United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 9, 2007 Decided June 1, 2007

No. 06-1276

VONAGE HOLDINGS CORPORATION,

PETITIONER

v.

FEDERAL COMMUNICATIONS COMMISSION AND

UNITED STATES OF AMERICA,

RESPONDENTS

VERIZON COMMUNICATIONS INC., ET AL.,

INTERVENORS

Consolidated with

06-1317

On Petitions for Review of an Order of the

Federal Communications Commission

Glenn B. Manishin argued the cause for petitioner

Computer and Communications Industry Association. With

him on the briefs were Jonathan E. Canis and Stephanie A.

Joyce.
2

Christopher J. Wright argued the cause for petitioner

Vonage Holdings Corporation. With him on the briefs were

Scott Blake Harris, Brita D. Strandberg, and Stephanie

Weiner.

Ross A. Buntrock and Michael B. Hazzard were on the

briefs for intervenor Voice on the Net Coalition, Inc. in

support of petitioner.

James M. Carr, Counsel, Federal Communications

Commission, argued the cause for respondents. With him on

the brief were Thomas O. Barnett, Assistant Attorney

General, U.S. Department of Justice, Robert B. Nicholson and

Robert J. Wiggers, Attorneys, Samuel L. Feder, General

Counsel, Federal Communications Commission, Eric D.

Miller, Deputy General Counsel, Richard K. Welch, Associate

General Counsel, and John E. Ingle, Deputy Associate

General Counsel.

David C. Bergmann was on the brief for intervenor

National Association of State Utility Consumer Advocates.

Michael E. Glover, Edward Shakin, Christopher M.

Miller, Helgi C. Walker, Joshua S. Turner, and Megan L.

Brown were on the brief for intervenor Verizon

Communications Inc.

Before: TATEL and GARLAND, Circuit Judges, and

EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: Petitioners, providers of voice

over internet protocol services (VoIP), challenge a Federal

Communications Commission order requiring them to
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contribute to the Universal Service Fund (USF). Specifically,

they claim that, in requiring such contributions, the

Commission exceeded its authority under the

Telecommunications Act of 1996 and acted arbitrarily and

capriciously by (1) analogizing VoIP to wireline toll service

for the purposes of setting the presumptive percentage of

VoIP revenues generated interstate or internationally, (2)

requiring pre-approval for traffic studies submitted by VoIP

providers but not for those submitted by wireless providers,

and (3) suspending the “carrier’s carrier rule” with respect to

VoIP. We conclude that the Commission has statutory

authority to require VoIP providers to make USF

contributions and that it acted reasonably in analogizing VoIP

to wireline toll service for purposes of setting the presumptive

percentage of VoIP revenues generated interstate and

internationally. But finding the Commission’s explanation

wanting as to the pre-approval of traffic studies and the

suspension of the carrier’s carrier rule, we vacate those

portions of the Order.

I.

In March 2004, the Federal Communications

Commission issued a notice of proposed rulemaking calling

for comments on how best to regulate a range of internet

protocol-enabled services, including voice over internet

protocol, an internet-based service offering “multidirectional

voice functionality, including, but not limited to, services that

mimic traditional telephony.” In re IP-Enabled Services, 19

F.C.C.R. 4863, 4866 n.7 (2004); see also Minn. Pub. Utils.

Comm’n v. FCC, Nos. 05-1069, 05-1122, 05-3114, 05-3118,

2007 WL 838938, at *1 (8th Cir. Mar. 21, 2007) (describing

the difference between packet-switched and circuit-switched

communications). Perhaps most significantly for VoIP’s

future, the Commission asked whether it should classify VoIP
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as a “telecommunications service” or an “information

service.” If classified as a telecommunications service, VoIP

would be subject to mandatory Title II common carrier

regulations, 47 U.S.C. § 153(44), but as an information

service it would not. See Nat’l Cable & Telecomms. Ass’n v.

Brand X Internet Servs., 545 U.S. 967, 975–77 (2005). The

Commission also requested comment on a range of narrower

questions, including—most relevant to this case—whether

VoIP providers should be required to contribute to the

Universal Service Fund (USF). See IP-Enabled Services, 19

F.C.C.R. at 4905 ¶ 63 (calling for comment on whether VoIP

providers should contribute to the USF but stating that the

question would be addressed in the separately docketed

Universal Service Contribution Methodology proceeding).

The USF is a funding stream the Commission uses to

subsidize telecommunications and information services in

rural and high-cost areas, as well as for schools, libraries, and

low-income households. 47 U.S.C. § 254(b)(3), (h)(1)(B).

The USF receives its funding from businesses in the

telecommunications sector; some businesses are required by

statute to contribute while others must contribute only when

the Commission has, in its discretion, required them to do so.

Specifically, the Act mandates contributions from “[e]very

telecommunications carrier that provides interstate

telecommunications services.” Id. § 254(d). Moreover, under

its permissive contribution authority, the Commission may

demand USF contributions from “[a]ny other provider of

interstate telecommunications . . . if the public interest so

requires.” Id.

Two years later and following public comment, the

Commission issued an order requiring providers of

“interconnected” VoIP services to contribute to the USF. In

re Universal Service Contribution Methodology, 21 F.C.C.R.
5

7518 (2006) (hereinafter “Order”). Interconnected VoIP

services “(1) enable real-time, two-way voice

communications; (2) require a broadband connection from the

user’s location; (3) require IP-compatible customer premises

equipment; and (4) permit users to receive calls from and

terminate calls to the PSTN [public switched telephone

network].” Id. at 7526 ¶ 15; see also 47 C.F.R. § 9.3. 

Deferring a decision on whether to classify VoIP as a

telecommunications service or an information service, the

Commission grounded its order in its permissive contribution

authority and, alternatively, its Title I ancillary jurisdiction.

See Am. Library Ass’n v. FCC, 406 F.3d 689, 692–93 (D.C.

Cir. 2005) (holding that the Commission may regulate under

its ancillary jurisdiction when “the subject of the regulation

[is both] . . . covered by the Commission’s general grant of

jurisdiction under Title I of the Communications Act . . . .

[and] ‘reasonably ancillary to the effective performance of the

Commission’s various responsibilities.’” (citation omitted)).

The Commission gave three reasons for taking this

discretionary step. First, USF contributions have declined in

recent years, while interconnected VoIP services have

“experienced dramatic growth.” Order at 7528 ¶ 19. Thus,

requiring contributions from interconnected VoIP providers

would “preserve and advance universal service.” Id. at 7527

¶ 17. Second, interconnected VoIP providers ought to

contribute to the USF because “much of the appeal of their

services to consumers derives from the ability to place calls to

and receive calls from the PSTN, which is supported by

universal service mechanisms.” Id. at 7540 ¶ 43. Third,

competitive neutrality—a principle that requires advantaging

no one technology over another—favors making VoIP

providers contribute because they increasingly compete with

analog voice service providers, who contribute to the USF.

Id. at 7541 ¶ 44. 
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Having decided to require VoIP providers to contribute,

the Commission turned to the issue of how to calculate the

level of such contributions. The Commission assesses USF

contributions only on revenues generated from interstate or

international calls. See Tex. Office of Pub. Util. Counsel v.

FCC, 183 F.3d 393, 446–48 (5th Cir. 1999). For companies

connecting landline customers, determining the percentage of

interstate or international calls is relatively simple. But for

wireless and VoIP providers—whose customers may use their

services from many locations and often have area codes that

do not correspond to their true location—determining the

percentage of interstate and international traffic is more

difficult. Given those difficulties, the Commission

established—as it has since 1998 for wireless—a “safe

harbor” that approximates the percentage of VoIP revenues

generated from interstate and international calls. The safe

harbor ensures that VoIP providers will not have to make USF

contributions on more than a certain percentage of their

revenues. As its name suggests, the safe harbor is only a

ceiling: VoIP providers may reduce their USF contributions

if, through traffic studies, they can show that their actual

percentage of interstate and international revenues falls below

the safe harbor percentage.

To set the safe harbor level, the Commission sought to

identify the “appropriate analogue” for VoIP service. Order

at 7545 ¶ 53. The Commission considered two possibilities:

wireline toll service (colloquially referred to as landline long

distance), which the Commission presumes to be 64.9%

interstate and international, and wireless service, presumed to

be 37.1% interstate and international. The Commission

selected wireline toll service as the better analogue, giving

two reasons for its decision. First, it cited two industry

reports, one estimating that 83.8% of VoIP traffic is interstate
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or international and a second putting the figure at

66.2%—both figures higher than the safe harbor level for

wireline toll service. Second, the Commission cited

advertisements demonstrating that VoIP providers frequently

market their service as a substitute for wireline toll service,

noting that many customers purchase such plans in order to

“place a high volume of interstate and international calls” and

consequently “benefit from the pricing plans the providers

offer for such services.” Id. at 7546 ¶ 55. 

The Commission then ruled that interconnected VoIP

providers wishing to contribute less than the safe harbor level

may do so only after the Commission has approved their

traffic studies. This rule differs from the rule applicable to

wireless providers, who may contribute according to the

findings of their traffic studies even before Commission

approval. Having “identified concerns in the wireless context

with the use of traffic studies,” the Commission feared that

allowing VoIP providers to rely on traffic studies without preapproval would “risk extending the problems we have

identified with the use of traffic studies . . . to a new

technology.” Id. at 7547 ¶ 57. Addressing the inconsistent

treatment of wireless and VoIP providers, the Commission

explained that imposing a pre-approval requirement on both

groups “would be disruptive to wireless contributors who,

unlike interconnected VoIP providers, are already relying on

the current regime.” Id. 

Finally, the Commission suspended the so-called

carrier’s carrier rule, which prevents duplicative USF

contributions at the wholesale and retail levels. The rule

accomplishes this by basing contributions only on “end-user

telecommunications revenues.” 47 C.F.R. § 54.706(b). The

Commission suspended the rule with respect to VoIP for two

quarters following issuance of the Order, explaining that “if
8

carriers are permitted to invoke the carrier’s carrier rule

immediately to exclude revenues from interconnected VoIP

providers, the result could be a net decrease in the Fund in the

short term,” a result inconsistent with its obligation to

“preserve and advance universal service.” Order at 7548 ¶ 59.

The Computer and Communications Industry

Association (CCIA), a trade group with at least one

interconnected VoIP provider among its members, and

Vonage Holdings Corporation (Vonage), a provider of

interconnected VoIP, now petition for review. The CCIA

challenges the Commission’s assertion of authority—under

both section 254(d) and its Title I ancillary jurisdiction—to

require VoIP providers to contribute to the USF. Vonage

does not contest the Commission’s authority to require USF

contributions, challenging instead three other aspects of the

Order: the safe harbor level, the pre-approval requirement for

traffic studies, and the suspension of the carrier’s carrier rule.

II.

Section 254(d) of Title 47 states that: 

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. . . . 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.
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47 U.S.C. § 254(d). According to the Commission, section

254(d)’s “permissive portion” (the final sentence) authorizes it

to require VoIP providers to contribute to the USF, regardless

of whether VoIP is ultimately classified as a

“telecommunications service” or an “information service.”

Understanding this position requires a brief detour through the

regulatory classification decision the Commission has yet to

make and the statutory text and case law governing it. 

The Act defines both “telecommunications service” and

“information service” as “offerings.” See 47 U.S.C. § 153(46)

(defining “[t]elecommunications service” as “the offering of

telecommunications for a fee directly to the public”); id.

§ 153(20) (defining “[i]nformation service” as “the offering of

a capability for generating, acquiring, storing, transforming,

processing, retrieving, utilizing, or making available

information via telecommunications”). In an order issued

several years ago, the Commission advanced a narrow

definition of the verb “offer,” explaining that cable modem

service, even though it contains telecommunications as a

component, is not a “telecommunications service” because an

“offering” of telecommunications can only be something

perceived as telecommunications by the end user viewing the

integrated, finished product. In re Inquiry Concerning HighSpeed Access to the Internet Over Cable and Other Facilities,

17 F.C.C.R. 4798, 4822–23 ¶¶ 38–39 (2002) (hereinafter

“Cable Modem Order”). Because cable modem customers use

the service “to access the World Wide Web . . . rather than

‘transparently’ to transmit and receive ordinary-language

messages without computer processing” the Commission

concluded that “cable modem service is not a ‘stand-alone,’

transparent offering of telecommunications.” Brand X, 545

U.S. at 988 (citing Cable Modem Order at 4823–4825

¶¶ 41–43). In Brand X, the Supreme Court upheld the
10

Commission’s interpretation of the word “offer” as reasonable,

explaining:

It is common usage to describe what a company

“offers” to a consumer as what the consumer

perceives to be the integrated finished product, even

to the exclusion of discrete components that

compose the product . . . . One might well say that

a car dealership “offers” cars, but does not “offer”

the integrated major inputs that make purchasing

the car valuable, such as the engine or the chassis.

It would, in fact, be odd to describe a car dealership

as “offering” consumers the car’s components in

addition to the car itself. 

Brand X, 545 U.S. at 990.

Were the Commission to conclude that VoIP is an

“offering of telecommunications” and therefore to classify it

as a telecommunications service, VoIP providers would fall

under section 254(d)’s mandatory contribution language (the

first sentence). The scope of the Commission’s permissive

contribution authority, however, does not depend on whether

VoIP is considered an “offering” of either telecommunications

or information. Rather, the Commission’s permissive

contribution authority extends to “provider[s] of interstate

telecommunications.” 47 U.S.C. § 254(d) (emphasis added).

The verb “provide,” the Commission explained, “is a different

and more inclusive term than ‘offer.’” Order at 7538–39 ¶ 40.

Black’s Law Dictionary, upon which the Commission relied,

defines “‘provide’” as “‘[t]o make, procure or furnish for

future use, prepare. To supply; to afford; to contribute.’” Id.

(alteration in original) (quoting BLACK’S LAW DICTIONARY

1244 (6th ed. 1990)). Under this definition, the Commission

explained, the verb “provide” is broad enough to include the
11

act of supplying a good or service as a component of a larger,

integrated product. For instance, under the Commission’s

interpretation, McDonald’s provides beef, as well as

hamburgers, and The Washington Post provides ink, as well as

newspapers.

After concluding that a “provider of telecommunications”

need only supply telecommunications as a component of its

finished product, the Commission explained that VoIP does in

fact include telecommunications as a component. The Act

defines “[t]elecommunications” as “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). The

Commission explained that interconnected VoIP services

provide such transmission by virtue of their interconnection

with the PSTN:

[B]y definition, interconnected VoIP services are

those permitting users to receive calls from and

terminate calls to the PSTN. . . . [W]e find

interconnected VoIP providers to be “providing”

telecommunications regardless of whether they own

or operate their own transmission facilities or they

obtain transmission from third parties. In contrast

to services that merely use the PSTN to supply a

finished product to end users, interconnected VoIP

supplies PSTN transmission itself to end users. 

Order at 7539–40 ¶ 41 (footnotes and internal quotation marks

omitted); see also id. at 7540 n.147 (distinguishing a contrary

result in In re Petition for Declaratory Ruling that

pulver.com’s Free World Dialup Is Neither

Telecommunications nor a Telecommunications Service, 19

F.C.C.R. 3307, 3312 ¶ 9 (2004), on the grounds that the non-
12

interconnected VoIP provider in that order did not “supply

connectivity to any PSTN user.”).

With this background in mind, we turn to the issues

before us.

III.

Where, as here, Congress has delegated interpretive

authority to an agency, we review the agency’s interpretation

of a statute under the familiar two-part test set forth in

Chevron U.S.A. Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837 (1984). We first inquire whether “Congress

has directly spoken to the precise question at issue. . . . [and if]

the intent of Congress is clear, that is the end of the matter.”

Id. at 842–43. But if “the statute is silent or ambiguous with

respect to the specific issue, the question . . . is whether the

agency’s answer is based on a permissible construction of the

statute.” Id. at 843. In this case, the Commission does not

contend that the statute unambiguously places VoIP providers

within the phrase “providers of telecommunications.” Nor has

petitioner CCIA given us any reason to conclude that either

the phrase “providers of telecommunications” or the Act’s

definition of telecommunications unambiguously exempts

VoIP providers from the Commission’s permissive

contribution authority. Thus, we proceed to Chevron step two,

where “we need not determine that the [agency’s] reading . . .

is the best possible reading, only that it was reasonable.” Am.

Fed’n of Gov’t Employees, Local 446 v. Nicholson, 475 F.3d

341, 355 (D.C. Cir. 2007).

The Commission’s application of section 254(d) to

interconnected VoIP providers involved two discrete

decisions: (1) that, unlike the verb “offer,” the verb “provide”

may apply to the act of supplying a component of an
13

integrated product, and (2) that VoIP providers supply

telecommunications as a component of their service. 

Provide v. Offer

Recall that in Brand X the Supreme Court upheld the

narrow definition of “offer” advanced by the Commission.

Thus, we now face only two issues: has the Commission

reasonably interpreted the word “provide,” and was it

reasonable for the Commission to give the word “provide” a

different meaning than the word “offer”?

As to the first issue, we have little trouble concluding that

the word “provide” is sufficiently broad to encompass the

Commission’s interpretation. Returning to Brand X’s car

dealership hypothetical, we see nothing strange about the

statement that a dealership provides both cars and engines.

Indeed, one could reasonably interpret the statement that a

dealership “does not provide engines” to mean that it sells cars

without engines, not that it won’t sell disconnected engines.

We also see nothing that would prevent the Commission

from interpreting the word “offer” from the demand side (i.e.,

the consumer’s perception of what she receives) and the word

“provide” from the supply side (the seller’s perception of what

she supplies). True, the words have mutual synonyms and can

be used interchangeably in some contexts. See, e.g.,

WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1566,

1827 (1993) (listing “supply” in the definitions of both words).

Such similarities, however, provide an insufficient basis for

concluding that Congress unambiguously intended the two

words to have the same meaning—something it could have

accomplished quite simply by using the same word. Indeed,

we have repeatedly held that “‘[w]here different terms are

used in a single piece of legislation, the court must presume
14

that Congress intended the terms to have different meanings.’”

Transbrasil S.A. Linhas Aereas v. Dep’t of Transp., 791 F.2d

202, 205 (D.C. Cir. 1986) (alteration in original) (quoting

Wilson v. Turnage, 750 F.2d 1086, 1091 (D.C. Cir. 1984)).

Thus, the Commission’s construction of the verb “provide” in

the phrase “providers of telecommunications” is reasonable

under Chevron step two. 

Telecommunications as a Component of VoIP

CCIA presents three challenges to the Commission’s

finding that VoIP providers supply telecommunications as a

component of their service insofar as they “suppl[y] PSTN

transmission itself to end users.” Order at 7540 ¶ 41. All

three are unpersuasive.

First, CCIA argues that “[a]s only telecommunications,

and not ‘information services,’ may be subject to the USF

contribution obligations under the Act, the VoIP Order

exceeds the scope of the Commission’s authority.” CCIA Br.

22–23. Spoiling for tomorrow’s battle, CCIA insists that

“VoIP is an information service, whether or not it is

‘interconnected’ with the PSTN.” CCIA Br. 23–24. But,

although “information service” and “telecommunications

service” are mutually exclusive categories, CCIA points to no

authority supporting its argument that a provider of

“information services” cannot also be a “provider of

telecommunications” for the purposes of section 254(d).

Indeed, the Act clearly contemplates that

“telecommunications” may be a component of an “information

service,” defining the latter 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).
15

Second, CCIA argues that “[u]nder Brand X, the

Commission is not permitted to isolate the ‘transmission

element’ of VoIP and consider that component in isolation for

purposes of Title II classification.” CCIA Br. 29. But in

Brand X the Court merely held that the meaning of the word

“offering” in the statute’s definition of “telecommunications

service” was ambiguous and that the Commission’s narrow

interpretation was reasonable. The Court had no occasion to

consider the meaning of the phrase “providers of

telecommunications,” much less to determine that the phrase

unambiguously demands the same construction the

Commission applies to an “offering of telecommunications.” 

Finally, CCIA argues that “since interconnected VoIP

always involves change in the ‘form or content’ of

information, it cannot by definition be ‘telecommunications.’”

CCIA Reply Br. 6. But we have found no indication that

anyone made this argument before the Commission, which

may explain why the Commission never addressed it. Asked

about this at oral argument, CCIA’s counsel pointed to two

portions of the record where he assured us we would find the

argument. See Oral Arg. Tr. 8 (citing CCIA Reply Br. 5 n.5).

Like much of CCIA’s brief, however, the cited comments

argue only that VoIP is an information service, not that

interconnected VoIP providers provide no

“telecommunications” as a component of their service.

Accordingly, we may not address this argument here. See 47

U.S.C. § 405(a) (foreclosing judicial review of “questions of

fact or law upon which the Commission . . . has been afforded

no opportunity to pass”). 

Finding that the Commission has section 254(d) authority

to require interconnected VoIP providers to make USF

contributions, we have no need to decide whether the
16

Commission could have also done so under its Title I ancillary

jurisdiction.

IV.

Next we turn to Vonage’s challenges to the safe harbor

level, the pre-approval requirement for VoIP traffic studies,

and the suspension of the carrier’s carrier rule. We review

these decisions under the arbitrary and capricious standard,

affirming if the Commission “considered the relevant factors

and articulate[d] a rational connection between the facts found

and the choice made.” BellSouth Telecomms., Inc. v. FCC,

469 F.3d 1052, 1056 (D.C. Cir. 2006) (alteration in original)

(citation and internal quotation marks omitted). Mindful of

Congress’s insistence that USF contributions be made “on an

equitable and nondiscriminatory basis,” we devote particular

attention to the Commission’s reasons for treating VoIP

differently from other technologies. 47 U.S.C. § 254(d); see

also 47 U.S.C. § 254(b)(4) (“All providers of

telecommunications services should make an equitable and

nondiscriminatory contribution to the preservation and

advancement of universal service.”).

Safe Harbor Level

The Commission set the safe harbor level by analogizing

VoIP to wireline toll service. Because VoIP’s functionality

and customer profile differ from those of other technologies,

reasoning by analogy in this way invites some inevitable

imprecision. Vonage, however, does not challenge this aspect

of the Commission’s method, nor do we think it could, given

our cases demanding far less than perfect precision in agency

line drawing. In WJG Telephone Co. v. FCC, we wrote:
17

It is true that an agency may not pluck a number out

of thin air when it promulgates rules in which

percentage terms play a critical role. When a line

has to be drawn, however, the Commission is

authorized to make a “rational legislative-type

judgment.” If the figure selected by the agency

reflects its informed discretion, and is neither

patently unreasonable nor “a dictate of unbridled

whim,” then the agency’s decision adequately

satisfies the standard of review.

675 F.2d 386, 388–89 (D.C. Cir. 1982) (citations omitted); see

also WorldCom, Inc. v. FCC, 238 F.3d 449, 461–62 (D.C. Cir.

2001) (“The relevant question is whether the agency’s

numbers are within a zone of reasonableness, not whether its

numbers are precisely right.” (internal quotation marks

omitted)).

Vonage argues that the Commission acted arbitrarily and

capriciously in choosing wireline toll service instead of

wireless service as the analogue for VoIP. The Commission

analogized VoIP to wireline toll service principally because

VoIP providers market their service as a substitute for wireline

toll service and offer pricing plans—typically flat fees for

unlimited local and long distance calls—that make the service

attractive to customers who place high volumes of interstate

and international calls. Questioning this analogy, Vonage

argues that, unlike wireline toll service, VoIP functions as an

“all-distance service” that enables local as well as long

distance and international calls. Vonage also points out that

the Commission recognized VoIP’s all-distance functionality

in two previous decisions, one requiring VoIP providers to

ensure 911 service, In re IP-Enabled Services, E911

Requirements for IP-Enabled Service Providers, 20 F.C.C.R.

10,245, 10,246 ¶ 1 (2005), and the other requiring them to
18

provide intercept capability for law enforcement, In re

Communications Assistance for Law Enforcement Act and

Broadband Access and Services, 20 F.C.C.R. 14,989,

15,009–10 ¶ 42 (2005).

We agree with Vonage that this difference in capabilities

renders the VoIP/wireline toll service analogy imperfect.

Perfection, however, is not what the law requires. To prevail,

Vonage must show that wireless is so much the better

analogue for VoIP that the Commission acted arbitrarily and

capriciously by failing to select it. This Vonage has not done.

The mere fact that both VoIP and wireless are “all-distance”

services hardly compels the conclusion that usage patterns for

VoIP are closer to those for wireless than to those for wireline

toll service. Vonage’s “all-distance” argument also does

nothing to disturb the Commission’s conclusion that VoIP and

wireless are likely to attract different types of

customers—with VoIP customers predisposed, on average, to

making more long distance and international calls. Indeed,

Vonage concedes that VoIP is unlikely to attract customers

who make relatively few long distance calls, but nowhere

argues that the same is true for wireless. That omission is

significant: if VoIP only attracts customers who make high

volumes of long distance and international calls but wireless

attracts all kinds of customers—perhaps because its mobility

appeals even to people who make few long distance

calls—then VoIP will carry a greater proportion of long

distance and international calls than wireless.

Because Vonage has neither shown why usage patterns

for VoIP are more like those for wireless than for wireline toll

service nor unsettled the Commission’s reasoning regarding

the type of customer attracted to VoIP, we have little trouble

rejecting its challenge to the safe harbor level. Our confidence

in this conclusion is unshaken by Vonage’s criticism of the
19

two industry reports cited in the Order. One of those reports

estimates that 83.8% of VoIP traffic is long distance or

international and the other puts the figure at 66.2%. Vonage

insists that these reports, both of whose estimates exceed the

64.9% level selected by the Commission, shed no light on the

issue because they estimate world-wide rather than just U.S.

VoIP traffic and because nothing suggests that the reports

cover only interconnected VoIP. For these reasons, we agree

with Vonage that the two reports, by themselves, would

provide weak support for the Commission’s decision. But the

Commission did not hang its hat solely on these reports.

Indeed, had the Commission done so, we expect that, given the

reports’ estimates, it would have chosen an even higher safe

harbor level. The Commission, moreover, did not overstate

the reports’ precision, citing them only for the general

proposition that “VoIP traffic is predominantly long distance

or international.” Order at 7545 ¶ 53. Finally, because neither

Vonage nor any other commenter submitted studies of its own,

the two industry reports appear to be the only record evidence

estimating actual VoIP traffic. Given this, we are reluctant to

fault the Commission for considering the only available data,

however imperfect. See Am. Pub. Commc’ns Council v. FCC,

215 F.3d 51, 56 (D.C. Cir. 2000) (“Where existing

methodology or research in a new area of regulation is

deficient, the agency necessarily enjoys broad discretion to

attempt to formulate a solution to the best of its ability on the

basis of available information.” (internal quotation marks

omitted)).

Pre-Approval of Traffic Studies

The Commission chose to require pre-approval for VoIP

traffic studies because of “problems [it had] identified with the

use of traffic studies by wireless carriers.” Order at 7547 ¶ 57.

In other words, the Commission decided that the consequences
20

of unreliable traffic studies submitted by wireless providers

should be borne not by the wireless providers themselves, but

by VoIP providers alone. Though recognizing the inequity in

this decision, the Commission devoted but one sentence to

justifying it: “While there would be a benefit to parity of

requirements between wireless and interconnected VoIP

providers, a pre-approval requirement for wireless traffic

studies would be disruptive to wireless contributors who,

unlike interconnected VoIP providers, are already relying on

the current regime.” Id.

This explanation hardly justifies treating VoIP and

wireless differently. Imposing a new pre-approval

requirement on wireless carriers would no doubt have been

disruptive to them. The Commission, however, has failed to

explain how it is any less disruptive to impose such an

obligation on interconnected VoIP providers who have gone

overnight from making no direct USF contributions to

contributing at nearly twice the level of wireless providers.

We understand that regulations can be more costly when

unforeseen. We also understand that the Commission may

have assumed, given the IP-Enabled Services notice, that

interconnected VoIP providers would have foreseen new USF

regulations. But even so, the Commission has given us no

reason to believe that interconnected VoIP providers foresaw

that they would be subject to a pre-approval requirement.

After all, the Commission had declined to impose such a

requirement on wireless providers despite the fact that their

own studies suffered from reliability problems. The

Commission’s explanation thus gives us no confidence that it

has apportioned USF obligations on “an equitable and

nondiscriminatory basis.” 47 U.S.C. § 254(d).
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Suspension of the Carrier’s Carrier Rule

We come finally to the Commission’s suspension of the

carrier’s carrier rule—a rule that prevents double payment at

the wholesale and retail level by basing USF contributions

only on “end-user telecommunications revenues.” 47 C.F.R.

§ 54.706(b). As the Commission acknowledged, this decision

effectively required VoIP providers to make duplicative USF

contributions for two quarters: once directly on their own

interstate and international revenues and a second time

indirectly in the form of higher costs passed along from

carriers who sell them telecommunications inputs. The

Commission’s sole justification for imposing this unique

obligation on VoIP providers was this: “if carriers are

permitted to invoke the carrier’s carrier rule immediately to

exclude revenues from interconnected VoIP providers, the

result could be a net decrease in the Fund in the short term.”

Order at 7548 ¶ 59.

This explanation suffers from a fundamental flaw: the

Commission never explained how there could be a net

decrease in fund revenues by making VoIP providers

contribute while keeping the carrier’s carrier rule in force.

Indeed, increasing USF revenues was the very reason the

Commission gave for requiring interconnected VoIP providers

to contribute to the Fund. And, as Vonage points out, the only

reason to expect a decrease in fund revenues would be if the

indirect payments interconnected VoIP providers made before

the Order were somehow larger than the direct payments they

would make after the Order. For that to occur, however,

interconnected VoIP providers would have to sell their

services for less than they pay for a single wholesale

input—an unlikely business model that, without some

explanation from the Commission, we are unwilling to assume

VoIP providers pursue.
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In its brief, the Commission offered several new

explanations for a potential short-run decrease in the fund.

We, however, may not consider counsel’s post-hoc

rationalizations. See SEC v. Chenery Corp., 318 U.S. 80,

89–90 (1943).

V.

We grant the petitions for review and vacate the Order

with respect to the pre-approval requirement for

interconnected VoIP traffic studies and the suspension of the

carrier’s carrier rule. We deny the petitions with respect to the

Commission’s construction of section 254(d), the setting of

the safe harbor level, and all remaining claims, which we have

considered and found to be without merit.

So ordered.