United States Court of Appeals

FOR THE DISTRICT OF COUMBIA CIRCUIT

Argued January 24, 2000 Decided June 27, 2000

No. 99-1149

[State of Iowa and]{.smallcaps}

[Iowa Telecommunications and Technology Commission,]{.smallcaps}

[Petitioners]{.smallcaps}

v\.

[Federal Communications Commission and]{.smallcaps}

[United States of America,]{.smallcaps}

[Respondents]{.smallcaps}

[Bell Atlantic Telephone Companies, et al.,]{.smallcaps}

[Intervenors]{.smallcaps}

On Petition for Review of an Order of the

Federal Communications Commission

*Michael D. Hays* argued the cause for petitioners. With him on the
briefs were *Kenneth D. Salomon* and *J.G. Harrington*.

*James M. Carr*, Counsel, Federal Communications Commission, argued the
cause for respondents. With him on the briefs were *Christopher J.
Wright*, General Counsel, *Daniel M. Armstrong*, Associate General
Counsel, and *John E. Ingle*, Deputy Associate General Counsel.
*Catherine G. O\'Sullivan* and *Nancy C. Garrison*, Attorneys, U.S.
Department of Justice, entered appearances.

*Donald M. Falk, Michael E. Glover, Edward H. Shakin, Dan L. Poole,
Robert B. McKenna, William F. Maher, Jr., Stephen L. Goodman, Richard
White Jr., Michael S. Pabian, David Cosson, Lawrence E. Sarjeant, Linda
Kent, Keith Townsend, John Hunter* and *Julie Rones* were on the brief
for intervenors. *L. Marie Guillory* and *Lawrence W. Katz* entered
appearances.

Before: [Ginsburg]{.smallcaps}, [Sentelle,]{.smallcaps} and
[Rogers]{.smallcaps}, *Circuit Judges*.

Opinion for the Court filed by *Circuit Judge* [Ginsburg.]{.smallcaps}

[Ginsburg]{.smallcaps}, *Circuit Judge*: The State of Iowa and the Iowa
Telecommunications and Technology Commission (collectively, Iowa)
petition for review of a declaratory ruling by the Federal
Communications Commission. The Commission held that the Iowa
Communications Network (ICN) is not a common carrier and therefore not a
\"telecommunications carrier\" within the meaning of § 254(h) of the
Telecommunications Act of 1996, 47 U.S.C.§ 254(h). Consequently, the ICN
is ineligible for direct universal service support for the discounted
telecommunications services it provides to schools, libraries, and rural
health care providers. *See* Federal-State Joint Board on Universal
Service, *Declaratory Ruling*, 14 F.C.C.R. 3040 (1999) (*Declaratory
Ruling*).

Iowa raises two arguments in its petition for review. First, Iowa claims
the Commission erred by determining that the ICN is not a common
carrier. Second, Iowa claims that regardless whether the ICN is a common
carrier, it is a \"telecommunications carrier\" within the meaning of
the 1996 Act, and therefore is eligible for direct universal service
support. To the extent the latter claim is not foreclosed by our recent
decision in *Virgin Islands Tel. Corp. v. FCC*, 198 F.3d 921, 922, 925
(1999) (upholding as reasonable FCC\'s position that \"
\'telecommunications carrier\' means essentially the same as common
carrier\"), it is foreclosed by the deference we owe the Commission\'s
reasonable interpretation of the statute it administers, pursuant to
step two of the analysis in *Chevron U.S.A., Inc. v. NRDC*, 467 U.S. 837
(1984).

With respect to Iowa\'s first claim, however, the Commission failed to
address Iowa\'s argument that offering services to all potential
customers to whom the carrier, under state law, may provide services
makes the ICN a common carrier for purposes of the 1996 Act. We
therefore grant the petition for review and remand this matter to the
Commission to consider Iowa\'s argument in the first instance.

**I. Background**

The Iowa legislature established the ICN in 1989 to provide heavily
subsidized high‑speed telecommunications services throughout the state,
particularly to areas that may be underserved by the local exchange
carrier. The legislature did not, however, authorize the ICN to serve
everyone in the state that could use its services; in particular, the
ICN may not provide services to individuals or to most private
businesses. Rather, the ICN may provide service only to \"public and
private agencies,\" Iowa Code § 8D.11(2), defined as follows:

> \"Private agency\" means an accredited nonpublic school, a nonprofit
> institution of higher education eligible for tuition grants, or a
> hospital licensed pursuant to chapter 135B or a physician clinic to
> the extent provided in section 8D.13, subsection 16.
>
> \"Public agency\" means a state agency, an institution under the
> control of the board of regents, the judicial branch \... a school
> corporation, a city library, a regional library \... a county library
> \... or a judicial district department of correctional services \...,
> an agency of the federal government, or a United States post office
> which receives a federal grant for pilot and demonstration projects.

Iowa Code § 8D.2(4)‑(5).

Iowa Code § 8D.9 further divides the class of \"public and private
agencies\" into two subclasses. First, Certifying Users, which are
institutions of higher education, area education agencies, and certain
United States Post Offices, were required to certify by July 1, 1994
their intention to connect to the network. Any Certifying User that did
not certify its intention by that date may not use the ICN without
specific legislative authorization. Any Certifying User that did timely
certify its intention to connect to the ICN must receive all its
telecommunications services from the ICN unless it obtains a waiver
based upon certain objective criteria specified in the statute. *See
id.* § 8D.9(2). Second, Preauthorized Users, which are all other public
and private agencies, may connect to the ICN at any time without further
authorization from the legislature, and may choose which
telecommunications services to take from the ICN. Although Iowa points
to no statute requiring that the ICN serve all authorized users, the
parties agree that in practice the ICN will provide service to any
Preauthorized User and to any timely Certifying User that requests
service.

Under § 254(h)(1) of the 1996 Act, a \"telecommunications carrier\" must
provide services at discounted rates to schools, libraries, and rural
health care providers, and is entitled to receive from the Commission,
in an amount equal to the aggregate discount given to such entities,
either a reimbursement or an offset against the carrier\'s obligation to
participate in or contribute to the universal telecommunications service
fund. 47 U.S.C. § 254(h)(1). \"Telecommunications carrier\" is defined
as \"any provider of telecommunications services,\" *id.* § 153(44), and
\"telecommunications service\" is defined as \"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,\" *id.* § 153(46).

The Commission determined that \"telecommunications services\" means
\"only telecommunications provided on a common carrier basis.\"
Federal-State Joint Board on Universal Service, *Report & Order*, 12
F.C.C.R. 8776, 9177 & 785 (1997). Therefore, in the Commission\'s scheme
for administering § 254, a carrier that provides a service on a
non‑common carrier basis is not a \"telecommunications carrier\" and
hence is ineligible for universal service support with respect to that
service.

In response to Iowa\'s request for a declaratory ruling, the Commission
held that the ICN is not a common carrier. *See* 14 F.C.C.R. at 3056 &
29. Specifically, the Commission noted that the primary characteristic
of a common carrier is that it \"holds \[it\]self out to serve
indifferently all potential users,\" *id.* at 3050 & 21, and determined
that the ICN failed this test for two reasons: The ICN does not hold
itself out to serve all users, but is instead limited to serving only
\"public and private agencies,\" as defined by the statute law of Iowa,
*see id.* & & 22, 24-25; and the ICN impermissibly discriminates among
users in the terms upon which it offers service, *see id.* at 3051 & 23.
Iowa petitions for review of the *Declaratory Ruling*.

**II. Analysis**

Before the Commission, Iowa argued, among other things, that the ICN is
a common carrier because it offers service to all the users it is
authorized by law to serve:

> \[T\]he case law firmly establishes that ICN only need serve a
> specified clientele indifferently to qualify as a common carrier\....
> \[ICN\'s\] customers are determined by its governing statute, not by
> the ICN itself. Under that statute the Legislature designated broad
> classes of potential customers and required the ICN to serve all of
> the members of those classes.

In its brief to this court, Iowa reiterates this argument and relies
primarily upon two cases for support: *FCC v. Midwest Video Corp.*, 440
U.S. 689 (1979), and National Ass\'n *of Regulatory Util. Comm\'rs v.
FCC* (*NARUC*), 525 F.2d 630 (D.C. Cir. 1976).

In *Midwest Video* the Commission had promulgated regulations requiring
cable television systems to allocate channels for public, educational,
government, and leased access users. 440 U.S. at 693. Although the
regulations required that the public and leased access channels be open
to all potential users, use of the educational and government access
channels was limited respectively to \"local educational authorities\"
and the \"local government.\" 47 C.F.R. § 76.254(a)(2)‑(3) (1977). A
private organization could not air an educational program on the
educational access channel because it would not come within the class of
users authorized by law. Yet the Supreme Court held that the access
rules, by \"transferr\[ing\] control of the content of access cable
channels from cable operators to members of the public\" had \"relegated
cable systems, *pro tanto*, to common‑carrier status.\" 440 U.S. at
700-01.

In *NARUC* this court reviewed the Commission\'s determination that
Specialized Mobile Radio Systems (SMRS) providing transmission services
were not common carriers. 525 F.2d at 639. The court announced a test
for common carriage that focused primarily upon whether the carrier
holds itself out indiscriminately to serve all to whom it can \"legally
and practically be of use.\" *Id.* at 640-42. We wrote:

> It is not an obstacle to common carrier status that SMRS offer a
> service that may be of practical use to only a fraction of the
> population, nor that the \[FCC\'s\] Order limits possible subscribers
> to SMRS services to eligibles under Sections 89, 91, and 93 of the
> Regulations. The key factor is that the operator offer indiscriminate
> service to whatever public its service may legally and practically be
> of use.

*Id.* at 642.

Both *Midwest Video* and *NARUC* can be read as approving the general
rule that a carrier offering its services only to a legally defined
class of users may still be a common carrier if it holds itself out
indiscriminately to serve all within that class. That is precisely
Iowa\'s argument.

Although the Commission expressly recognized in the *Declaratory Ruling*
that the ICN\'s customer base is restricted by state law rather than by
the carrier\'s own choice, *see* 14 F.C.C.R. at 3053 & 25, it did not
respond to this argument. Before this court, the Commission first claims
that the argument was not clearly enough presented before the agency to
elicit an answer. True it is that the State did not cite cases before
the agency, but it clearly made the argumentCas is evident in the
passage quoted in the first paragraph of this part of our opinion. The
Commission\'s only substantive response is that *Midwest Video* and the
other cases cited by Iowa involved the provision of a specialized
service that \"necessarily limited the class of customers that the
carrier would serve.\" This response fails to address the issue whether
a legal prohibition upon serving some potential customers to whom the
service would be of useCin *Midwest Video*, for example, those capable
of producing video programming suitable for the government and
educational access channelsCis inconsistent with being a common carrier.

We are not suggesting that *Midwest Video* or *NARUC* or the other cases
Iowa cites require a decision in Iowa\'s favor. Rather, our point is
that the Commission\'s failure to address Iowa\'s argument requires that
we remand this matter for the Commission\'s further consideration. *See,
e.g.*, *Frizelle v. Slater*, 111 F.3d 172, 177 (D.C. Cir. 1997)
(remanding where agency \"did not respond to two \... arguments, which
do not appear frivolous on their face and could affect the \[agency\'s\]
ultimate disposition\"); *AT&T Corp. v. FCC*, 86 F.2d 242, 247 (D.C.
Cir. 1997) (remanding where Commission \"completely failed to address\"
argument raised in *ex parte* letter).

The Commission also ruled that the ICN is not a common carrier because
it impermissibly discriminates among users in the terms of service it
offers. The Commission identified three distinct forms of
discrimination: (1) Certifying Users but not Preauthorized Users must
take all or none of their telecommunications services from the ICN; (2)
some Certifying Users may receive waivers of the all‑or‑none
requirement; and (3) those that did not timely certify, as well as all
potential users that are not public or private agencies, are excluded
entirely from using the ICN. *Declaratory Ruling*, 14 F.C.C.R. at 3051 &
23.

In its opening brief to this court, Iowa pointed out that common
carriers typically treat different classes of customers differently, and
that the Communications Act itself contemplates reasonable distinctions
in the terms and conditions of service offered to different classes of
customers. *See* 47 U.S.C. § 201(b) (\"communications \... may be
classified into \... such \[ \] classes as the Commission may decide to
be just and reasonable, and different charges may be made for the
different classes of communications\"). In its responsive brief, the
Commission reiterated but did not meaningfully argue its first and
second grounds for saying that the ICN unduly discriminates. We
therefore follow the Commission\'s lead in focusing exclusively upon the
third form of discrimination. *See SEC v. Banner Fund Int\'l*, 211 F.3d
602, 613-14 (D.C. Cir. 2000) (declining to address \"asserted but
unanalyzed\" argument not developed after being challenged by adverse
party). Even as to that ground, the Commission\'s defense is conclusory:

> \[W\]hile common carriers may permissibly engage in some
> discrimination among classes of users \... \[the\] exclus\[ion of\]
> entire classes of potential users from its customer base simply
> because they do not fit the Iowa Code\'s definition of a private or
> public agency \... is irreconcilable with well‑established principles
> of common carriage.

Moreover, as the Commission conceded at oral argument, this claim of
discrimination raises precisely the same question as the Commission\'s
first reason for denying the ICN common carrier status: Whether holding
out service only to the class of users authorized by law to receive it
is inconsistent with being a common carrier. Therefore, discrimination
of the sort here claimed is not an independent basis for denying the
ICN\'s common carrier status, and does not alter our conclusion that we
must remand this matter for the Commission\'s further consideration.

**III. Conclusion**

The Commission failed to address Iowa\'s argument that the ICN is a
common carrier because it holds out service indiscriminately to all the
users it is authorized by law to serve. Therefore, we grant the petition
for review and remand this case for further consideration by the
Commission.

> *So ordered.*