United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 4, 2000 Decided July 14, 2000

No. 97-1538

GTE Service Corporation and

Micronesian Telecommunications Corporation,

Petitioners

v\.

Federal Communications Commission and

United States of America,

Respondents

MCI Communications Corporation, et al.,

Intervenors

Consolidated with

99-1045, 99-1046

On Petitions for Review of an Order of the

Federal Communications Commission

Daniel E. Troy and Howard J. Symons argued the cause for petitioners.
With them on the briefs were Gail L. Polivy, R. Michael Senkowski,
Michael F. Altschul, Michelle M. Mundt. David A. Gross, James D. Ellis,
Robert M. Lynch, Michael J. Zpevak, William B. Barfield, M. Robert
Sutherland, L. Andrew Tollin, Michael Deuel Sullivan, Luisa L. Lancetti,
S. Mark Tuller an Matthew B. Pachman. M. Edward Whelan and Theodore C.
Whitehouse entered appearances.

John Edward Ingle, Deputy Associate General Counsel, Federal
Communications Commission, argued the cause for respondents. With him on
the brief were Christopher J. Wright, General Counsel, Laurel R.
Bergold, Counsel, Joel I. Klein, Assistant Attorney General, U.S.
Department of Justice, Robert B. Nicholson, and Robert J. Wiggers,
Attorneys. Adam D. Hirsh, Attorney, entered an appearance.

John W. Katz, Veronica M. Ahern, Herbert E. Marks and Thomas K. Crowe
were on the brief for intervenors.

Before: Williams, Ginsburg, and Sentelle, Circuit Judges.

Opinion for the Court by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: Several parties petition for review of four
orders by the Federal Communications Commission implementing the rate
integration requirement of § 254(g) of the Communications Act of 1934,
as amended by the Telecommunications Act of 1996, 47 U.S.C. § 254(g).
The petitioners challenge two determinations made by the Commission: (1)
That a telecommunications provider is required to integrate its rates
across all commonly owned or controlled affiliates that provide
interstate interexchange services; and (2) that the requirement of rate
integration applies to providers of Commercial Mobile Radio Service
(CMRS), that is, wireless technologies such as cellular and PCS.

We hold first that the Commission\'s interpretation of § 254(g) as
requiring rate integration across affiliates is reasonable and second
that the Commission erred in concluding the plain text of § 254(g)
required it to apply the rate integration requirement to providers of
CMRS. We therefore vacate the order in relevant part and remand this
matter to the Commission for further consideration whether, as an
exercise of its delegated authority, § 254(g) should be applied to
providers of CMRS.

# I. Background

Prior to 1972 rates for interstate long distance telecommunications
services to and from non-contiguous domestic locations such as Alaska,
Hawaii, and Puerto Rico were much higher than rates for the same
services within the contiguous 48 states. In effect, providers of long
distance services treated those locations as foreign for the purpose of
setting long distance rates. See Establishment of Domestic
Communications-Satellite Facilities by Non-Governmental Entities, 35
F.C.C.2d 844, 856 p 35 (1972) (Domsat II Order). The Commission became
concerned that this disparate treatment \"inhibited the free flow of
communications between the contiguous states and \[non-contiguous
domestic\] points to the disadvantage of all of our citizens.\" Id. The
Commission also recognized that the use of satellites, the cost of which
is insensitive to distance, was making it economically feasible to serve
non-contiguous locations at rates comparable to those offered in the
contiguous 48 states. See id.

In 1972, therefore, the Commission initiated a policy of \"rate
integration\": Telecommunications carriers serving Alaska, Hawaii, and
Puerto Rico (and later the U.S. Virgin Islands) were required, as a
condition of their licenses to use new domestic satellites, to submit a
plan that would \"give maximum effect to the elimination of overall
distance as a major cost factor and \... integrate these three United
States points into the uniform mileage rate pattern that now obtains for
the contiguous states.\" Id. at 857 p 37. Thus AT&T was required to
develop a tariff that would integrate the rates it charged for
interstate long distance service to Alaska, Hawaii, and Puerto Rico into
the domestic rate pattern applicable in the contiguous 48 states. See
Integration of Rates, 61 F.C.C.2d 380, 392 (1976) (1976 Rate Integration
Order). Rate integration would thus ensure \"service between the
contiguous states and \... noncontiguous points\[ \] at rates that are
equivalent to those prevailing for comparable distances in the
contiguous 48 states.\" Integration of Rates, 9 F.C.C.R. 2197, 2198 n.2
(1993).

## A. Rate Integration under the Telecommunications Act of 1996

The Commission adopted its policy of rate integration as an exercise of
its broad authority under the Communications Act to regulate carriers
for the public convenience and necessity. See 47 U.S.C. § 214; Domsat II
Order, 35 F.C.C.2d at 856 p 35. In the Telecommunications Act of 1996,
Pub. L. No. 104-104, 110 Stat. 56 (1996), the Congress put rate
integration upon a statutory footing by adding § 254(g) to the
Communications Act of 1934:

Within 6 months after February 8, 1996, the Commission shall adopt rules
to require \... that a provider of interstate interexchange
telecommunications services shall provide such services to its
subscribers in each State at rates no higher than the rates charged to
its subscribers in any other State.

Although perhaps not obvious on its face, the parties agree that §
254(g) means what the Conference Report says it means:

New section 254(g) is intended to incorporate the polic\[y\] of \...
rate integration of interexchange services\.... The conferees intend the
Commission\'s rules \... to incorporate the policies contained in the
Commission\'s proceeding entitled \"Integration of Rates and Services
for the Provision of Communications by Authorized Common Carriers
between the United States Mainland and the Offshore Points of Hawaii,
Alaska and Puerto Rico/Virgin Islands\" (61 FCC2d 380 (1976)).

H.R. Conf. Rep. No. 104-458, at 132 (1996).

## B. The Commission\'s Orders

The Commission promulgated rules requiring rate integration under §
254(g) in a series of four orders: (1) Implementation of Section 254(g)
of the Communications Act of 1934, as Amended, Report & Order, 11
F.C.C.R. 9564 (1996) (Integration Order); (2) First Memorandum Opinion
and Order on Reconsideration, 12 F.C.C.R. 11812 (1997) (First
Reconsideration Order); (3) Order, 12 F.C.C.R. 15739 (1997) (Stay
Order); and (4) Memorandum Opinion & Order, 14 F.C.C.R. 391 (1998)
(Second Reconsideration Order). The petitioners now challenge two
determinations made in the course of those orders.

### 1. Rate Integration Across Affiliates

In the Integration Order the Commission announced without elaboration
that it read the term \"provider of interstate interexchange
telecommunications services\" in § 254(g) to include \"parent companies
that, through affiliates, provide service in more than one state.\" 11
F.C.C.R. at 9598 p 69. Upon reconsideration at the instance of GTE and
U.S. West, Inc., the Commission explained that the statute was ambiguous
on the specific issue whether for purposes of rate integration a
\"provider of interstate interexchange telecommunications services\"
includes commonly owned or controlled affiliates of the provider. First
Reconsideration Order, 12 F.C.C.R. at 11819 p 14. Because an
interexchange carrier could circumvent rate integration by providing
interstate long distance service to each non-contiguous location through
a separate subsidiary, the Commission concluded that requiring rate
integration among affiliates was most consonant with the purpose of the
statute. See id. p 15. Under the resulting rule, for example, the GTE
affiliate that provides long distance service only in the Commonwealth
of the Northern Mariana Islands is required to integrate its rates with
those of all other GTE affiliates providing long distance service
anywhere in the contiguous 48 states or in other non-contiguous domestic
locations.

### 2. Rate Integration by CMRS Providers

Prior to enactment of the 1996 Telecommunications Act, the Commission
had required only wireline carriers, and not providers of CMRS, to
integrate their rates. In the Integration Order the agency gave no
indication that it believed § 254(g) either required or authorized a
change in this state of affairs. In the First Reconsideration Order,
however, the Commission stated, again without elaborating, that CMRS
providers were required by § 254(g) to integrate the rates for their
interstate interexchange services. 12 F.C.C.R. at 11821 p 18. Several
parties petitioned the Commission to reconsider and stay enforcement of
that determination.[^1] In the Second Reconsideration Order the
Commission explained its rationale for requiring CMRS providers to
integrate their rates: Section 254(g) by its terms applies to providers
of interstate interexchange service without making an exception for
CMRS. 14 F.C.C.R. at 396 p 10.

Because CMRS does not use wireline exchanges, its coverage by § 254(g)
raised the following question for the Commission: Which interstate CMRS
are \"interexchange\" services? Noting that the Communications Act
defines \"telephone exchange service\" as \"service within a telephone
exchange, or \... comparable service provided through a system of
switches, transmission equipment, or other facilities,\" 47 U.S.C. §
153(47), the Commission determined that CMRS within a \"major trading
area\" (MTA) was \"comparable\" to wireline \"service within a telephone
exchange,\" 14 F.C.C.R. at 401 p 23; therefore, CMRS between MTAs was
comparable to \"interexchange\" wireline service, and interstate,
inter-MTA CMRS was subject to rate integration.

# II. Analysis

The petitioners seek review of the rules requiring rate integration
among affiliates and the application of rate integration to providers of
CMRS. Both challenges turn upon the Commission\'s interpretation of the
phrase \"provider of interstate interexchange telecommunications
services\" in § 254(g). Because the Congress committed administration of
the Communications Act to the Commission, we review the petitioners\'
challenges to the Commission\'s interpretation of § 254(g) using the
two-step analysis of Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).
Under Chevron step one, we ask \"whether Congress has directly spoken to
the precise question at issue.\" If so, then we \"must give effect to
the unambiguously expressed intent of Congress.\" If not, then under
Chevron step two we will defer to the agency\'s interpretation of the
Act if it is reasonable in light of the text, the structure, and the
purpose of the Act. See id. at 842-43.

## A. Rate Integration Across Affiliates

The petitioners make two arguments for the proposition that the Congress
in § 254(g) unambiguously directed the Commission to prescribe rate
integration only with respect to each individual provider of
telecommunications services and not with respect to all commonly owned
or controlled affiliates. They first argue that because \"provider\"
means simply \"one that provides,\" the Congress could not have meant
the phrase \"provider of interstate interexchange telecommunications
services\" to include parent companies, which are not licensed to and do
not provide telecommunications services. Further, because holding
companies are not \"providers,\" they \"may not be used as conduits
through which rate integration requirements are imposed on commonly
owned affiliates.\"

Both parts of petitioners\' argument miss the mark. First, the
Commission no longer interprets \"provider of interstate interexchange
telecommunications services\" to include parent companies that are not
themselves carriers: In the First Reconsideration Order the Commission,
responding to this very argument, narrowed its cross-affiliate rule to
apply only to \"affiliated carriers\"\--thereby excluding any parent
company that is not itself a carrier. 12 F.C.C.R. at 11819 p 16. And as
to the petitioners\' derivative claim that the Commission cannot
regulate commonly owned affiliates except by impermissibly regulating
parent companies as \"conduits,\" the petitioners provide no legal
support for this ipse dixit. Nor does the Commission either purport or
need to regulate the parent\--as a conduit or otherwise\--when it
requires two or more carriers under common control to coordinate their
activities.

The petitioners\' second argument turns upon the Congress having
expressly extended regulatory obligations to the \"affiliates\" of a
carrier in other sections of the Act; by not similarly including the
word \"affiliates\" in § 254(g), we are told, the Congress unambiguously
(albeit implicitly) limited the scope of the integration requirement to
the rates charged by individual providers of telecommunications
services. The petitioners make a substantial point: In 1996 the Congress
added \"affiliate\" as a defined term in the Communications Act, see 47
U.S.C. § 153(1), and then used that term in 15 sections of the Act, see
47 U.S.C. ss 222, 224, 228, 251, 260, 271-275, 541, 543, 548, 572, and
573. In many of those sections the Congress specifically extended a
regulatory prohibition or obligation from the individual carrier to the
carrier\'s affiliates. See, e.g., 47 U.S.C. § 572 (\"No local exchange
carrier or any affiliate of such carrier \... \[may acquire\] more than
a 10 percent financial interest, or any management interest, in any
cable operator providing cable service within the \[LEC\'s\] telephone
service area\").

If the Congress had written § 254(g) upon a blank slate, announcing an
entirely new requirement that rates to non-contiguous points be
integrated, then the absence of \"affiliates\" from the text of §
254(g), coupled with its inclusion in so many other sections, might be
strong textual evidence that the Congress spoke directly to this issue.
See, e.g., Alabama Power Co. v. FERC, 160 F.3d 7, 14 (D.C. Cir. 1998).
Section 254(g) does not, however, announce a new policy; the legislative
history makes clear that the Congress intended § 254(g) to carry forward
by regulation the Commission\'s preexisting policy requiring rate
integration. See H.R. Conf. Rep. No. 104-458, at 132 (1996). An
undisputed aspect of that policy is that AT & T was required to
integrate its rates across all its affiliated providers. The parties
dispute whether other carriers were required to integrate rates across
affiliates but, regardless of the answer to that question, it is clear
that the Commission under its preexisting policy could and in the case
of AT&T did mandate integration across affiliates. Against that
backdrop, the omission of the word \"affiliates\" in a statute intended
to perpetuate existing Commission policy cannot be read to preclude for
the first time integration across affiliates; the most the omission
tells us is that the Congress did not specifically require the
Commission to order rate integration across affiliates. We agree with
the Commission, therefore, that § 254(g) is ambiguous on the precise
issue whether affiliates may be included within the phrase \"provider of
interstate interexchange telecommunications services.\"

Turning to Chevron step two, the petitioners argue that the
Commission\'s interpretation is unreasonable because it conflicts with
two of the purposes of the 1996 Act, namely, \"to promote competition
and reduce regulation.\" Pub. L. No. 104-104, 110 Stat. 56, 56 (1996)
(preamble), and with one of the goals of rate integration, namely, the
expansion of telecommunications services offered to non-contiguous
domestic locations, see Domsat II Order, 35 F.C.C.2d at 856 p 35. The
petitioners illustrate their point with the following (not very)
hypothetical situation: A carrier provides interstate interexchange
service through separate affiliates in the highly competitive mainland
market and in a high-cost domestic overseas market (such as Guam, which
cannot be served by domestic satellites because of its distance from the
continental United States). If rates must be integrated across those
affiliates then, according to the petitioners, the carrier must either
charge above-market rates on the mainland, and therefore become
noncompetitive, or charge below-market rates in the overseas location,
and therefore lose money on every call. Faced with this Hobson\'s
choice, the carrier will want to sell its overseas affiliate, presumably
to a new owner with no other operations subject to the rate integration
requirement.

The problem with the petitioners\' argument\--passing over the
Commission\'s factual rejoinder that the carrier would not lose money on
every call\--is that the central purpose of rate integration, namely,
ensuring \"service between the contiguous states and \... noncontiguous
points\[ \] at rates that are equivalent to those prevailing for
comparable distances in the contiguous 48 states,\" Integration of
Rates, 9 F.C.C.R. 2197, 2198 n.2 (1993), by its nature does nothing to
reduce regulation or to promote competition. The real question raised by
this argument, therefore, is not whether integration across affiliates
is regulatory and anti-competitive but whether it is unreasonable in
light of the underlying goal of rate integration (pace the preamble to
the 1996 Act), namely, equalized rates to non-contiguous locations.
Viewed thus at the margin, the petitioners\' hypothetical scenario
actually demonstrates the reasonableness of the Commission\'s
interpretation: If the Commission did not read affiliates into the term
\"provider\" in § 254(g), then the petitioners\' hypothetical carrier
would charge higher rates in the non-contiguous market (through one
affiliate) than it charges on the mainland (through the other
affiliate), and there would be no rate integration of non-contiguous
markets at all. We therefore agree with the Commission that interpreting
\"provider of interstate interexchange telecommunications services\" to
encompass commonly owned or controlled affiliates is reasonable in light
of the text and the regulatory purpose of § 254(g).

Finally, the petitioners challenge the Commission\'s decision as
inconsistent and therefore arbitrary and capricious. Even if
interpreting \"provider\" to include affiliates is permissible, the
petitioners claim, the Commission has interpreted \"provider\" in three
inconsistent ways: (1) for wireline carriers, \"provider\" means a
provider and all commonly owned or controlled affiliates; (2) for
providers of CMRS, as to which the Commission has stayed the requirement
of affiliate integration, \"provider\" will likely be interpreted to
mean a provider and all affiliates not jointly owned by competing
providers; and (3) for the purpose of \"geographic rate
averaging\"\--another policy prescribed in § 254(g)\--the Commission has
\"implicitly\" excluded affiliates from the scope of the term
\"provider.\"

We reject this challenge for two reasons. First, as the Commission
notes, it has to date given but a single interpretation to the term
\"provider\" in § 254(g). For the purpose of rate integration,
\"provider\" includes affiliates of both wireline and CMRS providers;
the Stay Order did not alter this interpretation, and the Commission may
yet adhere to it. And in a separate order not under review here, the
Commission gave the same interpretation for the purpose of geographic
rate averaging. See Motion of AT&T Corp. to be Reclassified as a
Non-Dominant Carrier, 12 F.C.C.R. 20787, 20804 p 31 (1997). Second, even
if the Commission ultimately does interpret \"provider\" differently
with respect to wireline service and CMRS, that would not necessarily be
arbitrary and capricious. The Commission might reasonably conclude that
requiring integration among affiliates better advances the purposes of
the Congress with respect to wireline service than it does with respect
to CMRS, depending upon the competitive structure of the markets in
which the two services are offered. On the record presently before us,
therefore, we see no infirmity in the Commission\'s actions, and we deny
the petition to review the requirement of integration across affiliates.

## B. Rate Integration by CMRS Providers

The Commission held that the phrase \"provider of interstate
interexchange telecommunications services\" in § 254(g) \"unambiguously
applies to the interstate, interexchange services offered by CMRS
providers. If Congress had intended to exempt CMRS providers, it
presumably would have done so expressly as it did in other sections of
the Act.\" Second Reconsideration Order, 14 F.C.C.R. at 396 p 10. In an
unusually direct confrontation under Chevron step one, the petitioners
maintain not that the statute is ambiguous but that it unambiguously
means the opposite of what the Commission says it means. For our part,
we cannot agree with either the Commission or the petitioners that the
Congress spoke unambiguously on the precise issue that divides them.

The Commission\'s secondary assertion that the Congress would have
expressly exempted CMRS from § 254(g) had it so intended is undermined
by the Conference Report indicating that the Congress meant § 254(g) to
incorporate the Commission\'s preexisting rate integration policy, see
H.R. Conf. Rep. No. 104-458, at 132 (1996), which the Commission had
never before applied to CMRS. As Commissioner Powell wrote in dissent,
\"when it is undisputed that CMRS providers were not subject to the
Commission\'s pre-1996 Act rate integration policy, and where Congress
seems to say it is merely incorporating that policy, why would we expect
to find an explicit and unambiguous indication to exclude them?\"
Dissenting Statement of Commissioner Michael K. Powell, 1999 WL 38420
(Jan. 28, 1999).

This leaves the Commission\'s primary assertion that the term
\"interexchange telecommunications service,\" which is not defined in
the Communications Act, \"on its face unambiguously\" makes CMRS subject
to rate integration under § 254(g). The Commission starts out in the
hole: Because CMRS does not use exchanges, it is by no means obvious
that the Congress, when it used a phrase in which the word
\"interexchange\" is an essential term, was referring to CMRS. True, the
Congress provided a functional definition of \"telephone exchange
service,\" including not just \"service within a telephone exchange\"
but also \"comparable service provided through \... other facilities,\"
47 U.S.C. § 153(47); therefore, the Commission may characterize as
\"exchange service\" even services that, like CMRS, do not use
exchanges. That the Congress may have extended to providers of CMRS
various statutory obligations attaching to \"exchange service\" does
not, however, demonstrate that the Congress, in using the word
\"interexchange,\" must have extended the requirement of rate
integration to providers of CMRS. The Commission might decide, as an
exercise of its delegated authority to interpret ambiguities in the Act,
that the phrase \"interexchange telecommunications service\" in § 254(g)
is best read in a manner analogous to the express definition of
\"exchange service,\" that is, as applying not only to wireline
interexchange service but also to CMRS that the Commission determines is
\"comparable\"; but that interpretation is certainly not compelled by
the \"unambiguous\" text of the statute.

As for the petitioners\' Chevron step one arguments, they first claim
that the Congress\'s use of the word \"interexchange\"\--which they say
has no relevance to CMRS\--demonstrates that § 254(g) must apply only to
wireline providers. As we just explained, however, the functional
definition of \"telephone exchange service\" in 47 U.S.C. § 153(47)
demonstrates that the Congress has authorized the Commission to
characterize as \"exchange service\" even services that do not use
exchanges. Therefore it is not clear that the Congress was referring
only to wireline service when it used the word \"interexchange.\" The
petitioners\' second claim is that by stating in the legislative history
that § 254(g) was intended to codify the Commission\'s preexisting
policy, which did not apply to providers of CMRS, the Congress clearly
and unambiguously excluded providers of CMRS from the coverage of §
254(g). We think this reads too much into both the Commission\'s policy
and the legislative history. The Commission had never either applied or
declined to apply the policy to providers of CMRS. There is no reason to
believe that prior to the 1996 Act the Commission was in any way
precluded from extending its policy to providers of CMRS, and the
Congress, in stating that it was incorporating the Commission\'s
preexisting policy into § 254(g), gave no indication that it meant to
freeze rate integration as it then was and to prohibit any further
development or extension of the policy.

The petitioners further argue that application of § 254(g) to providers
of CMRS \"would be inconsistent with the deregulatory intent\" of 47
U.S.C. § 332(c) (authorizing Commission to exempt CMRS from some
regulations), the definition of \"telephone toll service\" in 47 U.S.C.
§ 153(48), and the pro-consumer purpose of the 1996 Telecommunications
Act overall. However probative these arguments may be in determining
whether the Commission\'s interpretation of § 254(g) is reasonable, they
do not rise to the level of demonstrating that the Congress has spoken
directly to this precise issue.

In light of the text and legislative history of § 254(g), then, it is
unclear whether CMRS is included in the phrase \"interexchange
telecommunications service\": the Congress may have been referring only
to wireline interexchange service, or it may also have meant to include
\"comparable\" CMRS. At this juncture we would ordinarily proceed to
step two and consider whether the Commission\'s interpretation of the
statute is reasonable. In this case, however, the Commission never
exercised its discretionary authority to interpret the statute, as the
Second Reconsideration Order makes clear; because it believed that the
plain text of § 254(g) subjected providers of CMRS to the requirement of
rate integration, the Commission did not go on to show why, even if it
is not the only possible interpretation of the statute, it is
nonetheless a reasonable interpretation of the statute. 14 F.C.C.R. at
396 p p 10, 11, 18.

Thus the Commission \"act\[ed\] pursuant to an erroneous view of law
and, as a consequence, fail\[ed\] to exercise the discretion delegated
to it by Congress.\" Prill v. NLRB, 755 F.2d 941, 942 (D.C. Cir. 1985);
see also FCC v. RCA Communications Inc., 346 U.S. 86, 95-96 (1953).
Because the Commission might well exclude CMRS from coverage under §
254(g) as an exercise of its discretion, we must remand this matter for
the Commission to make that determination in the first instance. See SEC
v. Chenery Corp., 318 U.S. 80, 88 (1943); Prill, 755 F.2d at 956-57.[^2]

# III. Conclusion

The petition for review is denied insofar as it challenges the
Commission\'s requirement that carriers integrate their interstate long
distance rates with those of all commonly owned or controlled affiliates
in both contiguous and non-contiguous domestic locations. The petition
is granted insofar as it challenges the Commission\'s requirement that
providers of CMRS likewise integrate their rates. The orders under
review are vacated in relevant part and this matter is remanded to the
Commission for further consideration.

> So ordered.

[^1]: The Commission, without expressing any doubt that § 254(g) applies
    to CMRS providers, stayed application of the rule requiring CMRS
    providers to integrate their rates across affiliates pending further
    consideration whether such integration would produce
    anti-competitive effects owing to the prevalence of cross-ownership
    and joint ventures in the CMRS industry. See Stay Order, 12 F.C.C.R.
    at 15746 p 14.

[^2]: ^^ In view of this disposition, we do not address the
    petitioners\' alternative claim that if § 254(g) applies to
    providers of CMRS then the Commission is required by 47 U.S.C. § 160
    to forbear from enforcement of the requirement.