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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 24, 2003 Decided June 29, 2004

No. 02-1261

NATIONAL ASSOCIATION OF STATE UTILITY

CONSUMER ADVOCATES,

PETITIONER

v.

FEDERAL COMMUNICATIONS COMMISSION AND

UNITED STATES OF AMERICA,

RESPONDENTS

BELLSOUTH TELECOMMUNICATIONS, INC., ET AL.,

INTERVENORS

On Petition for Review of an Order of the

Federal Communications Commission

Billy J. Gregg argued the cause for petitioner. On the

brief was Michael J. Travieso.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.
2

Laurence N. Bourne, Counsel, Federal Communications

Commission, argued the cause for respondents. With him on

the brief were R. Hewitt Pate, Acting Assistant Attorney

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

and Robert J. Wiggers, Attorneys, John A. Rogovin, General

Counsel, Federal Communications Commission, and John E.

Ingle, Deputy Associate General Counsel.

Michael K. Kellogg argued the cause for intervenors BellSouth Telecommunications, Inc., et al. With him on the brief

were Aaron M. Panner, Scott H. Angstreich, Gary L. Phillips, Jeffry A. Brueggeman, H. Richard Juhnke, Jay C.

Keithley, Michael E. Glover, Edward Shakin, Joseph DiBella, and Robert B. McKenna.

Before: GINSBURG, Chief Judge, and EDWARDS and ROGERS,

Circuit Judges.

Opinion for the Court filed by Chief Judge GINSBURG.

GINSBURG, Chief Judge: The National Association of State

Utility Consumer Advocates (NASUCA) petitions for review

of an order of the Federal Communications Commission

adjusting the manner in which Local Exchange Carriers

(LECs) may recover the fixed costs they incur in providing

service to residential and single-line business customers.

NASUCA claims the approach adopted by the Commission

violates the ‘‘universal service’’ provisions of the Telecommunications Act of 1996, results in rates that are unjust and

unreasonable, and is arbitrary and capricious, in violation of

the Administrative Procedure Act. We hold the Commission

acted reasonably and in conformity with the 1996 Act and,

accordingly, we deny NASUCA’s petition for review.

I. Background

This case challenges the Commission’s latest attempt to

phase out certain ‘‘implicit subsidies’’ resulting from the

access fee the LECs charge interexchange carriers (IXCs) in

order to recover the expenses the LECs incur to build and

operate local loops — the part of the telecommunications

network that runs from the LEC’s switch to the customer’s
3

premises (a/k/a ‘‘the last mile’’). These implicit subsidies are

the means by which the Commission assures the provision of

universal service, for without the subsidies many customers in

sparsely populated areas would be unwilling to pay the high

rates necessary to cover the LECs’ cost of serving them. As

detailed more fully below, and in accordance with the policy of

the 1996 Act, the Commission has been attempting to make

the subsidies transparent by replacing implicit subsidies with

explicit subsidies. See 47 U.S.C. § 254. The order here

under review is intended to be a step in that direction.

When AT&T was broken up in 1984, the Commission first

issued rules governing the access charges IXCs were to pay

LECs for originating and terminating long-distance calls.

See generally Nat’l Ass’n of Regulatory Util. Comm’rs v.

FCC, 737 F.2d 1095 (D.C. Cir. 1984). Those charges did not,

however, cover the cost of the local loop, which the LECs

instead recovered directly from end users through a flat fee

per line called the Subscriber Line Charge (SLC); it is flat

because the LEC’s cost of providing the local loop is not

traffic-sensitive. See In the Matter of Access Charge Reform;

Price Cap Performance Review for Local Exchange Carriers;

Transport Rate Structure and Pricing End User Common

Line Charges (Access Charge Reform Order) ¶ 24, 12 FCC

Rcd 15,982, 15,998-99 (1997). Recovering the cost of the loop

from end users, however, raised the prospect that customers

in outlying regions, where the cost per line could be quite

high, would drop their telephone service and thus compromise

the objective of universal service. The Commission therefore

decreed that some of the cost of the local loop would be

recovered through a per-minute-use charge, known as the

Carrier Common Line (CCL) charge, that IXCs would pay

LECs for handling their traffic. Access Charge Reform

Order ¶¶ 37, 38, at 15,998-16,000.

The Commission initially capped the SLC at $3.50 per line.

Because that was significantly below the average fixed cost of

the local loop, a substantial portion of the cost had to be

recovered through the CCL charge, which worked a large,

albeit implicit, subsidy from high- to low-volume long-distance

callers.
4

The implicit subsidies inherent in the Commission’s rate

structure helped to assure access to affordable telecommunication service in rural areas, but they were incompatible with

another goal of the 1996 Act, namely, opening local telecommunication markets to competition. Implementation of the

Local Competition Provisions of the Telecommunications Act

of 1996 ¶ 5, 11 FCC Rcd 15,499, 15,506-07 (1996). To that end

the Act required incumbent LECs to share their networks

with rival telecommunications providers. Id. ¶ 4, at 15,506.

A rival telecommunications carrier that leases elements of the

incumbent LEC’s network has a significant advantage in

competing for customers the incumbent must charge above

cost in order to subsidize others. Id. ¶ 5, at 15,506-07.

Indeed, this pattern of subsidization could not persist if

incumbent LECs were to compete against new entrants.

In 1997 the Commission took a step toward ‘‘[r]ationalizing’’

its rate structure by ‘‘eliminat[ing] significant implicit subsidies in the access charge system.’’ Access Charge Reform

Order ¶ 36, at 15,998. This it did by allowing greater recovery of fixed costs through flat (as opposed to traffic-sensitive)

fees. The Commission did not, however, allow further recovery through the SLC, which remained capped at $3.50 per

line, because it was concerned that a higher price for the

basic dial tone could cause rural customers to discontinue

service — ‘‘contrary to [the Commission’s] mandate to ensure

universal service.’’ Id. ¶ 38, at 15,999. Rather than impose

an additional charge upon the end user, therefore, the Commission settled upon a ‘‘flat, per-line charge assessed on the

IXC to whom [sic] the access line is presubscribed,’’ id.,

known as the presubscribed interexchange carrier charge

(PICC).

Not long after introducing the PICC, the Commission

realized it was not a complete solution: ‘‘Because IXCs have

recovered the residential PICCs on a per-account basis, residential customers with only one line pay the same as those

with two or more lines, and so pay more than the costs IXCs

have incurred for providing them service.’’ In the Matter of

Access Charge Reform; Price Cap Performance Review for

Local Exchange Carriers; Low-Volume Long Distance
5

Users; Federal-State Joint Board On Universal Service

(CALLS I) ¶ 19, 15 FCC Rcd 12,962, 12,970 (2000). In order

to offset that newly-introduced cross-subsidy, the Commission

scheduled incremental increases in the cap on the SLC that

LECs charge end users — from $3.50 per line to $4.35 in

2000, to $5.00 in 2001, to $6.00 in 2002, and to $6.50 in 2003.*

Id. ¶ 70, at 12,988-89. Well, not necessarily. Recovery via

the SLC was not to exceed the ‘‘average TTT common line,

marketing[,] and transport interconnection charge revenue’’

(‘‘CMT Revenue’’) in any unbundled network element (UNE)

zone. Id. In other words, the maximum allowable recovery

via the SLC, CCL charge, and PICC combined is equal to the

amount the LEC would be allowed to recover under price cap

regulation, which is based upon the LEC’s historical cost of

providing the local loop. Accordingly, if the SLC cap exceeds

that amount, the LEC may recover up to, but no more than,

its CMT Revenue via those three rate elements.

Because a LEC recovers its local loop costs in a ‘‘cascading

fashion’’ — first through the SLC, then the PICC, and finally

the CCL charge — an increase in the SLC cap reduces by

the same amount what the LEC may recover through the

CCL charge and the PICC — the Commission’s goal being to

minimize and then to eliminate those charges. See In the

Matter of Cost Review Proceeding for Residential and Single-Line Business Subscriber Line Charge (SLC) Caps; Access Charge Reform; Price Cap Performance Review for

Local Exchange Carriers (CALLS II) ¶ 15, 17 FCC Rcd

10,868, at 10,875-76. When they are eliminated, the LEC is

permitted to ‘‘deaverage’’ the SLC in up to four UNE zones,

CALLS I ¶ 73, at 12,989-90, that is, to calculate the average

cost for each zone rather than for all zones combined. Calculating average costs in this manner ‘‘enhances the efficiency

of the local telephone market by allowing prices to be tailored

more easily and more accurately to reflect cost.’’ Id. ¶ 113, at

13,007.

* ‘‘O what a tangled web we weave, when first we practice to TTT’’

relieve. With apology to Sir Walter Scott, Marmion, Canto vi,

Stanza 17 (1808).
6

In CALLS I the Commission also established the Universal

Service Fund, an ‘‘explicit interstate universal service support

mechanism,’’ in order to help offset the reduction in the

implicit subsidies; it is to be funded with $650 million raised

through a new element in the rate that LECs charge subscribers. Id. ¶¶ 195, 218, at 13,043, 13,057; see also 47 U.S.C.

§§ 214(e), 254. The Fund was set up as ‘‘a five-year transitional plan designed to provide explicit subsidies to poor and

rural end-users.’’ Tex. Office of Pub. Util. Counsel (TOPUC)

v. FCC, 265 F.3d 313, 327 (5th Cir. 2001).

Finally, in CALLS I the Commission undertook to ‘‘review

any increases to residential and single-line business SLC caps

above $5.00 to verify that any such increases are appropriate

and reflect higher costs where they are to be applied.’’ ¶ 83,

at 12,994. In doing that review, the Commission said it would

examine ‘‘forward-looking cost information’’ to be provided by

the LECs. Id.

The Commission completed its review in September 2001

and issued its findings in June 2002. See CALLS II. This is

what the Commission found:

[E]ven the most conservative estimate of forward-looking

costs [i.e., NASUCA’s] shows that a substantial number

of lines exceed both the current $5.00 SLC cap, and the

ultimate $6.50 SLC cap. Thus, we determine that raising the SLC cap to the levels set forth in [CALLS I] is

justified by the record in this proceeding. We also find

that those increases to the SLC cap are necessary to

achieve our access charge reform goals, as stated in

[CALLS I], of removing implicit subsidies by moving to a

more cost-causative rate structure and enabling greater

opportunities for SLC deaveraging.

Id. ¶ 5, at 10,871. The Commission also pointed out that it

had previously found a SLC cap of $6.50 is ‘‘affordable’’ for

residential and single-line business customers, which finding

was upheld in TOPUC, 265 F.3d at 323. Hence, the Commission concluded, ‘‘to achieve the benefits of removing implicit

subsidies and allowing SLC deaveraging, while maintaining

affordable residential and single-line business rates for con-
7

sumers,’’ it would allow the SLC cap to increase as scheduled

in CALLS I. CALLS II ¶ 5, at 10,871-72.

NASUCA petitions this court for review of the Commission’s decision in CALLS II.

II. Analysis

NASUCA argues the Commission’s decision in CALLS II

violates several provisions of the 1996 Act and is ‘‘arbitrary

and capricious,’’ in violation of the APA. See 5 U.S.C.

§ 706(2)(A).

A. 1996 Act Claims

NASUCA first argues the Commission failed to ‘‘give effect

to the unambiguously expressed intent of Congress,’’ Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.

837, 842-43 (1984), to remove implicit subsidies and to replace

them with explicit subsidies, as expressed in §§ 254(b)(5) and

254(e) of the 1996 Act. NASUCA supports the factual predicate of this claim by pointing to its own cost study, which

showed nearly 75% of residential and single-line business

customers have forward-looking costs less than $5.00 and 86%

of those lines have forward-looking costs less than $6.50.

NASUCA views any SLC charge exceeding forward-looking

costs as an ‘‘implicit subsid[y] running from customers with

lower cost lines to customers with higher cost lines.’’

The Commission responds that an implicit subsidy from

lower cost to higher cost lines was not immediately ruled out

by the 1996 Act and under CALLS I is only to be phased out

over time; in fact, some subsidization is ‘‘inevitable’’ as long

as there is any rate averaging. According to the Commission,

the issue in this case, properly understood, is whether its

approach is ‘‘an improvement over the pre-existing situation

and will provide a transition to less subsidization.’’ We agree.

Although the Act charges the Commission with devising

‘‘specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service,’’ 47 U.S.C.

§ 254(b)(5), it does not decree an immediate revolution; as

we have said before, ‘‘there is no time limit on realization of
8

the reform,’’ Competitive Telecomms. Ass’n v. FCC, 309 F.3d

8, 15 (D.C. Cir. 2002) (emphasis in the original). The Commission in CALLS I put in place a reasonable timetable, id.,

recognizing that only by proceeding in steps may all implicit

subsidies be eliminated without compromising universal service.

In CALLS II the Commission explained that an increase in

the SLC cap would help LECs eliminate the PICC, ¶¶ 40-42,

at 10,886-87, which the Commission had previously found to

be an inefficient method of recovering the LECs’ fixed costs:

By eliminating the residential and single-line business

PICCs, the CALLS Proposal establishes a straightforward, economically rational pricing structure which enables consumers to make a choice among competing

providers through head-to-head comparisons and better

promotes competition by sending potential entrants economically correct entry incentives.

CALLS I ¶ 78, at 12,991. Again, an increase in the SLC cap

does not increase the LEC’s revenue; rather, it merely shifts

the source of the LEC’s CMT Revenue away from the CCL

charge and the PICC. CALLS II ¶¶ 5, 15, at 10,871-72,

10,875-76. Moreover, eliminating those charges is a precondition to the LEC being able to deaverage rates across UNE

zones. Deaveraging was made an important objective in

CALLS I, ¶¶ 113-28, at 13,007-14, and the method the Commission chose to accomplish that objective — namely, raising

the SLC cap based upon the cost studies conducted for

CALLS II, after having determined that doing so would not

jeopardize universal service, see id. ¶ 85, at 12,995; TOPUC,

265 F.3d at 323 — was eminently reasonable.

NASUCA next argues the increase in the SLC cap allows

LECs to charge SLC rates that are not ‘‘just and reasonable,’’ in violation of 47 U.S.C. §§ 201(b) and 254(b)(1). It

acknowledges that CALLS II does not alter the Commission’s

price-cap regime for setting rates, which has been in place

since 1991 and has been upheld by this court. See Nat’l

Rural Telecom Ass’n v. FCC, 988 F.2d 174 (D.C. Cir. 1993);

Southwestern Bell Tel. Co. v. FCC, 10 F.3d 892 (D.C. Cir.
9

1993). Rather, it claims the increases in the SLC cap under

CALLS II violate the ‘‘regulatory framework’’ of CALLS I,

under which, according to NASUCA, the Commission must

set rates based upon forward-looking costs. The Commission

responds by pointing out that in CALLS II it changed only

the SLC cap; it did nothing to change the method it uses to

set the underlying SLC rates. See CALLS II ¶ 26, at 10,879.

The Commission is clearly correct. Nothing in CALLS I

committed the Commission to the sea change in rate-setting

urged by NASUCA, that is, immediately basing all LECs’

rates solely upon forward-looking costs. On the contrary, the

Commission stated in CALLS I that it was ‘‘extending for five

years’’ its existing approach, which would over time bring

rates ‘‘toward forward-looking economic cost.’’ ¶ 60, at 12,-

984-85. As the Commission reasonably observed in the order

under review, the CALLS proceedings were ‘‘not designed to

change the existing method of setting SLC rates, which relies

on the application of the price cap formula to CMT revenues.’’

CALLS II ¶ 26, at 10,879 (emphasis in original). That approach, as mentioned above, is based upon historical, not

forward-looking, cost.

Finally, both in arguing the Commission violated the 1996

Act and in arguing its decision is arbitrary and capricious (see

Part II.B, below), NASUCA claims no further increase in the

SLC cap was necessary due to the ‘‘explicit’’ support provided

by the $650 million Universal Service Fund. That Fund,

however, is only one part of the Commission’s overall approach to eliminating implicit subsidies. Neither in CALLS I

nor in CALLS II did the Commission indicate the Universal

Service Fund alone would be sufficient to achieve the Commission’s ultimate goal of eliminating all implicit subsidies.

Accordingly, NASUCA’s invocation of the Fund does nothing

to call into question the reasonableness of the Commission’s

decision.

B. APA Claims

NASUCA argues the Commission’s decision in CALLS II is

‘‘arbitrary and capricious’’ because it: (1) ‘‘runs counter to the

evidence’’ in the record; (2) ‘‘failed to articulate any explana-
10

tion’’ for its conclusion; (3) departed from precedent upon the

basis of irrelevant factors; and (4) failed to explain why it

departed from prior FCC policy. For the most part, NASUCA here simply repackages its claims under the 1996 Act as

claims the Commission’s decision violates the Administrative

Procedure Act. We find the Commission’s decision no less

reasonable when viewed through the lens of the APA. As we

have seen, the agency adequately explained its reason for

increasing the SLC cap above $5.00, namely, to help eliminate

the CCL charge and the PICC and thereby facilitate deaveraging and more efficient pricing. Id. ¶¶ 27, 40-42, at 10,879-

80, 10,886-87. All that remains is NASUCA’s objection to the

factual basis for the Commission’s decision.

In claiming the Commission’s decision is not supported by

evidence in the record, NASUCA belittles the Commission’s

finding that 33 million residential and small business lines,

30% of all such lines, have forward-looking costs in excess of

$5.00. Pointing out that 78 million such lines (or 70%) must

have costs at or below $5.00, NASUCA claims the Commission had no valid reason for raising the SLC cap.

The Commission explained, however, that increases in the

SLC cap are appropriate if a ‘‘substantial number of lines

[have] forward looking costs that exceed the current $5.00

SLC cap and the ultimate $6.50 SLC cap.’’ Id. ¶ 27, at

10,879. The ‘‘most conservative estimate’’ in the record,

which was based upon NASUCA’s own study, was that 33

million residential and small business lines had costs above

$5.00, and 20 million of those lines had costs above $6.50, id.

at 10,880; see also id., Attachment A, numbers the Commission deemed ‘‘substantial.’’

NASUCA maintains the Commission’s determination that

33 million lines is a ‘‘substantial’’ number is not entitled to

deference from the court; this line-drawing exercise, it says,

is ‘‘quite straightforward,’’ calling upon the agency for neither

expertise nor discretion. That is just not correct.

In deciding to raise the SLC cap, the Commission first had

to determine how much confidence to place in the various

studies of forward-looking costs. Id. ¶¶ 30-38, at 10,881-85.
11

It then had to strike a balance between the ‘‘removal of

implicit subsidies and ensuring affordability’’ and hence universal service. Id. ¶ 27, at 10,879–80. In so doing, the

Commission deemed the number of lines with costs above the

SLC caps ‘‘substantial’’ because they were numerous enough

that increasing the caps as scheduled would significantly

reduce the inefficient, implicit subsidies and in some areas

facilitate deaveraging by eliminating the subsidies altogether.

The Commission is necessarily entitled to substantial deference when it must draw numerical lines in order to balance

two congressional policies that cannot both be fully achieved.

See Sinclair Broad. Group, Inc. v. FCC, 284 F.3d 148, 162

(D.C. Cir. 2002) (setting minimum number of station owners

in market to strike balance between ‘‘efficiencies of television

duopolies’’ and ‘‘robust level of diversity’’ is ‘‘quintessentially

[a] matter[ ] of line drawing invoking the Commission’s expertise’’); see also Cassell v. FCC, 154 F.3d 478, 485 (D.C. Cir.

1998), quoting Home Box Office, Inc. v. FCC, 567 F.2d 9, 60

(D.C. Cir. 1977) (court generally ‘‘unwilling to review linedrawing performed by the Commission unless a petitioner can

demonstrate that lines drawn TTT are patently unreasonable,

having no relationship to the underlying regulatory problem’’).

In sum, NASUCA’s claim that the Commission’s decision to

raise the SLC cap was arbitrary and capricious simply ignores the Commission’s reasoning in CALLS II and the facts

upon which that decision is based. The Commission’s decision striking a balance between competing congressional directives — reducing implicit subsidies and maintaining universal service — was reasonable and was supported by

substantial evidence in the record.*

* NASUCA also claims the Commission violated 47 U.S.C.

§ 254(k) by permitting recovery of traffic-sensitive loop costs

through the SLC, and acted arbitrarily and capriciously by declining to evaluate the SLC caps upon the basis of the alternate ‘‘run’’

of NASUCA’s study, which purported to exclude traffic-sensitive

costs. We have considered and rejected these claims, which do not

warrant treatment in a published opinion.
12

III. Conclusion

For the foregoing reasons, NASUCA’s petition for review

is

Denied.