purported technical or procedural mistake, the District of Columbia Circuit “ha[s] insisted

that a party raise the precise claim before the [FCC].” Id. The court has explained that

“such rigid adherence to § 405(a) is necessary with respect to claims of procedural error

in order to give the agency the opportunity to consider the claim in the first instance and

to correct any error in the rulemaking process prior to judicial review.” Id.

       Although we are not bound by the District of Columbia Circuit’s decision in

Globalstar, we find its reasoning to be both sound and persuasive and we thus adopt it in

this case. In doing so, we note that petitioners have failed to cite to a single case in which

another circuit has interpreted § 405(a) differently. Further, petitioners have made no

attempt to refute the District of Columbia Circuit’s reasoning for adopting a strict

construction of § 405(a). Consequently, we conclude that petitioners have waived their

inadequate notice and comment claim by failing to present it at any time to the FCC.

       That leaves only petitioners’ arguments that it would have been futile for them to

file a petition for reconsideration because (a) this court refused the FCC’s request to stay

these proceedings while petitions for reconsideration were pending, and (b) the FCC has a

history of “sitting on pending reconsideration petitioners.” Pet’r Reply Br. 3 at 28. These


                                             109
arguments, however, are unsupported by the record. To begin with, a review of the

docket sheet in this case fails to confirm that the FCC filed a motion to stay these

proceedings. Indeed, the only motion for stay was filed by one of the petitioners (the

National Telecommunications Cooperative Association) seeking to delay implementation

of the Order. Notably, the FCC opposed that motion and this court ultimately denied it.

As for petitioners’ assertion that the FCC has a “history of sitting on pending

reconsideration petitions,” they cite to nothing in the record or elsewhere that would

confirm that assertion. Thus, both of petitioners’ assertions are baseless.

       B. Additional Universal Service Fund Issues Principal Brief

       We now proceed to address the issues raised by petitioners in Brief 4, entitled

“Additional Universal Service Fund Issues Principal Brief.”

       1. The FCC’s decision to limit USF support for broadband deployment to
       price-cap ILECs

       Petitioners argue that the FCC’s decision to “deny[] any USF support to

competitive carriers for broadband and reserving it exclusively to price cap ILECs was

arbitrary in two respects.” Pet’r Br. 4 at 7. “First,” they argue, “the FCC failed to explain

how a USF policy reserving USF support for incumbents and excluding competitive rural

carriers from USF support could be reconciled with the Act’s directive that local telecom

markets be open to competition.” Id. In petitioners’ view, “making CAF II support

accessible only to the largest LECs will serve only to preserve and advance their

dominance in the local telecom market.” Id. (internal quotation marks omitted).



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“Second,” petitioners argue, “the FCC departed without reasoned explanation from its

own USF competitive neutrality principle that ‘universal support mechanisms and rules

neither unfairly advantage or disadvantage one provider over another.’” Id. at 8 (quoting

Universal Service Order, 12 F.C.C.R. 8776, ¶¶ 46-48 (1997)). According to petitioners,

the FCC “could not logically claim that admittedly disparate treatment is acceptable as

long as it is not ‘unfair’ without addressing how it could possibly be fair to exclude

CETCs from USF support entirely and still preserve competitive neutrality.” Id.

       a) The relevant portions of the Order

       The Order “create[d] the Connect America Fund [(CAF)], which will ultimately

replace all existing high-cost support mechanisms.” JA at 400 (Order ¶ 20). The Order

summarized the CAF in the following manner:

       The CAF will help make broadband available to homes, businesses, and
       community anchor institutions in areas that do not, or would not otherwise,
       have broadband, including mobile voice and broadband networks in areas
       that do not, or would not otherwise, have mobile service, and broadband in
       the most remote areas of the nation. The CAF will also help facilitate our
       ICC reforms. The CAF will rely on incentive-based, market-driven
       policies, including competitive bidding, to distribute universal service funds
       as efficiently and effectively as possible.

Id.

       Because “[m]ore than 83 percent of the approximately 18 million Americans that

lack access to residential fixed broadband at or above the [FCC]’s broadband speed

benchmark live in areas served by price cap carriers—Bell Operating Companies and

other large and mid-sized carriers,” the Order stated that “the CAF will introduce



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targeted, efficient support for broadband in two phases.” Id. (Order ¶ 21). Phase I,

intended “[t]o spur immediate broadband buildout, . . . will provide additional funding for

price cap carriers to extend robust, scalable broadband to hundreds of thousands of

unserved Americans in early 2012.” Id. (Order ¶ 22). “To enable this [Phase I]

deployment, all existing legacy high-cost support to price cap carriers will be frozen and

an additional $300 million in CAF funding will be made available.” Id. Phase II of the

process “will use a combination of a forward-looking broadband cost model,” to be

developed by the FCC’s Wireline Competition Bureau, “and competitive bidding to

efficiently support deployment of networks providing both voice and broadband service

for five years.” Id. (Order ¶ 23). Phase II “of the CAF will distribute a total of up to $1.8

billion annually in support for areas with no unsubsidized broadband competitor.” Id. at

401 (Order ¶ 25). More specifically, “[i]n determining areas eligible for support, [the

FCC] will . . . exclude areas where an unsubsidized competitor offers broadband service

that meets the broadband performance requirements” outlined in the Order. Id. at 456

(Order ¶ 170). In areas that are not served by an unsubsidized competitor, “[e]ach

incumbent carrier will . . . be given an opportunity to accept, for each state it serves, the

public interest obligations associated with all the eligible census blocks in its territory, in

exchange for the total [cost] model-derived annual [CAF Phase II] support associated

with those census blocks, for a period of five years.” Id. (Order ¶ 171). “If the

incumbent accepts the state-level broadband commitment, it . . . shall be the presumptive

recipient of the model-derived support amount for the five-year CAF Phase II period.”


                                              112
Id. After that five-year CAF Phase II period, however, the FCC anticipates distributing

all support through a competitive bidding process. Id. at 459 (Order ¶ 178); FCC Br. 4 at

4.

       The Order also “transition[s] existing competitive ETC support to the CAF . . .

over a five-year period beginning July 1, 2012.” JA at 557 (Order ¶ 513). In doing so,

the Order found “that a five-year transition w[ould] be sufficient for competitive ETCs

that are currently receiving high-cost support to adjust and make necessary operational

changes to ensure that service is maintained during the transition.” Id. at 558 (Order ¶

513). The Order outlined a “phase-down” framework in which “[c]ompetitive ETC

support” would first “be frozen at the 2011 baseline” level, and then reduced in each of

the ensuing five years until the competitive ETCs received no support at all. Id. at 559

(Order ¶ 519).

       b) Relevant statutory provisions

       Sections 214(e)(1) and (2) of the Act, which address the “provision of universal

service,” provide as follows:

       (1) Eligible telecommunications carriers. A common carrier designated as
       an eligible telecommunications carrier under paragraph (2), (3), or (6) shall
       be eligible to receive universal service support in accordance with section
       254 [47 USCS § 254] and shall, throughout the service area for which the
       designation is received—
              (A) offer the services that are supported by Federal universal service
              support mechanisms under section 254(c) [47 USCS 254(c)], either
              using its own facilities or a combination of its own facilities and
              resale of another carrier’s services (including the services offered by
              another eligible telecommunications carrier); and



                                            113
               (B) advertise the availability of such services and the charges
               therefor using media of general distribution.
       (2) Designation of eligible telecommunications carriers. A State
       commission shall upon its own motion or upon request designate a common
       carrier that meets the requirements of paragraph (1) as an eligible
       telecommunications carrier for a service area designated by the State
       commission. Upon request and consistent with the public interest,
       convenience, and necessity, the State commission may, in the case of an
       area served by a rural telephone company, and shall, in the case of all other
       areas, designate more than one common carrier as an eligible
       telecommunications carrier for a service area designated by the State
       commission, so long as each additional requesting carrier meets the
       requirements of paragraph (1). Before designating an additional eligible
       telecommunications carrier for an area served by a rural telephone
       company, the State commission shall find that the designation is in the
       public interest.

47 U.S.C. §§ 214(e)(1), (2).

       Section 254(e), entitled “Universal service support,” provides as follows:

       After the date on which Commission regulations implementing this section
       take effect, only an eligible telecommunications carrier designated under
       section 214(e) [47 USCS § 214(e)] shall be eligible to receive specific
       Federal universal service support. A carrier that receives such support shall
       use that support only for the provision, maintenance, and upgrading of the
       facilities and services for which the support is intended. Any such support
       should be explicit and sufficient to achieve the purposes of this section.

47 U.S.C. § 254(e).

       c) Arguments and analysis

       Petitioners argue that “[t]he Act requires both that only designated ETCs may

receive universal service support, 47 U.S.C. §§ 214(e)(1) and 254(e), and that additional

qualified carriers shall be designated ETCs in the areas of non-rural carriers[,] 47 U.S.C.

§ 214(e)(2).” Pet’r Br. 4 at 9. “These provisions,” petitioners argue, “reflect the dual



                                            114
nature of the FCC’s obligations under the Act, namely that it must see to it that both

universal service and local competition are realized.” Id. at 9-10 (internal quotation

marks and italics omitted). But, they argue, the FCC “has rendered meaningless the

competition-promoting aspect of its dual statutory obligations” by “determining . . . that

only price cap carriers (the great majority of which are non-rural), but not their

competitors, are eligible for additional USF support over the next five years – while their

competitors’ existing support is phased out during that same time period.” Id. at 10.

       We conclude, however, that the FCC reasonably interpreted § 214(e)(2) as not

requiring it to offer USF support to all ETCs in a particular area. The Order itself notes,

and we agree, that “nothing in the statute compels that every party eligible for support

actually receives it.” JA at 507 (Order ¶ 318). Rather, both §§ 214(e) and 254(e) clearly

speak only in terms of “eligibility” for USF support. Further, as the Order reasonably

noted, “the statute’s goal is to expand availability of service to users,” id., “not to

subsidize competition through universal service in areas that are challenging for even one

provider to serve,” id. (Order ¶ 319).

       To be sure, the FCC, acting pursuant to 47 U.S.C. § 254(b)(7), adopted and

generally attempts to adhere to a principle of “competitive neutrality.” That principle

holds that “universal service support mechanisms . . . should not unfairly advantage nor

disadvantage one provider over another, and neither unfairly favor nor disfavor one

technology over another.” Id. at 458 (Order ¶ 176; internal quotation marks omitted).

But that is only one of the seven statutory principles outlined in 47 U.S.C. § 254(b)(1)-(7)


                                              115
that are intended to guide the FCC “in drafting policies to preserve and advance universal

service,” including the distribution of USF support. Qwest Comm’n Int’l, Inc. v. FCC,

398 F.3d 1222, 1234 (10th Cir. 2005) (Qwest Comm’n). As we have noted, the “FCC

may exercise its discretion to balance the principles against one another when they

conflict,” and “any particular principle can be trumped in the appropriate case.” Id.

(internal quotation marks omitted). The only caveat is that the FCC “may not depart from

[the principles] altogether to achieve some other goal.” Id. (internal quotation marks

omitted).

       Here, the FCC’s Order concluded that, for price cap areas that are not served by an

unsubsidized competitor,21 “adhering to strict competitive neutrality at the expense of

state-level commitment process would unreasonably frustrate achievement of the

universal service principles of ubiquitous and comparable broadband services and

promoting broadband deployment,” and would also “unduly elevate the interests of

competing providers over those of unserved and under-served consumers . . . as well as

. . . consumers and telecommunications providers who make payments to support the

Universal Service Fund.” JA at 459 (Order ¶ 178). In making that decision, the FCC

found that in price-cap areas that lack an unsubsidized competitor, the incumbent LEC is

likely to be the only provider with wireline facilities that are already deployed. The FCC

also found that incumbent LECs, in contrast to competitive LECs, “generally continue to



       21
         As previously noted, the Order eliminates all USF support in price-cap areas that
are served by an unsubsidized competitor.

                                            116
have carrier of last resort [“COLR”] obligations for voice services,” id. at 457-58 (Order

¶ 175), and therefore must maintain networks capable of “ensur[ing] service to consumers

who request it” throughout their designated service area, id. at 458-59 (Order ¶ 177

n.290). “[C]ompetitive LECs,” the FCC found, “typically have not built out their

networks subject to COLR obligations” and, as a result, typically serve much smaller

geographic areas. Id. at 692-93 (Order ¶ 864). As the FCC explains in its response brief,

it essentially “predicted that it could get more ‘bang for its buck’ by providing subsidies

to incumbent LECs to upgrade their extensive existing facilities than by providing

subsidies to competitive ETCs . . . to deploy entirely new facilities.” FCC Br. 4 at 9.

       Notably, the interim USF arrangement adopted by the Order for price-cap carriers

is not wholly dissimilar from the pre-Order balance of USF funding. According to the

FCC, “wireline competitive ETCs . . . received only $23 million of high-cost universal

service support annually prior to the Order.” FCC Br. 4 at 10. “By contrast, price cap

carriers received more than $1 billion annually.” Id. (citing Order ¶¶ 7, 158, 501, 503

n.834). “That differential,” the FCC argues, “underscores the fact that competitive ETCs

serve very few lines relative to the price cap carriers.” Id.

       Finally, it is true, as petitioners suggest, “that by far the largest amount—both in

absolute and percentage terms—of areas unserved by broadband are in the service areas

of the price cap companies.” Pet’r Br. 4 at 14. But the inference that petitioners draw

from that fact, i.e., that price cap carriers “have previously ignored” large portions of their

service areas, id. at 12, is not entirely accurate. In the Order, the FCC found that the price


                                             117
cap areas only “receive[d] approximately 25 percent of high-cost support” under the pre-

Order USF funding framework. JA at 452 (Order ¶ 158). The FCC thus inferred, and it

appears reasonably so, that the coverage gaps in price cap areas were a product of

inadequate funding, rather than price-cap carrier mismanagement or inattention.

       We thus conclude that the FCC reasonably exercised its discretion in adopting this

USF funding framework for price-cap areas, particularly since the framework applies

only during the interim period marked by CAF Phase II. See generally Rural Cellular

Ass’n v. FCC, 588 F.3d 1095, 1105 (D.C. Cir. 2009) (“The ‘arbitrary and capricious’

standard is particularly deferential in matters implicating predictive judgments and

interim regulations.”); id. at 1106 (holding that “the FCC should be given ‘substantial

deference’ when acting to impose interim regulations”).

       2. Did the FCC violate the mandatory referral duty imposed by 47 U.S.C. §
       410(c)?

       Petitioners next assert that the FCC violated the mandatory referral duty imposed

by 47 U.S.C. § 410(c) when it (a) “directly adopted new separations rules with new

formal separations methodologies,” Pet’r Br. 4 at 4, and (b) “made decisions that had as

much effect on separations as direct changes to the rules themselves, such as by ordering

the reduction of intrastate access rates (and thereby revenues) and replacing them in part

with a new interstate charge, without also adjusting the allocation of the underlying costs

between jurisdictions,” id. at 4-5.

       a) Jurisdictional separations under the Act



                                            118
       The 1934 Act “establishe[d], among other things, a system of dual state and

federal regulation over telephone service.” La. Pub. Serv. Comm’n v. FCC, 476 U.S.

355, 360 (1986). “In broad terms, the [1934] Act grant[ed] to the FCC the authority to

regulate ‘interstate and foreign commerce in wire and radio communication,’ 47 U.S.C. §

151, while expressly denying [the FCC] ‘jurisdiction with respect to . . . intrastate

communication service,’ 47 U.S.C. § 152(b).” Id. “[T]he realities of technology and

economics,” however, “belie . . . a clean parceling of responsibility” between the FCC

and the states. Id. Thus, “[t]he determination of whether any particular service or facility

is ‘interstate’ or ‘intrastate’ is not always a straightforward matter; any particular facility

or service often provides some combination of the two.” Puerto Rico Tel. Co. v. T-

Mobile Puerto Rico LLC, 678 F.3d 49, 64 (1st Cir. 2012).

       “Addressing this issue, the Act establishes a process designed to resolve what is

known as jurisdictional separations matters, by which process it may be determined what

portion of an asset is employed to produce or deliver interstate as opposed to intrastate

service.” Id. (internal quotation marks omitted; citing 47 U.S.C. §§ 221(c), 410(c)). To

begin with, Section 221(c) of the Act authorizes the FCC to “classify the property” of any

“carriers engaged in wire telephone communication” in order to “determine what property

of said carrier shall be considered as used in interstate or foreign telephone toll service.”

47 U.S.C. § 221(c). In turn, § 410(c) of the Act, 47 U.S.C. § 410(c), “creates a

‘Federal–State Joint Board,’ and provides that ‘[t]he Commission shall refer any

proceeding regarding the jurisdictional separation of common carrier property and


                                              119
expenses between interstate and intrastate operations . . . to a Federal–State Joint Board.’”

Puerto Rico Tel., 678 F.3d at 64 (quoting 47 U.S.C. § 410(c)). Although the Board is

composed of “three Commissioners of the Commission and . . . four State

commissioners,” the State commissioners are allowed only to participate in deliberations

and may not vote. 47 U.S.C. § 410(c). The Board “is charged with ‘prepar[ing] a

recommended decision for prompt review and action by the Commission.’” Puerto Rico

Tel., 678 F.3d at 64 (quoting § 410(c)).

       “[T]he separations process literally separates costs such as taxes and operating

expenses between interstate and intrastate service,” and thereby “facilitates the creation or

recognition of distinct spheres of regulation.” Louisiana Pub. Serv. Comm’n v. FCC, 476

U.S. 355, 375 (1986). According to the FCC’s web site, “[t]he primary purpose of

separations is to determine whether a local exchange carrier (LEC)’s cost of providing

regulated services are to be recovered through its rates for intrastate services or through

its rates for interstate services.” Jurisdictional Separations, FCC Encyclopedia,

http://www.fcc.gov/encyclopedia/jurisdictional-separations (last visited Dec. 16, 2013);

see State Corp. Comm’n of State of Kan. v. FCC, 787 F.2d 1421, 1423 (10th Cir. 1986)

(“The process of ‘jurisdictional separations’ determines how . . . costs are allocated for

ratemaking purposes.”). “The first step in the current separations process requires carriers

to apportion regulated costs among categories of plant and expenses.” Jurisdictional

Separations, FCC Encyclopedia, supra. “In the second step of the current separations

process, the costs in each category are apportioned between intrastate and interstate


                                             120
jurisdictions.” Id. “Once costs are separated between the jurisdictions, carriers can then

apportion their interstate regulated costs among their interexchange services and their

intrastate costs among intrastate services.” Id. Historically, one of the primary purposes

of the separations process has been to prevent incumbent LECs from recovering the same

costs in both the interstate and intrastate jurisdictions.

       b) The jurisdictional separations process is currently frozen

       In 2001, the FCC, acting pursuant to the recommendation of the Federal-State

Joint Board on Jurisdictional Separations, froze the jurisdictional separations process.

Although the freeze was intended originally to last only five years, it has since been

extended and remains currently in effect (until June 30, 2014). JA at 729 (Order ¶ 932)

(“The jurisdictional process, which has been frozen for some time, is currently the subject

of a referral to the Separations Joint Board.”). In its most recent order extending the

freeze, the FCC noted that the freeze remained appropriate to afford “Joint Board

members” the “significant time and effort” it will take “to educate themselves about the

impacts of . . . reforms” to intercarrier compensation and universal service “on

separations.” FCC Report and Order, FCC 12-49 at ¶13, p.5 (May 8, 2012).

       The FCC has expressly noted the freezing of the jurisdictional separations process

in its regulations. 47 C.F.R. § 36.3. And, notably, the Order stated that “[t]he

jurisdictional separations process . . . is currently the subject of a referral to the

Separations Joint Board.” JA at 729 (Order ¶ 932).

       c) Did the Order effectively impact or change jurisdictional separations?


                                               121
       Petitioners point to “a number of key changes” that the Order purportedly made

“to separations rules and policies” and that in turn necessitated referral to the Joint Board.

Pet’r Br. 4 at 17. To begin with, petitioners assert, the Order “made numerous and

substantial changes directly to [the FCC’s] Part 36 rules,”22 including “limit[ing] the

portion of nationwide loop cost expense that certain carriers could allocate to the

interstate jurisdiction,” “curtail[ing] carriers’ ability to receive ‘Safety net additive

support’ for new Telecommunications Plant in Service,” “limit[ing] the amount of

Corporate Operations Expenses carriers could allocate to the interstate jurisdiction,” and

“giving [FCC] staff[, i.e., the Wireline Competition Bureau,] discretion to publish a

schedule each year establishing new limits on unseparated loop cost allocated to the

interstate jurisdiction.” Id. Further, petitioners argue that the Order’s “changes to [the]

universal service rules affected [the FCC’s] separations rules, thereby [again] requiring

referral” to the Joint Board. Id. at 20. In particular, they note that the Order “capped the

level of High Cost Loop (‘HCL’) Fund limit the support carriers would receive for

various expenses, including capital and operating expenses,” id., and “reduced HCL

support for carriers whose intrastate end user local rates were below a local rate floor,” id.

at 20-21. These changes, petitioners assert, “essentially reassigned to the intrastate

jurisdiction for possible recovery from other sources” “[c]osts that were [originally]

assigned to the interstate jurisdiction for recovery from the Universal Service Fund.” Id.



       22
        The “Part 36 rules” referred to by petitioners are the jurisdictional separations
procedures outlined by the FCC in 47 C.F.R. Part 36.

                                              122
at 21. Petitioners also assert that the Order, “[t]hrough its intercarrier compensation

reform, . . . reduced and eliminated certain intrastate access charges over a transition

period.” Id. at 22. “For many carriers,” petitioners assert, “the intrastate access revenues

can represent a substantial portion of their existing intrastate revenues.” Id. “The [Order]

also,” petitioners assert, “allowed carriers to charge a new interstate-approved rate, the

Access Recovery Charge, and receive some limited support from the Connect America

Fund as a partial and limited means of addressing substantial lost revenue.” Id. But,

petitioners argue, “[t]he FCC failed to reclassify carrier access costs between jurisdictions

as a corollary to these actions,” thus leaving the states with these costs “in their intrastate

allocations for ratemaking.” Id. at 23.

       The FCC argues, in response, that there “was no . . . jurisdictional separation here:

the Order did not reallocate costs for any type of telecommunications plant or any

operating expense between the federal and the state jurisdictions.” FCC Br. 4 at 13

(italics omitted). Addressing the specific points raised by petitioners, the FCC asserts as

follows:

       • the only changes the Order made to Part 36 were to Subpart F thereof,
       which “contains universal service rules governing high-cost loop support
       (‘HCLS’) for rate-of-return carriers,” id., and those changes, which “simply
       adjusted the amount of universal service funding that is prospectively
       available for HCLS,” id. at 14 (emphasis in original), “have nothing to do
       with jurisdictional separations,” id.;

       • the amended rules eliminating Safety Net Additive Support and imposing
       new limits on recoverable corporate operations expenses, capital expenses,
       and operating expenses . . . merely prohibit carriers from obtaining
       universal service subsidies to cover certain costs already allocated to the


                                              123
       federal jurisdiction” and thus “did not change the jurisdictional allocation of
       costs,” id.;

       • the reductions in “universal service support and intercarrier compensation
       revenues” implemented by the Order do not constitute “formal changes to
       the allocation of costs” that would “require consultation with the Joint
       Board,” id. at 15;

       • “petitioners’ assertion that states have been ‘left’ with the responsibility to
       recover certain carrier access costs overlooks the Order’s explicit holding
       that ‘states will not be required to bear the burden of establishing and
       funding state recovery mechanisms for intrastate access reductions,’” id. at
       16 (quoting Order ¶ 795); and

       • “the Order established a federal recovery mechanism to ‘provide carriers
       with recovery for reductions to eligible interstate and intrastate [intercarrier
       compensation] revenue.’” id. (quoting Order ¶ 795), “[a]nd the backstop
       Total Cost and Earnings Review process permits a carrier to make a
       comprehensive cost showing to the FCC that additional recovery is needed
       to avoid a taking,” id. at 17.

       Although § 410(c) does not expressly indicate who determines whether a particular

FCC proceeding concerns “the jurisdictional separation of common carrier property and

expenses between interstate and intrastate operations,” the only reasonable conclusion

that can be drawn from the statute is that Congress afforded the FCC the authority and

discretion to make that determination (subject, of course, to judicial review). See

Crockett Tel. Co. v. FCC, 963 F.2d 1564, 1570 (D.C. Cir. 1992) (holding that “[n]o

procedural requirements are triggered [under § 410(c)] absent the Commission’s

discretionary choice to adopt a new formal separation guideline.”). And, consequently,

under the Administrative Procedure Act, the FCC’s determination as to whether a

particular proceeding involved “jurisdictional separation” issues could be held unlawful



                                             124
and set aside only it if was found by a court to be “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

       In this case, we are not persuaded that the FCC, in determining that the Order did

not involve jurisdictional separations issues, has violated that deferential standard. Quite

clearly, the purpose of the FNPRM and the Order was not “to adopt a new formal

separation guideline” or methodology. Crockett, 963 F.2d at 1570. Rather, as the Order

itself notes, the purpose was to “comprehensively reform[] and modernize[] the universal

service and intercarrier compensation systems to ensure that robust, affordable voice and

broadband service . . . [we]re available to Americans throughout the nation.” JA at 394

(Order ¶ 1). Relatedly, the Order makes no changes to the FCC’s “formal separation

guideline[s].” Crockett, 963 F.2d at 1570; see Southwestern Bell Tel. Co. v. FCC, 153

F.3d 523, 556 (D.C. Cir. 1992) (holding that FCC order deciding “that federal support for

universal service should be applied to satisfy the interstate revenue requirement” did not

involve a jurisdictional separations issue that required referral to the joint board; “the

FCC was not allocating jointly used plant, nor was it changing the proportions for

allocating jointly used plant to interstate and intrastate jurisdictions.”). Consequently, we

conclude that the FCC did not violate § 410(c) in adopting the Order.

       3. Did the FCC irrationally refuse to modify service obligations for
       carriers to whom it denied USF support?

       Petitioners argue that, even assuming it was proper for the FCC to eliminate USF

support for all carriers serving any territory that is also served by an unsubsidized



                                             125
competitor, the FCC nevertheless erred “by refusing to relieve Eligible

Telecommunications Carriers (ETCs) of their ongoing duty to serve all comers without

USF support.” Pet’r Br. 4 at 24. According to petitioners, the “statutory structure” of 47

U.S.C. § 214(e) “leaves no room for doubt that Congress intended eligibility for support

and the duty to serve to be two sides of the same coin.” Id. at 26.

        a) The requirements imposed by § 214(e)

        As noted by petitioners, § 214(e)(1) of the Act imposes certain requirements on

ETCs:

        (1) Eligible telecommunications carriers. A common carrier designated as
        an eligible telecommunications carrier under paragraph (2), (3), or (6) shall
        be eligible to receive universal service support in accordance with section
        254 [47 USCS § 254] and shall, throughout the service area for which the
        designation is received—
               (A) offer the services that are supported by Federal universal service
               support mechanisms under section 254(c) [47 USCS § 254(c)], either
               using its own facilities or a combination of its own facilities and
               resale of another carrier’s services . . . ; and
               (B) advertise the availability of such services and the charges
               therefor using media of general distribution.

47 U.S.C. § 214(e)(1).

        b) Relevant portions of the Order

        In the Order, the FCC found that “USF support should be directed to areas where

providers would not deploy and maintain network facilities absent a USF subsidy, and not

in areas where unsubsidized facilities-based providers already are competing for

customers.” JA at 494 (Order ¶ 281; internal quotation marks omitted). In turn, the FCC,

in a portion of the Order entitled “Elimination of Support in Areas with 100 Percent


                                            126
Overlap,” id. at 493, outlined certain changes to the USF funding system. In the first

paragraph of that section, entitled “Background,” the FCC explained that “in many areas

of the country, universal service provides more support than necessary to achieve [the

FCC’s] goals by subsidizing a competitor to a voice and broadband provider that is

offering service without governmental assistance.” Id. (Order ¶ 280; internal quotation

marks omitted). In the ensuing paragraphs, entitled “Discussion,” the FCC “adopt[ed] a

rule to eliminate universal service support where an unsubsidized competitor — or a

combination of unsubsidized competitors — offers voice and broadband service

throughout an incumbent carrier’s study area, and [sought] comment on a process to

reduce support where such an unsubsidized competitor offers voice and broadband

service to a substantial majority, but not 100 percent of the study area.” Id. at 494 (Order

¶ 281). The FCC thus “exclude[d] from the CAF areas that are overlapped by an

unsubsidized competitor.” Id. The FCC also announced its intent to discontinue its

“current levels of high-cost support to rate-of-return companies where there is overlap

with one or more unsubsidized competitors.” Id. More specifically, the FCC “adopt[ed]

a rule to phase out all high-cost support received by incumbent rate-of-return carriers over

three years in study areas where an unsubsidized competitor — or a combination of

unsubsidized competitors — offers voice and broadband service at” certain specified




                                            127
speeds “for 100 percent of the residential and business locations in the incumbent’s study

area.”23 Id. at 494-95 (Order ¶ 283).

       In announcing these rules, the FCC “recognize[d] that there [we]re instances where

an unsubsidized competitor offer[ed] broadband and voice service to a significant

percentage of the customers in a particular study area (typically where customers are

concentrated in a town or other higher density sub-area), but not to the remaining

customers in the rest of the study area, and that continued support may be required to

enable the availability of supported voice services to those remaining customers.” Id. at

494 (Order ¶ 282). “In those cases,” the FCC concluded, “there should be a process to

determine appropriate support levels.” Id. “The FNPRM” thus sought “comment on the

methodology and data for determining overlap.” Id. at 495 (Order ¶ 284). And the Order

“direct[ed] the Wireline Competition Bureau to publish a finalized methodology for

determining areas of overlap.” Id.

       The Order also recognized the possibility that ETCs might be required to provide

service in areas where they no longer receive support, or receive reduced support. As a

result, in the attached FNPRM, the FCC sought comment on whether the reductions in

USF support “should be accompanied by relaxation of those carriers’ section 214(e)(1)

voice service obligations in some cases.” Id. at 790 (Order ¶ 1095); see id. at 791 (Order

¶ 1096). Although petitioners contend “[i]t was arbitrary, capricious, unreasonable and

       23
         Likewise, in areas served by price cap carriers, a new rule eliminates high-cost
support in a census block only where an unsubsidized competitor already serves that
census block. JA at 456 (Order ¶¶ 170-71).

                                            128
contrary to law for the [FCC] to maintain the [214(e)] service obligations while

eliminating support,” Pet’r Br. 4 at 27, they make no attempt to explain precisely how it

was arbitrary or capricious. And a reading of the Order refutes that assertion; clearly, the

FCC is taking a reasoned approach to the situation by seeking comment regarding the

possible relaxation of service obligations. As for their assertion that the FCC is acting

“contrary to law,” petitioners argue simply that “Congress clearly intended the[]

obligations and benefits [outlined in § 214(e)] to be complementary.” Id. But that

argument rests on the faulty assumption that being designated an ETC under § 214(e)

entitles a carrier to USF funds. As we have explained, ETC designation simply makes a

carrier eligible for USF. Nothing in the language of § 214(e) entitles an ETC to USF

funding.

       Finally, as the FCC notes in its response, once it finalizes its rules following

comment and further order, ETCs will “have avenues to seek relief should their

continuing section 214(e)(1) obligations prove too onerous.” FCC Br. 4 at 21. In

particular, the Order expressly authorizes “any carrier negatively affected by the universal

service reforms . . . to file a petition for waiver that clearly demonstrates that good cause

exists for exempting the carrier from some or all of those reforms, and that waiver is

necessary and in the public interest to ensure that consumers in the area continue to

receive voice service.” JA at 566 (Order ¶ 539). To be sure, the Order cautions that the

FCC will “subject such requests to a rigorous, thorough and searching review comparable

to a total company earnings review,” and will “take into account not only all revenues


                                             129
derived from network facilities that are supported by universal service but also revenues

derived from unregulated and unsupported services as well.” Id. at 567 (Order ¶ 540).

But the Order states that “[w]aiver w[ill] be warranted where an ETC can demonstrate

that, without additional universal service funding, its support would not be sufficient to

achieve the purposes of [section 254 of the Act].” Id. (internal quotation marks omitted;

brackets in original).

       c) The FCC’s notice of supplemental authority

       On November 5, 2013, the FCC filed with this court a Rule 28(j) letter advising

that on October 31, 2013, the FCC’s Wireline Competition Bureau (WCB) released an

order that allows ETCs to challenge a price-cap ILEC’s exclusive right to high-cost

support. Connect America Fund, Report and Order, WC Docket 10-90 (rel. Oct. 31,

2013) (WCB Order). More specifically, the WCB Order states, in pertinent part, as

follows:

       The Commission directed the [WCB] to exclude areas with unsubsidized
       competitors from Phase II funding. The codified rule states that an
       unsubsidized competitor is one that “does not receive high-cost support.”
       The Commission’s intent in adopting this rule was to preclude support to
       areas where voice and broadband is available without burdening the federal
       support mechanisms. We will presume that any recipient of high-cost
       support at the time the challenge process is conducted does not meet the
       literal terms of the definition, but will entertain challenges to that
       presumption from any competitive eligible telecommunications carrier that
       otherwise meets or exceeds the performance obligations established herein
       and whose high-cost support is scheduled to be eliminated during the five-
       year term of Phase II. This will provide an opportunity for the Commission
       to consider whether to waive application of the “unsubsidized” element of
       the unsubsidized competitor definition in situations that would result in



                                            130
       Phase II support being used to overbuild an existing broadband-capable
       network.

WCB Order ¶ 41, p.18.

       We agree with the FCC that this portion of the WCB Order further serves to

undercut petitioners’ argument that the Order violates the FCC’s principle of competitive

neutrality. Specifically, “[a] competitive ETC that successfully utilizes the challenge

process will not be forced to compete against an ILEC whose service in the same areas is

subsidized by federal universal service funding.” FCC Rule 28(j) Letter at 2.

       4. Is the Order, as applied to Allband and similarly-situated small rural
       carriers, unconstitutional under due process principles and as a bill of
       attainder, and/or does it violate the Act, principles of estoppel and contract
       law?

       The fourth and final issue of Brief 4 is devoted exclusively to issues raised by

Allband Communications Cooperative (Allband).

       a) Background information regarding Allband

       Allband is a communications cooperative created in 2003 to offer communications

services to residents in four rural contiguous counties in northern Michigan. In 2005, the

FCC approved Allband as an ILEC. Allband, in turn, obtained $8 million in loans from

the USDA Rural Utility Service (RUS), premised upon receipt of USF revenues as

security. With those loan proceeds, Allband constructed an advanced communications

network and began offering partial service in late 2005. By 2010, Allband had completed

its network and was offering services to the residents in its rural exchange area.




                                            131
According to petitioners, “[t]he annual USF funds provided to Allband comprise the bulk

of the revenues necessary to make payments on Allband’s RUS loans.” Pet’r Br. 4 at 30.

       Shortly after the Order at issue was released, Allband, acting pursuant to the

authority granted to it in the Order, filed a petition for waiver of both the $250 per-line

cap and the benchmarking rule adopted in the Order. FCC Br. 4 at 24. The FCC’s

Wireline Competition Bureau (WCB) considered the petition and found “good cause to

grant [Allband] a waiver of [the $250 per-line cap] for three years.” Id. (internal

quotation marks omitted). The WCB advised Allband, however, that it was expected “to

actively pursue any and all cost-cutting and revenue generating measures in order to

reduce its dependency on federal high-cost USF support.” Id. (internal quotation marks

omitted). The WCB also expressly noted Allband’s willingness to work with RUS to

restructure its loan terms. But the WCB did not grant Allband the unlimited waiver

Allband had requested. Instead, the WCB concluded it would reassess Allband’s

financial condition to determine whether a waiver remained necessary in the future.

       Allband sought full Commission review of the WCB’s Order and has asked the

FCC to waive both the $250 per-line cap and the regression rule until 2026, when Allband

will have repaid its loan from RUS. Allband’s petition remains pending before the FCC.

       b) The issues raised by Allband in this appeal

       Allband argues that the Order violates its constitutional rights in several respects.

Pet’r Br. 4 at 31. In support, Allband begins by asserting that it “fully meets all of the

provisions and purposes of the 1996 Act, such as the USF provisions of Section 254(b).”


                                             132
Id. In turn, Allband argues that the Order “contravenes the provisions[] and . . . goals and

objectives of Congress under Section 254(b)(5) and 254(d) of the Act, requiring ‘specific,

predictable and sufficient . . . mechanisms to preserve and advance universal service’; and

under Section 254(e) which requires that universal service support provided to ETC

Providers ‘should be explicit and sufficient to achieve the purposes of this section.’” Id.

(quoting statutes). Continuing, Allband argues that the Order “imposes a drastic

reduction in the per-line USF funding support to be provided some small rural companies

such as Allband, and also established a ‘benchmark regression rule’ which purports to

impose limitations on capital and operations costs reimbursable from the USF.” Id. at 32.

Allband argues that this benchmark regression rule “is . . . hopelessly vague,

unascertainable, uncertain, and arbitrary as applied to small companies such as Allband.”

Id.

       Ultimately, Allband argues that the Order, as applied to it, is “unconstitutional

under the Due Process clause because (i) it imposes a retroactive reversal of Commission

orders and USF program commitments upon which Allband (and the RUS) have relied in

establishing Allband and in incurring capital costs, . . . and (ii) because the expense

reimbursement limitations under the ever-changeable ‘benchmark regression rule,’ on a

going-forward basis, are hopelessly vague and unascertainable.” Id. “The Order thus

fails,” Allband argues, “to meet the holdings and reasoning stated in Federal

Communications Commission, et al. v. Fox Television Stations, Inc., 132 S.Ct. 2307

(2012).” Pet’r Br. 4 at 32-33 (italics in original omitted).


                                             133
       We readily reject Allband’s due process claim. To begin with, it is questionable

whether Allband has supported the due process claim with sufficient reasoned argument.

At best, Allband mentions the term “due process” and cites to a single case in support,

i.e., Fox Television, without explaining its relevance. In any event, our own independent

review of that case persuades us it is inapposite. At issue in Fox Television was whether

the FCC had violated the due process rights of two television networks by failing to give

them fair notice that, in contrast to a prior FCC policy, a fleeting expletive or a fleeting

shot of nudity could be actionably indecent. In addressing this issue, the Supreme Court

noted that “[a] fundamental principle in our legal system is that laws which regulate

persons or entities must give fair notice of conduct that is forbidden or required.” 132

S.Ct. at 2317. In turn, the Court held that “[t]his requirement of clarity in regulation is

essential to the protections provided by the Due Process Clause of the Fifth Amendment.”

Id. In the case at hand, there is no basis for us to conclude that the FCC failed to give

petitioners, including Allband, adequate notice of its intent or planned regulations.

Indeed, the FCC issued a NPRM and allowed petitioners to file comments thereto. Thus,

in short, there is no lack of fair notice in this case. Relatedly, it is unclear precisely what

“process” Allband is claiming it was deprived of. Notably, Allband was given notice and

an opportunity to comment, like all other carriers, and was also allowed to file a petition

for waiver from certain of the Order’s new USF rules. And, as noted, the FCC has

granted Allband temporary relief from certain of those rules.




                                              134
       Allband also argues that the Order is “unconstitutional as applied to Allband under

the Fifth Amendment Due Process clause” because it “would effect a confiscation of

Allband’s (and its customer-members’ property), and will financially destroy

commitments made by Allband to its employees, vendors, and entities providing credit

and loans.” Pet’r Br. 4 at 33. The only cases that Allband cites in support of its claim,

however, are distinguishable. For example, in Bluefield Waterworks & Improvement Co.

v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679, 690 (1923), the Supreme Court held that

public utility rates established by a state commission that “are not sufficient to yield a

reasonable return on the value of the property used at the time it is being used to render

the service are unjust, unreasonable and confiscatory, and their enforcement deprives the

public utility company of its property in violation of the Fourteenth Amendment.” In the

instant case, in contrast, Allband is not a public utility, and, in any event, the Order is not

reasonably comparable to a rate-setting order issued by a state utility commission.

Moreover, as the FCC notes in its response brief, any takings-type claim is not yet ripe

because the FCC has exempted Allband for a period of three years from the USF reforms

outlined in the Order, and has also afforded Allband the opportunity to seek an additional

waiver at the end of that time period.

       Allband next argues that the Order “constitutes an unconstitutional Bill of

Attainder.” Pet’r Br. 4 at 34. That is because, Allband argues, the “benchmark regression

rule” adopted in the Order “threatens to reduce reimbursement funding from the USF,




                                              135
crippling Allband and a small class of rural carriers which relied on the 1996 Act’s USF.”

Id.

       Allband’s argument, however, is clearly baseless. According to the Supreme

Court, “the Bill of Attainder Clause was intended . . . as an implementation of the

separation of powers, a general safeguard against legislative exercise of the judicial

function, or more simply-trial by legislature.” United States v. Brown, 381 U.S. 437, 442

(1965). Thus, “[a] bill of attainder is a legislative act which inflicts punishment without a

judicial trial.” United States v. Lovett, 328 U.S. 303, 315 (1946) (internal quotation

marks omitted). In this case, there has been no legislative act, let alone one that punishes

Allband without a judicial trial.24 Consequently, Allband has failed to establish the

existence of an unconstitutional Bill of Attainder.

       In addition to these constitutional arguments, Allband also asserts several other

non-constitutional claims. To begin with, Allband argues that the Order “is irrational to

the extreme” and “should be reversed as applied to Allband based upon estoppel

principles.” Pet’r Br. 4 at 35. Notably, however, Allband fails to flesh out this estoppel

claim by citing any case law or outlining the essential elements of an estoppel claim.

Consequently, the claim is inadequately briefed. In any event, as the FCC notes in its

response brief, it never represented to Allband that USF funding would remain constant




       24
        Presumably, Allband would have us treat the Order as a legislative act. Even if
we were to do so, there clearly has been no “punishment” of Allband that would render
the Order an unconstitutional bill of attainder.

                                            136
for the duration of Allband’s loan with RUS, or, for that matter, any other set length of

time. Thus, there is no basis for an estoppel claim.

       Relatedly, Allband argues that the Order “arbitrarily failed to consider Allband’s

assertions that the USF funding should not be reduced as applied to already invested

capital and expenses incurred in reliance on the USF, and at most, should apply only to

prospective investment incurred after the Order.” Id. at 36 (italics omitted). And,

Allband further argues, the Order “will cause a prompt default by Allband of its RUS loan

contracts and obligations,” and “wholly ignores that the pre-Order USF revenue stream

was relied upon by both Allband and the RUS to pay back the RUS loans.” Id. at 37. As

we have noted, however, the FCC, in its pre-Order USF funding system, never promised

Allband or any other carriers that they would continue to receive USF funding

indefinitely. And, in any event, the FCC has effectively considered Allband’s unique

situation by granting Allband’s petition for waiver and authorizing Allband to seek an

additional waiver at the end of three years.

       Allband next argues that the Order is “arbitrary because it fails to recognize that

the destructive impacts upon Allband (or similar rural small carriers) are wholly

unnecessary to achieve the stated goals or objectives of the Order.” Pet’r Br. 4 at 35

(italics omitted). In support, Allband argues that there is “no evidence of waste or

insufficiency attributable to [it].” Id. at 36. But, notwithstanding the fact that Allband

may operate efficiently (and Allband cites to no evidence in the record on this point), the

Order found that there were systemic inefficiencies in the existing USF funding system


                                               137
that required a complete alteration of that system. Notably, Allband does not dispute the

Order’s findings on that point. Further, the purported “destructive effects” on Allband

have clearly been mitigated, at least in the short term, by the FCC’s grant of Allband’s

petition for waiver. Consequently, there is no merit to this claim.

       Lastly, Allband argues that the Order is “unlawful and beyond the jurisdiction of

the FCC because it intrudes much too far into the economic market place” and “serves to

pick ‘winners and losers’ among companies.” Id. at 37. Allband, however, fails to cite to

a single case or statute in support of its claim. Consequently, we deem the claim

inadequately briefed and thus waived. See Adler v. Wal-Mart Stores, Inc., 144 F.3d 664,

679 (10th Cir. 1998).

       C. Wireless Carrier Universal Service Fund Principal Brief

       1. Does the FCC lack authority to redirect USF support to broadband or to
       regulate broadband?

       In the first issue of Brief 5, petitioners assert that the FCC lacks statutory authority

to redirect USF support to broadband or to regulate broadband. The specific arguments

offered by petitioners in support are, in large part, identical to those raised in the first

issue of Brief 3. We therefore reject those arguments for the reasons we have outlined

above. Petitioners in Brief 5 have also asserted that the Order’s broadband condition is

contrary to three additional provisions of the Act. We thus turn to address that argument.




                                              138
       a) Does the Order violate Congressional intent as expressed in 47 U.S.C.
       §§ 153(51), 214(e)(1) and 254?

       Petitioners argue that the Order’s broadband condition violates Congressional

intent as expressed in 47 U.S.C. §§ 153(51), 214(e)(1) and 254. Section 153(51) defines

the term “Telecommunications carrier” to mean:

       [A]ny provider of telecommunications services, except that such term does
       not include aggregators of telecommunications services (as defined in
       section 226 [47 USCS §226]). A telecommunications carrier shall be
       treated as a common carrier under this Act only to the extent that it is
       engaged in providing telecommunications services, except that the
       Commission shall determine whether the provision of fixed and mobile
       satellite service shall be treated as common carriage.

47 U.S.C. § 153(51).

       The terms “common carrier,” “telecommunications,” and “telecommunications

service,” all of which are used in the above-quoted definition, are themselves defined as

follows:

       (11) Common carrier. The term “common carrier” or “carrier” means any
       person engaged as a common carrier for hire, in interstate or foreign
       communication by wire or radio or in interstate or foreign radio
       transmission of energy, except where reference is made to common carriers
       not subject to this Act; but a person engaged in radio broadcasting shall not,
       insofar as such person is so engaged, be deemed a common carrier.
       ***
       (50) Telecommunications. The term “telecommunications” means the
       transmission, between or among points specified by the user, of information
       of the user’s choosing, without change in the form or content of the
       information as sent and received.
       ***
       (53) Telecommunications service. The term “telecommunications service”
       means the offering of telecommunications for a fee directly to the public . . .
       regardless of the facilities used.



                                            139
47 U.S.C. §§ 153(11), (50), (53).

       Title II of the Act imposes certain specific requirements on “common carriers” in

their provision of “telecommunications services.” Because telephone service is quite

clearly a “telecommunications service,” entities that provide telephone service are treated

and regulated as common carriers under Title II. Broadband internet service, however,

has been treated differently by the FCC. In 2002, the FCC determined that cable

broadband service was not a “telecommunications service” subject to regulation under

Title II, but rather was an “information service” subject only to the FCC’s ancillary

authority under Title I of the Act.

       All of which leads to petitioners’ argument that § 153(51)’s definition of

“telecommunications carrier” “clearly prohibits the FCC from treating telecom carriers as

common carriers under Title II when they are engaged in providing an information

service.” Pet’r Br. 5 at 14. In other words, petitioners argue, the statement in § 153(51)

that “[a] telecommunications carrier shall be treated as a common carrier under this Act

only to the extent that it is engaged in providing telecommunications services,” “places a

statutory limitation on the FCC’s jurisdiction to regulate.” Id. at 13.

       Relatedly, petitioners argue that when 47 U.S.C. §§ 153(51), 214(e)(1) and 254 are

considered together, the only conclusion that can be drawn is “that a common-carrier

ETC shall be eligible to receive USF support only to the extent it is engaged in providing

telecom services on a common-carrier basis.” Pet’r Br. 5 at 17. And in turn, petitioners

argue that Congress, “[b]y specifying [in 47 U.S.C. § 214(e)(1)] that only a common


                                             140
carrier can be an ETC [(eligible telecommunications carrier)], . . . imposed the

requirement that an ETC provide USF-supported telecom services on a common-carrier

basis.” Id. at 16. In short, petitioners argue, the wording of the relevant statutes clearly

indicates that (a) USF funding may only be given to ETCs providing telecommunications

services, and (b) ETCs that receive USF funding may use that funding only for the

provision of telecommunications services. Consequently, they argue, the FCC lacked

statutory authority (which they refer to in their brief as “jurisdiction”) to require ETCs to

offer broadband service upon reasonable request.

       We conclude, however, that the FCC has the better of the argument. As the FCC

notes in its response brief, petitioners’ arguments “fail to acknowledge that carriers use

the same facilities to provide both telecommunications and information services [i.e.,

broadband].” FCC Br. 5 at 16-17. Indeed, the FCC asserts, at the present time “more

than 800 incumbent LECs voluntarily offer broadband subject to common carrier

regulation under Title II of the Act.” Id. at 21. Consequently, petitioners’ reading of the

Act “would prohibit universal service support for any dual-use facilities — despite the

fact that hundreds of carriers, including petitioners, expended support on such facilities

under the FCC’s prior ‘no barriers’ policy.” Id. at 17-18 (citing Order ¶¶ 64-65, 308).

       Petitioners’ suggested reading of the Act also ignores 47 U.S.C. § 254(b), which,

as we have already discussed, outlines a set of “Universal service principles” that the

FCC must follow in establishing “policies for the preservation and advancement of

universal service.” Notably, these principles include providing “[a]ccess to advanced


                                             141
telecommunications and information services . . . in all regions of the Nation,” 47 U.S.C.

§ 254(b)(2), and ensuring that “[c]onsumers in all regions of the Nation, including low-

income consumers and those in rural, insular, and high cost areas, . . . have access to

telecommunications and information services,” 47 U.S.C. § 254(b)(3).

       Thus, considering the Act as a whole, and in context of the realities of existing

technology, we agree with the FCC that it was entirely reasonable for it to conclude that,

“[s]o long as a provider offers some service on a common carrier basis, it may be eligible

for universal service support as an ETC under sections 214(e) and 254(e), even if it offers

other services - including ‘information services’ like broadband Internet access- on a non-

common carrier basis.” FCC Br. 5 at 19.

       Finally, it is clear that the Order does not regulate broadband internet service or

providers. Rather, it merely imposes broadband-related conditions on those ETCs that

voluntarily seek to participate in the USF funding scheme. As the FCC notes, a provider

of telecommunications services is not required to seek USF funding. But if it does so, it

clearly can be subjected to certain conditions that the FCC may choose to attach to the

funding. As the FCC notes, “[a] funding condition, like the broadband public interest

obligation, is unlike common carrier regulation because providers voluntarily assume the

condition in exchange for support and ‘retain[] the ability to opt out of [the condition]

entirely by declining . . . federal universal service subsidies.’” Id. at 22 (quoting WWC

Holding Co. v. Sopkin, 488 F.3d 1262, 1274 (10th Cir. 2007)).




                                             142
       2. Must the USF portions of the Order be vacated?

       Petitioners argue, relatedly, that the USF portions of the Order must be vacated.

Pet’r Br. 5 at 31. But that argument is dependent upon a ruling in petitioners’ favor on

their claim that the Order’s broadband condition is contrary to statutory authority.

Because we have rejected this latter claim, there is no basis for vacating the USF portions

of the Order.

       3. Did the FCC act arbitrarily and capriciously in reserving CAF II
       support for ILECs?

       Petitioners next argue that, even if the FCC possessed statutory authority to impose

the broadband condition, it acted arbitrarily and capriciously in “mak[ing] its CAF II

support program the virtual preserve of the big ILEC price-cap carriers.” Pet’r Br. 5 at

33. This issue is identical to the first issue raised in Brief 4 (“Additional Universal

Service Fund Issues Principal Brief”) that we rejected above.

       4. Did the FCC act arbitrarily and capriciously in repealing the identical
       support rule and adopting a single-winner reverse auction?

       Petitioners challenge the FCC’s decision to “[a]bandon[] its practice of providing

USF support to multiple CETCs in an area” and instead “disburse Mobility I support to

only one CETC per area,” i.e., “the winning bidder in a reverse auction.” Id. at 36.

       a) The Order’s plan for disbursement of the Mobility Fund

       “In 2008, the [FCC] concluded that rapid growth in support to competitive ETCs

as a result of the identical support rule threatened the sustainability of the universal

service fund.” JA at 499 (Order ¶ 296). The FCC also found at that time “that providing


                                             143
the same per-line support amount to competitive ETCs had the consequence of

encouraging wireless competitive ETCs to supplement or duplicate existing services

while offering little incentive to maintain or expand investment in unserved or

underserved areas.” Id. Accordingly, “the [FCC] adopted an interim state-by-state cap

on high-cost universal support for competitive ETCs, . . . pending comprehensive high-

cost universal service reform.” Id.

       In the Order, the FCC “establish[ed] the Mobility Fund,” id. at 500 (Order ¶ 299),

to “secure funding for mobility directly, rather than as a side-effect of the competitive

ETC system, while rationalizing how universal service funding is provided to ensure that

it is cost-effective and targeted to areas that require public funding to receive the benefits

of mobility,” id. at 499-500 (Order ¶ 298). “The first phase of the Mobility Fund will

provide one-time support through a reverse auction, with a total budget of $300 million,

and will provide the [FCC] with experience in running reverse auctions for universal

service support.” Id. at 500 (Order ¶ 299). “The second phase of the Mobility Fund will

provide ongoing support for mobile service . . . with an annual budget of $500 million.”

Id. “This dedicated support for mobile service supplements the other competitive bidding

mechanisms under the Connect America Fund.” Id.

       According to the FCC’s response brief, it “completed the Mobility Fund Phase I

Auction” on September 27, 2012. FCC Br. 5 at 32. “Based on this auction, thirty-three

winning bidders became eligible to receive a total of $299,998,632 in one-time universal

service support to provide third-generation or better mobile voice and broadband services


                                             144
covering up to 83,494 road miles in 795 biddable geographic areas located in thirty-one

states and one territory.” Id.

       b) Petitioners’ specific challenges to the Mobility Fund disbursement plan

       In attacking the Order’s Mobility Fund Phase I plan, petitioners begin by arguing

that “the FCC ignored its prior policy choice of ensuring competitively-neutral funding.”

Pet’r Br. 5 at 37. But as the FCC correctly notes, the Order expressly discussed and

ultimately “eliminate[d] the [pre-existing] identical support rule.” JA at 554 (Order ¶

502). The “identical support rule,” the Order noted, “provide[d] competitive ETCs the

same per-line amount of high-cost universal service support as the incumbent local

exchange carrier serving the same area.” Id. at 552 (Order ¶ 498). The Order further

noted that the “rule’s primary role ha[d] been to support mobile services, [even though]

the [FCC] did not identify that purpose when it adopted the rule.” Id. For example, the

Order noted, “the largest competitive ETC recipient by holding company in 2010 was

AT&T, which received $289 million,” and in 2011, “about $611 million went to one of

the four national wireless providers.” Id. at 553 (Order ¶ 501). The Order concluded that

the “rule fail[ed] to efficiently target support where it [wa]s needed,” and thus “ha[d] not

functioned as intended.”25 Id. at 554 (Order ¶ 502). Thus, rather than “ignoring” the pre-

existing identical support rule as suggested by petitioners, the Order expressly reviewed

and rejected it.



       25
         The Order explains in much greater detail the inefficiencies that resulted from
the identical support rule. JA at 555 (Order ¶¶ 502-506).

                                             145
       Petitioners next argue that “[t]he FCC did not explain how its goal [of providing

appropriate levels of support for the efficient deployment of mobile services] was based

on any of the § 254(b) principles insofar as broadband services are ineligible for USF

support.” Pet’r Br. 5 at 37. According to petitioners, “[t]he FCC was obliged to provide

a detailed explanation of how its ‘balancing calculus’ of the statutory principles led it to

replace the rule with the Mobility I auction.” Id. at 38.

       This argument is flawed in several respects. To begin with, the Mobility Fund

Phase I auction was not intended to replace the identical support rule. Rather, this auction

was intended to “swiftly extend[] current generation wireless coverage in areas where it is

cost effective to do so with one-time support.” JA at 505 (Order ¶ 314). Further, the

Order directly addressed and rejected the argument that broadband services are ineligible

for USF support:

       307. As an initial matter, it is wholly apparent that mobile wireless
       providers offer “voice telephony services” and thus offer services for which
       federal universal support is available. Furthermore, wireless providers have
       long been designated as ETCs eligible to receive universal service support.
       ***

       308. . . . [W]e reject the argument that we may not support mobile
       networks that offer services other than the services designated for support
       under section 254. As we have already explained, under our longstanding
       “no barriers” policy, we allow carriers receiving high-cost support “to
       invest in infrastructure capable of providing access to advanced services” as
       well as supported voice services. Moreover, section 254(e)’s reference to
       “facilities” and “services” as distinct items for which federal universal
       service funds may be used demonstrates that the federal interest in universal
       service extends not only to supported services but also the nature of the
       facilities over which they are offered. Specifically, we have an interest in
       promoting the deployment of the types of facilities that will best achieve the


                                             146
       principles set forth in section 254(b) (and any other universal service
       principles that the Commission may adopt under section 254(b)(7)),
       including the principle that universal service program [sic] be designed to
       bring advanced telecommunications and information services to all
       Americans, at rates and terms that are comparable to the rates and terms
       enjoyed in urban areas. Those interests are equally strong in the wireless
       arena. We thus conclude that USF support may be provided to networks,
       including 3G and 4G wireless services networks, that are capable of
       providing additional services beyond supported voice services.


       309. . . . [T]he Mobility Fund will be used to support the provision of
       “voice telephony service” and the underlying mobile network. That the
       network will also be used to provide information services to consumers
       does not make the network ineligible to receive support; to the contrary,
       such use directly advances the policy goals set forth in section 254(b), our
       new universal service principle recommended by the Joint Board, as well as
       section 706.

JA at 502-03 (Order ¶¶ 307-309; internal footnotes omitted). Finally, as the above-quoted

language makes clear, the FCC expressly considered the principles outlined in § 254(b)

and concluded that the Mobility Fund Phase I auction was consistent with and served to

promote those principles. Nothing about the FCC’s analysis on this point strikes us as

arbitrary or capricious.

       Lastly, petitioners argue that “[b]y virtue of the FCC’s decision ‘not to subsidize

competition,’ and its adoption of a single-winner Mobility I auction, States were deprived

of their § 214(e)(2) authority to designate more than one CETC in a given area.” Pet’r

Br. 5 at 39. That is, petitioners argue, “[b]y unilaterally deciding that it would define the

areas throughout which CETCs would provide USF-supported services based on census

blocks, the FCC preempted the primary jurisdiction of the States to establish such areas.”



                                             147
Id. at 39-40. Petitioners argue that “§ 214(e)(2) conferred on the States the authority ‘to

designate more than one . . . ETC in a given area’ and to ‘determine whether that is in the

public interest.’” Id. at 40. “That conferral of authority,” petitioners assert, “necessarily

deprived the FCC of authority to limit Mobility I support to one CETC in any FCC-

designated, census block-based service area.” Id.

       Contrary to petitioners’ arguments, nothing in the Order deprives states of their

statutory authority to designate ETCs. Indeed, only designated ETCs may participate in

the Mobility Fund Phase I auction. JA at 524 (Order ¶ 386) (“to be eligible for Mobility

Fund support, entities must (1) be designated as a wireless ETC pursuant to section

214(e) of the Communications Act, by the state public utilities commission”).

Ultimately, petitioners’ arguments rest on the faulty assumption that ETC designation by

a State entitles an entity to USF funding. As we have discussed elsewhere in this opinion,

ETC designation by a State simply makes an entity eligible for, but not entitled to, USF

funding. Consequently, the rules adopted by the Order for distributing Mobility Fund

Phase I funds are not contrary to § 214(e), nor do they deprive the states of their

designation authority under that statute.

       5. Did the FCC act arbitrarily and capriciously in setting the Mobility II
       budget at $500 million?

       Petitioners also argue that the FCC acted arbitrarily and capriciously in setting the

Mobility Fund Phase II annual budget at $500 million, particularly when “compared to a

$4 billion annual budget for ILECs.” Pet’r Br. 5 at 42. Although petitioners concede that



                                             148
the FCC concluded in its Order that “the Mobility II budget would ‘be sufficient to

sustain and expand the availability of mobile broadband,’” they argue that the Order

“failed to supply a nexus between any record findings and [that] conclusion.” Id.

(quoting Order ¶ 495). In particular, petitioners complain that (a) “[t]he FCC did not cite

to any record representation by Verizon, Sprint, AT&T or T-Mobile that [they] would

maintain current coverage if [their] USF support is phased out,” id. at 43, (b) “[t]he FCC

made no findings supporting its conclusions that $579 million was sufficient support for

regional and small wireless CETCs in 2010 and that $500 million in annual support

would be sufficient for them in the future,” id., and (c) “no findings supported the FCC’s

conclusion that providing 800 percent more USF funding to large ILECs than to wireless

CETCs would constitute competitively-neutral funding,” id. at 43-44.

       Addressing these three complaints in turn, the FCC concluded in the Order that it

was “reasonable to assume that the four national [wireless] carriers will maintain at least

their existing coverage footprints even if the [USF] support they receive today [i.e., pre-

Order] is phased out.” JA at 551 (Order ¶ 495). Contrary to petitioners’ suggestion, the

FCC made this prediction based upon the record evidence that was compiled in response

to the Further Notice of Proposed Rulemaking. In particular, the FCC noted that “[u]nder

2008 commitments to phase down their competitive ETC support, Verizon Wireless and

Sprint have already given up significant amounts of the support they received under the

identical support rule, and there is nothing in the record showing that either carrier is

reducing coverage or shutting down towers” as a result of this reduction in USF support.


                                             149
Id. Further, the FCC noted that there was no evidence “in the record . . . suggest[ing]

AT&T or T-Mobile would reduce coverage or shut down towers in the absence of ETC

support.” Id. In light of this analysis, we are not persuaded that the FCC’s predictive

judgment that the four major wireless carriers would continue their existing coverage

even in the absence of USF support was arbitrary or capricious.

       The same can be said for petitioners’ complaint that the FCC failed to support its

conclusion that an annual $500 million budget was sufficient for regional and small

wireless carriers. In the Order, the FCC found that “[i]n 2010, $579 million flowed to

regional and small carriers, i.e., carriers other than the four nationwide providers.” Id. In

support of that finding, the FCC cited to its “2010 Disbursement Analysis.” Id. (Order ¶

495 n.821). Notably, petitioners make no attempt to discredit that report. In turn, the

FCC found in the Order that “[o]f this $579 million, we know in many instances that this

support is being provided to multiple wireless carriers in the same geographic area.” Id.

(Order ¶ 495). In support of that finding, the FCC cited to its “Response to United States

House of Representatives Committee on Energy and Commerce, Universal Service Fund

Data Request of June 22, 2011, Request 7: Study Areas with the Most Eligible

Telecommunications Carriers (Table 1: Study Areas with the Most Eligible

Telecommunications Carriers in 2010).” Id. (Order ¶ 495 n.822). Again, petitioners

make no attempt to discredit this source of evidence. Lastly, the FCC “note[d] that the

State Members of the Federal State Joint Board on Universal Service have proposed that

the Commission establish a dedicated Mobility Fund that would provide $50 million in


                                             150
the first year, $100 million in the second year, and then increase by $100 million each

year until support reaches $500 million annually.” Id. at 551-52 (Order ¶ 495).

Considering this recommendation together with its factual findings, the FCC opined “that

[its] $500 million budget w[ould] be sufficient to sustain and expand the availability of

mobile broadband.” Id. at 552 (Order ¶ 495). Nothing about this predictive judgment

was arbitrary or capricious.

       Finally, and again contrary to petitioners’ assertions, the FCC expressly justified

its decision to provide substantially less USF funding to wireless carriers than to other

types of carriers, including large ILECs. To begin with, the FCC noted that “[a]lthough

the budget for fixed services exceeds the budget for mobile services, . . . today

significantly more Americans have access to 3G mobile coverage than have access to

residential broadband via fixed wireless, DSL, cable, or fiber.” Id. at 551 (Order ¶ 494).

In turn, the FCC predicted “that as 4G mobile service is rolled out, this disparity will

persist — private investment will enable the availability of 4G mobile service to a larger

number of Americans than will have access to fixed broadband with speeds of at least 4

Mbps downstream and 1 Mbps upstream.” Id. In support of this finding and prediction,

the FCC cited to the “15th Annual Mobile Wireless Competition Report, 26 FCC Rcd at

9736-41, paras. 109-116 and Table 11.” Id. (Order ¶ 494 n.820). Petitioners have made

no attempt to challenge this source of information. Thus, in sum, we conclude the FCC

acted neither arbitrarily nor capriciously in deciding to provide substantially more USF

funding to “fixed services” than to wireless services.


                                             151
       6. Did the FCC fail to respond to comments calling for a separate mobility
       fund for insular areas?

       In the final issue of Brief 5, petitioners complain that the FCC did not respond to

comments calling for a separate mobility fund for insular areas. According to petitioners,

“[t]he FCC received comments from wireless CETCs in insular areas urging it to

establish a separate insular component of the Mobility Fund.” Pet’r Br. 5 at 46. The FCC

in turn, petitioners complain, “relegated its one-sentence response to the wireless CETCs’

comments to the margin of the Order,” and “declined to create a Mobility Fund for insular

areas[] because ‘these areas generally do not face the same level of deployment

challenges as Tribal areas.’” Id. (quoting Order ¶ 481 n.790). “That unexplained

statement,” petitioners assert, “was unresponsive to the comments the FCC invited and

received” and was therefore irrational. Id.

       The statement at issue was contained in a footnote to the portion of the Order

establishing the Tribal Mobility Fund Phase I, which was intended by the FCC “to

provide one-time support to deploy mobile broadband to unserved Tribal lands.” JA at

546 (Order ¶ 481). In that footnote, the FCC stated:

       Some carriers request a separate funding mechanism for insular areas. See,
       e.g., PR Wireless Mobility Fund NPRM Comments at 1-5. Because these
       areas generally do not face the same level of deployment challenges as
       Tribal lands, we decline to create a separate component of the Mobility
       Fund for them.

Id. (Order ¶ n.790).




                                              152
       The FCC asserts in its response brief that it was unnecessary for the Order to go

into greater detail in justifying this conclusion. In support, the FCC notes that in 2010 it

issued an order, referred to in the record as the “2010 Insular Order,” that “declin[ed] to

adopt a new high-cost support mechanism for non-rural insular carriers.” JA at 974

(Appendix D at ¶ 1). The Puerto Rico Telephone Company (PRTC) filed a petition for

reconsideration of the 2010 Insular Order. In Appendix D to the Order, the FCC rejected

PRTC’s petition. In doing so, the FCC noted that PRTC “failed to show that consumers

in Puerto Rico lack access to supported voice services because of inadequate federal

universal service support.” Id. Relatedly, the FCC noted, to the extent that telephone

subscribership in Puerto Rico “falls below the national average because of the number of

low-income consumers who are unable to afford access to telephone service,” id. at 976-

977, “it [wa]s not at all apparent why the Commission should establish a new insular

high-cost support mechanism rather than increase support for low-income consumers

through its existing low-income support programs,” id. at 977. Indeed, the FCC noted,

“subscribership in Puerto Rico [wa]s on the rise due, in part, to efforts by the

Commission, the Telecommunications Regulatory Board of Puerto Rico, and

telecommunications carriers in Puerto Rico to improve the effectiveness and consumer

awareness of federal low-income support programs.” Id. The FCC also rejected the

notion that it was “arbitrarily treat[ing] carriers serving insular areas differently from

carriers . . . serv[ing] rural areas.” Id.




                                              153
       According to the FCC, “[p]etitioners’ requests for an insular mobility fund relied

on the same flawed arguments” as those raised by PRTC and other non-rural insular

carriers. FCC Br. 5 at 45. In short, the FCC asserts, “there [we]re no changed

circumstances that would [have] require[d] [it] to reconsider its longstanding (and

repeatedly confirmed) view that a separate support mechanism for insular areas [wa]s

unnecessary because those areas do not exhibit cost or other characteristics that warrant

an exemption from generally applicable high-cost support mechanisms.” Id. at 45-46.

“Thus,” the FCC asserts, “it was sufficient for [it] to deny petitioners’ request by

reiterating that insular areas do not face unique ‘deployment challenges’ that would

warrant the creation of a separate support mechanism.” Id. at 46.

       Petitioners’ reply brief is silent on this issue: they make no attempt to rebut the

FCC’s assertion that the issues they now raise regarding the need for a mobility insular

fund are substantially similar to the issues raised by PRTC regarding the purported need

for a special insular fund for Puerto Rico. Consequently, we reject petitioners’ argument

on this issue.

D. Tribal Carriers Principal Brief

       1. Did the FCC act arbitrarily and capriciously in prescribing funding cuts
       for tribal carriers?

       In Brief 9, petitioners Gila River Indian Community and Gila River

Telecommunications, Inc. (collectively Gila River26) challenge the FCC’s decision in the

       26
         Gila River Indian Community is a federally recognized Indian tribe that is
“centered in a[] . . . reservation in rural southern Arizona.” Pet’r Br. 9 at 8. The Gila

                                             154
Order to cut USF funding to many rate-of-return carriers serving Tribal lands. More

specifically, Gila River argues that the Order’s application of § 254’s universal service

principles is arbitrary and capricious because there is no rational connection between the

FCC’s findings regarding the dismal state of communications services on Tribal lands and

its subjection of tribal carriers to rules that result in funding cuts. In support, Gila River

offers four specific arguments. As outlined below, however, we find no merit to any of

these arguments, and we conclude that the FCC’s decision was neither arbitrary nor

capricious.

       a) The relevant portions of the Order

       In the Order, the FCC concluded that its existing high-cost support rules were

outdated. JA at 396 (Order ¶ 6). In place of these rules, the FCC adopted what it

considered “fiscally responsible, accountable, incentive-based policies” that further “a

framework [designed] to distribute universal service funding in the most efficient and

technologically neutral manner possible.” Id. at 394 (Order ¶ 1). For instance, the Order

establishes, for the first time, a “budget for the high-cost programs within USF” of $4.5

billion over six years, the apportionment of which “represent[s the FCC’s] predictive

judgment as to how best to allocate limited resources.” Id. at 399 (Order ¶ 18). And

because the reforms are “focused on rooting out inefficiencies, [they] will not affect all

carriers in the same manner or in the same magnitude.” Id. at 496 (Order ¶ 289).


River tribe “wholly own[s] and operate[s]” Gila River Telecommunications, Inc. Id. at i.
Gila River Telecommunications, Inc. is “the only Tribal carrier to challenge the Order.”
FCC Br. 9 at 14. The tribe and the carrier will be referred to, collectively, as “Gila River.”

                                              155
       At the same time, the Order also implements several new measures aimed at

helping Tribal lands, which, the FCC expressly noted, “have significant

telecommunications deployment and connectivity challenges.” Id. at 546 (Order ¶ 481).

First, the FCC created the Tribal Mobility Fund Phase I, which is a $50 million fund

distributed by reverse auction “to provide one-time support to deploy mobile broadband

to unserved Tribal lands.” Id. This is in addition to the general $300 million Mobility

Fund Phase I, for which Tribal lands are eligible. Id. Second, the FCC “adopt[ed] a

preference for Tribally-owned or controlled providers seeking general or Tribal Mobility

Fund Phase I support.” Id. at 550 (Order ¶ 490). This preference comes in the form of a

bidding credit in the reverse auction. Third, of the $500 million designated annually “for

ongoing support for mobile services” as part of the Mobility Fund Phase II, up to $100

million will be allocated “to address the special circumstances of Tribal lands.” Id. at 551

(Order ¶ 494). The FCC “designated [this] substantial level of funding to ensure that

[Tribal] communities are not left behind.” Id. at 552 (Order ¶ 497). Finally, carriers

serving Tribal lands, like all carriers, can petition for an exemption (“waiver”) from a

reduction in subsidies. Id. at 566 (Order ¶ 539).

       b) Did the FCC fail to explain how it balanced the § 254(b) universal service
       principles in determining how much funding to give rate-of-return carriers serving
       Tribal lands?

       Gila River asserts that the FCC “fail[ed] to articulate [in the Order] how it

balanced the Section 254(b) principles as they pertain to rate-of-return carriers serving




                                            156
Tribal lands,” and that this failure “renders the Order arbitrary and capricious with respect

to such carriers.” Pet’r Br. 9 at 25.

       We conclude, however, that the FCC offered sufficient justification for its

decision. In its Order, the FCC stated that the funding it was allocating to rate-of-return

carriers serving Tribal lands was enough to “make a difference” while remaining

“consistent with [the FCC’s] commitment to fiscal responsibility and the varied

objectives [it had] for [its] limited funds.” JA at 548 (Order ¶ 485). In support, the FCC

pointed out that the $50 million in allocated funding “is approximately 25 percent of the

ongoing support awarded to competitive ETCs serving Covered Locations in 2010,”

which the FCC predicted will be enough to “help the availability of mobile voice and

broadband services” on Tribal lands. Id. at 547 (Order ¶ 482), 548 (Order ¶ 485).

Moreover, the FCC noted, the $100 million from the Mobility Fund Phase II “is roughly

equivalent to the amount of funding currently provided to Tribal lands in the lower 48

states and in Alaska, excluding support awarded to study areas that include the most

densely populated communities in Alaska.” Id. at 552 (Order ¶ 497). In short, the FCC

concluded, taking into account the special concerns facing carriers serving Tribal lands,

that its funding allocations struck the right balance between fiscal efficiency and the need

to advance telecommunications access on Tribal lands. Although Gila River disagrees

with the FCC, we are not persuaded that the FCC acted arbitrarily or capriciously in

reaching its decision.




                                            157
       c) Was it arbitrary and capricious for the FCC to treat carriers serving Tribal
       lands in a manner similar to rate-of-return carriers or to give certain funding to
       price-cap carriers and not to rate-of-return carriers?

       Gila River next argues that the Order’s “nearly universal cutbacks in support for

rate-of-return carriers simply cannot be squared with the evidentiary record that the FCC

itself made documenting quite powerfully that Tribal carriers are in an entirely different

situation from other carriers.” Pet’r Br. 9 at 28. We agree with the FCC, however, that

Gila River’s “assertion is . . . difficult to fathom.” FCC Br. 9 at 22. As explained above,

the Order contains several Tribal-specific initiatives that differ from the treatment of rate-

of-return carriers generally. We therefore reject Gila River’s argument.

       Gila River also asserts that the FCC’s “decision to maintain the annual support of

price-cap carriers, including those serving Tribal lands, at 2011 levels, while also making

these same carriers (but not rate-of-return carriers) eligible for up to an additional $300

million of new funding to promote broadband deployment, is arbitrary and capricious.”

Pet’r Br. 9 at 28. This is because, Gila River asserts, “nowhere did the FCC conclude that

Tribal lands served by price-cap carriers were worse served than Tribal lands served by

rate-of-return carriers.” Id.

       As the FCC correctly points out, however, “[t]his contention overlooks the

historical distinctions between the existing universal service regimes for price cap and

rate-of-return carriers.” FCC Br. 9 at 28. The previous framework for rate-of-return

carriers provided a stable return “regardless of the necessity or prudence of any given

investment.” JA at 496 (Order ¶ 287). As a result, the FCC’s goal of “rooting out


                                             158
inefficiencies” requires particular focus on rate-of-return carriers. Id. (Order ¶ 289).

Furthermore, although “more than 83 percent of the unserved locations in the nation are

in price cap areas, . . . such areas currently receive approximately 25 percent of high-cost

support.” Id. at 452 (Order ¶ 158). In light of these facts, the FCC “conclude[d]

increased support to areas served by price cap carriers . . . [wa]s warranted.” Id. at 452

(Order ¶ 159). And we cannot say that this conclusion was arbitrary or capricious.

       d) Did the FCC fail to explain how its funding cuts will allow carriers serving
       Tribal lands to reasonably fulfill the new broadband obligations imposed in the
       Order?

       Gila River complains that “[a]t the same time it financially hobbled rate-of-return

carriers serving Tribal lands, the FCC increased their load, imposing new and expensive

broadband obligations on them.” Pet’r Br. 9 at 30. In other words, Gila River argues,

“the Order irrationally mandates that rate-of-return carriers serving Tribal lands do vastly

more while depriving them of the funding needed just to break even.” Id. And that, Gila

River asserts, “confounds the fundamental purpose of Section 254” and is thus arbitrary

and capricious. Id.

       “[W]hen an agency's decision is primarily predictive, our role is limited; we

require only that the agency acknowledge factual uncertainties and identify the

considerations it found persuasive.” Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1105

(D.C. Cir. 2009). The FCC did that here. By way of the Order, the FCC explained its

reasoning for each of the subsidies and initiatives that it chose to promote

telecommunications access on Tribal lands.


                                             159
       Particularly irksome to Gila River is the Order’s repeal of the “identical support

rule.” The identical support rule provided competitive ETCs the same per-line amount of

high-cost universal service support as the incumbent carriers in the same area, regardless

of the competitive carriers’ costs. But the FCC, “[b]ased on more than a decade of

experience with the operation of the [identical support] rule and having received a

multitude of comments noting that [it] fail[ed] to efficiently target support where it [wa]s

needed,” concluded “that [it] ha[d] not functioned as intended.” JA at 554, ¶ 502.

       Gila River points out that the identical support rule was worth $150 million in

2011 to carriers serving Tribal lands. But Gila River fails to acknowledge that the

combination of $50 million from the Tribal Mobility Fund Phase I, up to $100 million

annually from the Mobility Fund Phase II, and the additional amount that carriers will

receive from the general $300 million Mobility Fund Phase I, should cover most, if not

all, of the funds lost from the identical support rule. And, in any event, because the FCC

made no claims that the Order would be revenue neutral, a deficit is not fatal to the Order.

       For these reasons, we conclude that Gila River has failed to demonstrate that the

FCC’s line-drawing was unreasonable.

       e) Did the FCC act arbitrarily and capriciously by granting an exemption to one
       Tribally-owned carrier?

       Although the Order imposes a five-year funding phase-out of all high-cost support

that competitive carriers receive under the identical support rule, one Tribally-owned

carrier, Standing Rock Telecommunications, received a two-year freeze at current



                                            160
funding levels. JA at 563 (Order ¶ 530). Gila River argues that the reasoning behind this

exemption applies equally to Gila River and other Tribally-owned carriers. And, Gila

River argues, “[t]he very essence of arbitrariness and capriciousness is the erratic and

profoundly disparate treatment of identically situated entities without any reasoned

explanation.” Pet’r Br. 9 at 35.

       Gila River ignores, however, the key distinction noted by the FCC in its Order.

The Order explained that Standing Rock is “a nascent Tribally-owned ETC that was

designated to serve its entire Reservation and the only such ETC to have its ETC

designation modified since release of the USF-ICC Transformation NPRM in February

2011.” JA at 564 (Order ¶ 531). The FCC concluded that because the company was new,

it needed extra time “to ramp up its operations in order to reach a sustainable scale to

serve consumers in its service territory.” Id. In other words, the FCC explained, it was

adopting this approach “in order to enable Standing Rock to reach a sustainable scale so

that consumers on the Reservation c[ould] realize the benefits of connectivity that, but for

Standing Rock, they might not otherwise have access to.” Id.

       To be sure, Gila River argues in its reply brief that the age of Standing Rock

should not be dispositive, and that “[s]upport for older carriers could promote Tribal self-

sufficiency and economic development just as much as support for newer carriers.” Pet’r

Reply Br. 9 at 15. But, that argument notwithstanding, we discern no unreasonableness in

the FCC’s limited exemption, aimed at giving a new carrier an extra subsidy in order to

advance universal service.


                                            161
                                       V. Conclusion

       We GRANT in part and DENY in part respondent’s Motion to Strike New

Arguments in the Joint Universal Service Fund Reply Brief of Petitioners. We DENY the

petitions for review, to the extent they are based upon the issues raised in the Joint

Universal Service Fund Principal Brief, the Additional Universal Service Fund Issues

Principal Brief, the Wireless Carrier Universal Service Fund Principal Brief, and the

Tribal Carriers Principal Brief.




                                             162
In re FCC 11-9900,

BACHARACH, J., concurring in part and dissenting in part.

       I join virtually all of Chief Judge Briscoe’s thorough, persuasive opinion. But, I

respectfully dissent on Part IV(A)(2). There, the majority rejects the Petitioners’

challenge to the sufficiency of the budget for the Universal Service Fund. On this limited

issue, I respectfully dissent. In my view, the FCC failed to supply a rational basis for its

conclusion that an annual budget of $4.5 billion would suffice with the new requirements

for broadband capability. In this respect, I believe the FCC acted arbitrarily in violation

of the Administrative Procedure Act.

       The FCC budgeted $4.5 billion for the high-cost portion of the Universal Service

Fund. See 2 R. at 399 ¶ 18, 438-39 ¶¶ 125-26.1 This fund includes a variety of

mechanisms to provide financial support to carriers. Id. at 399 n.16. One of these

mechanisms is called the “Connect America Fund.” Id. at 394 ¶ 1, 399 n.16. To obtain

support from this fund, a carrier “must provide broadband with actual speeds of at least 4

[megabits per second] downstream and 1 [megabit per second] upstream.” Id. at 400 ¶

22, 423-24 ¶¶ 92-93.

       The FCC does not suggest that it considered any cost projections for the new

broadband requirements. See Combined Responses of Federal Respondents and Support

Intervenors to the Joint Universal Services Fund Principal Brief at 36-38 (July 29, 2013).

Nonetheless, the FCC urges us to endorse its $4.5 billion budget as a “reasonable


       1
               On the challenges involving sufficiency of the budget, many of the
petitioners are rate-of-return carriers. The FCC has budgeted $2 billion (out of the annual
$4.5 billion) for rate-of-return carriers. See 2 R. at 438-39 ¶ 126.
predictive judgment.” Id. at 33. It is true that predictive judgments within an agency’s

area of expertise are entitled to “particularly deferential review, so long as they are

reasonable.” BNSF Ry. Co. v. Surface Transp. Bd., 526 F.3d 770, 781 (D.C. Cir. 2008).

But here, the FCC’s prediction is not reasonable, for it lacks support in any empirical

findings or even rough estimates of the anticipated costs of requiring carriers to upgrade

their equipment to meet the newly mandated requirements. Without at least some

findings or estimate regarding the new costs, how could the FCC reasonably predict that

its $4.5 billion budget for universal fund support would be “sufficient . . . to preserve and

advance universal service”? 47 U.S.C. § 254(b)(5).2

       The majority notes that in Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2001),

we qualified the sufficiency requirement, stating that the FCC “should” (rather than

“shall”) base its universal service policies on sufficiency. Majority Op. at 61. But there,

we emphasized the need for at least some data before the FCC could determine the

sufficiency of financial support for carriers. Qwest Corp., 258 F.3d at 1195, 1202.

       In Qwest, the FCC had set a benchmark figure to determine the amount of support

that a state would receive. See id. at 1197, 1202. The FCC attempted to justify the

benchmark as “a ‘reasonable compromise of commenters’ proposals.’” Id. at 1202. We

       2
              The majority concludes that the FCC had no duty to estimate the cost of the
new broadband requirements. Majority Op. at 63 n.7. I respectfully disagree. The FCC
imposed these requirements to promote universal service and justified the budget for
high-cost support based on its sufficiency “to achieve [the FCC’s] universal service
objectives.” 2 R. at 397 ¶ 10, 437-38 ¶ 123. The FCC cannot rationally justify the
sufficiency of its high-cost support for universal service without considering the costs that
are being imposed on the industry.

                                             -2-
rejected this justification because the FCC had not made any empirical findings on

sufficiency. Without such findings, we concluded that the FCC had failed to set forth a

rational basis for the chosen benchmark. Id. at 1195, 1202. We reasoned that the FCC is

not

       a mediator whose job is to pick the “midpoint” of a range or to come to a
       “reasonable compromise” among competing positions. As an expert
       agency, its job is to make rational and informed decisions on the record
       before it in order to achieve the principles set by Congress. Merely
       identifying some range and then picking a compromise figure is not rational
       decision-making.

Id.

       The $4.5 billion budget is just as arbitrary as the benchmark struck down in Qwest

Corp. The FCC has required carriers to upgrade their broadband speeds, as a condition of

universal service fund support, without pointing to any data or estimates of the costs to be

borne by the carriers.

       The sufficiency of the budget was challenged in the FCC proceedings. See, e.g., 6

R. at 4074-75 (petition for reconsideration by Windstream Communications, Inc. and

Frontier Communications Corp.), 4094, 4098-99 (comments of Gila River

Telecommunications, Inc.). For example, the Rural Broadband Alliance stated in the

FCC proceedings:

              [America’s Broadband Connectivity Plan] assumes that the
       [Universal Service Fund] is constrained as suggested by the [notice of
       proposed rulemaking]. We respectfully submit that the size of the fund
       required to meet the statutory requirements of the Act should be determined
       by the FCC on the basis of fact and applicable law. The fact that a group of
       carriers has utilized the proposed $4.5 billion “budget” in the formulation of


                                            -3-
       a consensus proposal does not provide the Commission with a basis to
       constrain the fund in the absence of specific findings consistent with the
       Commission’s obligations under the Act. It is not sufficient for the
       Commission to claim that it has discretion to constrain the size of the
       [Universal Service Fund] on the basis that a group of providers suggest that
       a $4.5 billion fund is “sufficient.”

Id. at 3182; see also id. at 3316-17 (Moss Adams LLP’s challenge to the sufficiency of

the $4.5 billion fund in light of the new cost of developing and upgrading broadband

networks).

       Other carriers pointed out that only a minority of existing broadband networks

were able to satisfy the new speed requirements. See id. at 2053-54 (comments of

CenturyLink); see also Supp. R. at 60-61 ¶ 170 & Figure 8 (FCC’s reference to a survey

by the National Telecommunications Cooperative Association, showing that in 2010,

75% of the member carriers reported offering internet access speeds of 1.5 to 3.0

megabits per second).

       Faced with these comments, the FCC defended its $4.5 billion budget based on

expectations of greater efficiencies, the presence of “safety valves,” and the difficulty of

projecting the cost for each carrier seeking support from the Universal Service Fund. In

my view, these arguments do not supply a rational basis for the FCC’s conclusion that the

budget would be sufficient with the new broadband requirements.

       First, the FCC predicted that its efforts to “root[] out inefficiencies” and “improve

accountability” in the legacy system would reduce reliance on the Universal Service

Fund. 2 R. at 437-38 ¶ 123; 496 ¶ 289. At the same time, the FCC set the budget at the



                                             -4-
2011 expenditure level. Id. at 399 ¶ 18. But the FCC did not compare the anticipated

cost savings to the cost burdens associated with the new broadband requirements. Thus,

the FCC did not articulate a reasonable basis to predict that the new cost-control measures

would materially soften the burden of the new broadband requirements.

       Second, the FCC relied on the presence of “safety valves.” For example, if a rate-

of-return carrier obtains a request for broadband service, it can decline when the request

would be considered “unreasonable.” Id. at 468 ¶¶ 207-08. And when a carrier

encounters extenuating circumstances, it can seek relief under the Total Cost and

Earnings Review Mechanism. Id. at 723-24 ¶ 924. In light of these safety valves, the

FCC may have considered the industry-wide cost to be sufficient because it is planning

to: (1) generously consider refusals to provide broadband service, and (2) liberally apply

the Total Cost and Earnings Review Mechanism. But these safety valves are designed to

relieve carriers on a case-by-case basis, not to relieve an entire industry of the additional

costs of the new requirements for broadband speed.

       Finally, the FCC’s counsel argued that the agency could not have determined the

cost of the broadband condition for each carrier seeking relief through the Universal

Service Fund. I agree, and no one has suggested otherwise. But the FCC made no effort

to provide any estimate regarding the cost of its new broadband requirements on the

industry as a whole.

       The development of industry-wide cost estimates were not only feasible, but also

part of the record. Six price-cap companies proffered a plan, called “America’s


                                             -5-
Broadband Connectivity Plan,” which included broadband speed requirements similar to

those adopted by the FCC. 5 R. at 2990. For these speed requirements, proponents of the

plan provided three cost estimates: $2.2 billion, $5.9 billion, and $9.7 billion. Id. at

2993-3004. The applicable estimate depended on whether the FCC would require

broadband service beyond the areas already being served by price-cap carriers or exclude

the highest-cost census blocks. Id. The FCC did not comment on these cost estimates or

explain how they would affect the scope of the eventual broadband condition.

       As the FCC’s counsel states, the agency couldn’t feasibly project the eventual

costs for every single carrier to construct facilities allowing for the newly mandated

broadband speeds. But the six price-cap carriers provided detailed estimates of the

overall cost, and the FCC never explains its inability to provide this sort of estimate.

Instead, the FCC states that it regards the $4.5 billion budget as “sufficient” without any

information, estimate, or even guess about the cost of what it is requiring.

       In Qwest we required more of the FCC, and we should do so here. Accordingly, I

respectfully dissent on Part IV(A)(2) of the majority opinion.




                                             -6-
                                                                     FILED
                                                          United States Court of Appeals
                                                                  Tenth Circuit

                                                                 May 23, 2014
                                  PUBLISH                    Elisabeth A. Shumaker
                                                                 Clerk of Court
                   UNITED STATES COURT OF APPEALS

                         FOR THE TENTH CIRCUIT




DIRECT COMMUNICATIONS CEDAR
VALLEY, LLC, a Utah limited liability
company; TOTAH COMMUNICATIONS,                 11-9900
INC., an Oklahoma corporation; H & B
COMMUNICATIONS, INC., a Kansas
Corporation; THE MOUNDRIDGE              Consolidated Case Nos.:
TELEPHONE COMPANY OF                     11-9581, 11-9585, 11-9586, 11-9587,
MOUNDRIDGE, a Kansas business            11-9588, 11-9589, 11-9590, 11-9591, 11-
organization; PIONEER TELEPHONE          9592, 11-9594, 11-9595, 11-9596, 11-
ASSOCIATION, INC., a Kansas              9597, 12-9500, 12-9510, 12-9511, 12-
corporation; TWIN VALLEY                 9513, 12-9514, 12-9517, 12-9520, 12-
TELEPHONE, INC., a Kansas corporation;   9521, 12-9522, 12-9523, 12-9524, 12-
PINE TELEPHONE COMPANY, INC., an         9528, 12-9530, 12-9531, 12-9532, 12-
Oklahoma corporation; PENNSYLVANIA       9533, 12-9534, 12-9575
PUBLIC UTILITY COMMISSION;
CHOCTAW TELEPHONE COMPANY;
CORE COMMUNICATIONS, INC.;
NATIONAL ASSOCIATION OF STATE
UTILITY CONSUMER ADVOCATES;
NATIONAL TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION;
CELLULAR SOUTH, INC.; AT&T, INC.;
HALO WIRELESS, INC.; THE VOICE
ON THE NET COALITION, INC.;
PUBLIC UTILITIES COMMISSION OF
OHIO; TW TELECOM INC.; VERMONT
PUBLIC SERVICE BOARD; THE STATE
CORPORATION COMMISSION OF THE
STATE OF KANSAS; CENTURYLINK
INC.; GILA RIVER INDIAN
COMMUNITY; GILA RIVER
TELECOMMUNICATIONS, INC.;
ALLBAND COMMUNICATIONS
COOPERATIVE; NORTH COUNTY
COMMUNICATIONS CORPORATION;
UNITED STATES CELLULAR
CORPORATION; PR WIRELESS, INC.;
DOCOMO PACIFIC, INC.; NEX-TECH
WIRELESS, LLC; CELLULAR
NETWORK PARTNERSHIP, A LIMITED
PARTNERSHIP; U.S. TELEPACIFIC
CORP.; CONSOLIDATED
COMMUNICATIONS HOLDINGS, INC.;
NATIONAL ASSOCIATION OF
REGULATORY UTILITY
COMMISSIONERS; RURAL
TELEPHONE SERVICE COMPANY,
INC.; ADAK EAGLE ENTERPRISES
LLC; ADAMS TELEPHONE
COOPERATIVE; ALENCO
COMMUNICATIONS, INC.;
ARLINGTON TELEPHONE COMPANY;
BAY SPRINGS TELEPHONE
COMPANY, INC.; BIG BEND
TELEPHONE COMPANY, INC.; THE
BLAIR TELEPHONE COMPANY;
BLOUNTSVILLE TELEPHONE LLC;
BLUE VALLEY
TELECOMMUNICATIONS, INC.;
BLUFFTON TELEPHONE COMPANY,
INC.; BPM, INC., d/b/a Noxapater
Telephone Company; BRANTLEY
TELEPHONE COMPANY, INC.;
BRAZORIA TELEPHONE COMPANY;
BRINDLEE MOUNTAIN TELEPHONE
LLC; BRUCE TELEPHONE COMPANY;
BUGS ISLAND TELEPHONE
COOPERATIVE; CAMERON
TELEPHONE COMPANY, LLC;
CHARITON VALLEY TELEPHONE
CORPORATION; CHEQUAMEGON
COMMUNICATIONS COOPERATIVE,
INC.; CHICKAMAUGA TELEPHONE
CORPORATION; CHICKASAW
TELEPHONE COMPANY; CHIPPEWA
COUNTY TELEPHONE COMPANY;
CLEAR LAKE INDEPENDENT
TELEPHONE COMPANY; COMSOUTH
TELECOMMUNICATIONS, INC.;
COPPER VALLEY TELEPHONE
COOPERATIVE; CORDOVA
TELEPHONE COOPERATIVE;
CROCKETT TELEPHONE COMPANY,
INC.; DARIEN TELEPHONE
COMPANY; DEERFIELD FARMERS'
TELEPHONE COMPANY; DELTA
TELEPHONE COMPANY, INC.; EAST
ASCENSION TELEPHONE COMPANY,
LLC; EASTERN NEBRASKA
TELEPHONE COMPANY; EASTEX
TELEPHONE COOP., INC.; EGYPTIAN
TELEPHONE COOPERATIVE
ASSOCIATION; ELIZABETH
TELEPHONE COMPANY, LLC;
ELLIJAY TELEPHONE COMPANY;
FARMERS TELEPHONE
COOPERATIVE, INC.; FLATROCK
TELEPHONE COOP., INC.; FRANKLIN
TELEPHONE COMPANY, INC.;
FULTON TELEPHONE COMPANY,
INC.; GLENWOOD TELEPHONE
COMPANY; GRANBY TELEPHONE
LLC; HART TELEPHONE COMPANY;
HIAWATHA TELEPHONE COMPANY;
HOLWAY TELEPHONE COMPANY;
HOME TELEPHONE COMPANY (ST.
JACOB, ILL.); HOME TELEPHONE
COMPANY (MONCKS CORNER, SC);
HOPPER TELECOMMUNICATIONS
COMPANY, INC.; HORRY TELEPHONE
COOPERATIVE, INC.; INTERIOR
TELEPHONE COMPANY; KAPLAN
TELEPHONE COMPANY, INC.; KLM
TELEPHONE COMPANY; CITY OF
KETCHIKAN, ALASKA, d/b/a KPU
Telecommunications; LACKAWAXEN
TELECOMMUNICATIONS SERVICES,
INC.; LAFOURCHE TELEPHONE
COMPANY, LLC; LA HARPE
TELEPHONE COMPANY, INC.;
LAKESIDE TELEPHONE COMPANY;
LINCOLNVILLE TELEPHONE
COMPANY; LORETTO TELEPHONE
COMPANY, INC.; MADISON
TELEPHONE COMPANY;
MATANUSKA TELEPHONE
ASSOCIATION, INC.; MCDONOUGH
TELEPHONE COOP., INC.; MGW
TELEPHONE COMPANY, INC.; MID
CENTURY TELEPHONE COOP., INC.;
MIDWAY TELEPHONE COMPANY;
MID-MAINE TELECOM LLC; MOUND
BAYOU TELEPHONE &
COMMUNICATIONS, INC.;
MOUNDVILLE TELEPHONE
COMPANY, INC.; MUKLUK
TELEPHONE COMPANY, INC.;
NATIONAL TELEPHONE OF
ALABAMA, INC.; ONTONAGON
COUNTY TELEPHONE COMPANY;
OTELCO MID-MISSOURI LLC;
OTELCO TELEPHONE LLC;
PANHANDLE TELEPHONE
COOPERATIVE, INC.; PEMBROKE
TELEPHONE COMPANY, INC.;
PEOPLE'S TELEPHONE COMPANY;
PEOPLES TELEPHONE COMPANY;
PIEDMONT RURAL TELEPHONE
COOPERATIVE, INC.; PINE BELT
TELEPHONE COMPANY; PINE TREE
TELEPHONE LLC; PIONEER
TELEPHONE COOPERATIVE, INC.;
POKA LAMBRO TELEPHONE
COOPERATIVE, INC.; PUBLIC
SERVICE TELEPHONE COMPANY;
RINGGOLD TELEPHONE COMPANY;
ROANOKE TELEPHONE COMPANY,
INC.; ROCK'S COUNTY TELEPHONE;
SACO RIVER TELEPHONE LLC;
SANDHILL TELEPHONE
COOPERATIVE, INC.; SHOREHAM
TELEPHONE LLC; THE SISKIYOU
TELEPHONE COMPANY; SLEDGE
TELEPHONE COMPANY; SOUTH
CANAAN TELEPHONE COMPANY;
SOUTH CENTRAL TELEPHONE
ASSOCIATION; STAR TELEPHONE
COMPANY, INC.; STAYTON
COOPERATIVE TELEPHONE
COMPANY; THE NORTH-EASTERN
PENNSYLVANIA TELEPHONE
COMPANY; TIDEWATER TELECOM,
INC.; TOHONO O'ODHAM UTILITY
AUTHORITY; UNITEL, INC.; WAR
TELEPHONE LLC; WEST CAROLINA
RURAL TELEPHONE COOPERATIVE,
INC.; WEST TENNESSEE TELEPHONE
COMPANY, INC.; WEST WISCONSIN
TELCOM COOPERATIVE, INC.;
WIGGINS TELEPHONE ASSOCIATION;
WINNEBAGO COOPERATIVE
TELECOM ASSOCIATION; YUKON
TELEPHONE CO., INC.; ARIZONA
CORPORATION COMMISSION;
WINDSTREAM CORPORATION;
WINDSTREAM COMMUNICATIONS,
INC.,

          Petitioners,

v.

FEDERAL COMMUNICATIONS
COMMISSION; UNITED STATES OF
AMERICA,

          Respondents,

and

SPRINT NEXTEL CORPORATION;
LEVEL 3 COMMUNICATIONS, LLC;
CENTURYLINK, INC.; CONNECTICUT
PUBLIC UTILITIES REGULATORY
AUTHORITY; INDEPENDENT
TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
ORGANIZATION FOR THE
PROTECTION AND ADVANCEMENT
OF SMALL TELEPHONE COMPANIES,
a/k/a ORGANIZATION FOR THE
PROMOTION AND ADVANCEMENT
OF SMALL TELECOMMUNICATIONS
COMPANIES (OPASTCO); WESTERN
TELECOMMUNICATIONS ALLIANCE;
NATIOINAL EXCHANGE CARRIER
ASSOCIATION, INC.; ARLINGTON
TELEPHONE COMPANY; THE BLAIR
TELEPHONE COMPANY; CAMBRIDGE
TELEPHONE COMPANY; CLARKS
TELECOMMUNICATIONS CO.;
CONSOLIDATED TELEPHONE
COMPANY; CONSOLIDATED TELCO,
INC.; CONSOLIDATED TELCOM, INC.;
THE CURTIS TELEPHONE COMPANY;
EASTERN NEBRASKA TELEPHONE
COMPANY; GREAT PLAINS
COMMUNICATIONS, INC.; K. & M.
TELEPHONE COMPANY, INC.;
NEBRASKA CENTRAL TELEPHONE
COMPANY; NORTHEAST NEBRASKA
TELEPHONE COMPANY; ROCK
COUNTY TELEPHONE COMPANY;
THREE RIVER TELCO; RCA - The
Competitive Carriers Association; RURAL
TELECOMMUNICATIONS GROUP,
INC.; CENTRAL TEXAS TELEPHONE
COOPERATIVE, INC.; VENTURE
COMMUNICATIONS COOPERATIVE,
INC.; ALPINE COMMUNICATIONS,
LC; EMERY TELCOM; PENASCO
VALLEY TELEPHONE COOPERATIVE,
INC.; SMART CITY TELECOM;
SMITHVILLE COMMUNICATIONS,
INC.; SOUTH SLOPE COOPERATIVE
TELEPHONE CO., INC.; SPRING
GROVE COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC;
VIRGINIA STATE CORPORATION
COMMISSION; MONTANA PUBLIC
SERVICE COMMISSION, VERIZON;
AT&T, INC.; SPRINT NEXTEL
CORPORATION; LEVEL 3
COMMUNICATIONS, LLC;
CENTURYLINK INC.; COX
COMMUNICATIONS, INC.; NATIONAL
TELECOMMUNICATIONS
COOPERATIVE ASSOCIATION;
INDEPENDENT TELEPHONE &
TELECOMMUNICATIONS ALLIANCE;
ORGANIZATION FOR THE
PROTECTION AND ADVANCEMENT
OF SMALL TELEPHONE COMPANIES,
a/k/a ORGANIZATION FOR THE
PROMOTION AND ADVANCEMENT
OF SMALL TELECOMMUNICATIONS
COMPANIES (OPASTCO); METROPCS
COMMUNICATIONS, INC.;
ARLINGTON TELEPHONE COMPANY;
THE BLAIR TELEPHONE COMPANY;
CAMBRIDGE TELEPHONE COMPANY;
CLARKS TELECOMMUNICATIONS
CO.; CONSOLIDATED TELEPHONE
COMPANY; CONSOLIDATED TELCO,
INC.; CONSOLIDATED TELCOM, INC.;
THE CURTIS TELEPHONE COMPANY;
EASTERN NEBRASKA TELEPHONE
COMPANY; GREAT PLAINS
COMMUNICATIONS, INC.; K. & M.
TELEPHONE COMPANY, INC.;
NEBRASKA CENTRAL TELEPHONE
COMPANY; NORTHEAST NEBRASKA
TELEPHONE COMPANY; ROCK
COUNTY TELEPHONE COMPANY;
THREE RIVER TELCO; NATIONAL
EXCHANGE CARRIER ASSOCIATION,
INC. (NECA), COMCAST
CORPORATION; VONAGE HOLDINGS
CORPORATION; RURAL
TELECOMMUNICATIONS GROUP,
INC.; NATIONAL CABLE &
TELECOMMUNICATIONS
ASSOCIATION; CENTRAL TEXAS
TELEPHONE COOPERATIVE, INC.;
VENTURE COMMUNICATIONS
COOPERATIVE, INC.; ALPINE
COMMUNICATIONS, LC; EMERY
TELCOM; PENASCO VALLEY
TELEPHONE COOPERATIVE, INC.;
SMART CITY TELECOM; SMITHVILLE
COMMUNICATIONS, INC.; SOUTH
SLOPE COOPERATIVE TELEPHONE
CO., INC.; SPRING GROVE
COMMUNICATIONS; STAR
TELEPHONE COMPANY; 3 RIVERS
TELEPHONE COOPERATIVE, INC.;
WALNUT TELEPHONE COMPANY,
INC.; WEST RIVER COOPERATIVE
TELEPHONE COMPANY, INC.; RONAN
TELEPHONE COMPANY; HOT
SPRINGS TELEPHONE COMPANY;
HYPERCUBE TELECOM, LLC,

    Intervenors.

STATE MEMBERS OF THE FEDERAL-
STATE JOINT BOARD ON UNIVERSAL
SERVICE,


          Amicus Curiae.
                 PETITION FOR REVIEW OF ORDERS OF THE
                 FEDERAL COMMUNICATIONS COMMISSION
                             (FCC No. 11-161)


Before BRISCOE, HOLMES, and BACHARACH, Circuit Judges.


BACHARACH, Circuit Judge.



Argued for Petitioners:

James Bradford Ramsey, National Association of Regulatory Utility Commissioners,
Washington, D.C., Russell Blau, Bingham McCutchen LLP, Washington, D.C., Robert
Allen Long, Jr., Covington & Burling, Washington, D.C., Michael B. Wallace, Wise
Carter Child & Caraway, Jackson, Mississippi, Pratik A. Shah, Akin Gump Strauss Hauer
& Feld LLP, Washington, D.C, Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, Joseph K. Witmer, Pennsylvania Public Utility Commission,
Harrisburg, Pennsylvania, Christopher F. Van de Verg, Annapolis, Maryland, Lucas M.
Walker, Molo Lamken, Washington, D.C., Don Lee Keskey, Public Law Resource Center
PLLC, Lansing, Michigan, Harvey Reiter, Stinson Morrison Hecker LLP, Washington,
David Bergmann, Columbus, Ohio, E. Ashton Johnston, Lampert, O’Connor & Johnston,
P.C., Washington, D.C., Heather Marie Zachary, Wilmer Cutler Pickering Hale and Dorr,
Washington, D.C., and William Scott McCollough, McCollough Henry, Austin, Texas.

Argued for Respondents:

Richard Welch, James M. Carr, and Maureen Katherine Flood, Federal Communications
Commission, Washington, D.C.

Argued for Respondents-Intervenors:

Scott H. Angstreich, Huber, Hansen, Todd, Evans & Figel, Washington, D.C., Howard J.
Symons, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., and Samuel L. Feder,
Jenner & Block LLP, Washington, D.C.
Appearances for Petitioners:

David R. Irvine, Jenson Stavros & Guelker, and Alan L. Smith, Salt Lake City, Utah, for
Direct Communications Cedar Valley, LLC, Totah Communications, Inc., H&B
Communications, Inc., The Moundridge Telephone Company of Moundridge, Pioneer
Telephone Association, Inc., Twin Valley Telephone, Inc., and Pine Telephone Company,
Inc.

Bohdan R. Pankiw, Kathryn G. Sophy, Shaun A. Sparks, and Joseph K. Witmer,
Pennsylvania Public Utility Commission, Harrisburg, Pennsylvania, for Pennsylvania
Public Utility Commission.

Benjamin H. Dickens, Jr. and Mary J. Sisak, Blooston, Mordkofsky, Dickens, Duffy &
Prendergrast, LLP, and Craig S. Johnson, Johnson & Sporleder, Jefferson City, Missouri,
for Choctaw Telephone Company.

James Christopher Falvey and Charles Anthony Zdebski, Eckert Seamens Cherin &
Mellott, Washington, D.C., for Core Communications, Inc.

David Bergmann, Columbus, Ohio, Paula Marie Carmody, Maryland’s Office of People’s
Counsel, Baltimore, Maryland, and Christopher J. White, New Jersey Division of Rate
Counsel, Office of the Public Advocate, Newark, New Jersey, for National Association of
State Utility Consumer Advocates.

Russell Blau and Tamar Elizabeth Finn, Bingham McCutchen LLP, Washington, D.C.,
for National Telecommunications Cooperative Association, U.S. Telepacific Corp.,
OPASTCO, and Western Telecommunications Alliance.

Rebecca Hawkins and Michael B. Wallace, Wise Carter Child & Caraway, Jackson,
Mississippi, David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP,
McLean, Virginia, for Cellular South Inc.

Daniel Deacon, Jonathan Nuechterlein and Heather Marie Zachary, Wilmer Cutler
Pickering Hale and Dorr, Washington, D.C., and Christopher M. Heimann and Gary L.
Phillips, AT&T, Inc., Washington, D.C., for AT&T, Inc.

William Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent,
II, Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and
Steven H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Halo
Wireless, Inc.
Jennifer P. Bagg, E. Ashton Johnston, and Donna M. Lampert, Lampert, O’Connor &
Johnston, P.C., Washington, D.C., and Glenn Richards, Pillsbury Winthrop Shaw
Pittman, Washington, D.C., for The Voice on the Net Coalition, Inc.

John Holland Jones, Office of the Ohio Attorney General, Columbus, Ohio, for Public
Utilities Commission of Ohio.

Thomas Jones, David Paul Murray, and Nirali Patel, Willkie, Farr & Gallagher LLP,
Washington, D.C., for TW Telecom Inc.

Bridget Asay, Office of the Attorney General for the State of Vermont, Montpelier,
Vermont, for Vermont Public Service Board.

William Scott McCollough, McCollough Henry, Austin, Texas, Walter Harriman Sargent,
II, Walter H. Sargent, a professional corporation, Colorado Springs, Colorado, and
Steven H. Thomas, McGuire, Craddock & Strother, P.C., Dallas, Texas, for Transcom
Enhanced Services, Inc.

Robert A. Fox, Kansas Corporation Commission Topeka, Kansas, for The State
Corporation Commission.

Yaron Dori, Robert Allen Long, Jr., and Gerard J. Waldron, Covington & Burling,
Washington, D.C., for Centurylink, Inc.

John Boles Capehart, Akin Gump Strauss Hauer & Feld, Dallas, Texas, Sean Conway,
Patricia Ann Millett, and James Edward Tysse, Akin Gump Strauss Hauer & Feld,
Washington, D.C., and Michael C. Small, Akin Gump Strauss Hauer & Feld,
Washington, D.C., for Gila River Indian Community and Gila River
Telecommunications, Inc.

Don Lee Keskey, Public Law Resources Center PLLC, Lansing Michigan, for
Consolidated Telco, Inc.

Roger Dale Dixon, Jr., Law Offices of Dale Dixon, Carlsbad, California, for North
County Communications Corporation.

David LaFuria and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,
Virginia, for United States Cellular Corporation.

David LaFuria, Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez &
Sachs, LLP, McLean, Virginia, for Petitioners PR Wireless, Inc. and Docomo Pacific,
Inc.
Todd Bradley Lantor, and Russell Lukas, Lukas, Nace, Gutierrez & Sachs, LLP, McLean,
Virginia, for Petitioners Nex-Tech Wireless, LLC, and Cellular Network Partnership, A
Limited Partnership.

Russell Blau, Bingham McCutchen LLP, Washington, D.C., for Consolidated
Communications Holdings, Inc.

James Bradford Ramsay and Holly R. Smith, National Association of Regulatory Utility
Commissioners, Washington, D.C., for National Association of Regulatory Utility
Commissioners.

David Cosson, Washington, D.C., H. Russell Frisby, Jr., Dennis Lane, and Harvey Reiter,
Stinson Morrison Hecker LLP, Washington, D.C., for Rural Independent Competitive
Alliance, Rural Telephone Service Company, Inc., Adak Eagle Enterprises LLC, Adams
Telephone Cooperative, Alenco Communications, Inc., Arlington Telephone Company,
Bay Springs Telephone Company, Big Bend Telephone Company, The Blair Telephone
Company, Blountsville Telephone LLC, Blue Valley Telecommunications, Inc., Bluffton
Telephone Company, Inc., BPM, Inc., Brantley Telephone Company, Inc., Brazoria
Telephone Company, Brindlee Mountain Telephone LLC, Bruce Telephone Company,
Bugs Island Telephone Cooperative, Cameron Telephone Company, LLC, Chariton
Valley Telephone Corporation, Chequamegon Communications Cooperative, Inc.,
Chickamauga Telephone Corporation, Chicksaw Telephone Company, Chippewa County
Telephone Company, Clear Lake Independent Telephone Company, Comsouth
Telecommunications, Inc., Copper Valley Telephone Cooperative, Cordova Telephone
Cooperative, Crockett Telephone Company, Inc., Darien Telephone Company, Deerfield
Famers’ Telephone Company, Delta Telephone Company, Inc., East Ascention
Telephone Company, LLC, Eastern Nebraska Telephone Company, Eastex Telephone
Coop., Inc., Egyptian Telephone Cooperative Association, Elizabeth Telephone
Company, LLC, Ellijay Telephone Company, Farmers Telephone Cooperative, Inc.,
Flatrock Telephone Coop., Inc., Franklin Telephone Company, Inc., Fulton Telephone
Company, Inc., Glenwood Telephone Company, Granby Telephone Company LLC, Hart
Telephone Company, Hiawatha Telephone Company, Holway Telephone Company,
Home Telephone Company (St. Jacob Illinois), Home Telephone Company (Moncks
Corner, South Carolina), Hopper Telecommunications Company, Inc., Horry Telephone
Cooperative, Inc., Interior Telephone Company, Kaplan Telephone Company, Inc., KLM
Telephone Company, City of Ketchikan, Alaska, Lackawaxen Telecommunications
Services, Inc., Lafourche Telephone Company, LLC, La Harpe Telephone Company,
Inc., Lakeside Telephone Company, Lincolnville Telephone Company, Loretto
Telephone Company, Inc., Madison Telephone Company, Matanuska Telephone
Association, Inc., McDonough Telephone Coop., Inc., MGW Telephone Company, Inc.,
Mid Century Telephone Coop., Inc., Midway Telephone Company, Mid-Maine Telecom,
LLC, Mound Bayou Telephone & Communications, Inc., Mondville Telephone
Company, Inc., Mukluk Telephone Company, Inc., National Telephone of Alabama, Inc.,
Ontonagon County Telephone Company, Otelco Mid-Missouri LLC, Otelco Telephone
LLC, Panhandle Telephone Cooperative, Inc., Pembroke Telephone Company, Inc.,
People’s Telephone Company, Peoples Telephone Company, Piedmont Rural Telephone
Cooperative, Inc., Pine Belt Telephone Company, Pine Tree Telephone LLC, Pioneer
Telephone Cooperative, Inc., Poka Lambro Telephone Cooperative, Inc., Public Service
Telephone Company, Ringgold Telephone Company, Roanoke Telephone Company,
Inc., Rock County Telephone Company, Saco River Telephone LLC, Sandhill Telephone
Cooperative, Inc., Shoreham Telephone LLC, The Siskiyou Telephone Company, Sledge
Telephone Company, South Canaan Telephone Company, South Central Telephone
Association, Star Telephone Company, Inc., Stayton Cooperative Telephone Company,
The North-Eastern Pennsylvania Telephone Company, Tidewater Telecom, Inc., Tohono
O’Odham Utility Authority, Unitel, Inc., War Telephone LLC, West Carolina Rural
Telephone Cooperative, Inc., West Tennessee Telephone Company, Inc., West Wisconsin
Telecom Cooperative, Inc., Wiggins Telephone Association, Winnebago Cooperative
Telecom Association, Yukon Telephone Co., Inc.

Maureen A. Scott, Wesley Van Cleve, and Janet F. Wagner, Arizona Corporation
Commission, Legal Division, Phoenix, Arizona, for Arizona Corporation Commission.

Jeffrey A. Lamken and Lucas M. Walker, Molo Lamkin, Washington, D.C.,
for Windstream Communications, Inc., and Windstream Corporation.

Appearances for Respondents:

Laurence Nicholas Bourne, James M. Carr, Maureen Katherine Flood, Jacob Matthew
Lewis, Austin Schlick, and Richard Welch, Federal Communications Commission,
Washington, D.C., for the Federal Communications Commission.

Robert Nicholson and Robert J. Wiggers, United States Department of Justice,
Washington, D.C., for United States of America.

Appearances for Intervenors:

Thomas J. Moorman, Woods & Aitken, Washington, D.C. and Paul M. Schudel, Woods
& Aitken, Lincoln, Nebraska, for The Blair Telephone Company, Clarks
Telecommunications Co., Consolidated Telco, Inc., Consolidated Telephone Company,
Consolidated Telecom, Inc., The Curtis Telephone Company, Great Plains
Communication, Inc. K&M Telephone Company, Inc., Nebraska Central Telephone
Company, Rock County Telephone Company, Three River Telco, Cambridge Telephone
Company, Northeast Nebraska Telephone Company.

David Cosson, Washington, D.C., for Eastern Nebraska Telephone Company, and H.
Russell Frisby, Jr., Dennis Lane, and Harvey Reiter, Stinson Morrison Hecker LLP,
Washington, D.C., and Thomas J. Moorman, Woods & Aitken, Washington, D.C. and
Paul M. Schudel, Woods & Aitken, Lincoln, Nebraska, for Arlington Telephone
Company.

Yaron Dori, Robert Allen Long, Jr., and Gerard J. Waldron, Covington & Burling,
Washington, D.C., for Centurylink, Inc.

Gerard J. Duffy, Benjamin H. Dickens, Jr., Robert M. Jackson, and Mary J. Sisak,
Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP, Washington, D.C., for 3
Rivers Telephone Cooperative, Inc. , Venture Communications Cooperative, Inc., Alpine
Communications, LC, Emery Telcom, Penasco Valley Telephone Cooperative, Inc.,
Smart City Telecom, Smithville Communications, Inc., South Slope Cooperative
Telephone Co., Inc., Spring Grove Communications, Star Telephone Company, Walnut
Telephone Company, and West River Cooperative Telephone Company, Inc.

Ivan C. Evilsizer, Evilsizer Law Office, Helena, Montana, for Ronan Telephone
Company and Hot Springs Telephone Company.

Helen E. Disenhaus and Ashton Johnston, Lampert, O’Connor & Johnston, P.C.,
Washington, D.C., for Hypercube Telecom, LLC.

Raymond Lee Doggett, Jr., Virginia State Corporation Commission, Richmond, Virginia,
for Virginia State Corporation Commission.

Dennis Lopach, Montana Public Service Commission, Helena, Montana, for Montana
Public Service Commission.

Christopher M. Heimann and Gary L. Phillips, SBC Communications, Washington, D.C.,
Jonathan Nuechterlein and Heather Marie Zachary, Wilmer Cutler Pickering Hale and
Dorr, Washington, D.C., for AT&T, Inc.

J. G. Herrington and David E. Mills, Dow Lohnes, PLLC, Washington, D.C., for Cox
Communications.

Scott H. Angstreich, Joshua D. Branson, Brendan J. Crimmins, Kellogg, Huber, Hansen,
Todd, Evans & Figel, Washington, D.C., and Michael E. Glover and Christopher Michael
Miller, Verizon Communications, Inc., Arlington, Virginia, for Verizon.

Russell Blau, Bingham McCutchen LLP, Washington, D.C., for National
Telecommunications Cooperative Association.
Carl W. Northrop, Telecommunications Law Professionals PLLC, Washington, D.C.,
Mark A. Stachiw, MetroPCS Communications, Inc., Richardson, Texas, for MetroPCS
Communications, Inc.

Clare Kindall, Office of the Attorney General Energy Department, New Britain,
Connecticut, for Connecticut Public Utilities Regulatory Authority.

Samuel L. Feder and Luke C. Platzer, Jenner & Block LLP, Washington, D.C., for
Comcast Corporation.

Christopher J. Wright, Wiltshire & Grannis, LLP, Washington, D.C., for Level 3
Communications, LLC, Vonage Holdings Corp., and Sprint Nextel Corporation.

Rick C. Chessen, Neal M. Goldberg, Jennifer McKee, and Steven F. Morris, National
Cable & Telecommunications Association, Washington, D.C., and Ernest C. Cooper,
Robert G. Kidwell, and Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky &
Popeo, P.C., Washington, D.C., for National Cable & Telecommunications Association.

Genevieve Morelli, The Independent Telephone & Telecommunications Alliance,
Washington, D.C., for Independent Telephone & Telecommunications Alliance.

Gerard J. Duffy, Blooston, Mordkofsky, Dickens, Duffy & Prendergrast, LLP,
Washington, D.C., for Western Telecommunications Alliance.

Gregory Jon Vogt, Law Offices of Gregory J. Vogt, PLLC, Alexandria, Virginia, and
Richard A. Askoff, Sr., National Exchange Carrier Association, Inc., Whippany, New
Jersey for National Exchange Carrier Association.

Craig Edward Gilmore, L. Charles Keller, and David H. Solomon, Wilkinson, Barker,
Knauer, LLP, Washington, D.C., for T-Mobile USA, Inc.

Caressa Davison Bennet, Kenneth Charles Johnson, Anthony Veach, and Daryl Altey
Zakov, Bennet & Bennet, Bethesda, Maryland, for Rural Telecommunications Group,
Inc. and Central Telephone Cooperative, Inc.

Appearances for Amicus Curiae:

James Hughes Cawley, Pennsylvania Public Utility Commission, Harrisburg,
Pennsylvania, and James Bradford Ramsay, National Association of Regulatory Utility
Commissioners, Washington, D.C., for State Members of the Federal-State Joint Board
on Universal Service.
                                 Table of Contents
                                                                        Page

I.    The FCC’s Restructuring of the Telecommunications Market           2

      A.    The Old Regime                                               2

      B.    The New Regime                                               7

      C.    The Transition from the Old Regime to the New
            Regime                                                       8

      D.    The Types of Challenges                                      9

II.   Challenges to the FCC’s Authority to Implement a National
      Bill-and-Keep Framework for All Traffic                           10

      A.    Standard of Review                                          11

      B.    The FCC’s Authority Over Access Charges on All Traffic      13

            1.     Traffic Between LECs and Long-Distance Carriers      13

                   a.    The FCC’s Rationale                            13

                   b.    The Petitioners’ Arguments                     14

                   c.    Traffic Between LECs and IXCs
                         as “Reciprocal Compensation”                   15

                         i.      “Reciprocal Compensation” as a Term
                                 of Art                                 15

                         ii.     Plain Meaning of the Term
                                 “Reciprocal Compensation”              17

                   d.    The Petitioners’ Reliance on §§ 252(d)(2)(A)
                         and 251(c)(2)(A)                               18




                                          i
                  i.     Section 252(d)(2)(A)                  19

                  ii.    Section 251(c)(2)(A)                  20

     2.    Preemption of State Regulatory Authority Over
           Intrastate Access Charges                           22

           a.     Sections 152(b) and 601(c)                   22

           b.     Section 253                                  24

           c.     Section 251(d)(3)                            26

           d.     Section 251(g)                               27

     3.    FCC Authority Over Intrastate Origination Charges   29

           a.     Section 251(b)(5) and Originating
                  Access Traffic                               30

           b.     The FCC’s Interpretations of
                  “Transport” and “Termination”                31

           c.     The Purported Prohibition of Originating
                  Access Charges                               32

C.   Bill-and-Keep as a Default Methodology                    33

     1.    Consideration Under § 252                           35

     2.    The “Just and Reasonable” Rate
           Requirement in §§ 201(b) and 252(d)(2)              41

           a.     Consideration of a Statutory Right
                  to Payments from Other Carriers              43

           b.     Sufficiency of Cost Recovery                 44

D.   Authority for the States to Suspend or Modify the
     New Requirements                                          45


                                   ii
III.   Challenges to Cost Recovery as Arbitrary and Capricious     47

       A.    The Transitional Plan                                 47

       B.    The Petitioners’ Challenges                           49

       C.    Standard of Review                                    49

       D.    Consideration of the Apportionment
             Requirement in Smith                                  51

             1.     The Apportionment Requirement                  51

             2.     Application of Smith to the FCC’s
                    Recovery Mechanism                             52

             3.     Waiver of the Challenge to the Access
                    Recovery Charge                                54

             4.     Recovery of Interstate Costs through
                    End-User Rates and Universal Service Support   55

       E.    Challenges Involving the Adequacy of the Recovery
             Mechanism                                             56

IV.    Procedural Irregularities in the Rulemaking Process         58

       A.    The FCC Proceedings                                   58

       B.    The Petitioners’ Arguments                            60

             1.     The Waiver Issue                               60

             2.     The FCC’s Motion to Strike                     61

       C.    Our Review of the Constitutional Challenges           62

       D.    The Petitioners’ Due Process Challenges               63

             1.     General Challenges to the Ex Partes            63


                                           iii
           2.     Ex Parte Challenges Based on Specific
                  Documents                                         65

           3.     The FCC’s Placement of Documents in the
                  Rulemaking Record                                 66

           4.     The FCC’s Decision to Rule on Pending Petitions   67

           5.     Adequacy of the August 3, 2011, Notice            68

           6.     Length of the Comment Period                      68

           7.     Cumulative Challenge                              69

     E.    “Commandeering” of State Commissions                     69

V.   Individual Challenges to the Order                             71

     A.    Rural Independent Competitive Alliance’s Challenge
           to the FCC’s Limitation on Funding Support for
           Rural Competitive LECs                                   71

     B.    The Challenge by National Telecommunications
           Cooperative Association, U.S. TelePacific Corporation,
           and North County Communications Corporation to the
           Transition of CMRS-LEC Traffic to Bill-and-Keep          75

     C.    Core Communications, Inc. and North County
           Communications Corporation’s Challenge to the
           FCC’s New Regulations on Access Stimulation              77

           1.     The FCC’s Refusal to Allow CLECs to Use
                  ILEC Ratemaking Procedures                        78

           2.     The FCC’s Requirement for Access-Stimulating
                  CLECs to Benchmark to the Price-Cap LEC
                  with the State’s Lowest Access Rates              81




                                          iv
D.   AT&T, Inc.’s Challenge to the FCC’s Decision
     to Allow VoIP-LEC Partnerships to Collect
     Intercarrier Compensation Charges for Services
     Performed by the VoIP Partner                          83

E.   Voice on the Net Coalition, Inc.’s Challenges to the
     FCC’s No-Blocking Obligation                           86

     1.    The Waiver Test                                  87

     2.    Challenge to the Notice                          89

     3.    Challenge to the Adequacy of the Explanation     91

     4.    Challenge to the FCC’s Ancillary Jurisdiction    91

F.   Transcom Enhanced Services, Inc.’s Challenges to
     the FCC’s IntraMTA Rule, Provisions on Call-
     Identification, and Blocking of Calls                  93

     1.    Transcom’s Challenge to the FCC’s IntraMTA
           Rule                                             93

     2.    Transcom’s Challenge to the Call-Identifying
           Rules                                            97

     3.    Transcom’s Challenge to the FCC’s No-
           Blocking Rules                                   99

G.   Windstream Corporation and Windstream
     Communications, Inc.’s Challenges to Origination
     Charges                                                99

     1.    Windstream’s Challenge to the FCC’s
           Explanation in the Original Order                101

     2.    Windstream’s Challenge to the FCC’s
           Explanation for the New Rule                     102




                                     v
            3.     Windstream’s Challenge to the FCC’s
                   Failure to Provide Funding Support      104

            4.     Windstream’s Challenge to the Initial
                   Period of Six Months                    108

VI.   Conclusion                                           108




                                          vi
                      Issues Involving Intercarrier Compensation

       Exercising its rulemaking authority under the Communications Act of 1934 and

the Telecommunications Act of 1996, the FCC overhauled the intercarrier compensation

regime and adopted a “uniform national bill-and-keep framework . . . for all

telecommunications traffic exchanged with a [local exchange carrier].” 2 R. at 403 ¶ 34.

To ease the transition to a new regime of bill-and-keep, the FCC also adopted a

comprehensive plan to phase out the old intercarrier compensation system. See id. at 403-

04 ¶ 35. The Petitioners challenge the plan on grounds that it exceeded the FCC’s

authority, was arbitrary and capricious, and resulted in a denial of due process.1 These

challenges are rejected.


1
       This opinion involves arguments the Petitioners and Intervenors presented in the
following briefs:

       !      Joint Intercarrier Compensation Principal Brief of Petitioners (July 17,
              2013);

       !      Additional Intercarrier Compensation Issues Principal Brief (Pet’rs) (July
              11, 2013);

       !      AT&T Principal Brief (July 16, 2013);

       !      Voice on the Net Coalition, Inc. Principal Brief (July 15, 2013);

       !      Transcom Principal Brief (July 12, 2013);

       !      National Association of State Utility Consumer Advocates Principal Brief
              (July 12, 2013);

       !      Windstream Principal Brief (July 17, 2013);

       !      Incumbent Local Exchange Carrier Intervenors’ Brief in Support of
              Petitioners (July 15, 2013).
I.     The FCC’s Restructuring of the Telecommunications Market

       In assessing the Petitioners’ challenges to this plan, we must take into account

what the FCC was trying to accomplish.

       A.     The Old Regime

       The FCC adopted the plan against the backdrop of two types of arrangements.

One provided reciprocal compensation for local calls, and the other involved charges for

long-distance carriers to connect to a local carrier’s network. In the Order, the FCC

revamped this regime, exercising authority over all traffic exchanged with a local

exchange carrier (“LEC”), including intrastate calls. See id. at 632 ¶ 739, 642 ¶¶ 761-62.

       Before 1996, regulation of telecommunications was generally divided between the

FCC and state commissions. The FCC regulated interstate service, and state commissions

regulated intrastate service. La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 360 (1986).

Under this division of authority, states granted exclusive franchises to LECs within their

designated service areas. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371 (1999).

Through these franchises, the LECs owned the local telecommunications networks. Id.

       In 1996, Congress set out to restructure the market to enhance competition. These

efforts led to enactment of the Telecommunications Act of 1996. In this statute, Congress

empowered the FCC and created a new breed of competitors (called “Competitive LECs”

or “CLECs”). See id. at 378 n.6; MCI Telecomm. Corp. v. Bell Atl. Pa., 271 F.3d 491,

498 (3d Cir. 2001).




                                             2
         Under the new statute, all LECs would assume certain duties. See 47 U.S.C.

§ 251. One of these duties involved the establishment of arrangements for “reciprocal

compensation” in the “transport and termination of telecommunications.” Id. at

§ 251(b)(5). This statutory duty includes two key terms underlying the present litigation:

“reciprocal compensation” and “telecommunications.” In the Order, the FCC recently

interpreted these terms to cover all traffic, including intrastate service and use of local

networks by long-distance carriers. Id. at 643 ¶ 764, 644 n.1374, 647 ¶ 772, 754-55

¶ 971.

         This interpretation reflects a departure from the FCC’s previous reading of the

1996 Act. In the past, for example, the FCC had narrowly read the phrase “reciprocal

compensation” as limited to local traffic. See Bell Atl. Tel. Cos. v. FCC, 206 F.3d 1, 4

(D.C. Cir. 2000). Under the FCC’s previous interpretation, the parties or state

commissions set the charges for intrastate traffic between two LECs. Supp. R. at 20-21

¶ 53.

         The charges were called “access charges” because long-distance carriers (called

“IXCs”) paid LECs for the opportunity to use their networks at the start- and end-points

of the calls. See id. at 19 ¶ 48. This system is known as “exchange access.” 47 U.S.C.

§ 153(20).




                                               3
      In exchange access, long-distance calls start (or “originate”) on an LEC’s network,

continue on the IXC’s network to another local telephone exchange, and end (or

“terminate”) on the network of another LEC. This process is illustrated in Diagram 1:




      Under the old regime, compensation between local- and long-distance carriers

involved one of three combinations:

      !      between an IXC and two LECs for an interstate call,

      !      between an IXC and two LECs for a call within the boundaries of a single
             state, and

      !      between two LECs.

      The three different combinations led to three different types of access charges,

each with its own mode of regulation:

      !      Interstate IXC-LEC Traffic: For this kind of traffic, the IXC paid an access
             charge to the originating LEC and a terminating interstate access charge to
             the terminating LEC. The access charges were regulated by the FCC.
             Supp. R. at 21 ¶ 53. For example, Diagram 2 illustrates a call from Denver
             to Oklahoma City:


                                            4
!   Intrastate IXC-LEC Traffic: For traffic within a single state by an IXC and
    LEC, the IXC paid an access charge to the originating LEC and an access
    charge to the terminating LEC. The access charge was governed by state
    law and was typically set above interstate rates. Id. This illustration
    reflects a typical intrastate call, one from Denver to Colorado Springs:




!   Local LEC-LEC Traffic: For local traffic between two LECs, the LECs
    paid each other consistently with their reciprocal compensation
    arrangement. The arrangement was either negotiated by the parties or set
    by the states using a methodology prescribed by the FCC under 47
    §§ 201(b) and 251(b)(5). Id. An example appears in Diagram 4, which
    shows a call from someone in Denver to another person in Denver:




                                  5
       Each arrangement assumed that the calling party should pay for the call. 2 R. at

634 ¶ 744. This assumption was based on the view that the callers were the only persons

that benefited from the call and that they should bear all of the costs. Id. Thus, callers

paid their own carriers, which in turn paid other carriers for access to their networks to

reach the person being called. Diagram 5 shows the payments for local- and long-

distance calls:




                                              6
       B.     The New Regime

       In the Order, the FCC restructured this system in three ways. First, the FCC

reinterpreted the 1996 law to cover all traffic, including traffic subject to charges for

access to a network. Id. at 642 ¶ 761-62. Second, the FCC claimed that it could prevent

state commissions from approving access charges for intrastate calls in the absence of an




                                              7
agreement between the parties. Id. at 644 ¶ 766. Third, the FCC rejected the idea that a

caller should bear the full cost of the call; thus, the FCC prescribed a new system, known

as “bill-and-keep,” for all traffic. Id. at 632 ¶ 741; see id. at 634 ¶ 744, 640 ¶ 756.

       “Bill-and-keep” anticipates that carriers will recover their costs from their end-user

customers rather than from other carriers. See id. at 631 ¶ 737, 648 ¶ 775 n.1408. In

moving to “bill-and-keep,” the FCC reasoned that the parties to a call should split the

costs because both enjoy the benefits. Id. at 634 ¶ 744, 640 ¶ 756, 649 n.1409. Once bill-

and-keep is fully implemented for all traffic exchanged with an LEC, the calling party

and the called party will divide the costs. Id. at 649 n.1409.

       C.     The Transition from the Old Regime to the New Regime

       Recognizing that the change would disrupt the market, the FCC opted to gradually

transition to bill-and-keep. In the transition period, incumbent LECs (“ILECs”) could

recover some, but not all, of their lost intercarrier compensation revenue through the

FCC’s funding mechanisms. Id. at 683-84 ¶¶ 847-48.

       The length of the transitional period will vary for different types of LECs. To

determine the transitional period, the FCC classifies ILECs based on the way that they are

regulated: “Price-cap ILECs” are LECs that must set rates at or below a price cap, and

“rate-of-return ILECs” are allowed to charge based on a set rate of return. Nat’l Rural

Telecomm. Ass’n v. FCC, 988 F.2d 174, 177-78 (D.C. Cir. 1993). For price-cap ILECs,

the FCC set a six-year period to gradually decrease reciprocal compensation charges and




                                               8
access charges for termination; for rate-of-return ILECs, the transition for these

intercarrier charges will last nine years. 2 R. at 661-63 ¶ 801, 661-63 Figure 9.

       CLECs are generally required to benchmark rates to an ILEC and utilize its

timeline for the transition. Id. at 272 ¶ 801. Traffic involving a wireless provider (called

“CMRS”) must transition to bill-and-keep either immediately or within six months,

depending on whether the traffic was subject to an existing agreement on intercarrier

compensation. Id. at 765 ¶ 996 (ordering an immediate transition); id. at 1145-46 ¶ 7

(extending the transition to six months for some CMRS-LEC traffic).

       The FCC allows ILECs to recover some, but not all, of their lost intercarrier

compensation revenues through a federal recovery mechanism. See id. at 683-84 ¶¶ 847-

48. Through this mechanism, carriers can recover some of their lost revenue through an

Access Recovery Charge on their end users. See id. at 715 ¶ 908. Carriers unable to

recover all of their eligible recovery through the Access Recovery Charge are eligible for

explicit support through the Connect America Fund. See id. at 721-22 ¶ 918.

       D.     The Types of Challenges

       The Petitioners challenge four aspects of the reforms: (1) implementation of bill-

and-keep for all traffic; (2) limitations on funding mechanisms during the transitional

period; (3) irregularities in the rule-making process; and (4) application of the reforms to

particular circumstances. We reject all of the challenges.




                                              9
II.    Challenges to the FCC’s Authority to Implement a National Bill-and-Keep
       Framework for All Traffic

       In the Order, the FCC concluded that 47 U.S.C. § 251(b)(5) applied to all

telecommunications traffic exchanged with an LEC. Based on this conclusion, the FCC

prescribed bill-and-keep as the default methodology for that traffic. The Petitioners

challenge not only the FCC’s authority to regulate the traffic, but also the way in which

the FCC chose to exercise this authority. Thus, we must address both challenges: the

FCC’s authority and the content of the new regulations.

       The FCC claims authority under 47 U.S.C. §§ 251(b)(5) and 201(b) to implement

bill-and-keep as the default intercarrier compensation framework for all traffic exchanged

with an LEC. See id. at 641 ¶ 760. For traffic between LECs and wireless providers, the

FCC also invokes authority under 47 U.S.C. § 332. Id. at 641 ¶ 760 n.1350, 675-76

¶¶ 834-36. And for interstate traffic, the FCC relies on 47 U.S.C. § 201. Id. at 646-47

¶ 771, 675-76 ¶¶ 834-36.

       Attacking this framework, the Petitioners raise three challenges.

       First, they challenge the FCC’s authority under § 251(b)(5). Joint Intercarrier

Compensation Principal Br. of Pet’rs at 7-28 (July 17, 2013). This challenge

encompasses three aspects of the traffic: (1) the FCC’s authority to regulate access

charges imposed by LECs on long-distance carriers; (2) the exclusive authority of states

in regulating intrastate access charges; and (3) the FCC’s authority over origination

charges. Id.


                                            10
       Second, the Petitioners argue that bill-and-keep does not constitute a permissible

methodology for at least some of the traffic. Id. at 28-45.

       Third, the Petitioners argue that the FCC lacks authority to order state

commissions to refuse exemptions to the bill-and-keep regime. Id. at 46-49.

       A.     Standard of Review

       Congress has unambiguously authorized the FCC to administer the

Communications Act through rulemaking and adjudication. City of Arlington v. FCC, __

U.S. __, 133 S. Ct. 1863, 1874 (2013). Thus, we apply Chevron deference to the FCC’s

interpretation of the statute and its own authority. Id. at 1874; Sorenson Commc’ns, Inc.

v. FCC, 659 F.3d 1035, 1042 (10th Cir. 2011).

       Chevron involves a two-step inquiry. Chevron U.S.A., Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837, 842-43 (1984); Sorenson, 659 F.3d at 1042.

       In the first step, we ask whether Congress has spoken on the issue. Qwest

Commc’ns Int’l, Inc. v. FCC, 398 F.3d 1222, 1229-30 (10th Cir. 2005) (quoting Chevron,

467 U.S. at 842). When the statute is unambiguous, we look no further and “give effect

to Congress’s unambiguously expressed intent.” Qwest, 398 F.3d at 1230 (citing

Chevron, 467 U.S. at 842-43).

       “[I]f the statute is silent or ambiguous with respect to the specific issue,” we must

decide “whether the agency’s answer is based on a permissible construction of the

statute.” Chevron, 467 U.S. at 843; see City of Arlington, 133 S. Ct. at 1874 (“Where




                                             11
Congress has established a clear line, the agency cannot go beyond it; and where

Congress has established an ambiguous line, the agency can go no further than the

ambiguity will fairly allow.”). When we address this issue, the Petitioners must show that

the FCC’s interpretation of the statute was impermissible. Nat’l Cable & Telecomms.

Ass’n, Inc. v. Gulf Power Co., 534 U.S. 327, 333 (2002).

       We review changes in the FCC’s interpretation of the Communications Act under

the Administrative Procedure Act (“APA”). See Nat’l Cable & Telecomms. Ass’n v.

Brand X Internet Servs., 545 U.S. 967, 981 (2005). But the APA does not subject the

FCC’s change in position to heightened review. FCC v. Fox Television Stations, Inc.,

556 U.S. 502, 514 (2009); Qwest Corp. v. FCC, 689 F.3d 1214, 1224 (10th Cir. 2012).

The APA requires only that “‘the new policy [be] permissible under the statute, [and] that

there are good reasons for it.’” Qwest Corp., 689 F.3d at 1225 (quoting Fox Television,

556 U.S. at 515). This requirement is satisfied if the FCC acknowledges that it is

changing position and provides a reasoned explanation for “disregarding facts and

circumstances that underlay or were engendered by the prior policy.” Fox Television, 556

U.S. at 515.2

       In applying Chevron and the APA, we confine our review to the grounds relied on

by the agency. Nat’l R.R. Passenger Corp. v. Bos. & Me. Corp., 503 U.S. 407, 420
2
       The Petitioners contended at oral argument that the FCC could not take an
expansive approach to its statutory authority when the agency had earlier taken a contrary
position. We reject this contention. An agency’s earlier interpretation of a statute does
not restrict future exercises of authority under Chevron. See Nat’l Cable & Telecomms.
Ass’n, 545 U.S. at 981.

                                            12
(1992) (citing S.E.C. v. Chenery Corp., 318 U.S. 80, 88 (1943)); S. Utah Wilderness

Alliance v. Office of Surface Mining Reclamation & Enforcement, 620 F.3d 1227, 1236

(10th Cir. 2010). But we can rely on “implicitly adopted rationales . . . as long as they

represent the ‘fair and considered judgment’ of the agency, rather than a ‘post hoc

rationalization.’” S. Utah Wilderness Alliance, 620 F.3d at 1236 (quoting Auer v.

Robbins, 519 U.S. 452, 462 (1997)).

       B.       The FCC’s Authority Over Access Charges on All Traffic

       The FCC interprets 47 U.S.C. § 201(b) and § 251(b)(5) to apply to all traffic,

including access given to long-distance carriers, intrastate traffic, and origination. This

interpretation is reasonable.

                1.    Traffic Between LECs and Long-Distance Carriers

       In adopting the new regulations, the FCC concluded that it had jurisdiction over all

traffic between LECs and long-distance carriers. 2 R. at 641 ¶ 760, 642 ¶¶ 761-62, 646-

47 ¶¶ 771-72.

                      a.        The FCC’s Rationale

       This interpretation flows in part from the language in § 251(b)(5). This section

provides that each LEC must “establish reciprocal compensation arrangements for the

transport and termination of telecommunications.” 47 U.S.C. § 251(b)(5). The term

“telecommunications” is defined in the statute and “encompasses communications traffic

of any geographic scope . . . or regulatory classification.” 47 U.S.C. § 153(50). Because




                                             13
the term is untethered to geographic or regulatory limits, the FCC regards its authority

under § 251(b)(5) to cover all traffic regardless of geography or regulatory classification.

2 R. at 642 ¶ 761.

       In addition, the FCC relies on 47 U.S.C. § 201(b), which authorizes the adoption

of regulations as necessary to carry out §§ 251 and 252. Id. at 641 ¶ 760; see 47 U.S.C.

§ 201(b); AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 (1999).

       Based on the broad definition of “telecommunications” and the text of § 201, the

FCC recently concluded that § 251(b)(5) covers all traffic between IXCs and LECs. 2 R.

at 642 ¶ 761, 643-44 ¶ 765. In doing so, the FCC recognized that it had changed its

interpretation of § 251(b)(5). Id. at 642 ¶ 761. But the FCC reasoned that its earlier

reading of the law had been “inconsistent” with the text. Id.3

                     b.     The Petitioners’ Arguments

       The Petitioners oppose this interpretation, contending that: (1) the statutory term

“reciprocal compensation” does not include traffic between IXCs and LECs, and (2)

other sections in the Communications Act preclude this reading of the FCC’s statutory

authority. These contentions fail under Chevron.



3
       The Petitioners contend that we should prefer an agency interpretation adopted
“when the origins of both the statute and the finding were fresh in the minds of their
administrators.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 12 n.9 (July
17, 2013) (quoting Sec’y of Labor v. Excel Mining, LLC, 334 F.3d 1, 7 (D.C. Cir. 2003)).
Because the FCC’s interpretation of the Communications Act is entitled to Chevron
deference under settled law, its “freshness” is irrelevant. See Brand X Internet Servs., 545
U.S. at 1001-02.

                                             14
                      c.    Traffic Between LECs and IXCs as “Reciprocal
                            Compensation”

       The FCC broadly interprets the phrase “reciprocal compensation” to encompass

any intercarrier compensation agreements between carriers. See id. at 641-42 ¶¶ 761-62,

643-44 ¶ 765. The Petitioners raise two challenges to this conclusion under the first step

of Chevron: (1) Congress used the term “reciprocal compensation” as a technical term of

art to denote local traffic between two LECs; and (2) the plain meaning of “reciprocal

compensation” cannot include traffic between IXCs and LECs because the payments go

only one way (to the LECs). Joint Intercarrier Compensation Principal Br. of Pet’rs at 7-

13 (July 17, 2013).

                            i.     “Reciprocal Compensation” as a Term of Art

       The Petitioners contend that Congress used the term “reciprocal compensation” as

a term of art. Id. at 7-9. According to the Petitioners, the term “reciprocal compensation”

was used in 1996 to refer to intercarrier compensation for local calls. Id. at 8-9. The

Petitioners’ evidence does not remove the ambiguity in the phrase “reciprocal

compensation.”

       Under step one of Chevron, we start with the statutory text to determine whether

the phrase “reciprocal compensation” is a term of art. See Ass’n of Am. R.R.s v. Surface

Transp. Bd., 161 F.3d 58, 64 (D.C. Cir. 1998). At this step, we give technical terms of art

their established meaning absent a contrary indication in the statute. McDermott Int’l Inc.

v. Wilander, 498 U.S. 337, 342 (1991); La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355,


                                             15
371-72 (1986). Thus, we must decide whether the Petitioners have shown that Congress

referred to the term “reciprocal compensation” as a term of art limited to local traffic. We

conclude that the Petitioners did not satisfy this burden.

       The Petitioners rely on two pieces of evidence: (1) an FCC website description of

the term “reciprocal compensation,” which limited its application to local calls; and (2)

accounts in the trade press, which discussed state-imposed reciprocal compensation

requirements for local traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at 8

n.4, 9 n.5 (July 17, 2013). The two pieces of evidence do not eliminate ambiguity in the

phrase.

       The website simply described “reciprocal compensation” as the FCC did at the

time. The FCC was then defining “reciprocal compensation” as limited to local traffic

between two LECs. The FCC now embraces a contrary definition, and we have no reason

to treat the prior interpretation as evidence of a term of art and disregard the current

interpretation.

       Accounts in the trade press also do little to eliminate ambiguity in the phrase

“reciprocal compensation.” Before enactment of the statute in 1996, the trade press

included some references to reciprocal compensation on local calls. See 3 R. at 1471

n.19. But these accounts do not suggest that the term “reciprocal compensation” is

inherently limited to local calls.




                                              16
        Accordingly, the Petitioners have not shown that the term “reciprocal

compensation” embodied a term of art limited to local traffic.

                             ii.    Plain Meaning of the Term “Reciprocal
                                    Compensation”

        The Petitioners also argue that the FCC has distorted the plain meaning of the term

“reciprocal compensation.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 25-

26 (July 17, 2013). According to the Petitioners, traffic between an LEC and IXC is not

“reciprocal” because the charges and traffic go only one way. Id. at 10, 25-26; Joint

Intercarrier Compensation Reply Br. of Pet’rs at 9-10 (July 31, 2013). For this position,

the Petitioners contend that for compensation to be “reciprocal,” both carriers must pay

each other. Joint Intercarrier Compensation Principal Br. of Pet’rs at 10 (July 17, 2013).

Relying on this definition, the Petitioners argue that access charges “are never reciprocal”

because the IXC pays the LECs on both ends to originate and terminate the traffic. Id.

(emphasis omitted).

        In effect, the Petitioners are arguing at step one of Chevron that § 251(b)(5) is

unambiguous because access charges are always paid to the LEC and never to the IXC.

But the nature of access charges does not remove ambiguities in the phrase “reciprocal

compensation.” See Pac. Bell v. Cook Telecom, Inc., 197 F.3d 1236, 1242-44 (9th Cir.

1999) (concluding that § 251(b)(5) can plausibly be read to cover an agreement between

an LEC and one-way paging provider even though the compensation flows only one

way).


                                              17
       Section 251(b)(5) requires LECs to establish arrangements for “reciprocal

compensation.” 47 U.S.C. § 251(b)(5). Thus, we could adopt the Petitioners’

interpretation only if the statute requires traffic and compensation to “actually flow to and

from both carriers . . . to be a ‘reciprocal compensation arrangement.’” Pac. Bell, 197

F.3d at 1244. This is a reasonable reading of the statute. But the statute can also be read

to simply require the existence of reciprocal obligations. See id. (concluding that one-

way paging providers were entitled to reciprocal compensation under the statute even

through traffic and payment are never reciprocal). A carrier can have a reciprocal

entitlement to compensation for transporting and terminating traffic even if it does not

ultimately transport or terminate a call. See Atlas Tel. Co. v. Okla. Corp. Comm’n, 400

F.3d 1256, 1264 (10th Cir. 2005) (stating that under 47 U.S.C. § 251(b)(5), the term

“reciprocal compensation” can cover traffic transported on an IXC’s network).

       The statutory term “reciprocal compensation” is ambiguous; thus, we reach the

second step of Chevron. At step two, we conclude that the FCC reasonably interpreted

the term “reciprocal compensation” for “telecommunications” to include the traffic

between IXCs and LECs.

                     d.     The Petitioners’ Reliance on §§ 252(d)(2)(A) and
                            251(c)(2)(A)

       The Petitioners argue that two other statutory sections (§§ 252(d)(2)(A) and

251(c)(2)(A)) would prevent application of § 251(b)(5) to access traffic. Joint Intercarrier

Compensation Principal Br. of Pet’rs at 10-11 (July 17, 2013). We disagree.


                                             18
                              i.     Section 252(d)(2)(A)

       The Petitioners invoke § 252(d)(2)(A), arguing that it precludes an expansive

reading of § 251(b)(5) because traffic never originates on an IXC’s network. Id. at 11-12;

Joint Intercarrier Compensation Reply Br. of Pet’rs at 9 (July 31, 2013). This argument is

invalid.

       Section 252(d)(2)(A) applies to state commission arbitrations of interconnection

agreements between an ILEC and another telecommunications carrier. See 47 U.S.C.

§ 252. Under this section, state commissions can consider reciprocal compensation terms

just and reasonable only if they “provide for the mutual and reciprocal recovery by each

carrier of costs associated with the transport and termination on each carrier’s network

facilities of calls that originate on the network facilities of the other carrier.” Id. at

§ 252(d)(2)(A). Because IXCs do not originate calls, the Petitioners contend that

reciprocal compensation arrangements cannot apply to traffic between LECs and IXCs.

See Joint Intercarrier Compensation Principal Br. of Pet’rs at 11-12 (July 17, 2013).

       The FCC rejected this argument, reasoning that § 252(d)(2)(A) does not limit

§ 251(b)(5). See 2 R. at 645-46 ¶ 768. In rejecting the argument, the FCC found that

§ 252(d)(2)(A) “‘deals with the mechanics of who owes what to whom,’” but “‘does not

define the scope of traffic to which § 251(b)(5) applies.’” Id. (quoting In re High-Cost

Universal Serv. Support, 24 FCC Rcd. 6475, 6481 ¶ 12 (2008)). With this finding, the

FCC reiterated that Congress did not intend “‘the pricing standards in section 252(d)(2) to




                                               19
limit the otherwise broad scope of section 251(b)(5).’” 2 R. at 645-46 ¶ 768 (quoting

High-Cost Universal Serv. Support, 24 FCC Rcd. 6475, 6480 ¶ 11 (2008)). Instead, the

FCC concluded that § 252(d)(2)’s pricing rules do “not address what happens when

carriers exchange traffic that originates or terminates on a third carrier’s network.” In re

High-Cost Universal Serv. Support, 24 FCC Rcd. at 6481 ¶ 12.

       The FCC’s interpretation is reasonable. Section 251(b)(5) broadly refers to “the

transport and termination of telecommunications.” 47 U.S.C. § 251(b)(5). This section is

incorporated into § 252(d)(2), but not the other way around. Consequently, there is

nothing in § 252(d)(2) to suggest that it limits the scope of § 251(b)(5). In these

circumstances, the FCC reasonably relied on the breadth of § 251(b)(5) to conclude that it

is not narrowed by § 252(d)(2).

                            ii.     Section 251(c)(2)(A)

       The Petitioners also rely on § 251(c)(2)(A), which distinguishes between

“exchange access” and “exchange service.” This section requires ILECs to provide

telecommunications carriers with interconnection to their networks “for the transmission

and routing of telephone exchange service [local calls] and exchange access [long-

distance calls].” 47 U.S.C. § 251(c)(2)(A). Because the section distinguishes between

“exchange service” and “exchange access,” the Petitioners argue that “reciprocal

compensation” must refer to something other than “exchange access.” Joint Intercarrier

Compensation Principal Br. of Pet’rs at 11-12 (July 17, 2013). We reject this argument.




                                             20
       The Petitioners’ argument does not render § 251(b)(5) unambiguous or vitiate the

reasonableness of the FCC’s interpretation. For this argument, the Petitioners incorrectly

conflate “exchange service” and “reciprocal compensation.” Section 251(c)(2)(A) refers

to an ILEC’s duty to allow others to interconnect for local- and long-distance calls. This

duty is distinct from the duty in § 251(b)(5) to establish arrangements for reciprocal

compensation. See, e.g., Verizon Cal., Inc. v. Peevey, 462 F.3d 1142, 1146 (9th Cir.

2006). Thus, § 251(c)(2)(A) does not unambiguously shed light on how the FCC should

interpret § 251(b)(5).

       The Petitioners cite a House Conference report. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 11 n.8 (July 17, 2013); Joint Intercarrier Compensation Reply

Br. of Pet’rs at 11 n.12 (July 31, 2013). But the report does not remove the ambiguity in

§ 251(b)(5). The House Report addressed only the need for the FCC to preserve its own

authority under § 201 and the FCC’s continued authority over access charges. “The

obligations and procedures prescribed in [§ 251] do not apply to interconnection

arrangements between local exchange carriers and telecommunications carriers under

§ 201 of the Communications Act for the purpose of providing interexchange service, and

nothing in this section is intended to affect the Commission’s access charge rules.” H.R.

Conf. Rep. 104-458, at 117. The House Report does not undermine the FCC’s authority

to enact a national reciprocal compensation framework under §§ 251(b)(5) and 201(b).




                                             21
              2.       Preemption of State Regulatory Authority Over Intrastate
                       Access Charges

       The Petitioners argue that even if the FCC can regulate IXC-LEC traffic, this

authority would include calls that were interstate, but not intrastate. Joint Intercarrier

Compensation Principal Br. of Pet’rs at 14-25 (July 17, 2013). For this argument, the

Petitioners rely on:

       !      47 U.S.C. § 152(b),

       !      47 U.S.C. § 601(c),

       !      § 601(c) of the Telecommunications Act of 1996,

       !      47 U.S.C. § 253,

       !      47 U.S.C. § 251(d)(3), and

       !      47 U.S.C. § 251(g).

We disagree with the Petitioners in their interpretation of these sections.

                       a.    Sections 152(b) and 601(c)

       According to the Petitioners, 47 U.S.C. § 152(b) and § 601(c)(1) of the

Telecommunications Act of 1996 insulate intrastate access charges from federal

regulation under § 251(b)(5). Joint Intercarrier Compensation Principal Br. of Pet’rs at

14-15 (July 17, 2013).

       Sections 152(b) and 601(c)(1) provide in part:

              47 U.S.C. § 152(b): [N]othing in this chapter shall be construed to
              apply or to give the Commission jurisdiction with respect to (1)
              charges, classifications, practices, services, facilities, or regulations


                                              22
                for or in connection with intrastate communication service by wire or
                radio of any carrier.

                ****

                § 601(c)(1) of the Telecommunications Act of 1996: No Implied
                Effect. This Act and the amendments made by this Act . . . shall not
                be construed to modify, impair, or supersede Federal, State, or local
                law unless expressly so provided in such Act or amendments.4

Because the FCC’s earlier, valid interpretation did not require preemption of intrastate

access charges, the Petitioners argue that § 251(b)(5) cannot be read more broadly to

require preemption now. Id. at 15.

         The Petitioners address the argument as if it arises at the first Chevron step. But

the argument is insufficient at this step because Congress intended the 1996 Act to apply

to intrastate communications and expressly allowed the FCC to preempt state law. AT&T

Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 n.6 (1999); MCI Telecomms. Corp. v. Pub.

Serv. Comm’n of Utah, 216 F.3d 929, 938 (10th Cir. 2000).

         Nonetheless, the Petitioners argue that § 152(b) and § 601(c)(1) require the FCC to

narrowly interpret § 251(b)(5) to avoid interference with state regulation of intrastate

traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at 14-15, 19, 39 n.29 (July

17, 2013). We disagree. Otherwise, we would be interpreting §§ 152(b) and 601(c)(1) in

a way that would upset the regulatory scheme envisioned in the 1996 Act. See Geier v.

Am. Honda Motor Co., Inc., 529 U.S. 861, 870 (2000).


4
         Section 601(c)(1) was codified at 47 U.S.C. § 152 in the Historical and Statutory
Notes.

                                               23
       Section 152(b) simply limits the FCC’s ancillary jurisdiction. See AT&T Corp.,

525 U.S. at 380-81 & n.7 (stating that § 152(b) serves only to limit the FCC’s ancillary

authority). And, § 601(c)(1) does not limit Congress’s actual delegation of authority to

the FCC. See Qwest Corp. v. Minn. Pub. Utils. Comm’n, 684 F.3d 721, 731 (8th Cir.

2012) (§ 601(c)(1) does not save state regulatory action conflicting with FCC

regulations); Farina v. Nokia, Inc., 625 F.3d 97, 131 (3d Cir. 2010) (declining to interpret

§ 601(c)(1) broadly “where a federal regulatory scheme reflects a careful balancing”).

Because §§ 152(b) and 601(c)(1) do not unambiguously narrow the scope of § 251(b)(5),

we proceed to Chevron’s second step. See City of Arlington v. FCC, __ U.S. __, 133 S.

Ct. 1863, 1868 (2013).

       At that step, we defer to the FCC’s interpretation of a statutory ambiguity that

concerns the scope of its regulatory authority. See id. at 1874. This deference applies to

“statutes designed to curtail the scope of agency discretion.” Id. at 1872.

       Administrative deference is suitable here. Congress appears to grant plenary

authority to the FCC through § 251, and §§ 152(b) and 601(c)(1) do not preclude the FCC

from interpreting § 251(b)(5) to allow preemption of state regulation over intrastate

access charges.

                     b.     Section 253

       The Petitioners also argue that the FCC has usurped state authority to promote

broadband development through a system of intercarrier compensation. Joint Intercarrier




                                             24
Compensation Principal Br. of Pet’rs at 16-18, 22 (July 17, 2013). For this argument, the

Petitioners use Pennsylvania as an example. Id. According to the Petitioners,

Pennsylvania uses access charges to promote broadband development and Pennsylvania’s

laws are not preempted under 47 U.S.C. § 253. Id. at 22 & n.20. Reliance on § 253 is

misguided.

       We have not been asked to decide the validity of the Pennsylvania law. Instead,

the Petitioners ask us to decide if the FCC acted arbitrarily and capriciously in deciding to

preempt intrastate access charges under § 251(b)(5). In deciding to preempt regimes for

state access charges, the FCC did not act arbitrarily or capriciously.

       The FCC’s policy choice is not undermined by the alleged efforts in Pennsylvania.

Though the Petitioners boast of efforts in Pennsylvania, they are silent regarding the steps

to promote broadband in the 49 other states. Without evidence of a nationwide effort to

promote broadband, the FCC concluded that a national approach would promote certainty

and predictability. 2 R. at 656 ¶ 790. In reaching this conclusion, the FCC expressed

concern regarding “variability and unpredictability” when broadband development is left

to the states. Id. at 657-58 ¶ 794.

       The lone example of Pennsylvania, as a leader in developing broadband networks,

does little to undermine the FCC’s concern with variability among the states. The FCC

explained its preference for a national strategy to develop broadband, and the Petitioners’

example of Pennsylvania does not render the FCC’s strategy arbitrary or capricious.




                                             25
                     c.      Section 251(d)(3)

       The Petitioners further rely on 47 U.S.C. § 251(d)(3) to rebut the FCC’s

interpretation that § 251(b)(5) includes intrastate traffic between IXCs and LECs. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 16-18 (July 17, 2013). Section

251(d)(3), entitled “Preservation of State access regulations,” prevents the FCC from

preempting state commissions’ regulations, orders, or policies that: (1) establish LEC

access and interconnection obligations, (2) are consistent with the requirements of § 251,

and (3) do not substantially prevent implementation of the requirements of § 251 and the

purposes of the Act. 47 U.S.C. § 251(d)(3). According to the Petitioners, § 251(d)(3)

prevents the FCC from preempting state access charges. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 16-18 (July 17, 2013).

       This argument is unpersuasive. The FCC reasonably concluded that § 251(d)(3)

does not speak to the preemptive effect of § 251(b)(5) or limit the permissible

interpretations of the statute or the FCC’s rulemaking authority. 2 R. at 644 n.1374, 644-

45 ¶ 767. The FCC has interpreted intrastate traffic as subject to § 251(b)(5); and, in

exercising the grant of power under § 251(b)(5), the FCC is establishing a national bill-

and-keep policy for all access traffic.

       This is the context for our consideration of § 251(d)(3). As noted above,

§ 251(d)(3) preserves state regulations only if they would not substantially prevent

implementation of § 251. And, in exercising its powers under § 251, the FCC views




                                             26
intrastate access charges as an obstacle to reform. Id. at 644-45 ¶ 767. That finding is

enough for the FCC to exercise its authority to preempt intrastate access charges under

§ 251(d)(3). See Qwest Corp. v. Ariz. Corp. Comm’n, 567 F.3d 1109, 1120 (9th Cir.

2009) (holding that state requirements were inconsistent with, and prevented

implementation of, § 251 because the FCC had precluded the requirements); Ill. Bell Tel.

Co. v. Box, 548 F.3d 607, 611 (7th Cir. 2008) (concluding that § 251(d)(3) did not save

state regulations that were contrary to the FCC’s determinations). As a result, § 251(d)(3)

does not preclude the FCC’s broad interpretation of its authority under § 251(b)(5).

                     d.     Section 251(g)

       Section 251(g) preserved existing obligations to provide access and

interconnection, along with compensation, until they are explicitly superseded by FCC

regulations. 47 U.S.C. § 251(g). This section does not undermine the FCC’s

interpretation of § 251(b)(5).

       Both sides point to § 251(g) as support for their interpretations of § 251(b)(5). The

Petitioners argue that § 251(g) involved only interstate traffic, reasoning that when this

section took effect, no court or agency decision had purported to give the FCC

jurisdiction over intrastate traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs

at 23-25 (July 17, 2013). The FCC argues the opposite: that § 251(g) shows that

Congress contemplated FCC regulation over intrastate traffic. Federal Resp’ts’ Final

Resp. to the Joint Intercarrier Compensation Principal Br. of Pet’rs at 18 (July 29, 2013).




                                             27
We need not choose between these conflicting interpretations of § 251(g) because the

FCC did not rely on this section. See 2 R. at 644 n.1374 (noting that the FCC “need not

resolve [the] issue, because all traffic terminated on an LEC [would], going forward, be

governed by section 251(b)(5) regardless of whether section 251(g) previously covered

the state intrastate access regime”).

       And the Petitioners’ argument would not require us to narrow the scope of traffic

governed by § 251(b)(5). At most, the Petitioners’ argument would lead to a narrow

reading of § 251(g), for it would address only the viability of agreements involving

intrastate traffic until the FCC acted. This reading would leave § 251(g) silent on the

continued viability of compensation arrangements for intrastate traffic.

       Under the first step of Chevron, we are called upon to decide whether the FCC’s

interpretation of § 251(b)(5) is unambiguously foreclosed by § 251(g). For the sake of

argument, we can assume that the Petitioners are correct in stating that § 251(g) did not

address intrastate traffic. If that is true, however, § 251(g) could not act as an

unambiguous expression of congressional intent on the extent of the FCC’s authority over

intrastate traffic.

       The resulting issue is whether the FCC’s broad reading of § 251(b)(5) is

permissible notwithstanding § 251(g). We conclude that the FCC’s interpretation is

permissible. Section 251(g) provides only for the continuation of arrangements for access

charges under any consent decree existing when the 1996 statute went into effect. See 47




                                              28
U.S.C. § 251(g). But the statute also provides that these arrangements would end when

the FCC acted. See id.

       When Congress enacted the 1996 law, the D.C. District Court had required access

charges for calls that were both interstate and intrastate. United States v. AT&T, 552 F.

Supp. 131, 169 n.161 (D.D.C. 1982). Under § 251(g), these arrangements would end

when they were superseded by the FCC. 47 U.S.C. § 251(g). In light of § 251(g), the

FCC could reasonably conclude that it had the power to supersede the arrangements for

access charges that were both interstate and intrastate because all had arisen out of the

same consent decree. See 2 R. at 644 n.1374.

       This interpretation was not the only one possible. For example, one could also

view § 251(g) to reflect the widespread assumptions in 1996 that states (not the FCC)

regulated intrastate access. But under the second step of Chevron, the FCC’s contrary

reading of § 251(g) was at least reasonable. As a result, we defer to the FCC’s reading of

§ 251(g).

              3.     FCC Authority Over Intrastate Origination Charges

       With this reading, we conclude that the FCC enjoys at least some regulatory

authority over intrastate traffic between LECs and IXCs. But we must address the scope

of this authority, for the Petitioners argue that it would not extend to origination charges.

This argument is three-fold: (1) Originating access traffic is exempt from reciprocal

compensation because § 251(b)(5) refers only to “transport and termination,” not




                                              29
“origination”; (2) the FCC failed to acknowledge that it had changed its definitions of

“transport” and “termination”; and (3) the FCC’s preemption of originating access

charges is arbitrary and capricious because it does not allow originating LECs to recover

their origination costs. Joint Intercarrier Compensation Principal Br. of Pet’rs at 25-28

(July 17, 2013). The first two challenges lack merit, and the third challenge is not ripe.

                     a.      Section 251(b)(5) and Originating Access Traffic

       In the Order, the FCC capped charges for originating access. 2 R. at 836-37

¶ 1298, 661 ¶ 801, 661 Figure 9, 667 ¶ 22. The Petitioners deny regulatory authority over

origination charges even under the FCC’s interpretation of § 251(b)(5). According to the

Petitioners, originating access charges are not subject to § 251(b)(5) because it refers to

“transport and termination,” but not “origination.” Joint Intercarrier Compensation

Principal Br. of Pet’rs at 26 (July 17, 2013) (citing 47 U.S.C. § 251(b)(5)). We reject the

Petitioners’ interpretation of § 251(b)(5).

       This section authorizes arrangements for the reciprocal compensation of “transport

and termination.” Both sides point to the omission of origination charges.

       For their part, the Petitioners suggest that the omission leaves the FCC powerless

to reform origination charges. Id. The FCC argues the opposite: If § 251(b)(5)

authorizes arrangements for reciprocal compensation involving transport and termination,

the omission of origination charges must have meant that LECs are unable to charge

access fees for origination. R. at 669 ¶ 817 (citing In re Implementation of the Local




                                              30
Competition Provisions in the Telecomms. Act of 1996, 11 FCC Rcd. 15499, 16016

¶ 1042 (1996)); Federal Resp’ts’ Final Resp. to the Joint Intercarrier Compensation

Principal Br. of Pet’rs at 21-22 (July 29, 2013).

       This view is supported by “a venerable canon of statutory construction,” “[t]he

maxim ‘expressio unius est exclusio alterius’—which translates roughly as ‘the

expression of one thing is the exclusion of other things.’” United States v. Hernandez-

Ferrer, 599 F.3d 63, 67-68 (1st Cir. 2010).

       The FCC’s interpretation reflects a reasonable approach. The Petitioners state that

for toll calls, carriers must perform three types of functions: origination, transport, and

termination. Joint Intercarrier Compensation Principal Br. of Pet’rs at 26 (July 17, 2013).

Two of the three functions are included in § 251(b)(5). The single omission could

suggest that Congress intended to exclude “origination” from the duty to provide

compensation. Because the FCC’s interpretation of § 251(b)(5) is reasonable, it is

entitled to deference under Chevron. Thus, we reject the Petitioners’ challenge to FCC

regulation of origination charges.

                     b.      The FCC’s Interpretations of “Transport” and
                             “Termination”

       The Petitioners argue that the FCC has arbitrarily changed its definition of the

statutory term “termination” without acknowledging the change. Joint Intercarrier

Compensation Principal Br. of Pet’rs at 12-13 (July 17, 2013). According to the




                                              31
Petitioners, the FCC previously defined the term “termination” in a way that excluded

“origination.” Id. at 13.

       This argument is incorrect, for the FCC has not changed its definition of

“termination.” 2 R. at 642 ¶ 761. Instead, the FCC has changed its view regarding the

traffic that is subject to § 251(b)(5). Id. With this change, the FCC provided an

explanation. Id. at 642-43 ¶¶ 761-64.

       In light of this explanation, we reject the Petitioners’ challenge. It presupposes

that the FCC has redefined the terms “transport” and “termination” without saying why.

But these definitions have not changed. Instead, the FCC has refocused on the statutory

term “telecommunications,” concluding that it is this term—rather than “transport” or

“termination”—that determines the scope of § 251(b)(5). Id. at 647 ¶ 761. By focusing

on the term “telecommunications” and explaining this focus, the FCC stated why it was

reassessing the scope of § 251(b)(5); accordingly, we reject the Petitioners’ challenge.

                     c.     The Purported Prohibition of Originating Access Charges

       The Petitioners also argue that the prohibition on originating access charges is

arbitrary and capricious because the FCC did not explain why the “prohibition on

origination charges applies where the originating LEC receives no further compensation

from its end-user.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 27-28 (July

17, 2013). This challenge is not ripe.




                                             32
       The FCC has announced that it will eventually abolish originating access charges

and has capped originating access charges at current levels. See 2 R. at 650 ¶¶ 777-78. In

the interim, the FCC has sought further comment “on other possible approaches to

originating access reform, including implementation issues and our legal authority to

adopt any such reforms.” Id. at 839 ¶ 1305. Because the FCC has not yet abolished

originating access charges, this challenge is unripe. See AT&T Corp. v. Iowa Utils. Bd.,

525 U.S. 366, 386 (1999) (“When . . . there is no immediate effect on the plaintiff’s

primary conduct, federal courts normally do not entertain pre-enforcement challenges to

agency rules and policy statements.”).

       C.     Bill-and-Keep as a Default Methodology

       The FCC not only extended its regulations to all access traffic, but also began a

transition to bill-and-keep as the default standard for reciprocal compensation. 2 R. at

646 ¶ 769. According to the FCC’s interpretation of its authority, § 201(b) allows the

adoption of rules and regulations to implement § 251(b)(5). Id. at 646 ¶ 770. In

implementing § 251(b)(5), the FCC considers bill-and-keep to be “just and reasonable”

under § 201(b); thus, the FCC concluded it has statutory authority to implement bill-and-

keep as the default reciprocal compensation standard for all traffic subject to § 251(b)(5).

Id. at 646-47 ¶¶ 771-72.

       In arriving at this conclusion, the FCC addressed opposition based on §§ 252(c)

and 252(d)(2). Id. at 647-48 ¶ 773. Section 252 does two things: (1) It preserves state




                                             33
rate-setting authority in state commission arbitrations involving ILECs and other carriers;

and (2) it defines “just and reasonable” rates. 47 U.S.C. § 252.

       For two reasons, the FCC concluded that these provisions did not prevent adoption

of a bill-and-keep methodology. 2 R. at 647-48 ¶¶ 774-75. First, the FCC pointed to

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 384 (1999), which authorizes the FCC to

establish a pricing methodology for state commissions to apply in these arbitrations. 2 R.

at 648 ¶ 773. In choosing among pricing methodologies, the FCC found specific

approval of bill-and-keep in 47 U.S.C. § 252(d)(2)(B). Id. at 648-49 ¶ 775. Second, the

FCC found that bill-and-keep is just and reasonable under § 252(d)(2) because it allows

carriers to recover their transport and termination costs from their end-users. Id. at 648-

49 ¶¶ 775-76.

       Both conclusions are criticized by the Petitioners. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 28-45 (July 17, 2013). They argue that: (1) bill-and-keep

effectively sets a zero rate that infringes on state rate-setting authority under § 252(d), and

(2) bill-and-keep does not lead to just and reasonable intercarrier compensation rates

under §§ 252(d)(2)(A) and 201(b). Id. at 28-45.

       We apply Chevron and defer to the FCC’s interpretation of its authority to enact

bill-and-keep as the default standard for reciprocal compensation.




                                              34
              1.      Consideration Under § 252

       The Petitioners contend that the FCC cannot establish bill-and-keep as a

methodology because it intrudes on state rate-setting authority under § 252. Id. at 28-31.

State authority is preserved in three parts of § 252: (b), (c), and (d).

       In (b), Congress preserved the authority of states in arbitrating interconnection

agreements between ILECs and other carriers. See 47 U.S.C. § 252(b).

       In (c), § 252 required state commissions—not the FCC—to “establish any rates for

interconnection, services, or network elements according to subsection (d) of this

section.” Id. at § 252(c)(2).

       And in (d), Congress preserved state arbitration authority over “[c]harges for the

transport and termination of traffic.” Id. § 252(d)(2). Under this section, a state

commission cannot consider reciprocal compensation terms and conditions just and

reasonable unless:

              (i)     such terms and conditions provide for the mutual and
                      reciprocal recovery by each carrier of costs associated with
                      the transport and termination on each carrier’s network
                      facilities of calls that originate on the network facilities of the
                      other carrier; and

              (ii)    such terms and conditions determine such costs on the basis
                      of a reasonable approximation of the additional costs of
                      terminating such calls.

Id. at § 252(d)(2)(A). Though subsection (d) preserves state arbitration authority over

charges, it also expressly allows approval of bill-and-keep arrangements, prohibiting a




                                               35
construction that would “preclude arrangements that afford the mutual recovery of costs

through the offsetting of reciprocal obligations, including arrangements that waive mutual

recovery (such as bill-and-keep arrangements).” Id. at § 252(d)(2)(B)(i).

       The FCC has focused on this language, pointing out that Congress specifically

stated that bill-and-keep arrangements are considered “just and reasonable.” 2 R. at 648-

49 ¶ 775.

       The Petitioners argue that the FCC has misinterpreted § 252(d)(2)(B)(i), stating

that it simply requires carriers to voluntarily waive payments and submit to bill-and-keep

arrangements. Joint Intercarrier Compensation Principal Br. of Pet’rs at 36-37 (July 17,

2013). This interpretation conflicts with the statute. Section 252(d)(2)’s pricing

standards apply only to terms imposed through compulsory arbitration. See 47 U.S.C.

§ 252(c). Voluntarily negotiated terms can contradict the statutory requirements and are

not subject to this pricing provision. See id. at § 252(a)(1). Thus, the FCC was entitled to

reject the Petitioners’ narrow interpretation of § 252(d)(2).

       Because the statute expressly authorizes bill-and-keep arrangements along with

state rate-setting authority, we believe the FCC’s interpretation of § 252(d)(2) is

reasonable and entitled to deference under Chevron. See City of Arlington v. FCC, __

U.S. __, 133 S. Ct. 1863, 1874 (2013).

       Under Section 252(d)(2), states continue to enjoy authority to arbitrate “terms and

conditions” in reciprocal compensation. See 47 U.S.C. § 252(d)(2). For example, even




                                             36
under bill-and-keep arrangements, states must arbitrate the “edge” of carrier’s networks.

2 R. at 649-50 ¶ 776. This reservoir of state authority can be significant.

       The “edge” of a carrier’s network consists of the points “at which a carrier must

deliver terminating traffic to avail itself of bill-and-keep.” Id. The location of the “edge”

of a carrier’s network determines the transport and termination costs for the carrier.

       The impact is illustrated in Diagram 6. In this scenario, Carrier A has low

transport and termination costs because it needs only to transport the calls a short distance

(between Points A and B).




       A different delineation of the edge could significantly increase Carrier A’s costs.

This impact is illustrated in Diagram 7, which would reflect a state commission’s decision

to set the edge of Carrier A’s network at Point D rather than Point A:




                                             37
       The FCC reasonably determined that by continuing to set the network “edge,”

states retain their role under § 252(d) in “determin[ing] the concrete result in particular

circumstances.” Id. at 649-50 ¶ 776 (quoting AT&T v. Iowa Utils. Bd., 525 U.S. 366, 384

(1999)).

       The Petitioners disagree. In their view, AT&T Corp. v. Iowa Utilities Board, 525

U.S. 366 (1999), and Iowa Utilities Board v. Federal Communications Commission, 219

F.3d 744 (8th Cir. 2000), rev’d in part by Verizon Commc’ns. Inc. v. FCC, 535 U.S. 467

(2002), preserved the states’ role in “establishing the actual reciprocal compensation rate,

not finding points on a network at which a carrier must deliver traffic.” Joint Intercarrier

Compensation Principal Br. of Pet’rs at 29-31 (July 17, 2013). The Petitioners argue that

bill-and-keep effectively sets the intercarrier compensation rate at zero and intrudes on




                                              38
state rate-setting authority.5 Id. at 29-30 (citing Iowa Utils. Bd., 219 F.3d at 757, rev’d in

part, Verizon Commc’ns, Inc. v. FCC, 535 U.S. 467 (2002)).

       We reject the Petitioners’ broad reading of AT&T and Iowa Utilities Board.

       In AT&T, the Supreme Court upheld the FCC’s rule-making authority over §§ 251

and 252. AT&T, 525 U.S. at 378. Interpreting § 252(c)(2)’s reservation of rate-setting

authority to state commissions, the Court upheld the FCC’s requirement that state

commissions use a particular methodology for prices involving interconnection and


5
        In their reply brief, the Petitioners also challenge the FCC’s rate limitations during
the transition to bill-and-keep. Joint Intercarrier Compensation Reply Br. of Pet’rs at 15
(July 31, 2013). This challenge is new. In their opening brief, the Petitioners did not
challenge the FCC’s decision to prescribe interim rates. Instead, the Petitioners
challenged only the FCC’s final prescription of bill-and-keep as a methodology for all
traffic. Indeed, the term “interim rates” was mentioned just once in the Petitioners’
opening brief. Joint Intercarrier Compensation Principal Br. of Pet’rs at 40 (July 17,
2013). And that reference came in a quotation that the Petitioners used for an unrelated
argument, addressing the applicability of § 252(d)(2)(A) to interstate intercarrier
compensation rates under § 201. See id. Because “[a]rguments inadequately briefed in
the opening brief are waived,” Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th
Cir. 1998), we would ordinarily decline to reach the Petitioners’ new contention in their
reply brief regarding the invalidity of the FCC’s interim rates. See Joint Intercarrier
Compensation Reply Br. of Pet’rs at 14-15 (July 31, 2013).

        Though the Petitioners did not challenge interim rates in their opening brief, the
LEC Intervenors did. See Incumbent Local Exchange Carrier Intervenors’ Br. in Supp. of
Pet’rs at 8 (July 15, 2013) (“Nonetheless, the Order end-runs the statutory directive by
adopting a methodology that prescribes specific transition rates plus a specific ultimate
rate of zero.”). But intervenors generally cannot raise new issues. Arapahoe Cnty. Pub.
Airport Auth. v. FAA, 242 F.3d 1213, 1217 n.4 (10th Cir. 2001). This prohibition is
prudential and should be avoided only in “extraordinary” cases. Id. Because we are
“hesitant to definitively opine on such [a] legally significant issue[] when [it has] received
such cursory treatment,” United States v. Gordon, 710 F.3d 1124, 1150 (10th Cir. 2013),
we decline to disregard the general rule. As a result, we do not reach the Petitioners’
arguments in their reply brief on the validity of the FCC’s interim rates.

                                              39
unbundled access. See id. at 384-85. In doing so, the Supreme Court concluded that the

FCC has rulemaking authority to implement a pricing methodology for the states to

implement, “determining the concrete result in particular circumstances. That is enough

to constitute the establishment of rates.” Id. at 384.

       In Iowa Utilities Board, the Eighth Circuit Court of Appeals applied judicial

estoppel to strike down the FCC’s proxy prices for interconnection, network element

charges, wholesale rates, and transport and termination rates. 219 F.3d at 756-57. The

court did not distinguish between reciprocal compensation rates and interconnection,

network element charges, and wholesale rates. Id. Instead, the court held that “[s]etting

specific prices goes beyond the FCC’s authority to design a pricing methodology and

intrudes on the states’ right to set the actual rates pursuant to § 252(c)(2).” Id. at 757.

       Against the backdrop of AT&T and Iowa Utilities Board, the FCC reasonably

concluded that bill-and-keep involves a permissible methodology notwithstanding the

states’ authority to set rates under § 252(c). The Petitioners assume that the state

commissions have authority to require intercarrier compensation, for the states can set

“rates” for interconnection under § 252(c)(2). This assumption is belied by § 252(d)(2),

which governs state arbitrations over the “terms and conditions for reciprocal

compensation.” 47 U.S.C. § 252(d)(2).

       The phrase “terms and conditions” does not necessarily require intercarrier

compensation, for the statute expressly provides that § 252(d)(2)(A) should “not be




                                              40
construed . . . to preclude . . . bill-and-keep arrangements.” Id. at § 252(d)(2)(B)(i). If the

states’ rate-setting authority required carriers to pay one another, the statutory approval of

bill-and-keep arrangements would not make sense. See The Telecomms. Act of 1996:

Law & Legislative History 6 (eds. Robert E. Emeritz, Jeffrey Tobias, Kathryn S. Berthat,

Kathleen C. Dolan, & Michael M. Eisenstadt 1996) (stating that under § 251(b), “each

LEC must . . . enter into reciprocal compensation arrangements with interconnecting

carriers, a requirement that can be met by ‘bill-and-keep’ arrangements”). Thus, the FCC

reasonably interpreted the statute to allow the elimination of any intercarrier

compensation through the adoption of bill-and-keep.

       As the Petitioners argue, this methodology would eliminate the existence of any

“rates” for intercarrier compensation. With elimination of these “rates,” the state

commissions would have less to arbitrate under § 252(c). But that is the product of the

statutory approval of “bill-and-keep” rather than an invention of the FCC. Through bill-

and-keep, state commissions will continue to define the edges of the networks; that role

preserves state regulatory authority over the “terms and conditions” of reciprocal

compensation. There is no violation of § 252(c).

              2.     The “Just and Reasonable” Rate Requirement in §§ 201(b) and
                     252(d)(2)

       The Petitioners point to 47 U.S.C. §§ 201(b) and 252(d)(2), arguing that they

require rates to be “just and reasonable.” Joint Intercarrier Compensation Principal Br. of

Pet’rs at 39-40 (July 17, 2013); see 47 U.S.C. §§ 201(b), 252(d)(2). Invoking these


                                              41
sections, the Petitioners argue that the FCC’s bill-and-keep methodology is not “just and

reasonable.” Joint Intercarrier Compensation Principal Br. of Pet’rs at 39-42 (July 17,

2013). This argument is invalid under Chevron.

       According to the FCC, bill-and-keep allows for just and reasonable rates by

providing for the “mutual and reciprocal recovery of costs through the offsetting of

reciprocal obligations.” Federal Resp’ts’ Final Resp. to the Joint Intercarrier

Compensation Principal Br. of Pet’rs at 33-34 (July 29, 2013). Under a bill-and-keep

arrangement, each carrier obtains an “in kind” exchange. To illustrate:




In Diagram 8, Carrier 1 transports and terminates calls that originate on Carrier 2’s

network. In exchange, Carrier 2 transports and terminates calls that originate on Carrier

1’s network. Both parties obtain reciprocal benefits, and both can recover their additional

costs from their end-users. 2 R. at 648-49 ¶ 775 & n.1408, 649-50 ¶ 776.

       The FCC reasoned that under this methodology, a carrier that terminates a call that

originates with another carrier performs a service for its end-user, the call’s recipient.




                                              42
Because both end-users benefit from the call, the end-users should split the cost and pay

their respective carriers for the call. Through this in-kind exchange of services, bill-and-

keep allows carriers to obtain compensation for the call from their own customers. Id. at

640-41 ¶¶ 756-57, 648 n.1408, 649 n.1410.

       The Petitioners contend that bill-and-keep leads to unreasonable rates for two

reasons: (1) Carriers have a statutory right to payment from other carriers; and (2)

reciprocal compensation arrangements do not allow for sufficient cost recovery. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 34-38, 41-43 (July 17, 2013).

                     a.      Consideration of a Statutory Right to Payments from
                             Other Carriers

       The first contention involves a statutory right to payments from other carriers. Id.

at 42. For this contention, however, the Petitioners do not point to any statutory

language. Instead, they rely on Louisiana Public Service Commission v. Federal

Communications Commission, 476 U.S. 355, 364-65 (1986), for the proposition that

carriers are entitled to recover their reasonable expenses and a fair return on their

investment through customer rates. Id. at 41. But Louisiana Public Service Commission

requires only that carriers recover their reasonable expenses and a fair return on their

investment from their customers and does not specify the source of this recovery. La.

Pub. Serv. Comm’n, 476 U.S. at 364-65. Therefore, the FCC rationally concluded that §§

201(b) and 252(d)(2) are satisfied by an in-kind exchange of services. See id. at 646-47

¶ 771, 649-650 ¶ 776.


                                              43
                     b.     Sufficiency of Cost Recovery

       Under Section 252(d)(2)(A)(ii), state commissions can consider terms and

conditions just and reasonable only if they permit recovery by each carrier of costs based

on a “reasonable approximation of the additional costs of terminating such calls.” 47

U.S.C. § 252(d)(2)(A)(ii). Pointing to this provision, the Petitioners argue that: (1) the

FCC was inconsistent by acknowledging that carriers incur costs for termination and

generally cannot raise end-user rates because of competition, (2) the FCC failed to

explain its departure from earlier reliance on termination costs, and (3) bill-and-keep is

not “just and reasonable” because it does not allow sufficient recovery of costs. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 34-38 (July 17, 2013). These

arguments are unpersuasive.

       Bill-and-keep anticipates that carriers will recover their costs from their end-users.

2 R. at 648 ¶ 775 & n.1408, 649-50 ¶ 776. States are free to set end-user rates, and the

Order does not prevent states from raising end-user rates to allow a fair recovery of

termination costs. See id. at 649-50 ¶ 776.

       The Petitioners’ fall-back position is that the FCC failed to explain its change in

position. Joint Intercarrier Compensation Principal Br. of Pet’rs at 37-38 (July 17, 2013).

We disagree, for the FCC pointed to new analyses showing that both parties benefit from

a call and that bill-and-keep allows for mutual recovery of costs. 2 R. at 640-41 ¶¶ 755-

59.




                                              44
       Finally, the Petitioners contend that bill-and-keep violates § 252(d)(2) by failing to

explicitly provide for cost recovery. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 37-38 (July 17, 2013). We reject this argument for two reasons. First, as

discussed in Chief Judge Briscoe’s separate opinion, the FCC reforms include funds for

carriers that would otherwise lose revenues. 2 R. at 683-88 ¶¶ 847-53. Second, the FCC

has found that carriers can offset lost revenue by increasing charges on end-users. Id. at

403 ¶ 34, 648-49 ¶ 775 n.1408. The FCC’s rationale involves a reasonable predictive

judgment, warranting our deference. See Ace Tel. Ass’n v. Koppendrayer, 432 F.3d 876,

880 (8th Cir. 2005) (holding that a reciprocal compensation rate of zero did not violate

the “just and reasonable” requirement in 47 U.S.C. § 252(d)(2)); MCI Telecomms. Corp.

v. U.S. W. Commc’ns, 204 F.3d 1262, 1271-72 (9th Cir. 2000) (upholding a determination

that bill-and-keep was “just and reasonable” under 47 U.S.C. § 252(d)(2)(A)). As a

result, we conclude that the FCC did not arbitrarily or capriciously fail to provide for cost

recovery.

       D.     Authority for the States to Suspend or Modify the New Requirements

       The Petitioners also argue that the FCC has assumed powers reserved to state

commissions under 47 U.S.C. § 251(f)(2). This section empowers state commissions to

suspend or modify requirements under § 251(b) for small LECs that would otherwise

incur an undue burden. 47 U.S.C. § 251(f)(2).




                                             45
       The FCC addressed § 251(f)(2), cautioning “states that suspensions or

modifications of the bill-and-keep methodology . . . would . . . re-introduce regulatory

uncertainty . . . and undermine the efficiencies gained from adopting a uniform national

framework.” 2 R. at 671-72 ¶ 824. In light of this concern, the FCC discouraged grants

of relief under § 251(f)(2), stating that any suspension or modification of bill-and-keep

would likely undermine the public interest. Id. The FCC added that it would “monitor

state action” and might “provide specific guidance” in the future. Id.

       The Petitioners object to this admonition, contending that the FCC prejudged state

commission decisions and effectively prohibited states from modifying the bill-and-keep

regime. Joint Intercarrier Compensation Principal Br. of Pet’rs at 46-48 (July 17, 2013).

This challenge is not ripe.

       The FCC’s cautionary statement does not constitute a binding rule; instead, it

reflects only a prediction that applications for suspension or modification would fail

under the statutory standard. See 2 R. at 671-72 ¶ 824. Because this prediction does not

“impose an obligation, deny a right or fix some legal relationship,” the Petitioners’

challenge is premature. Chi. & S. Air Lines v. Waterman S.S. Corp., 333 U.S. 103, 112-

13 (1948); see Nat’l Ass’n of Broadcasters v. FCC, 569 F.3d 416, 425 (D.C. Cir. 2009)

(holding that a challenge to the FCC’s “prediction,” which involved future waiver

requests, was not ripe); see also Minn. Pub. Utils. Comm’n v. FCC, 483 F.3d 570, 582-83




                                             46
(8th Cir. 2007) (holding that a state regulator’s challenge to an FCC order was not ripe

because it involved only a prediction of what the FCC would do in the future).

III.   Challenges to Cost Recovery as Arbitrary and Capricious

       The Petitioners have challenged not only the ultimate goal of the reforms, but also

the way in which the FCC chose to transition toward a national bill-and-keep

methodology.

       A.      The Transitional Plan

       Perceiving that an immediate change would unduly disrupt the market, the FCC

elected to gradually move toward a bill-and-keep methodology. 2 R. at 659-60 ¶ 798,

661-62 ¶ 801 & Figure 9. The FCC decided to transition terminating access charges to

bill-and-keep over a six-year period for price cap carriers and over a nine-year period for

rate-of-return carriers. See id. at 661-62 ¶ 801 & Figure 9. The FCC limited interstate

originating access charges to existing levels, but has not yet decided how to transition

these charges to bill-and-keep. See id. at 669 ¶¶ 817-18.

       The FCC created a federal recovery mechanism to ease the transition to bill-and-

keep for incumbent LECs. See id. at 683 ¶ 847. This recovery mechanism is not revenue

neutral, for the FCC helps incumbent LECs recover only part of their lost revenues. See

id. at 684-85 ¶ 851, 723-24 ¶ 924. The amount of the recovery will be based on existing

trends that show declining revenues. See id. at 684-85 ¶ 851. For price-cap carriers, the

recovery generally starts at 90% of 2011 revenues and declines 10% per year. Id. For




                                             47
rate-of-return carriers, the recovery starts at 2011 revenues for switched access and net

reciprocal compensation. Id. When the FCC acted, rate-of-return carriers were

experiencing yearly drops in revenue of: (1) 3% for interstate switched access, and (2)

10% for intrastate intercarrier compensation. Choosing a benchmark between 3% and

10%, the FCC chose to reduce the eligible recovery for rate-of-return carriers by 5% each

year. Id.

       Under the FCC’s recovery mechanism, carriers can recover part of their lost

revenues through: (1) a federally tariffed Access Recovery Charge on end-users, and (2)

supplemental support from the Connect America Fund. Id. at 685-88 ¶¶ 852-53. The

Access Recovery Charge is limited to prevent individual end-users from paying excessive

rates and is allocated at a carrier’s holding-company level. Id. at 685-688 ¶ 852, 717

¶ 910. To obtain supplemental support from the Connect America Fund, carriers must

meet certain broadband obligations. Id. at 721-22 ¶ 918.

       Although the FCC predicts this recovery mechanism will suffice for regulated

services, carriers can request additional support and waiver of their broadband obligations

through a “Total Cost and Earnings Review” process. See id. at 723-24 ¶ 924, 725 ¶ 926.

This process allows a carrier to show that the standard recovery mechanism is “legally

insufficient” and “threatens [the carrier’s] financial integrity or otherwise impedes [its]

ability to attract capital.” Id. at 723-25 ¶¶ 924-25. The FCC regards this process as a




                                              48
sufficient safety valve to prevent rates from becoming confiscatory. See id. at 724 ¶ 924

& n.1834.

         The recovery mechanism will phase out over time. See id. at 684-85 ¶ 851. As it

phases out, carriers will recover their network costs from end-users and the Universal

Service Fund. Id. at 403 ¶ 34. But carriers will remain able to seek additional support

through the FCC’s Total Cost and Earnings Review process. See id. at 684-85 ¶ 851, 724

¶ 924.

         B.    The Petitioners’ Challenges

         The Petitioners raise two types of APA challenges to the FCC’s recovery

mechanism and final bill-and-keep framework. First, the Petitioners argue that the FCC

failed to apportion costs, as required in Smith v. Illinois Telephone Co., 282 U.S. 133

(1930). Joint Intercarrier Compensation Principal Br. of Pet’rs at 50-51 (July 17, 2013).

Second, the Petitioners challenge the sufficiency of the recovery mechanism for carriers

losing revenue under the reforms. Id. at 53-54, 56.

         C.    Standard of Review

         In challenging the interim measures and final bill-and-keep framework, the

Petitioners focus on the reasonableness of the FCC’s actions; thus, we review these

challenges under the APA. Id.; see 5 U.S.C. § 706(2)(A). For this review, we consider

whether the FCC acted arbitrarily, capriciously, with an abuse of discretion, or otherwise

in violation of the law. Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1045 (10th Cir.




                                             49
2011). The regulations are presumptively valid, and the Petitioners bear the burden of

proof. Id. at 1046. We will uphold the regulations if the FCC has “examine[d] the

relevant data and articulate[d] a satisfactory explanation for its action including a rational

connection between the facts found and the choice made.” Id. (quoting Motor Vehicle

Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Agency action is

arbitrary and capricious only if the agency:

              has relied on factors which Congress has not intended it to consider,
              entirely failed to consider an important aspect of the problem,
              offered an explanation for its decision that runs counter to the
              evidence before the agency, or is so implausible that it could not be
              ascribed to a difference in view or the product of agency expertise.

Motor Vehicle Mfrs. Ass’n, 463 U.S. at 43.

       In reviewing the regulations, we can consider only the rationale articulated by the

agency. Licon v. Ledezma, 638 F.3d 1303, 1308 (10th Cir. 2011). But “we will uphold a

decision of less than ideal clarity if the agency’s path may reasonably be discerned.”

Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974); Licon,

638 F.3d at 1308.

       Our review under the “‘arbitrary and capricious’ standard is particularly deferential

in matters implicating predictive judgments and interim regulations.” Rural Cellular

Ass’n v. FCC, 588 F.3d 1095, 1105 (D.C. Cir. 2009); see Sorenson Commc’ns, Inc., 659

F.3d 1035, 1046 (10th Cir. 2011) (substantial deference is appropriate for interim

ratemaking); accord Alenco Commc’n, Inc. v. FCC, 201 F.3d 608, 616 (5th Cir. 2000)




                                               50
(review of transitional regulations is “especially deferential”). When we review the

FCC’s predictive judgment on a matter within its expertise and discretion, “complete

factual support in the record . . . is not possible or required.” FCC v. Nat’l Citizens

Comm. for Broad., 436 U.S. 775, 814 (1978).

       D.     Consideration of the Apportionment Requirement in Smith

       The Petitioners argue that the FCC failed to apportion the costs attributable to

interstate and intrastate traffic. Joint Intercarrier Compensation Principal Br. of Pet’rs at

50-51, 54 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 5 (July

31, 2013). This argument is rejected.

              1.      The Apportionment Requirement

       The apportionment requirement originated in Smith v. Illinois Bell Telephone Co.,

282 U.S. 133 (1930). There, a state commission set intrastate rates; but the district court

invalidated the rate schedule, reasoning that the rates were too low to allow the carriers to

recover their costs. Id. at 142, 146. In determining the sufficiency of the rates, the state

regulator and the district court assumed that the carriers used all of their property for

intrastate service. Id. at 144-46. But the carriers also used their facilities for interstate

service. Id. at 146-47. The Supreme Court viewed the district court’s conclusion as

flawed because it had failed to account for interstate service. Id. at 150-51. To determine

whether the intrastate rates were high enough, the district court had to decide which of the




                                               51
carrier’s properties were used for intrastate service; otherwise, the court could not know

how much the carrier had to recoup for the cost of that property. Id. at 150-51, 162.

       Smith’s protection is narrow: A regulator may not impose confiscatory rates,

assuming that a regulator in another jurisdiction will exercise its unilateral independent

authority to allow a fair recovery. Id. at 148-49.

              2.      Application of Smith to the FCC’s Recovery Mechanism

       The Petitioners contend that the FCC failed to apportion costs between the

intrastate and interstate jurisdictions. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 50-51, 54 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at

5 (July 31, 2013). According to the Petitioners, the failure to apportion costs renders the

FCC’s recovery mechanism inadequate because it: (1) requires recovery of intrastate

revenues through the interstate jurisdiction, and (2) does not provide sufficient recovery

of costs. Joint Intercarrier Compensation Principal Br. of Pet’rs at 54 (July 17, 2013); see

Joint Intercarrier Compensation Reply Br. of Pet’rs at 6 n.6 (July 31, 2013) (challenging

the recovery of intrastate costs through interstate charges).

       We disagree. Smith requires jurisdictional separation to ensure that the regulator

sets rates based on costs of service in the regulator’s jurisdiction. Smith, 28 U.S. at 148-

49. The problem in Smith was that the state regulator had jurisdiction only for intrastate

service, but was setting rates based on the cost of both intrastate and interstate service.

Id. at 150-51, 162.




                                              52
       Our circumstances differ because the FCC enjoys authority to: (1) set interstate

rates, and (2) regulate access traffic that is either interstate or intrastate. Because the FCC

obtained regulatory authority over intrastate traffic, it can affect intrastate rates through

regulation. The FCC’s regulatory authority over intrastate traffic supports flexibility in

our application of Smith. See Lone Star Gas Co. v. Texas, 304 U.S. 224, 241 (1938)

(distinguishing Smith from the case of a federal agency acting within its authority); MCI

Telecomms. Corp. v. FCC, 750 F.2d 135, 141 (D.C. Cir. 1984) (“Smith appears to be

based on the limits of state jurisdiction, rather than on constraints imposed on federal

agencies by the due process clause.”).

       Smith does not require the apportionment to be exact, for it requires “only

reasonable measures.” Smith, 282 U.S. at 150. When the FCC acts on an interim basis to

transition to a new regulatory structure, Smith is flexible in requiring “reasonable

measures.” See Rural Tel. Coal. v. FCC, 838 F.2d 1307, 1315 (D.C. Cir. 1988) (holding

that a cost allocation constituted a reasonable measure under Smith as “part of a

transitional process, and ‘[i]nterim solutions may need to consider the past expectations

of parties and the unfairness of abruptly shifting policies’”); MCI Telecomms. Corp., 750

F.2d at 141 (rejecting MCI’s challenge because Smith “was not considering the

constitutionality of an interim ratemaking solution”). This flexibility is particularly

appropriate when the FCC implements: “(a) an interim ratemaking solution (b) justified




                                              53
by a substantial policy objective.” ACS of Anchorage, Inc. v. FCC, 290 F.3d 403, 408

(D.C. Cir. 2002).

       The FCC’s transition plan appropriately allows recovery of lost intrastate revenues

through a federal recovery mechanism. By funding shortfalls for intrastate services, the

FCC did not leave LECs to obtain recovery from another jurisdiction. The situation in

Smith was the opposite, and the FCC’s recovery mechanism is valid under any reasonable

interpretation of Smith. See id. at 409-10.

              3.     Waiver of the Challenge to the Access Recovery Charge

       The National Association of State Utility Consumer Advocates challenges the

Access Recovery Charge on two grounds: (1) The FCC did not analyze its authority to

implement the charge; and (2) the FCC acted arbitrarily and capriciously by allowing

carriers to pass along state-specific costs to customers in other states. National

Association of State Utility Consumer Advocates Principal Br. at 5-6, 11-14 (July 12,

2013). But we cannot reach these issues because they were not properly raised before the

FCC. See 47 U.S.C. § 405(a); Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215, 1227-28

(10th Cir. 2009).

       The National Association contends that these issues were raised in the petition for

reconsideration filed by the Public Service Commission for the District of Columbia.

National Association of State Utility Consumer Advocates Reply Br. at 1 (July 31, 2013)

(citing 6 R. at 4046-53). It is true that the National Association’s second challenge was




                                              54
raised in the D.C. Commission’s petition for reconsideration. 6 R. at 4049. But this

petition had not been decided when the present action began. See National Association of

State Utility Consumer Advocates Reply Br. at 2 (July 31, 2013).6 Thus, the National

Association cannot avoid waiver based on the D.C. Commission’s presentation of a

similar challenge. See Petroleum Commc’ns, Inc. v. FCC, 22 F.3d 1164, 1170-71 (D.C.

Cir. 1994).

                4.    Recovery of Interstate Costs through End-User Rates and
                      Universal Service Support

       In their reply, the Petitioners challenge the FCC’s ultimate bill-and-keep

framework on grounds that it will require interstate cost recovery through local end-user

rates once the federal recovery mechanism phases out. Joint Intercarrier Compensation

Reply Br. of Pet’rs at 5-6 (July 31, 2013). According to the Petitioners, local end-user

rates are subject to the intrastate jurisdiction and cannot be used for interstate cost

recovery. Id.

       This argument does not fit our facts. Bill-and-keep allows carriers to recover their

interstate costs not only from end-users, but also from the Universal Service Fund. See 2
6
        The parties have not advised us of an eventual decision on the D.C. Commission’s
petition for reconsideration. But even if the FCC has eventually decided the petition for
reconsideration, the present challenge would have been premature. See TeleSTAR, Inc. v.
FCC, 888 F.2d 132, 134 (D.C. Cir. 1989) (per curiam) (“We hold . . . that when a petition
for review is filed before the challenged action is final and thus ripe for review,
subsequent action by the agency on a motion for reconsideration does not ripen the
petition for review or secure appellate jurisdiction.”); see also Council Tree Commc’ns,
Inc. v. FCC, 503 F.3d 284, 287 (3d Cir. 2007) (stating that because a petition for
reconsideration remained pending when the petition for review was filed, as well as the
time of the court’s eventual decision, the petition for review was “incurably premature”).

                                              55
R. at 403 ¶ 34, 648-49 ¶ 775 n.1408. The FCC concluded that these sources can provide

carriers with a sufficient return without shifting the burden to another jurisdiction. Id. at

723-24 ¶ 924. This conclusion involved a reasonable predictive judgment.

       Even if the prediction had been unwise, however, the FCC has not required

carriers to recover federal costs based on rates outside of the FCC’s jurisdiction. Thus,

we reject the Petitioners’ Smith challenge based on recovery of costs through local end-

user rates.

       E.      Challenges Involving the Adequacy of the Recovery Mechanism

       The Petitioners also contend that the FCC arbitrarily and capriciously failed to

allow carriers to recover a fair return. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 53-54, 56-57 (July 17, 2013). According to the Petitioners, the eligible recovery

declines precipitously at 5% per year, the recovery mechanism will not allow carriers to

recover even this amount, and the recovery mechanism will eventually disappear. Id.

With these limitations, the Petitioners argue that the FCC has capped other intercarrier

compensation rates and limited financial support. Id. With less revenue and inadequate

financial support, the Petitioners contend that future rates will be too low. Id. at 56. The

Court rejects the Petitioners’ argument as a facial challenge; as an as-applied challenge,

the issue is not ripe.

       The facial challenge fails because the FCC’s Order will not necessarily lead to

confiscatory rates. The FCC has concluded that the telecommunications industry is




                                              56
transitioning to IP networks, the bill-and-keep regime will advance that transition, and the

FCC’s funding mechanism will phase out at a slower rate than the baseline. 2 R. at 631

¶ 736, 707-08 ¶ 894. With these developments, the FCC could consider existing trends in

the marketplace and alternative opportunities for carriers to generate revenue.

       With landline revenues in steady decline, the FCC concluded that its recovery

mechanism would fairly represent what carriers would have earned without the reforms.

Id. at 724 ¶ 924.

       The FCC considered not only the downward trends in the market, but also other

opportunities for carriers to generate revenue. It is true that bill-and-keep will end

intercarrier compensation for transport and termination of switched access. Id. at 640

¶ 756. But the FCC reasoned that LECs can continue to collect compensation from other

carriers and that the reforms would improve productivity and decrease costs. Id. at 725-

26 ¶ 928. For example, incumbent LECs could continue to collect compensation for

originating access and dedicated transport. Id. With continuation of these charges, the

FCC projected gains in productivity and decreases in expenses. Id. at 726-27 ¶¶ 929-30.

The FCC’s reasoning does not suffer any facial flaws, and we reject the Petitioners’ facial

challenge.

       We also decline to entertain the as-applied challenge because it is not ripe. When

a carrier faces an insufficient return, it can seek greater support under the Total Cost and

Earnings Review Process. Id. at 723-26 ¶¶ 924-28. Until this process is invoked, the as-




                                             57
applied challenge is premature. If the FCC imposes confiscatory rates, carriers could then

bring as-applied challenges. See Verizon Commc’n, Inc. v. FCC, 535 U.S. 467, 526-27,

528 n.39 (2002).

IV.   Procedural Irregularities in the Rulemaking Process

      The Petitioners also challenge the Order on due-process grounds.

      A.     The FCC Proceedings

      The FCC issued the Order after four formal notices and a lengthy rulemaking

process. In re Universal Serv. Reform Mobility Fund, 25 FCC Rcd. 14716 (2010); In re

Connect America Fund, 26 FCC Rcd. 4554 (2011); Further Inquiry into Tribal Issues

Relating to Establishment of a Mobility Fund, 26 FCC Rcd. 5997 (2011); Further Inquiry

Into Certain Issues in the Universal Serv.-Intercarrier Compensation Transformation

Proceeding, 26 FCC Rcd. 11112 (2011). Through that process, the FCC obtained

hundreds of comments and thousands of ex parte submissions. See 2 R. at 398 ¶ 12,

1029-45.

      In ultimately determining how to proceed, the FCC relied on a plan (called the

“ABC Plan”) proposed by six price-cap carriers in response to the FCC’s 2011 notice.

See, e.g., id. at 445-46 ¶ 142. The FCC’s final notice requested additional comment on

the ABC Plan. 1 R. at 290. For this plan, the FCC provided a three-week notice and

comment period, followed by a 13-day reply period. See id. at 290, 378.




                                           58
       The FCC rulemaking proceedings were “permit-but-disclose” proceedings. Id. at

26-27 ¶ 65; see 47 C.F.R. § 1.1200(a). In these proceedings, “ex parte presentations to

Commission decision-making personnel are permissible but subject to certain disclosure

requirements.” 47 C.F.R. § 1.1200; see EchoStar Satellite LLC v. FCC, 457 F.3d 31, 39

(D.C. Cir. 2006). Thus, following ex parte presentations, the proponents must place

copies of all written ex parte presentations in the record and file written summaries of all

data and arguments presented in oral ex parte presentations. See 47 C.F.R.

§ 1.1206(b)(1)-(2). These rules also provide for submission of confidential information,

FCC notice of ex parte presentations it has received, and a sunshine period starting

immediately before the FCC votes (when only limited written responses to ex partes are

permitted). Id.

       In following its ex parte rules, the FCC obtained hundreds of ex parte submissions

between the close of the final comment period and the “blackout” date. 6 R. at 3754-71.

As allowed under the FCC’s rules, many of these submissions were confidential and

others had to sign confidentiality agreements to access unredacted versions. To promote

transparency, the FCC placed three lists (referring to more than 110 publicly available

sources) and a mobile service competition analysis into the rulemaking record after the

close of the comment period. See id. at 3847-53, 3918-21, 3947-61.

       In the Order, the FCC not only promulgated rules, but also addressed pending

petitions. 2 R. at 757 ¶ 975.




                                             59
       B.     The Petitioners’ Arguments

       The Petitioners raise seven constitutional challenges to the FCC’s order. Six

involve denial of due process from the FCC’s procedure. These challenges involve: (1)

the number and timing of the ex parte submissions, (2) the consideration of specific ex

partes, (3) the FCC’s placement of documents in the rulemaking record after close of the

comment period, (4) the FCC’s commingling of adjudicatory and rulemaking

proceedings, (5) the inadequacy of the notice issued on August 3, 2011, and (6) the

brevity of the final comment schedule. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 58-62 (July 17, 2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-

33 (July 31, 2013). The Petitioners’ seventh challenge is that the FCC improperly

commandeered state commissions. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 62-63 (July 17, 2013).

              1.     The Waiver Issue

       Before addressing the seven challenges, we must decide whether we can entertain

some of the arguments raised in the Petitioners’ reply. The FCC moves to strike some of

these arguments, asserting that the Petitioners had omitted them in the opening brief.

Mot. to Strike Args. in the Joint Intercarrier Compensation Reply Br. of Pet’rs (Sept. 30,

2013). The Petitioners contend that in their reply brief, they simply elaborated on the

due-process arguments raised in their opening brief or responded to the FCC’s arguments.




                                            60
Joint Pet’r Resp. to FCC Mot. to Strike Args. from the Joint Intercarrier Compensation

Reply Br. at 1 (Oct. 15, 2013).

       Generally, “[a]rguments inadequately briefed in the opening brief are waived.”

Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998). To enforce this

requirement, we have granted motions to strike arguments that are raised for the first time

in a reply brief. E.g., M.D. Mark, Inc. v. Kerr-McGee Corp., 565 F.3d 753, 768 n.7 (10th

Cir. 2009).

       Waiver is based on Federal Rule of Appellate Procedure 28(a)(8)(A), which

requires a party to include its arguments and reasons, with supporting citations to the

record.

       In their reply, the Petitioners have referred to documents not mentioned in the

opening brief and raised more specific objections to the FCC’s rulemaking procedure.

Compare Joint Intercarrier Compensation Principal Br. of Pet’rs at 58-62 (July 17, 2013),

with Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013). But the

new references do not justify an order striking the reply.

              2.     The FCC’s Motion to Strike

       In their opening brief, the Petitioners mount a general challenge to the FCC’s

rulemaking procedure. Joint Intercarrier Compensation Principal Br. of Pet’rs at 61 (July

17, 2013). But the Petitioners’ reply brief can be read in two ways: (1) The Petitioners

continue to mount a general cumulative challenge to the FCC’s rulemaking procedure and




                                             61
have included more specific record citations as general examples to illustrate their

broader argument; or (2) the Petitioners continue to mount a cumulative challenge, but

also intend to rely on the citations identified for the first time in the reply brief. See Joint

Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013). The first reading

involves permissible elaboration on the opening brief. The second reading would involve

a violation of Rule 28(a)(8)(A). Instead of striking the reply, we read it narrowly, with

citation of the materials only to illustrate the general cumulative challenge advanced in

the opening brief.

       C.     Our Review of the Constitutional Challenges

       The Petitioners’ procedural challenges stem from the constitutional right to due

process, which requires notice and a fair opportunity to be heard. See Fuentes v. Shevin,

407 U.S. 67, 80 (1972). The APA adds more specific requirements. For example, an

agency must provide notice of the proposed rulemaking and allow interested persons “an

opportunity to participate in the rulemaking through submission of written data, views, or

arguments with or without opportunity for oral presentation.” 5 U.S.C. § 553(b)-(c).

       “‘Absent constitutional constraints or extremely compelling circumstances the

administrative agencies should be free to fashion their own rules of procedure and

methods of inquiry permitting them to discharge their multitudinous duties.’” Phillips

Petroleum Co. v. EPA, 803 F.2d 545, 559 (10th Cir. 1986) (quoting Vt. Yankee Nuclear

Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 543 (1978)). “Congress




                                               62
intended that the discretion of the agencies and not that of the courts be exercised in

determining when extra procedural devices should be employed.” Wyoming v. Dep’t of

Agric., 661 F.3d 1209, 1239 (10th Cir. 2011). Therefore, the agencies enjoy discretion to

establish the procedures they utilize to make substantive judgments. See id.

       D.     The Petitioners’ Due Process Challenges

       The Petitioners identify six types of errors that cumulatively resulted in a denial of

due process. Joint Intercarrier Compensation Principal Br. of Pet’rs at 58-62 (July 17,

2013); Joint Intercarrier Compensation Reply Br. of Pet’rs at 27-33 (July 31, 2013).

              1.     General Challenges to the Ex Partes

       The Petitioners initially focus on the hundreds of ex partes with the FCC. Joint

Intercarrier Compensation Principal Br. of Pet’rs at 59-61 (July 17, 2013). According to

the Petitioners, the ex parte filings multiplied just before the blackout date and the FCC

frequently allowed access only upon the signing of a confidentiality agreement. Id. at 60.

The Petitioners note that eight of the ex partes had been posted only three days before the

FCC adopted the Order. Joint Intercarrier Compensation Reply Br. of Pet’rs at 30 (July

31, 2013). For these ex partes, the Petitioners contend that interested parties were unable

to respond before the blackout period began. Joint Intercarrier Compensation Principal

Br. of Pet’rs at 61 (July 17, 2013).

       Ex parte contacts were proper, for they “are the bread and butter of the process of

administration and are completely appropriate so long as they do not frustrate judicial




                                             63
review or raise serious questions of fairness.” Home Box Office, Inc. v. FCC, 567 F.2d 9,

57 (D.C. Cir. 1977) (per curiam).

       The administrative proceedings involved continuous responses to the FCC’s

notices and to other responses. Ultimately, however, the proceedings had to end. When

they did, many parties could legitimately contend that they needed more time to reply to

others’ responses. The only alternative, however, would have been to keep the comment

period alive forever.

       The APA ensures an opportunity to comment on the notice of proposed

rulemaking, but not to reply to the rulemaking record. See Am. Mining Cong. v.

Marshall, 671 F.2d 1251, 1262 (10th Cir. 1982) (stating that the APA provides a right to

comment on proposed rulemaking, but not “the rulemaking record”). In light of this

limitation under the APA, we cannot impose additional requirements under the guise of

due process. See Vt. Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435

U.S. 519, 524-25 (1979).

       The Petitioners have not shown a failure to comply with the APA or even reliance

on any of the disputed ex partes. Am. Mining Cong., 671 F.2d at 1261; see Sierra Club v.

Costle, 657 F.2d 298, 398-99 (D.C. Cir. 1981) (“The decisive point, however, is that EDF

itself has failed to show us any particular document or documents to which it lacked an

opportunity to respond, and which also were vital to EPA’s support for the rule.”). As a

result, we reject the general challenges to the ex partes.




                                              64
              2.     Ex Parte Challenges Based on Specific Documents

       In their reply brief, the Petitioners point to four ex partes to support their due

process challenge: (1) an October 20, 2011, Verizon ex parte filing that addresses Access

Recovery Charges, (2) an October 18, 2011, Verizon ex parte concerning regulation of

Voice-Over-the-Internet (“VoIP”), (3) an October 21, 2011, Verizon ex parte that

addresses VoIP preemption, and (4) an October 19, 2011, AT&T ex parte that addresses

VoIP jurisdiction. 6 R. at 3980-81, 3929, 3938-45, 4005; Joint Intercarrier Compensation

Reply Br. of Pet’rs at 31-32 & nn.33-34 (July 31, 2013).7

       In their opening brief, the Petitioners did not address the ex partes of October 18,

October 19, or October 21; thus, the Petitioners have waived any argument based

specifically on these documents. See Harman v. Pollock, 446 F.3d 1069, 1082 n.1 (10th

Cir. 2006) (per curiam).8 Because the Petitioners raised the October 20, 2011, Verizon ex

parte in their opening brief, we will analyze it here. See Joint Intercarrier Compensation

Principal Br. of Pet’rs at 60-61 (July 17, 2013).

       In its ex parte on October 20, 2011, Verizon discussed the Access Recovery

Charge on end-users. See 6 R. at 3980-81. And, in a meeting with the FCC’s general


7
       In their opening brief, the Petitioners also referred to five AT&T contacts as
examples of ex partes. Joint Intercarrier Compensation Principal Br. of Pet’rs at 60 (July
17, 2013). But the Petitioners did not specifically rely on these documents; thus, we have
considered them in our general discussion and do not specifically address them here.
8
       We have considered these documents as general examples of ex parte contacts.
We will also consider them as general examples of subjects covered in pending
adjudicatory petitions discussed in these proceedings.

                                              65
counsel, Verizon discussed the Access Recovery Charge and its implementation at the

holding-company level. See id. at 3980. The Petitioners contend in their reply that: (1)

the FCC did not sufficiently inform them in the notice about implementation at the

holding company level, and (2) Verizon unfairly obtained knowledge about this matter

prior to circulation of the Order. Joint Intercarrier Compensation Reply Br. of Pet’rs at

31 (July 31, 2013); see Joint Intercarrier Compensation Principal Br. of Pet’rs at 60-61

(July 17, 2013).

       We reject these arguments. The ABC Plan involved application of the Access

Recovery Charge at the holding-company level; and in the notice on August 3, 2011, the

FCC specifically asked for comments on this provision. 5 R. at 3000-01; 1 R. at 302.

              3.     The FCC’s Placement of Documents in the Rulemaking Record

       The Petitioners also complain that the FCC placed over 110 documents into the

rulemaking record after the close of the comment period. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 59-60 (July 17, 2013) (citing 6 R. at 3847-53, 3918-21, 3947-

61). The FCC’s handling of these documents did not result in a denial of due process.

       Ordinarily, agencies should not add information to the rulemaking record after the

close of the comment period. See Small Refiner Lead Phase-Down Task Force v. U.S.

EPA, 705 F.2d 506, 540-41 (D.C. Cir. 1983). But the APA “does not require that every

bit of background information used by an administrative agency be published for public

comment.” Am. Mining Cong. v. Marshall, 671 F.2d 1251, 1262 (10th Cir. 1982). And




                                            66
agencies need not submit “additional fact gathering [that] merely supplements

information in the rulemaking record by checking or confirming prior assessments

without changing methodology, by confirming or corroborating data in the rulemaking

record, or by internally generating information using a methodology disclosed in the

rulemaking record” to further notice and comment. Chamber of Commerce of U.S. v.

SEC, 443 F.3d 890, 900 (D.C. Cir. 2006).

       The Petitioners do not explain the significance of the additional documents or tie

them to any of the disputed provisions in the Order; thus, we reject the Petitioners’

procedural challenge based on late insertion of these documents into the record. See Am.

Mining Cong., 671 F.2d at 1261.

              4.     The FCC’s Decision to Rule on Pending Petitions

       The FCC found that its conclusions had “effectively address[ed], in whole or in

part, certain pending petitions” and granted or denied several petitions. 2 R. at 757 ¶ 975.

The Petitioners claim, without citation, that the FCC improperly commingled rulemaking

and adjudicatory proceedings. Joint Intercarrier Compensation Principal Br. of Pet’rs at

59 (July 17, 2013). We reject the argument.

       Commingling of functions is permitted when the proceeding involved rulemaking.

See AT&T v. FCC, 449 F.2d 439, 454-55 (2d Cir. 1971). And the FCC’s proceeding

involved rulemaking even if the new rules had the effect of deciding others’ petitions.




                                             67
The incidental disposition of those petitions did not convert the rulemaking proceeding

into an adjudication, and there was no violation of due process or the APA.

              5.     Adequacy of the August 3, 2011, Notice

       In their reply, the Petitioners argue that the notice on August 3, 2011, was

inadequate. Joint Intercarrier Compensation Reply Br. of Pet’rs at 28 (July 31, 2013).

This argument was waived because it was omitted in the Petitioners’ opening brief. See

Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998).

       In the opening brief, the Petitioners made vague references to the sufficiency of the

notice. See Joint Intercarrier Compensation Principal Br. of Pet’rs at 58 (July 17, 2013)

(“Courts vacate APA rulemakings that fail to substantially comply with the requirement

for public participation or which provide no meaningful opportunity for comment.”); id.

at 61 (“Courts have previously vacated FCC rulemakings where there was no realistic

notice or opportunity to be heard.”). But these references would not have alerted the FCC

or the Court to a challenge based on the sufficiency of the August 3 notice. As a result,

we decline to consider the Petitioners’ new argument in their reply about the sufficiency

of the August 3 notice.

              6.     Length of the Comment Period

       In their reply brief, the Petitioners also challenge the length of the FCC’s comment

period. Joint Intercarrier Compensation Reply Br. of Pet’rs at 28-29 (July 31, 2013).




                                             68
Because the Petitioners did not present this argument in their opening brief, the issue is

waived. See Adler, 144 F.3d at 679.

              7.     Cumulative Challenge

       The Petitioners have not shown that any part of the FCC’s procedure was

erroneous; thus, we reject the Petitioners’ cumulative challenge. See Sorenson Commc’ns

v. FCC, 659 F.3d 1035, 1046 (10th Cir. 2011) (applying a presumption of validity to the

FCC’s actions).

       E.     “Commandeering” of State Commissions

       The Petitioners also contend that the FCC has commandeered state commissions

by: (1) requiring them to regulate according to new federal standards under § 252, and

(2) shifting cost recovery to the states. Joint Intercarrier Compensation Principal Br. of

Pet’rs at 62-63 (July 17, 2013). We disagree.

       Generally, the federal government unlawfully conscripts states when they must

involuntarily enact or administer a federal regulatory program. See Printz v. United

States, 521 U.S. 898, 932 (1997); New York v. United States, 505 U.S. 144, 176 (1992).

The same may be true when the federal government provides a state with funding to

implement a program and later “surpris[es] participating States with post-acceptance or

‘retroactive conditions.’” Nat’l Fed’n of Indep. Bus. v. Sebelius, __ U.S. __, 132 S. Ct.

2566, 2606 (2012). But “[w]here federal regulation of private activity is within the scope

of the Commerce Clause, [the Court has] recognized the ability of Congress to offer




                                             69
States the choice of regulating that activity according to federal standards or having state

law pre-empted by federal regulation.” New York, 505 U.S. at 173-74.

       That is the case here, for states are not required to regulate under § 252. Instead,

the federal government has undertaken regulation of matters previously regulated by the

states. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 n.6 (1999). The federal

government’s creation of a federal regulatory scheme does not conscript the state

commissions to do anything, and we reject the Petitioners’ argument. See Cellular Phone

Taskforce v. FCC, 205 F.3d 82, 96-97 (2d Cir. 2000) (rejecting a similar challenge under

47 U.S.C. § 332(c)(7)(B)(iv)).

       The Petitioners also contend that the FCC has assumed responsibility for cost

recovery as a means of coercing state commissions. Joint Intercarrier Compensation

Principal Br. of Pet’rs at 62-63 (July 17, 2013). For this contention, the Petitioners rely

on National Federation of Independent Business v. Sebelius, __ U.S. __, 132 S. Ct. 2566

(2012). That case involved federal funding to the states so they could implement a

federal program. See Nat’l Fed’n of Indep. Bus., 132 S. Ct. at 2605-06. Here, the federal

government has assumed responsibility for financial support to third parties—not

states—so the FCC can implement a federal program. National Federation of

Independent Business is inapplicable, and the FCC has not coerced state commissions.




                                             70
V.     Individual Challenges to the Order

       In addition to the broad challenges to the FCC’s regulation of access traffic,

adoption of a bill-and-keep regime, and procedural fairness, individual parties and groups

challenge specific aspects of the reforms. We reject these challenges.

       A.     Rural Independent Competitive Alliance’s Challenge to the FCC’s
              Limitation on Funding Support for Rural Competitive LECs

       The FCC authorized financial support to incumbent LECs (but not competitive

LECs), through the Universal Service Fund. 2 R. at 688 ¶ 853, 691-93 ¶¶ 862, 864. This

difference is challenged by the Rural Independent Competitive Alliance. Additional

Intercarrier Compensation Issues Principal Br. (Pet’rs) at 10-19 (July 11, 2013). We

reject the challenge.

       The arbitrary-and-capricious standard requires an agency to “provide an adequate

explanation to justify treating similarly situated parties differently.” Comcast Corp. v.

FCC, 526 F.3d 763, 769 (D.C. Cir. 2008). The FCC justified the disparity on two

grounds: (1) CLECS, unlike ILECs, can freely raise rates on end-users without

regulatory constraints; and (2) CLECs, unlike ILECs, “typically can elect whether to enter

a service area and/or to serve particular classes of customers (such as residential

customers) depending upon whether it is profitable to do so without subsidy.” 2 R. at

691-92 ¶ 864. Because these justifications show that ILECs have a greater need than

CLECs for additional financial support, the FCC would seem to have “articulate[d] a

satisfactory explanation for its action [that] includ[es] a rational connection between the


                                             71
facts found and the choice made.” Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035,

1045 (10th Cir. 2011) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 43 (1983)).

       The Rural Independent Competitive Alliance disagrees, contending that the FCC’s

explanations are implausible and false. Additional Intercarrier Compensation Issues

Principal Br. (Pet’rs) at 10-19 (July 11, 2013).

       The FCC relies primarily on its second rationale: Competitive LECs have greater

freedom to choose where and how to provide service; thus, they have less need for

financial support than incumbent LECs. Federal Resp’ts’ Final Resp. to Pet’rs’

Additional Intercarrier Compensation Issues Principal Br. at 16-20 (July 29, 2013) (citing

2 R. at 693 ¶ 864 & n.1675). This explanation was rational. Because most incumbent

LECs are carriers of last resort, they must ordinarily serve their assigned areas even when

it is no longer profitable. See Stuart Buck, Telric v. Universal Service: A Takings

Violation, 56 Fed. Comms. L.J. 1, 46 (2003) (“[M]any (if not all) ILECs are designated as

‘carriers of last resort’ under various state laws, which means that they are generally not

allowed to (1) refuse local phone service to any customer in any area in which they

operate, or (2) discontinue service in an area where there is no other carrier.”). The FCC

reasonably regarded competitive LECs as more flexible. 2 R. at 692-93 ¶ 864. Without

status as carriers-of-last-resort, many competitive LECs can choose which customers to

serve and freely leave the region.




                                             72
       The Alliance points to a previous FCC order, where it stated that CLECs lack

lower-cost urban operations that urban ILECs can use to subsidize rural service.

Additional Intercarrier Compensation Issues Principal Br. (Pet’rs) at 15-16 (July 11,

2013) (citing In re Access Charge Reform, 16 FCC Rcd. 9923, 9950 ¶ 65 (2001)).

According to the Petitioners, this statement shows that rural CLECs cannot “pick and

choose to retain their most profitable customers.” Id. In the prior order, however, the

FCC did not question the CLECs’ greater opportunity to select customers or restrict

service. See In re Access Charge Reform, 16 FCC Rcd. at 9950 ¶¶ 65-66.

       It is true, as the Alliance argues, that some competitive LECs have committed to

serve entire regions. Additional Intercarrier Compensation Issues Principal Br. (Pet’rs) at

15 (July 11, 2013). Notwithstanding these commitments, the FCC could reasonably rely

on the flexibility available to competitive LECs and the relative lack of flexibility for

incumbents. See 2 R. at 692-93 ¶ 864. Unlike ILECs, CLECs made a rational economic

decision to enter the market and serve specific customers and areas. Id. at 692-93 ¶ 864-

65.

       The Alliance argues that once CLECs built their networks, they developed reliance

interests that could not be ignored by the FCC. Additional Intercarrier Compensation

Issues Principal Br. (Pet’rs) at 17-18 (July 11, 2013). It surely would have been arbitrary

and capricious if the FCC had disregarded the CLECs’ reliance interests. See FCC v. Fox

Television Stations, Inc., 556 U.S. 502, 515 (2009). But the FCC did no such thing.




                                             73
Instead, the FCC set out to balance the need for a recovery mechanism against the need to

avoid undue burdens on those carriers contributing to the Universal Service Fund. See 2

R. at 690 ¶ 859. In balancing these needs, the FCC made an empirical judgment that

“competitive LECs . . . [had] not built out their networks subject to [carrier-of-last-resort]

obligations requiring the provision of service when no other provider [would] do so.” Id.

at 692-93 ¶ 864.

       This empirical judgment may be debatable. But we must defer to the FCC in its

empirical judgment on an issue involving its institutional expertise. See Metro Broad.,

Inc. v. FCC, 497 U.S. 547, 570 (1990) (deferring to the FCC in its determination of an

empirical nexus). When the FCC drew on this empirical judgment, it did not ignore the

CLECs’ reliance interests; instead, the FCC concluded that these interests did not trump

other competing considerations. See Qwest Corp. v. FCC, 689 F.3d 1214, 1227-31 (10th

Cir. 2012) (upholding the FCC’s denial of a forbearance petition, based on a change in

approval that involved “moving of the goalpost,” because the change was adequately

explained).

       The Alliance contends that this deference will undermine the FCC’s own objective

of broadening the array of services in rural areas. Additional Intercarrier Compensation

Issues Principal Br. (Pet’rs) at 18-19 (July 11, 2013). According to the Alliance, CLECs

deserve support because they are more likely than ILECs to deploy advanced

telecommunications services in rural areas. Id. (citing In re Access Charge Reform, 16




                                              74
FCC Rcd. 9923, 9950 ¶ 65 (2001)). But the FCC has broad discretion to balance

competing policy goals, including the control of transition costs. See Sorenson v.

Commc’ns v. FCC, 659 F.3d 1035, 1045 (10th Cir. 2011); see also Rural Cellular Ass’n

v. FCC, 588 F.3d 1095, 1108 (D.C. Cir. 2009) (the FCC “has broad discretion” to balance

the objectives in funding universal service). The FCC acted reasonably in balancing the

need to carefully oversee the Universal Service Fund with the goal of extending service in

rural areas.

       B.      The Challenge by National Telecommunications Cooperative
               Association, U.S. TelePacific Corporation, and North County
               Communications Corporation to the Transition of CMRS-LEC Traffic
               to Bill-and-Keep

       The FCC decided to immediately implement bill-and-keep as the default reciprocal

compensation methodology for CMRS-LEC (cellphone-landline) traffic. 2 R. at 761-62

¶ 988. On reconsideration, the FCC extended the transition for six months for local

CMRS-LEC traffic subject to an interconnection agreement. Id. at 1145-46 ¶ 7.

       National Telecommunications Cooperative Association, U.S. TelePacific

Corporation, and North County Communications Corporation challenge these decisions

as arbitrary and capricious. Additional Intercarrier Compensation Issues Principal Br.

(Pet’rs) at 20-21 (July 11, 2013). According to these petitioners, the FCC applied

different standards to similar situations, implementing a flash-cut for CMRS-LEC traffic

while professing to avoid flash cuts. Id. at 20-21 (quoting 2 R. at 663 ¶ 802). We

conclude that the FCC’s time-table satisfies the APA.


                                            75
       The FCC decided to immediately institute bill-and-keep for CMRS-LEC traffic,

giving two reasons: (1) Evidence showed that arbitrage schemes were more problematic

for CMRS-LEC traffic than local LEC-LEC traffic; and (2) an immediate shift for

CMRS-LEC traffic would be less disruptive than it would have been for other types of

traffic. 2 R. at 764-65 ¶¶ 995-96 & n.2099.

       The FCC downplayed concerns about disruption for three reasons.

       First, CMRS providers and CLECs had only recently developed arrangements for

reciprocal compensation. Id. at 765 ¶ 996. Without a longer history of these

arrangements, CLECs “had no basis for reliance on such a methodology in their business

models.” Id.

       Second, without an interconnection agreement, ILECs do not receive reciprocal

compensation. Id. at 765-66 ¶ 997. And, the FCC found that most large ILECs with such

an agreement had “already adopted $0.0007 or less as their reciprocal compensation rate.”

Id. at 766 ¶ 997.

       Third, the FCC found that ILECs with interconnection agreements might have

more time to adjust to bill-and-keep because the FCC was not abrogating existing

agreements. Id. at 767 ¶ 1000.

       For these reasons, the FCC concluded that an immediate transition to bill-and-keep

for CMRS-LEC traffic would not be too disruptive or “overburden[] the universal service




                                              76
fund.” Id. The FCC’s rationale was internally consistent, facially reasonable, and

supported by the evidence. As a result, the FCC’s explanation sufficed under the APA.

       C.     Core Communications, Inc. and North County Communications
              Corporation’s Challenge to the FCC’s New Regulations on Access
              Stimulation

       In the Order, the FCC addressed an interim arbitrage scheme known as “access

stimulation.” Id. at 601-17 ¶¶ 656-701. Access stimulation occurs when an LEC with

high access charges enters into an arrangement with a provider of high call-volume

operations, such as chat lines, adult-entertainment calls, or free conference calls. Id. at

601 ¶ 656. The arrangement “inflates or stimulates the access minutes terminated to the

LEC, and the LEC then shares a portion of the increased access revenues . . . with the

‘free’ service provider.” Id. Because an IXC cannot pass along these higher access costs

to the customers making these more expensive calls, the IXC must recover these extra

costs from all of its customers. Id. at 602 ¶ 663.

       This scheme works because LECs entering “traffic-inflating revenue-sharing

agreements” need not reduce their access rates “to reflect their increased volume of

minutes.” Id. at 601 ¶ 657. According to the FCC, these LECs experience a “jump in

revenues and thus inflated profits that almost uniformly make the LEC’s interstate

switched access rates unjust and unreasonable under section 201(b) of the Act.” Id.

       The FCC defined “access stimulation” in the Order. Id. at 604 ¶ 667. “Access

stimulation” occurs when an “LEC has entered into an access revenue sharing agreement”




                                              77
and “the LEC either has had a three-to-one interstate terminating-to-originating traffic

ratio in a calendar month, or has had a greater than 100 percent increase in interstate

originating and/or terminating switched access MOU in a month compared to the same

month in the preceding year.” Id. at 604 ¶ 677.

       Petitioners Core Communications, Inc. and North County Communications

Corporation challenge two aspects of the rules: (1) The FCC allowed access-stimulating

ILECs, but not access-stimulating CLECs, to utilize procedures allowing retariffs of

charges for terminating access; and (2) the FCC required access-stimulating CLECs to

benchmark to the price-cap LEC with the lowest terminating access rates in the state.

Additional Intercarrier Compensation Issues Principal Br. (Pet’rs) at 31-36 (July 11,

2013). The Petitioners challenge both provisions as arbitrary and capricious under the

APA. Id. These challenges are rejected.

              1.     The FCC’s Refusal to Allow CLECs to Use ILEC Ratemaking
                     Procedures

       The Petitioners challenge the refusal to allow access-stimulating CLECs to set

rates above the FCC’s chosen benchmark. Id. at 31. According to the Petitioners, the

FCC did not explain its refusal to allow “CLECs to have the same option as ILECs to rely

upon the § 61.38 rules to demonstrate actual costs and demand in the rate-of-return

territories in which they provide switched access.” Id. We disagree.

       The issue involves a regulation in place before the recent reforms: 47 C.F.R.

§ 61.38. This regulation called for incumbent LECs to file tariffs supported by cost-of-


                                             78
service data. See Aeronautical Radio, Inc. v. FCC, 642 F.2d 1221, 1234 (D.C. Cir. 1980).

Because these tariffs have supplied benchmarks for CLECs,9 they have not ordinarily had

to submit cost data.

       Core and North County contend that for access stimulation, the remedy is harsher

for CLECs than ILECs. ILECs can obtain relief from rate adjustments by submitting cost

studies under 47 C.F.R. § 61.38; CLECs cannot. Additional Intercarrier Compensation

Issues Principal Br. (Pet’rs) at 31-32 (July 11, 2013). According to Core and North

County, the FCC failed to explain the disparity. Id. We disagree.

       The FCC explained its rationale in the Order: Determining the reasonableness of

CLEC pricing has proven impractical. 2 R. at 614-15 ¶ 694. Thus, the FCC “has

specifically disclaimed reliance on cost to set competitive LEC access rates.” In re

Access Charge Reform: PrairieWave Telecomms., Inc., 23 FCC Rcd. 2556, 2560 ¶ 13

(2008).

       This rationale is neither arbitrary nor capricious. The FCC previously noted the

advantages of setting CLEC rates through benchmarking rather than the submission of

cost data:

              [A] benchmark provides a bright line rule that permits a simple
              determination of whether a CLEC’s access rates are just and
              reasonable. Such a bright line approach is particularly desirable
              given the current legal and practical difficulties involved with
              comparing CLEC rates to any objective standard of
              “reasonableness.”


9
       See In re Access Charge Reform, 16 FCC Red. 9923, 9943-45 (2001).

                                            79
In re Access Charge Reform, 16 FCC Rcd. 9923, 9939 ¶ 41 (2001).

       Core and North County do not address the historical differences between the

pricing of ILECs and CLECs. Instead, Core and North County argue that CLECs should

have the opportunity to support relief through cost data under 47 C.F.R. § 61.38. The

FCC feared that this option would create difficulty in assessing the reasonableness of

CLEC rates. 3 R. at 1933 (cited at 2 R. at 614 n.1172).

       The FCC addressed a similar issue six years ago when confronted with a waiver

petition by a CLEC (PrairieWave Telecommunications, Inc.), which submitted extensive

cost data and requested an opportunity to charge based on its own costs rather than a

benchmark tied to ILEC rates. See In re Access Charge Reform: PrairieWave

Telecomms., Inc., 23 FCC Rcd. 2556, 2556 ¶ 1 (2008). Like Core and North County,

PrairieWave discounted the burden because it had been the only CLEC to seek a waiver.

See id. at 2560-61 ¶ 13. The FCC explained that if it were to accept PrairieWave’s cost

data, “every competitive LEC” would request a waiver. Id. And with this flood of data,

the FCC would need to alter CLEC rates from a “straightforward comparison” to an

“administratively difficult cost study analysis.” Id. at 2561 ¶ 14; see also In re Access

Charge Reform, 16 FCC Rcd. 9923, 9939 ¶ 41 (2001) (stating that a benchmarking

approach provides a simple way to determine the reasonableness of a CLEC’s access

rates and avoids the “legal and practical difficulties involved with comparing CLEC rates

to any objective standard of ‘reasonableness’”).




                                             80
       The FCC’s explanation here was similar. For example, the FCC cited comments

from one LEC that had acknowledged the “legal and practical difficulties involved with

comparing CLEC rates to any objective standard of reasonableness.” 2 R. at 614 n.1172

(citing 3 R. at 1933).

       Core and North County downplay the burden in preparing the cost data, but do not

address the FCC’s concern about how the data would be utilized. The FCC rationally

concluded that the cost data would prove useful only if the agency were to abandon its

benchmarking approach for CLEC rates and face the legal and practical difficulties of

setting CLEC rates based on an objective standard of reasonableness. Core and North

County do not present any reason for the FCC to reverse course in this manner, and we

are left without any reason to question the FCC’s decision. Thus, its refusal to open the

§ 61.38 procedures, allowing submission of cost data for rate-setting, is neither arbitrary

nor capricious.

              2.     The FCC’s Requirement for Access-Stimulating CLECs to
                     Benchmark to the Price-Cap LEC with the State’s Lowest
                     Access Rates

       The FCC not only declined to allow CLECs to use the § 61.38 procedures, but also

required access-stimulating CLECs to benchmark their switched-access rates to the state’s

price-cap LEC with the lowest access charges. Id. at 612-13 ¶ 689. According to the

Petitioners, this benchmark was arbitrary and capricious because: (1) it applies to CLECs




                                             81
statewide, and (2) the FCC lacked evidentiary support for its decision. Additional

Intercarrier Compensation Issues Principal Br. (Pet’rs) at 32-36 (July 11, 2013).

       Core and North County initially argue that it was irrational to tie the benchmark to

a price-cap LEC’s statewide rates when the CLEC was stimulating access in only a small

part of the state. Id. at 32-33. The FCC took a different view. It reasoned that when a

CLEC artificially increases traffic, its volumes resemble those of the price-cap LEC in the

state. 2 R. at 612-13 ¶ 689. Thus, the FCC concluded that for CLECs improperly

stimulating traffic, rates should be tied to the state’s price-cap LEC. Id.

       Core and North County regard this explanation as “irrational” because the CLEC

may not even be operating in territories served by rate-of-return LECs. Additional

Intercarrier Compensation Issues Principal Br. (Pet’rs) at 33 (July 11, 2013). This

argument ignores the FCC’s view that the pertinent comparator is the state’s price-cap

LEC, not the smaller rate-of-return carriers. The FCC’s view may be debatable, but it is

neither arbitrary nor capricious.

       Core and North County also question the evidentiary basis for the FCC to use

price-cap LECs, rather than rate-of-return LECs. Id. at 34-35. The Petitioners contend

that the FCC grounded its benchmarking decision on a finding that the “access

stimulating LEC’s traffic volumes are more like those of the price cap LEC in the state,

and it is therefore appropriate and reasonable for the access stimulating LEC to

benchmark to the price cap LEC.” Id. at 34 (citing 2 R. at 612-13 ¶ 689).




                                             82
       The FCC’s conclusion has some evidentiary support. See 3 R. at 1536 (AT&T’s

evidentiary submission, showing that rural traffic-stimulating CLECs are terminating

three to five times as many minutes as the largest ILECs in Iowa, Minnesota, and South

Dakota). This evidence suggests that traffic-stimulating CLECs do not operationally

resemble the ILECs they benchmark. See id. at 1538 (AT&T’s submission, showing that

traffic-stimulating CLECs “clearly are not in the same business as NECA Band 8 ICOs”).

       Based on this evidence, the FCC’s decision was reasonable. The FCC chose to

require benchmarks of access-stimulating CLECs to price-cap LECs based on evidence

that their volumes were comparable. This decision was reasonable, and we reject the

APA challenge by Core and North County.

       D.     AT&T, Inc.’s Challenge to the FCC’s Decision to Allow VoIP-LEC
              Partnerships to Collect Intercarrier Compensation Charges for
              Services Performed by the VoIP Partner

       AT&T challenges one aspect of the new rules: the opportunity for VoIP-LEC

partnerships to charge intercarrier compensation during the transition to bill-and-keep.

AT&T Principal Br. at 16-23 (July 16, 2013). This challenge is rejected.

       LECs have partnered with VoIP providers and wireless carriers (like AT&T).

Eventually, when bill-and-keep is fully implemented, LECs in these partnerships will be

unable to impose any access charges. But during the transition period, LECs can impose

access charges, though they will be phased downward. AT&T’s challenge focuses on

differences between the rules pertaining to LEC-VoIP partnerships and LEC-wireless




                                            83
partnerships. During the transition period, LECs can impose access charges for functions

performed by VoIP partners. See 2 R. at 753-54 ¶ 970. But LECs that partner with

wireless providers (like AT&T) cannot charge for functions performed by the wireless

partner. Id. at 753 n.2024.10

       AT&T argues that it was arbitrary and capricious to deny the same opportunities to

LECs that partner with wireless providers. AT&T Principal Br. at 18-23 (July 16, 2013).

According to AT&T, the FCC failed to: (1) adequately explain its decision to give VoIP

providers an advantage over wireless providers, and (2) address the concern over

competitive equality. Id. at 16. We disagree, concluding that the FCC adequately

responded to AT&T’s objection. This explanation was two-fold: (1) The ability of VoIP

providers to charge for access would promote development of IP networks; and (2) VoIP

providers partnered with LECs to interconnect, and wireless providers voluntarily

partnered with LECs to avoid FCC regulation. 2 R. at 752 ¶ 968, 753 n.2024.

       As discussed in Chief Judge Briscoe’s separate opinion, Congress set out in the

1996 Act to promote the development of IP networks. See, e.g., In re LAN Tamers, Inc.,

329 F.3d 204, 206 (1st Cir. 2003) (explaining that universal service includes high-speed


10
        AT&T is inconsistent in its argument. It sometimes focuses on the CLEC’s ability
to tariff for work done by VoIP providers; other times, AT&T addresses the ability to
receive intercarrier compensation for this work. This distinction matters because the
ability to obtain intercarrier compensation is separate from the ability to use a tariff to do
so. In re Sprint PCS, 17 FCC Rcd. 13192, 13196 (2002). The rule preventing CLECs
from tariffing for work done by their CMRS partners is based on the absence of an
independent right to intercarrier compensation. See In re Access Charge Reform, 19 FCC
Rcd. 9108, 9116 (2004).

                                              84
internet access). Unlike conventional wireless service, VoIP service depends on IP

facilities. See, e.g., In re Universal Serv. Contribution Methodology, 21 FCC Rcd. 7518,

7526 ¶ 15 (2006). To promote development of IP networks, the FCC attempted to

support VoIP providers because they were developing these networks. See 2 R. at 752

¶ 968.

         This strategy was at least reasonable. Any decision would have created an

asymmetry between VoIP providers and either wireless providers or LECs. The FCC

could reasonably have concluded that a contrary decision would have slowed IP

deployment and undercut the FCC’s stated goal of encouraging the deployment of IP

networks.

         The FCC relied not only on the goal of promoting IP deployment, but also on the

need for wireless providers to partner with LECs. Id. at 753 n.2024. As the FCC

explained, VoIPs frequently partner with LECs to interconnect with the network, while

wireless providers frequently partner with LECs to avoid FCC regulations. Id. at 753-54

¶ 970, 753 n.2024. Until the FCC issued the Order, it had not determined the intercarrier

compensation obligations for VoIP traffic. Federal Resp’ts’ Final Resp. to the AT&T

Principal Br. at 14 (July 29, 2013) (quoting Notice of Proposed Rulemaking ¶ 610, Supp.

R. at 192). In contrast, the FCC had long prohibited wireless carriers from collecting

access charges through CLEC partners. 2 R. at 753 ¶ 970 n.2024. These differences

between LEC-VoIP partnerships and wireless-LEC partnerships provided a reasonable




                                             85
foundation for the FCC’s distinction in the interim rules. See id. The FCC did not act

arbitrarily or capriciously when it allowed access charges for functions provided by VoIP

providers in partnership with LECs, but not for functions performed by wireless providers

in partnership with LECs.

       AT&T argues that the FCC’s explanation did not address the complaint about a

“market-distorting competitive bias” in favor of VoIP providers. AT&T Principal Br. at

18 (July 16, 2013). Prior to entry of the Order, however, AT&T had complained only that

it would be arbitrary to treat wireless providers differently than VoIP providers. 6 R. at

3987 (AT&T’s argument that the FCC’s proposed rule would “arbitrarily tilt the

regulatory playing field”); id. at 3989-90 (AT&T’s argument that there “could be no

rationale for such an arbitrary distinction, which would represent nothing more than a

flagrant instance of competition-distorting regulatory favoritism”). Because the FCC

presented sound regulatory reasons for treating VoIP providers differently than wireless

carriers, it adequately responded to AT&T’s allegation that it was arbitrarily favoring

VoIP providers.

       E.     Voice on the Net Coalition, Inc.’s Challenges to the FCC’s No-Blocking
              Obligation

       To avoid high access charges, some long-distance carriers began to block long-

distance calls that terminated with certain LECs. Establishing Just & Reasonable Rates

for Local Exchange Carriers, 22 FCC Rcd. 11629, 11629 ¶ 1 (2007). The FCC attempted

to stop this practice, reiterating its general prohibition on “call blocking.” Id. In the


                                              86
Order, the FCC also extended this prohibition to interconnected VoIP or one-way VoIP

service providers obtaining intercarrier compensation. 2 R. at 756 ¶ 974. The FCC

feared that VoIP providers, like the long-distance companies, could have incentives to

block calls to avoid high access charges. See id.

       Voice on the Net challenges this prohibition on three grounds: (1) The FCC gave

inadequate notice that it was considering a “no-blocking” obligation; (2) the FCC failed

to adequately explain its decision; and (3) the FCC lacked statutory authority to impose

the no-blocking obligation on information services. Voice on the Net Coalition, Inc.

Principal Br. at 9-19 (July 15, 2013). The first challenge is invalid because the FCC’s

notice was sufficient. The other two challenges were waived.

              1.      The Waiver Test

       We would ordinarily decline to entertain any of the present arguments because

they were not raised in the FCC’s rulemaking proceedings or in a petition for rehearing.

“The filing of a reconsideration petition to the Commission is ‘a condition precedent to

judicial review . . . where the party seeking such review . . . relies on questions of fact or

law upon which the Commission . . . has been afforded no opportunity to pass.’”

Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1044 (10th Cir. 2011) (quoting 47

U.S.C. § 405(a)).

       Voice on the Net has not drawn our attention to a petition for reconsideration; thus,

“we must determine whether the FCC was otherwise given an opportunity to pass on




                                              87
[these] issue[s].” Id. This opportunity existed only if one of the commenters had

developed the issue in the administrative proceedings. See Sorenson Commc’ns, Inc. v.

FCC, 567 F.3d 1215, 1227-28 (10th Cir. 2009) (holding that the issue was waived

because the petitioner failed to raise in the FCC proceedings the “basis” for the present

legal challenge).

       The D.C. Circuit Court of Appeals has adopted a straightforward test for waiver

under § 405. “The pith of the test is this: ‘the argument made to the Commission’ must

‘necessarily implicate[]’ the argument made to us.” Sprint Nextel Corp. v. FCC, 524 F.3d

253, 257 (D.C. Cir. 2008) (quoting Time Warner Entm’t Co. v. FCC, 144 F.3d 75, 80

(D.C. Cir. 1998)). This test reflects a practical method of applying § 405, and we adopt

the test for our circuit. Like the D.C. Circuit, we apply the test by distinguishing between

procedural and substantive challenges. See Time Warner Entm’t Co., 144 F.3d at 80.

When the challenge involves only a “technical or procedural mistake,” the party must

have raised the same claim to the FCC. Id. at 81. But if a petitioner makes a substantive

challenge, such as one involving FCC policy, we determine whether the FCC would

necessarily have viewed the question as part of the case. See New England Pub.

Commc’ns Council, Inc. v. FCC, 334 F.3d 69, 79 (D.C. Cir. 2003).

       We apply this test to each of Voice on the Net’s arguments to determine if the

argument was preserved in the FCC proceeding.




                                             88
               2.     Challenge to the Notice

         According to Voice on the Net, the FCC failed to provide adequate notice and an

opportunity to comment on the no-blocking obligation on one-way VoIP providers.

Voice on the Net Coalition, Inc. Principal Br. at 9-13 (July 15, 2013). Because this

challenge is procedural, rather than substantive, we address whether Voice on the Net

raised the same challenge in the FCC proceeding. See Time Warner Entm’t Co., 144 F.3d

at 81.

         Voice on the Net contends that the issue was preserved in a VoIP White Paper

presented to the FCC. Voice on the Net Coalition, Inc. Reply Br. at 1 (July 31, 2013).

We disagree except for the narrow contention that the FCC failed to define “‘one-way’

VoIP services.” See id. at 10.

         The VoIP White Paper discussed potential FCC rate regulation on one-way VoIP,

but not the challenged no-blocking obligation on one-way VoIP providers:

               The FCC . . . has not undertaken the pre-requisites under the [APA]
               necessary to impose rate regulation on “one-way” VoIP. The term
               “one-way interconnected VoIP” is not defined by the Act or in the
               Commission’s rules. Neither has the FCC provided a proposed
               definition of the term, or provided notice, explanation or justification
               of the proposed regulation.

6 R. at 3830. The White Paper also stated in a footnote, without mentioning a no-

blocking obligation, that “[n]otice must be ‘sufficient to fairly apprise interested parties of

all significant subjects and issues involved.’” Id. at 3830 n.32 (quoting Am. Iron & Steel

Inst. v. EPA, 568 F.2d 284, 291 (3d Cir. 1977)).


                                              89
       Voice on the Net acknowledges that rate regulation is not the same as a no-

blocking obligation. Voice on the Net Coalition, Inc. Reply Br. at 2 (July 31, 2013). But

Voice on the Net points to the FCC’s assertion of a close connection between intercarrier

compensation and a no-blocking obligation. Id. Because the two issues are closely

related, Voice on the Net contends that the challenge to rate regulation on one-way VoIP

service necessarily implicated the present challenge. Id.

       This contention fails. In opposing rate regulation on one-way VoIP, Voice on the

Net did not provide the FCC with a fair opportunity to pass on a separate, narrower no-

blocking obligation. For example, if parties were to allege that the FCC failed to notice

the transition to bill-and-keep, they would not preserve a much narrower claim that the

FCC failed to adequately notice the Access Recovery Charge. Though the two are

related, a general challenge does not necessarily implicate a more specific one. See Sprint

Nextel Corp. v. FCC, 524 F.3d 253, 257 (D.C. Cir. 2007).

       The VoIP White Paper did preserve a potential challenge to the FCC’s use of the

term “one-way interconnected VoIP.” See 6 R. at 3830. But the FCC explained in its

notice that one-way interconnected VoIP constituted VoIP service that “allow[s] users to

terminate calls to the [Public Switched Telephone Network], but not receive calls from

the PSTN, or vice versa.” 1 R. at 365 n.57. Because the FCC defined “one-way

interconnected VoIP” in the notice, we reject the challenge.




                                            90
             3.     Challenge to the Adequacy of the Explanation

      Voice on the Net also invokes the APA in challenging the sufficiency of the FCC’s

explanation for no-blocking rules. Voice on the Net Coalition, Inc. Principal Br. at 13-15

(July 15, 2013). Because this challenge is procedural, rather than substantive, we

examine whether the same issue was raised in the administrative proceeding. See Time

Warner Entm’t Co., 144 F.3d at 81.

      According to Voice on the Net, its argument on the no-blocking rules was

preserved in the VoIP White Paper. Voice on the Net Coalition, Inc. Reply Br. at 2 (July

31, 2013). But the VoIP White Paper did not address the sufficiency of the explanation

for the no-blocking rules on one-way VoIP providers; thus, this challenge has been

waived.

             4.     Challenge to the FCC’s Ancillary Jurisdiction

      Voice on the Net also challenges the FCC’s ancillary jurisdiction. Voice on the

Net Coalition, Inc. Principal Br. at 15-19 (July 15, 2013). This challenge involves FCC’s

policy; thus, “we ask whether a reasonable Commission necessarily would have seen the

question raised before us as part of the case presented to it.” Time Warner Entm’t Co.,

144 F.3d at 81. The question would have constituted part of the case as long as it had

been presented by one of the parties. See EchoStar Satellite, LLC v. FCC, 704 F.3d 992,

996 (D.C. Cir. 2013).




                                            91
       According to Voice on the Net, the FCC’s ancillary jurisdiction was challenged in

the VoIP White Paper and a letter on October 18, 2011. Voice on the Net Coalition, Inc.

Reply Br. at 1 (July 31, 2013). These documents contain arguments that: (1) VoIP

services were “likely to be information services and may even [have been] software

applications or online offerings wholly outside of the Commission’s jurisdiction,” (2) the

FCC could not “avoid obvious limitations in its ability to regulate services outside of its

primary jurisdiction, including information services and other online services and

applications,” and (3) VoIP did not involve “Title II telecommunications services,” but

were “information services, outside of the scope of Section 201 Title II rate regulation.”

6 R. at 3830, 3935-36. These arguments did not cover the FCC’s ancillary authority.

       Voice on the Net also urges a futility exception. Voice on the Net Coalition, Inc.

Reply Br. at 3-4 (July 31, 2013). No such exception exists, and the Supreme Court stated

in Booth v. Churner that it would not “read futility or other exceptions into statutory

exhaustion requirements where Congress has provided otherwise.” Booth v. Churner,

532 U.S. 731, 741 n.6 (2001). Because § 405(a) involves a statutory exhaustion

requirement, we are not free to recognize a futility exception. See Fones4All Corp. v.

FCC, 550 F.3d 811, 818 (9th Cir. 2008) (holding that futility does not excuse exhaustion

because it is specifically required in § 405). In the absence of a futility exception, we

conclude that Voice on the Net has waived its substantive challenges.




                                             92
       F.     Transcom Enhanced Services, Inc.’s Challenges to the FCC’s Intra-
              MTA Rule, Provisions on Call-Identification, and Blocking of Calls

       Petitioner Transcom calls itself “an enhanced service provider.” 6 R. at 3855. As

an enhanced service provider, Transcom regards itself as an end-user rather than a

telecommunications carrier. Id. at 3965. Because Transcom views itself as an end-user

rather than a telecommunications carrier, it argues that it can never be in the middle of a

telecommunication for intercarrier compensation purposes and cannot be regulated as a

common carrier. Transcom Principal Br. at 21-22 (July 12, 2013).

       Based on this characterization, Transcom challenges three aspects of the FCC’s

Order: (1) the FCC’s interpretation of its intraMTA rule governing reciprocal

compensation between wireless providers and LECs; (2) the FCC’s ancillary jurisdiction

to impose call-identifying rules on non-carriers who do not originate or terminate traffic;

and (3) the validity of the FCC’s no-blocking rules on VoIP providers. Id. at 39-40, 45-

48. We reject each argument. Transcom is not the called party, and Transcom has not

preserved its second and third challenges.

              1.     Transcom’s Challenge to the FCC’s IntraMTA Rule

       Transcom initially challenges the FCC’s clarification of its “IntraMTA rule.” This

rule addresses calls between an LEC and a wireless provider that originate and terminate

in the same “Major Trading Area.” These calls are characterized as local and are subject

to reciprocal compensation. 2 R. at 768 ¶ 1003; 47 C.F.R. 51.701(b)(2).




                                             93
       This characterization was addressed in the FCC proceedings by a wireless carrier,

Halo Wireless. See 2 R. at 768-69 ¶ 1005; 6 R. at 3926-28. Halo asserted that it had

provided “‘Common Carrier Wireless Exchange Service to [Enhanced Service Providers]

and Enterprise Customers.’” Id. at 3975. According to Halo, its traffic originated at the

base station where its customers (enhanced service providers like Transcom) connected

wirelessly. See 2 R. at 768 ¶ 1005. Halo would then deliver its traffic to the terminating

LEC and characterize its traffic as local (or “intraMTA”). See id.

       Multiple parties presented evidence that Halo’s traffic did not originate on a local

wireless line. See id. These parties stated that Halo’s traffic originated as access traffic

and progressed to Halo’s enhanced service providers, who then handed off the call to

Halo to deliver to the terminating LEC. Id. This process is illustrated in Diagram 9,

which shows a typical long-distance call from Oklahoma City to Denver:




                                              94
       Halo’s “customer” (the enhanced service provider) is not the party who was calling

or being called. Nonetheless, Halo argued that its traffic was not subject to access

charges because the enhanced service provider terminated each long-distance call and

originated a new local wireless call. See id. at 769 ¶ 1006. In response, the FCC clarified

that for purposes of the intraMTA rule, the “re-origination of a call over a wireless link in

the middle of a call path [did] not convert a wireline-originated call into a [wireless]-

originated call for reciprocal compensation.” Id. For the intraMTA rule, the FCC ignores

the presence of an enhanced service provider, such as Transcom, in the middle of a call;

instead, the FCC looks to the calling party’s location in relation to the called party. See

id.

       This conclusion requires Halo (as a common carrier) to pay access charges;

however, the FCC has not addressed Transcom’s status as an end-user or common carrier.

Though its status was not addressed, Transcom argues that it can no longer enjoy the

benefits of being an “end user.” Transcom Principal Br. at 11, 26-30 (July 12, 2013).

       According to Transcom, calls terminate and originate with enhanced service

providers. Id. at 21. Under this view, even when the enhanced service provider is in the

middle of a communication, the call terminates; when the call leaves the enhanced service

provider, a new call has begun. See id.




                                              95
       For this characterization, Transcom misreads two cases and overlooks the FCC’s

prior determination that a call “terminates” only when the call reaches the called party.

Id. at 33-34; Transcom Reply Br. at 12-13 (July 30, 2013).

       Transcom relies on Atlantic Bell Telephone Companies v. Federal

Communications Commission, 206 F.3d 1 (D.C. Cir. 2000), and Worldcom, Inc. v.

Federal Communications Commission, 288 F.3d 429 (D.C. Cir. 2002), two cases

involving dial-up internet Id. at 44.

       In Atlantic Bell Telephone Companies, the D.C. Circuit Court of Appeals vacated

an FCC order that excluded internet service providers from the reach of 47 U.S.C.

§ 251(b)(5). Atl. Bell Tel. Cos., 206 F.3d at 5, 8. The FCC had found that calls to internet

service providers were not considered “local” because they usually involved further

communications with out-of-state websites. See id at 5. The court rejected this “end-to-

end” analysis because it ignored the FCC regulation defining “termination” as “the

switching of traffic that is subject to section 251(b)(5) at the terminating carrier’s end

office switch (or equivalent facility) and delivery of that traffic from that switch to the

called party’s premises.” See id. at 6. Applying this regulation, the court concluded that

calls terminated when they reached the internet service providers; thus, the internet

service providers were “clearly the ‘called part[ies].’” Id.

       Transcom has not explained how it meets the FCC’s regulatory definition of

“termination,” rendering Atlantic Bell Telephone Companies inapplicable. In addition to




                                              96
this lack of explanation, Transcom has not pointed to any authority making its purported

position as an enhanced service provider or an end-user relevant to the FCC’s

interpretation of the intraMTA rule.

       Atlantic Bell Telephone Companies presented a different situation because

Transcom is not the called party. Dial-up providers are treated differently because they

are the parties being called. See In re Core Commc’ns, Inc., 455 F.3d 267, 271 (D.C. Cir.

2006) (“Under the dial-up method, a consumer uses a line provided by a local exchange

carrier . . . to dial the local telephone number of an Internet service provider.”). Because

Transcom is not the called party, calls do not terminate with it; and the FCC reasonably

interpreted its intraMTA rule.

              2.     Transcom’s Challenge to the Call-Identifying Rules

       Transcom also challenges the FCC’s caller-identification rules. In the Order, the

FCC prohibited “intermediate providers” from altering “path signaling information

identifying the telephone number, or billing number, if different, of the calling party that

is received with a call.” 47 C.F.R. § 64.1601(a)(2); see 2 R. at 624-25 ¶¶ 719-20. The

FCC defined an “intermediate provider” as “any entity that carries or processes traffic

that traverses or will traverse the PSTN at any point insofar as that entity neither

originates nor terminates that traffic.” 47 C.F.R. § 64.1600(f); 2 R. at 624 ¶ 720.

Because this regulation regulates non-carriers, the FCC concedes it lacks Title II

authority. Federal Resp’ts’ Final Resp. to the Transcom Principal Br. at 21 (July 24,




                                             97
2013). Transcom contends that this regulation also exceeds the FCC’s ancillary

jurisdiction. Transcom Principal Br. at 46-47 (July 12, 2013).

       We do not reach the jurisdictional challenge because Transcom failed to preserve it

in the administrative proceeding. See 47 U.S.C. § 405(a). In its response brief, the FCC

contended that Transcom had waived its jurisdictional argument. Federal Resp’ts’ Final

Resp. to the Transcom Principal Br. at 21 (July 24, 2013). Transcom responded, without

explanation, by citing over 100 pages in the record. Transcom Reply Br. at 23 (July 30,

2013). These citations are not helpful.

       Of the cited material, only two footnotes and four pages are potentially relevant.

See 3 R. at 1220, 1222 n.30, 1325-26, 1478-79 n.5, 1834. Two of the pages state only

that information services are outside the FCC’s Title II authority. Id. at 1220, 1834. The

other pages discuss policy reasons weighing against regulation of information services

under Title I. Id. at 1325-26. And one footnote states generally that “the FCC lacks

‘blanket’ Title I authority to regulate non-telecommunications industries.” Id. at 1478-79

n.5.

       The other footnote broadly challenges ancillary jurisdiction for a much broader

rule: one requiring information service providers to transmit call identification data “even

if the communications never touch the PSTN and even if the ‘phone number’ is not used

for that communication.” Id. at 1222 n.30. The FCC rule applies only to calls that




                                             98
traverse the PSTN; as a result, we have no reason to address the FCC’s ancillary authority

over calls that do not traverse the PSTN. See 2 R. at 755-56 ¶¶ 973-74.

       Transcom has failed to identify a single place, amid the 100+ pages cited, in which

it alerted the FCC to its jurisdictional attack on the call-identifying rules. Accordingly,

this challenge has been waived.

              3.      Transcom’s Challenge to the FCC’s No-Blocking Rules

       Like Voice on the Net, Transcom challenges the FCC’s no-blocking rules for VoIP

providers. Transcom Principal Br. at 48-49 (July 12, 2013). In addressing Voice on the

Net’s argument, we held that this challenge is waived because this challenge was not

presented in the administrative proceeding. For the same reason, we conclude that

Transcom has waived this challenge. See 47 U.S.C. § 405(a).

       G.     Windstream Corporation and Windstream Communications, Inc.’s
              Challenges to Origination Charges

       Windstream Corporation and Windstream Communications, Inc., which operate a

price-cap LEC, challenge the FCC’s treatment of originating access charges for VoIP

traffic. Windstream Principal Br. at 20-32 (July 17, 2013). This challenge is rejected.

       In the Order, the FCC immediately set the default access rates for interstate and

intrastate toll VoIP traffic “equal to [the] interstate rates applicable to non-VoIP traffic.”

2 R. at 735 ¶ 944. Thus, charges for VoIP traffic would be capped at interstate rates for

origination and termination. Id. at 746-47 ¶ 961. The FCC added that it would allow

VoIP originating access charges at interstate rates on a transitional basis, “subject to the


                                              99
phase-down and elimination of those charges pursuant to a transition to be specified.” Id.

at 746 n.1976. The caps allegedly hurt Windstream because access charges are generally

higher for intrastate calls than for interstate calls. See id. at 656-57 ¶ 791, 663 n.1508.

       Because the Order largely focused on charges for terminating access, Windstream

asked the FCC to “clarify ‘that the Order [did] not apply to, and [was] not intended to

displace, intrastate originating access rates for PSTN-originated calls that [were]

terminated over VoIP facilities.’” Windstream Principal Br. at 13 (July 17, 2013)

(quoting 6 R. at 4076).

       In response, the FCC modified its VoIP rules in a second reconsideration order. 2

R. at 1162 ¶ 30. There the FCC acknowledged that Windstream had presented evidence

undermining the initial assumption that all VoIP intercarrier compensation, including

originating access charges for TDM format originated traffic, had been “widely subject to

dispute and varied outcomes.” Id. at 1163-65 ¶¶ 32-34. Based on the new evidence, the

FCC allowed LECs to resume charging intrastate originating access rates for VoIP calls

for two years. Id. at 1165-66 ¶ 35. Although originating VoIP intrastate access charges

would be capped at interstate levels after two years, the FCC did not allow use of its

recovery mechanism to recoup lost revenue. See id. at 1165 ¶ 35 n.97.

       Windstream invokes the APA to challenge this treatment of intrastate VoIP

originating access charges on four grounds: (1) The FCC failed in the initial order to

provide a reasoned explanation for reducing origination charges for VoIP traffic; (2) the




                                             100
FCC acted irrationally in treating VoIP originating access differently than originating

access for traditional landline service; (3) the FCC failed to provide funding support; and

(4) the FCC acted arbitrarily and capriciously in failing to grant relief for the initial six-

month period preceding the Second Reconsideration Order. Windstream Principal Br. at

20-32 (July 17, 2013); Windstream Reply Br. at 15 (July 31, 2013). We reject these

arguments.

              1.      Windstream’s Challenge to the FCC’s Explanation in the
                      Original Order

       Windstream contends that in the original order, the FCC failed to explain the

decision to “flash-cut[] intrastate VoIP originating access rates to much-lower interstate

rates.” Windstream Principal Br. at 20 (July 17, 2013). According to Windstream, the

FCC did not clearly reduce VoIP originating access charges because the discussion

involved only terminating access. Id. at 21-22.

       We reject Windstream’s characterization of the original order. There the FCC

stated that it would reduce intrastate VoIP originating access charges to the same level as

interstate rates. In the Order, the FCC: (1) defined “VoIP-PSTN traffic” to cover “traffic

exchanged over PSTN facilities that originates and/or terminates in IP format,” and (2)

stated that “VoIP-PSTN traffic” would be “subject to charges not more than originating

and terminating interstate access rates.” 2 R. at 732-33 ¶ 940, 746-47 ¶ 961.11 This
11
       Windstream argues that footnote 1976 undermines this reading of the Order.
Windstream Principal Br. at 21 (July 17, 2013). We disagree. Though footnote 1976
appears in the VoIP section of the Order, it generally discusses originating access charges
under 47 U.S.C. § 251(b)(5) and the anticipated reforms involving originating access.

                                              101
language is clear even though the FCC elsewhere focused on terminating access charges.

The FCC’s VoIP framework applied to the origination of access VoIP traffic.

       The FCC also explained its decision to cap VoIP intrastate originating access

charges at interstate rates. In the Order, the FCC established (for the first time) an

entitlement to originating and terminating access charges for VoIP traffic during the

transition to bill-and-keep. Id. at 729 ¶ 933.

       When the FCC issued its initial order, it had little reason to believe that billing

disputes were more prevalent for termination than for origination. Thus, termination and

origination were subjected to the same rules. See id. at 730-32 ¶¶ 937-39. After the

Order was issued, Windstream presented evidence that disputes were less frequent for

origination than for termination. Id. at 1164 ¶ 33. This evidence prompted the FCC to

modify its order, and we must now review the FCC’s explanation for the new version. Id.

at 1164-66 ¶¶ 34-35.

              2.       Windstream’s Challenge to the FCC’s Explanation for the New
                       Rule

       Windstream contends that the FCC failed to explain its decision to treat originating

access VoIP traffic differently than traditional originating access traffic. Windstream

Principal Br. at 22-24 (July 17, 2013). In the Second Reconsideration Order, the FCC

determined that “there were fewer disputes and instances of non-payment or under-

payment of origination charges billed at intrastate originating access rates for intrastate


See 2 R. at 746 n.1976.

                                             102
toll VoIP traffic than was the case for terminating charges for such traffic.” 2 R. at 1164

¶ 33. Arguing that this acknowledgment applies equally to originating access charges for

traditional service, Windstream contends that the FCC failed to explain why it was

treating intrastate originating access differently in VoIP and traditional service.

Windstream Principal Br. at 24 (July 17, 2013). We reject this contention.

          The FCC explained that in the overarching transition to bill-and-keep for all

traffic, originating access charges need not be treated the same for traditional service and

VoIP service. 2 R. at 1162-63 ¶ 31. In the initial order, the FCC pointed out that it was

adopting “a distinct prospective intercarrier compensation framework for VoIP traffic

based on its findings specific to that traffic.” Id. But before entry of the original order,

the FCC had not extended access charges to VoIP traffic; thus, carriers had less reason to

rely on continuing revenue for VoIP intercarrier compensation. See id. at 1162 ¶ 31 &

n.84. Without this reliance interest, the FCC thought LECs should have to justify

extension of the intercarrier compensation regime for VoIP traffic during the transition.

See id.

          In the Second Reconsideration Order, the FCC credited evidence that carriers were

actually receiving originating access charges for VoIP traffic. Id. at 1164 ¶ 33. Whether

entitled to the access charges or not, carriers were collecting these charges on VoIP

traffic; and with this reality, the FCC gave carriers two years to charge the higher

origination rates for intrastate access on VoIP traffic. See id. at 1165-66 ¶ 35.




                                              103
       In doing so, the FCC was careful to address originating VoIP access traffic in the

context of its transitional VoIP intercarrier compensation regime. See id. In the context

of the FCC’s transition to bill-and-keep for all traffic, this decision was not arbitrary and

capricious. See Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1046 (10th Cir. 2011)

(stating that special deference is given to transitional measures).

              3.     Windstream’s Challenge to the FCC’s Failure to Provide
                     Funding Support

       Windstream also challenges the FCC’s refusal to provide funding support for

reductions in intrastate originating VoIP access charges, calling the refusal arbitrary and

capricious. Windstream Principal Br. at 25-29 (July 17, 2013). This challenge is

rejected.

       In other parts of the Order, the FCC: (1) emphasized its “commitment to a gradual

transition” to bill-and-keep and rejection of flash-cuts, and (2) adopted a funding

mechanism for traditional terminating access charges because “[p]redictable recovery

during the intercarrier compensation reform transition [was] particularly important to

ensure that carriers ‘[could] maintain/enhance their networks while still offering service

to end-users at reasonable rates.’” 2 R. at 695 ¶ 870, 689-90 ¶ 858, 704 ¶ 890. And, the

FCC decided not to reduce traditional originating access charges until it could “further

evaluate the timing, transition, and possible need for a recovery mechanism.” Id. at 632

¶ 739. With these statements, Windstream argues that the FCC failed to explain its




                                             104
refusal to adopt a recovery mechanism for the reduction in intrastate originating VoIP

access charges. Windstream Principal Br. at 25-29 (July 17, 2013). We disagree.

       The FCC provided carriers with a two-year transition period before lowering

intrastate VoIP originating access charges to interstate levels. 2 R. at 1165-66 ¶ 35. With

this step, the FCC explained that reduction in intrastate originating VoIP access charges

would not require replacement revenue in the context of “the Commission’s overall VoIP

intercarrier compensation framework.” Id. The FCC predicted that under its VoIP

intercarrier compensation framework, “most providers [would] receive, either via

negotiated agreements or via tariffed charges, additional revenues for previously disputed

terminating VoIP calls and [would] also realize savings associated with reduced litigation

and disputes.” Id. In light of these benefits, the FCC found that “indefinitely permitting

origination charges at the level of intrastate access for prospective intrastate toll VoIP

traffic [was] not necessary to ensure a measured transition.” Id. Thus, in capping VoIP

intrastate originating access charges without a separate recovery mechanism, the FCC

reasoned that carriers would obtain sufficient revenue. Id.

       This explanation sufficed under the APA. In transitioning the industry to bill-and-

keep for all traffic, the FCC could reasonably conclude that the interim measures would

ease many of the burdens on LECs. As recognized above, we give substantial deference

to interim regulations and transitional measures. See Sorenson Commc’ns, Inc., 659 F.3d

at 1046. And we are “particularly deferential when [we] review[] an agency’s predictive




                                             105
judgments, especially those within the agency’s field of discretion and expertise.”

Franklin Sav. Ass’n v. Dir., Office of Thrift Supervision, 934 F.2d 1127, 1146 (10th Cir.

1991).

         We apply these principles in reviewing the FCC’s prediction that carriers would

obtain sufficient revenue for terminating access to offset losses in revenue for originating

VoIP access. Windstream criticizes this prediction on four grounds: (1) The FCC did not

address the absence of a recovery mechanism for intrastate VoIP originating access

charges; (2) the FCC failed to support its assertion that carriers would receive sufficient

revenue in the overall context of the VoIP intercarrier compensation framework; (3) a

flash cut would occur at the end of the two-year transition period; and (4) the FCC was

inconsistent in establishing a recovery mechanism for the loss of access charges for

terminating VoIP, but not originating VoIP access. Windstream Reply Br. at 10-15 (July

31, 2013). We reject each argument.

         The FCC found that a recovery mechanism was unnecessary for intrastate VoIP

originating access charges. See 2 R. at 1165-66 ¶ 35. The FCC explained its approach to

“the transition of origination charges for intrastate toll VoIP traffic in the context of the

Commission’s overall VoIP intercarrier compensation framework.” Id. The FCC

predicted that most providers would receive “additional revenues for previously disputed

terminating VoIP calls” and save in litigation costs. Id. These predictions led the FCC to




                                              106
conclude that a recovery mechanism was not necessary to prevent undue disruption from

reduced charges for the origination of intrastate calls. See id.

       We also reject Windstream’s argument (presented in its reply brief)12 that

intercarrier compensation would be inadequate. This argument was omitted in

Windstream’s opening brief; thus, the argument has been waived. Adler v. Wal-Mart

Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998).

       Windstream characterizes the two-year transition period as an unwarranted “flash

cut.” Windstream Principal Br. at 19-24 (July 17, 2013). But the FCC applied its

institutional expertise in concluding that carriers could adjust their business models

before dropping rates. We again have little reason to question the FCC’s predictive

judgment based on Windstream’s characterization of the two-year period as a “flash cut.”

       In addition, Windstream argues that the FCC acted inconsistently by creating a

recovery mechanism for reductions in access charges for termination, but not origination.

Windstream Reply Br. at 14-15 (July 31, 2013). The FCC acknowledged the difference,

but explained it. See 2 R. at 1165-66 ¶ 35. This explanation was based on the disputed

nature of termination charges for VoIP providers. See id. By resolving these disputes in

favor of VoIP providers, the FCC reasoned that access charges for termination access

could be used to offset reduction in revenue for origination access. Id. With greater

overall termination charges for VoIP carriers, the FCC could reasonably decline to offer a

recovery mechanism for losses in origination charges.
12
       Windstream Reply Br. at 11-12 (July 31, 2013).

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       As Windstream points out, the FCC provided different treatment for origination-

and termination-charges; but the FCC explained the difference. This explanation might

have been debatable, but it was neither arbitrary nor capricious. As a result, we defer to

the FCC in applying its institutional expertise when it declined to provide a separate

recovery mechanism for lost revenue in originating access.

              4.     Windstream’s Challenge to the Initial Period of Six Months

       Windstream argues that the FCC should have ordered carriers to pay higher

originating access rates retroactively for the six-month period between the initial order

and the second reconsideration order. Windstream Principal Br. at 29-32 (July 17, 2013).

Even if the FCC could require retroactive payment of higher rates, the FCC could have

chosen to make the higher rates prospective (rather than retroactive). See Mountain

Solutions, Ltd. v. FCC, 197 F.3d 512, 520 (D.C. Cir. 1999). And Windstream did not ask

the FCC to exercise this discretion in the petition for rehearing. 6 R. at 4076-84. Because

the FCC would have had no obligation to consider the issue sua sponte, we decline to

disturb the Order on this ground.

VI.    Conclusion

       We deny all of the petitions for review involving the FCC’s regulations regarding

intercarrier compensation. In addition, we deny the FCC’s Motion to Strike New

Arguments in the Joint Intercarrier Compensation Reply Brief of Petitioners.




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