* District Judge of the Southern District of Texas, sitting by designation.

1 The CALLS Order is officiallynamed In the Matter of Deployment of Access Charge

Reform,PriceCap Performance Reviewfor Local ExchangeCarriers, Low-Volume DistanceUsers,

REVISED OCTOBER 1, 2001

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

____________

No. 00-60434

____________

TEXAS OFFICE OF PUBLIC UTILITY COUNSEL; NATIONAL

ASSOCIATION OF STATE UTILITY CONSUMER

ADVOCATES,

Petitioners,

versus

FEDERAL COMMUNICATIONS COMMISSION; UNITED

STATES OF AMERICA,

Respondents.

On Petition for Review of a Final Order of 

the Federal Communications Commission

September 10, 2001

Before EMILIO M. GARZA and PARKER, Circuit Judges, and ELLISON,* District Judge.

EMILIO M. GARZA, Circuit Judge:

This petition for review of the CALLS Order1 represents the latest challenge to the Federal
and Federal-State Joint Board on Universal Service, Sixth Report and Order in CC Docket No. 96-

262 and 94-1, and Report and Order in CC Docket 99-249, and Eleventh Report and Order in CC

Docket 96-56, 15 FCC Rcd. 12962 (released May 31, 2000). The order derives its appellation from

the Coalition of Affordable Local and Long Distance Service (“CALLS”), a group of local and longdistance providers that helped draft the initial proposal.

-2-

Communication Commission’simplementation of the Telecommunications Act of 1996, Pub.L. No.

104-04, 110 Stat. 56 (codified as amended in scattered sections of title 47, United States Code)

(“1996 Act”). The Texas Office of Public Utility Counsel (“TOPUC”) and the National Association

of State Utility Consumer Advocates (“NASUCA”), along with intervenor Consumer Federation of

America (“CFA”) (collectively, “Petitioners”), claim that the CALLS Order violates the procedural

requirements of the Administrative Procedure Act, 5 U.S.C. § 706(2)(A) as well as the substantive

provisions of the 1996 Act. We affirm the CALLS Order in most respects, but we remand for further

analysis the portions regarding the $650 million Universal Service Fund and the X-Factor.

I

We must briefly review the regulatory regime of the telephone industry to better understand

the issues presented in this petition. The telephone industry is comprised of two sets of carriers.

Local exchange carriers(“LECs”) provide local basic telephone service, while interexchange carriers

(“IXCs”) offer long-distance service. Since the divestiture of AT&T in 1984, robust competition has

existed in the long-distance market with IXCs trying to recruit new customers and lure subscribers

from each other. On the other hand, LECs until recently had natural monopolies on local service in

their respective regions, because they own the network infrastructure necessary to make telephone

calls. The prohibitive capital costs involved in laying out a separate infrastructure deterred potential

competitorsfromentering the localservicemarket. The 1996 Act made competition in the local basic

service market one of its main goals. Congress prodded incumbent local exchange carriers
-3-

(“ILECs”)—that is, LECs like the Baby Bells which own the infrastructure—to provide cost-based

use of their network to companiesthat wanted to enter the localservice market. In return, Congress

allowed ILECs, which had previously been barred from offering long-distance service in their home

regions, to enter that market.

The 1996 Act’s provision of allowing LECs to use ILECs’ infrastructure resembled an

arrangement already shared by IXCs and ILECs: IXCs rely on ILECs’ network to originate and

terminate long-dist ance calls. More technically, the IXCs use the “local loop,” which refers to

telephone wiresrunning froma person’stelephone to the localtelephone switch. Whenever someone

makes a long-distance phone call, he or she tapsinto the local network, where the call is then routed

between a LEC local switch and an IXC switch. The costs incurred by the ILECs in providing the

use of this infrastructure are called “loop costs.”

Two sources of revenues allow the ILECs to recover the loop costs. First, all end-users of

basic localservice pay a flat Subscriber Line Charge (“SLC”) that appearsin their monthly telephone

bills. Prior to the CALLS Order, the FCC capped the SLC at $3.50 per month: ILECs can charge

less than $3.50 per month, but it cannot levy an access charge above that amount. The SLC alone

is insufficient to defray the loop costs entirely. Thus, the FCC assesses an access charge against

IXCs, which in turn usually pass down these costs to end-users. At first, the FCC levied a trafficsensitive fee called the CommonCarrier Line Charge (“CCL”) against IXCs. The FCC later replaced

theCCL withthe flat-ratePresubscribed InterexchangeCarrierCharge (“PICC”). See AccessCharge

Reform Order, Price Cap Reform Performance Review for Local Exchange Carriers, Transport

Structure and Pricing, End User Common Line Charges, CC Docket Nos. 96-262, 94-1, 91-213 and

95-72, First Report and Order, FCC 97-158, 62 Fed. Reg. 31867 (released May 16, 1997) (“Access
-4-

Charge Reform Order”). The FCC determined that high-volume long-distance callers did not

financially burden the network more than low-volume callers, but were nevertheless being penalized

by a traffic-sensitive CCL charge. The FCC believed that the flat-rate PICC more accurately

represented the true costs incurred by long-distance callers.

In addition to fostering competition in the local telephone service market, the 1996 Act had

another key goal of continuing the provision of affordable universal service to all Americans.

Traditionally, the phone bills of poor and rural customers have been implicitly subsidized by rate

manipulation. High-volume long-distance callers and urban residents pay artificially higher phone bills

to subsidize and support universal service for others. Congress recognized that these implicit

subsidies could not continue under the market-based regime ushered in by the 1996 Act. In a

competitive market, a carrier that subsidizes rural or poor customers by charging below-cost rates

while billing above-cost rates to urban customers will be undercut by a competitor offering at-cost

rates to urban end-users. Congress wanted to continue subsidizing universal service, but in a way

more consistent with the market-oriented reforms. The 1996 Act thus required that the implicit

subsidy system of rate manipulation be replaced wit h explicit subsidies for universal service. To

implement the goals of the 1996 Act, the FCC issued a series of orders.

The FCC first issued its Access Charge Reform Order. As noted before, the order abolished

the traffic-sensitive CCL fees assessed against IXCs, and replaced them with the flat-rate PICC. By

ensuring that access charges more accurately reflected the actual costs incurred, the FCC hoped that

it would facilitate the shift to a competitive market. The order also increased the SLC cap for multiline business customers on the assumption that they could afford such a price increase. It, however,

did not increase the SLC cap for primary residences and single-line businesses. Several IXCs
-5-

petitioned for review of the Access Charge Reform Order, alleging, among other things, that the

failure to increase the SLC cap on primary residential and single-line businesses amounted to new

implicit subsidies. The Eighth Circuit upheld the Access Charge Reform Order in part on the ground

that the 1996 Act’s commitment to universal access constrained the FCC fromraising the SLC pricecap on other lines. See Southwestern Bell Tel. Co. v. FCC, 153 F.2d 523 (8th Cir. 1998) (citing 47

U.S.C. § 254(b)’s statement of affordable universal access). Noting that the order was a transitional

plan only, the court further upheld the FCC’s decision to rely on market forces rather than on

comprehensive cost analysis in changing its access charge policy.

The FCC also issued In re Federal-State Joint Board on Universal Service, CC Docket No.

96-45, Report and Order, 12 FCC Rcd. 8776 (1997) (“Universal Service Order”). This order

emphasized that implicit subsidies for universalservice should be gradually removed from interstate

access charges, and replaced with an explicit universal service fund derived from percentage-based

fees levied against telecommunications carriers. This Circuit remanded parts of the order, but we

upheld the requirement that LECs must reduce access charges by an amount commensurate with the

money received for the explicit universalservice fund. See Tex. Office of Pub.Util. Counsel v. FCC,

183 F.3d 393 (5th Cir. 1999) (“TOPUC I”). 

Finally, the FCC addressed the issue of the “X-Factor” in its In the Matter of Price Cap

Performance Review for Local Exchange Carriers, CC Docket 96-262, Fourth Report and Order,

12 FCC Rcd 16,642 (1997) (“Price Cap Review”). FCC had annually reduced LECs’ price-caps by

imposing what it dubbed the X-Factor, a percentage number that represented the LECs’ increase in

productivityminusthe rate ofinflation. By lowering the price-caps (and hence the amount that LECs

could charge consumers), the X-Factor pressured LECsto become more efficient and to lower their
-6-

costs. In effect, the X-Factor passed down the savings from the LECs’ increased productivity to the

consumers. In its Price Cap Review, the FCC raised the X-Factor to 6.5 percent. On petition for

review, the D.C. Circuit found the increase to be arbitrary and capricious because the FCC did not

provide sufficient evidence of increased productivity by the LECs to warrant the 6.5 percent figure.

See United States Tel. Ass’n v. FCC, 188 F.3d 521 (D.C. Cir. 1999) (“USTA”). It remanded this

issue back to the FCC.

While revisiting the two remanded ordersfromUSTA and TOPUC I, the FCC considered and

adopted the CALLS Order, a five-year transitional plan intended to help resolve the thorny issues of

access charges. This order originates from the work of the Coalition for Affordable Local and Long

Distance Service (“CALLS”), a group of major IXCs and ILECs. Although ILECs and IXCs

traditionallyhave held opposing views ontelecommunicationsreform, theyworked together in jointly

presenting the CALLS proposal. The FCC conducted a notice-and-comment proceeding pursuant

to the Administrative Pro cedure Act (“APA”) by soliciting public comments on the proposal and

receiving dozens of comments. After making some changes, the FCC submitted a modified CALLS

proposal, and again solicited comments but on an abbreviated schedule. Several weeks later, the FCC

issued the final CALLS Order.

The CALLS Order promulgatesfour key changes, all of which are challenged in this petition

for review. First, the FCC abolishes the PICC fees assessed against IXCs. Second, to compensate

for the loss of revenues from the elimination of the PICC, the order raises the SLC price cap for

primary residential lines. It will increase from $3.50 to $6.50 over a period of several years. The

FCC changed the fee structure, believing that it would encouragemore competition and lead to lower

rates overallfor consumers. Third, the FCC reintroduces a 6.5 percent X-Factor, but switches it from
2 The Petitioners have filed two opening briefs: TOPUC and CFA jointly filed a brief,

while NASUCA filed separately. For the purpose of brevity, this opinion will not attempt to identify

the specific arguments made by each brief, and will instead refer to them collectively as the

Petitioners’ argument or brief. Similarly, the respondents in the case, the FCC and the CALLS

Coalition have filed separate briefs, but we will not individually identify the arguments made by each

respondent.

-7-

a productivityproxyto a non-productivity-based mechanismfor rate reduction. Fourth, it establishes

a transitional $650 million Universal Service Fund to provide explicit subsidies for poor and rural

customers.

The parties challenging the CALLS Order include the Texas Office of Public UtilityCounsel,

as well as the National Association of State Utility Consumer Advocates and the intervenor

Consumer Federation of America, both of which are consumer advocacy groups.2 In their petition,

they make two broad challenges against the order. The Petitioners first contend that the CALLS

Order did not comport with the APA requirements. They characterize the CALLS Order as the

product of a surreptitious political deal between the respondent FCC and the respondent-intervenor

CALLS Coalition. The Petitioners also challenge the order on substantive grounds, claiming that it

betrays, among other things, the 1996 Act’s requirement of affordable universal access. We first

addressthe substantive statutory challenge, and then the procedural objectionsto the CALLS Order.

II

In reviewing the Petitioners’ substantive claims, we apply the two-step analysis set forth in

Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837, 842-43, 104 S.Ct. 2778, 2781-

2783, 81 L.Ed.2d 694 (1984). In step one, we look to see whether Congress has spoken directly on

the precise question at issue. See id. at 843, 104 S.Ct. at 2781. If Congress has done so, we must

“give effect to [Congress’] unambiguously expressed intent.” Id. at 843, 104 S.Ct. at 2781. If the
-8-

statute is ambiguous as to the question at issue, we move to the second step of the Chevron analysis

to determine “whetherthe agency’s answer is based upon a permissible construction.” Id. at 843, 104

S.Ct. at 2782. Under this second step, we can reverse the agency’s decision only if it was arbitrary,

capricious or manifestly contrary to the statute. See id. at 844, 104 S.Ct. at 2782. The question is

not whether we might have preferred another way to interpret the statute, but whether the agency’s

decision was a reasonable one. See MCI Telecomm. Corp. v. FCC, 675 F.2d 408, 413 (D.C. Cir.

1982). 

We address in order the Petitioners’ three main objectionsto the CALLS Order: whether the

SLC price cap increase violates § 254(b)(1) and § 254(i)’s purported affordability mandate; whether

it contravenes § 254(k)’s prohibition against unreasonable allocation ofjoint and common costs; and

whether the 1996 Act requires the FCC to conduct a comprehensive, forward-looking study.

A

The Petitioners object to the increase in the SLC caps for residential and single-line business

customers, alleging that it violates the affordability mandate of 47 U.S.C. § 254 and arbitrarily

reverses the long-settled agency policy of ensuring affordable universal service. We hold that the

increase in the SLC price cap does neither: the FCC hasreasonably interpreted § 254 under step-two

of the Chevron analysis, and has provided sufficient justification for its change in price cap policy.

The Petitioners point to two statutory provisions that allegedly preclude the FCC from

increasing the SLC cap. Section 254(b)(1) states that “[q]uality services should be available at just,

reasonable, and affordable rates,” and § 254(i) declaresthat “[t]he Commission and the Statesshould

ensure that universalservice is available at rates that are just, reasonable and affordable.” 47 U.S.C.

§ 254(i), 254(b)(1). The FCC acknowledges the importance of affordability under the 1996 Act, but
3 The headings of the seven principles are: “Quality and rates”; “Access to advanced

services”; “Access in rural and high cost areas”; “Equitable and nondiscriminatory contributions”;

“Specific and predictable support mechanisms”; “Access to advanced telecommunications services

for schools, health care, and libraries”; and a catch-call “Additional principles.” 47 U.S.C. §

254(b)(1)-(7).

-9-

states that it is only an aspirational guideline that must be carefully balanced with other statutory

objectives. In response, the Petitioners imply that the FCC must make affordability paramount in

formulating access charge policy, even if it comes at the expense of other statutory goals. 

We hold that the FCC’s interpretation § § 254(b)(1) and 254(i) as merely aspirational is

permissible under step-two of the Chevron analysis. Accordingly, the two provisions cannot serve

as a basisto invalidate the SLC price cap increase (assuming that the increase endangers affordability,

which the FCC denies). 

We first discuss § 254(b)(1). Under the heading of “[u]niversal service principles,” § 254(b)

lists seven factors that the FCC should follow in implementing the 1996 Act.3 One of the principles

is that “[q]uality service should be at . . . affordable rates.” 47 U.S.C. § 254(b)(1). We have

previously analyzed § 254(b) under Chevron step-two because the listed principles use “vague,

general language,” rendering the section ambiguous. TOPUC I, 183 F.3d at 421 (analyzing

§ 254(b)(3)). Under this deferential review, we have approved the FCC’s interpretation of the

statutory principles as aspirational only. See id, 183 F.3d at 421 (refusing to “rely[] on the

aspirational language in § 254(b) to bind the FCC to adopt certain cost methodologiesfor calculating

universal service support”); see also Chevron at 843, 104 S.Ct. at 2778 (holding that courts must

defer to an agency’sreasonable reading of an ambiguous provision). Indeed, the lofty and expansive

language of § 254(b) “hardly constitute[] a series of specific statutory commands.” TOPUC I, 183

F.3d at 421. Rather, they “reflect congressional intent to delegate difficult policy choices to the
-10-

Commission’s discretion.” See Alenco, 201 F.3d 608, 615 (5th Cir. 2000); cf. Nat’l Ass’n of

Regulatory Util. Comm’r v. FCC, 737 F.2d 1095, 1134 (D.C. Cir. 1984) (noting the “breadth of the

Commission’s statutory discretion to balance the multiple goals embodied in the Communications

Act.”).

Similarly, we hold that the FCC’s reading of § 254(i) as aspirational is a “permissible

construction of the statute.” Chevron at 843, 104 S.Ct. at 2778. Section 254(i) states that the FCC

“should ensure that universalservice is. . . affordable.” Generally, courts have “read ‘shall’ as a more

direct statutory command than words such as ‘should’ or ‘may.’” TOPUC I, 184 F.3d at 418. The

Petitioners counter that courts neverthelesssometimesread “should” as a direct statutory command.

See, e.g., Alenco, 201 F.3d at 614-15. While that may be true, the Petitioners do not provide any

convincing reasons why the word “should” in this context must be read to rebut the general

presumption. The Petitioners’ argument shows only that, at best, the meaning of § 254(i) is unclear.

If a statutory provision is ambiguous, we must uphold the FCC’s interpretation as long as it is a

reasonable reading. See Chevron at 843, 104 S.Ct. at 2778. 

Thus, while the FCC cannot flatly ignore or contravene the goal of affordability, Congress

gave it the latitude to formulate a policy that considers affordability, along with other policy goals of

the 1996 Act. We cannot arrogate to ourselves this policy-making function, merely because we (or

the Petitioners) believe that the FCC is not maximizing the affordability goal at the expense of other

objectives. As we explain later, the increase in the SLC cap represents FCC’s reasoned attempt to

maintain the difficult balance between the principles of ensuring affordability and encouraging

competition.

Notwithstanding the statutory provisions, we cannot uphold FCC’s decision to increase the
4 As an initial point, the Petitioners err in intimating that the FCC refused to increase

the SLC cap on residential and single-line business customers solely because of affordability. The

FCC did not increase the SLC cap for several reasons, including the prudential rationale of not

altering the rate structure at a time of rapid reform. For example, in the Access Charge Reform

Order, the FCC explained: “Because of concerns about affordability, and in light of the significant

changesthat are stillunderwayin this proceeding, in the federal universalservice support proceeding,

and possible future changesto the separations process, we conclude that the SLC for [residential and

single-line business] linesshould not be raised.” Id. (emphasis added). Likewise, the FCC explained

in its Universal Service Order that it would not raise “at this time” the SLC caps “in light of

significant changes that are still underway.” Universal Service Report, ¶ 763.

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SLC caps if it represents an unexplained reversal of past FCC policy. “While the agency is entitled

to change its views on the acceptability of [a prior policy], it is obligated to explain its reasons for

doing so.” Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 56, 103 S.Ct.

2856, 2873, 77 L.Ed.2d. 443 (1983). The Petitioners allege that FCC has reversed itself from its

earlier decisions not to raise the SLC cap on residences and single-line businesses due to affordability

concerns. See, e.g., Access Charge Reform Order, ¶ 73 (increasing the SLC cap only on multi-line

businesses). 

The FCC has articulated rational reasons to the degree that it has changed prior policies. 4

Simply put, the telecommunications market has undergone dramatic changes in the past few years,

and it continues to do so. In light of this dynamic market, the FCC has walked a delicate tightrope

between the 1996 Act’stwin goals of ensuring affordability and promoting localservice competition.

We have implicitly recognized that an uneasy tension exists between these two goals: although

increased competition will ultimately make phone service more affordable, the transition from a

highly-regulated industry to a market-oriented regime can bring some growing pains. See Alenco,

201 F.3d at 615. As a consequence, while the “FCC must see to it that both universal service and

local competition are realized,” we have also recognized that “Congress has conferred broad
-12-

discretion on the agency to negotiate these dual mandates [and that] courts ought not [to] lightly

interfere with its reasoned attempt to achieve both objectives.” Id. at 615 (emphasis in original). 

Citing several factors and changes in the market, the FCC believed that its prior concerns

about affordability were “sufficientlymitigated to allow an increase in the SLC” from $3.50 to $6.50

over the course ofseveral years. CALLS Order, ¶ 86. First, the FCC noted that the prior SLC limit

of $3.50 was established in 1984; if adjusted for inflation, it would stand at $4.94. See id. at ¶ 85.

In light of this, the FCC did not find that an increase in the SLC cap would raise affordability

concerns. Second, it cited empirical evidence suggesting that telephone subscribership would not be

“negatively impacted” by such an increase. See id. at ¶ 86. The FCC also noted that increased

funding for the Lifeline support program allayed prior fears of unaffordability. Finally, the FCC

promised to conduct a cost-study before the SLC is scheduled to rise above $5.00.

In addition, the FCC believed that pro-competitive benefits from the abolition of the PICC

would offset any increase in the SLC. Although the PICC is technically assessed against the IXCs,

they usually pass it down, with added costs, to the end-users. See id. Eliminating the PICC would

remove such unnecessary transaction costs. The FCC further reasoned that consumers would benefit

because the PICC, as an external cost imposed on all IXCs, is relatively resistant to competitive

pressures. See CALLS Order, ¶ 89. Consequently, the FCC believed that it would be difficult for

the IXCsto reduce and compete away thisfee. See id. On the other hand, only the ILECs assess the

SLC, which is imposed directly against the consumers. The newly entering LECs are not required

to charge the SLC. Thus, the FCC held that competitive pressure could force ILECs to reduce the

SLC through efficiency gains. See id. 

The Petitionersstrongly dispute the FCC’sreasoning. For example, they reply that the FCC’s
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logic about the PICC is counterintuitive because the long-distance market is currently more

competitive than the local service market. Under our standard of review, we are not required to

concur wholeheartedly with the policy analysis of the FCC. Rather, we only examine whether “prior

policies and standards are being deliberately changed” and “not casually ignored.” Bush-Quayle ‘92

Primary Campaign Comm., Inc. v. FEC, 104 F.3d 448, 453 (D.C. Cir. 1997). After reviewing the

record, we are satisfied that the FCC hassufficiently explained itsreasonsfor increasing the SLC for

residential and single-line business customers. The Petitioners may not agree with the FCC’s

reasoning, but we cannot usurp the FCC’s role in making the difficult policy decisions regarding

affordability and competition. See Alenco, 201 F.3d at 615.

B

The Petitioners also challenge the CALLS Order on the ground that it recovers an

unreasonablydisproportionate amount ofjoint and commoncosts ofuniversalservice fromend-users.

At dispute is the meaning of § 254(k), which states that the FCC “shall establish any necessary cost

allocation rules, accounting safeguards, and guidelines to ensure that services included in the

definition of universal service bear no more than a reasonable share of the joint and common costs

of facilities used to provide these services.” 47 U.S.C. § 254(k). By abolishing the PICC fee

assessed against IXCs and increasing the SLC cap on end-users, the FCC unreasonably recovers 100

percent of joint and common costs of universalservice from end-users, according to the Petitioners.

One of the Petitioners, TOPUC, had presented this very same argument in challenging the

Access Charge Reform Order, which had increased the SLC price cap on multi-line businesses. The

Eighth Circuit wholly rejected that argument in Southwestern Bell. It noted that “[b]ecause the SLC

is a method of recovering loop costs, not an allocation of those costs between supported and
5

In any case, as a practical matter, the Petitioners’ fears of anti-consumer effects are

exaggerated. Both sides apparently agree that most customers have a presubscribed long-distance

carrier, and that IXCs pass down the PICC charge, along with transaction costs, to their customers.

Moreover, even “[i]f an end-user customer does not have a presubscribed interexchange carrier,” he

may not be able to avoid the PICC because “the local exchange carrier may collect the PICC directly

from the end user.” 47 C.F.R. § 69.153 (2000). Hence, from a policy perspective, end-users will be

assessed access charges, whether directly through the SLC or indirectlythrough the PICC or through

a combination of both; thus, a more appropriate question, at least in terms of impact on consumers,

is whether the net burden on consumers will be lower or higher.

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unsupported services, § 254(k) is not implicated.” Southwestern Bell, 153 F.3d at 559. We agree

with the Eighth Circuit. Section 254(k) concerns cost allocation of joint and common costs, while

the SLC and the PICC involve the recovery of such costs. Thus, § 254(k) does not implicate the

SLC or the PICC: cost recovery involves how and from whom the funds are collected, while cost

allocation refers to how the costs are disbursed.5

C

In enacting the 1996 Act, Congress established the goal that network access charges should

eventually reflect the actual costs of providing and administering the particular network service. To

meet this objective, the FCC has primarily relied on market forces to restructure the access charges.

The Petitioners maintain that the FCC hasfailed to conduct a comprehensive, forward-looking coststudy in violation of the 1996 Act. We reject this argument.

The 1996 Act does not compel the FCC to conduct forward-looking cost-studies because the

cost-study requirements of § § 251(c)(1) and 252(d)(1) do not apply to the interstate accessservices

at issue in this petition. See Competitive Telecomm. Ass’n v. FCC, 117 F.3d 1068, 1072 (8th Cir.

1997) (“[I]t is clear from the Act that Congress did not intend all access charges to move to costbased pricing, at least not immediately. The Act plainly preserves certain rate regimes already in

place.”). Instead, § § 201(b) and 202(a)’s broader standard that interstate service rates be “just and
-15-

reasonable” without “unreasonable discrimination” applies here. See 47 U.S.C. § § 201(b), 202(a).

This “just and reasonable” standard gives the FCC discretion in structuring the access charges. The

FCC accordingly has delayed conducting a forward-looking cost-study because of time constraints

and the technical uncertainty involved in carrying out a reliable cost study. In lieu of cost-studies,

the FCC has primarily relied on competitive pressures to lower costs. 

The Eighth Circuit earlier upheld the FCC’s reliance on the market to restructure rates. See

Southwestern Bell, 153 F.2d at 547 (noting that “[d]ue to the difficulty in creating a reliable forwardlooking cost model for interstate access services, a prescriptive plan would not be feasible at the

present time”). The Petitioners remind the court that nearly three years have passed since the Eighth

Circuit’s decision. Although we recognize that the FCC has not acted as quickly as the Petitioners

would want, we cannot say that the FCC has acted arbitrarily or capriciously, given the transitional

nature of the CALLS Order. See Alenco, 201 F.3d at 616 (giving special deference to transitional

rules). We are further assured by the FCC’s promise to conduct a cost-study before the SLC cap is

set to rise over five dollars. In sum, we believe that the Eighth Circuit’s analysis in Southwestern Bell

is apropos here:

The FCC has reasonably exercised its predictive judgment in concluding that

competition in the local telephone services market will effectively drive interstate

access charges to economic costs. If, in light of the actual market developments, the

Commission determinesthat competition is not having the anticipated effect on access

charges, the agency presumably willrevisit the issue. We cannot conclude at this time

that the FCC’s decision to adopt a market-based approach was arbitrary . . . in light

of the broad discretion Congress has given the Commission in setting interstate rates.

Southwestern Bell, 153 F.3d at 547. 

III

ThePetitioners allege that the FCC’s proceduresinformulating theCALLSOrder were fatally
-16-

defective and in violation of the APA. See 5 U.S.C. § 706(2)(a). They claim that the FCC failed to

follow appro priate notice-and-comment procedures; that it acted arbitrarily and capriciously in

establishing the $650 million figure for the Universal Service Fund, and that it provided no rational

basis to support a 6.5 percent X-Factor.

In reviewing an agency’s procedures under the APA, we apply the arbitrary and capricious

standard, recognizing that particular deference is accorded to transitionalrules. See Alenco, 201 F.3d

at 616. We cannot “substitute [our] judgment for that of the agency.” State Farm at 43, 103 S.Ct.

at 2866. Our role is “to review the agency action to determine whether the decision ‘was based on

a consideration of the relevant factors and whether there was a clear error of judgment.’” State of

Louisiana v. Verity, 853 F.2d 322, 327 (5th Cir. 1988) (quoting State Farm). 

A

The Petitioners characterize the CALLS Order as a tainted political compromise between the

FCC and the CALLS Coalition. Specifically, the abbreviated second round of notice-and-comment

and the ex parte contact between the FCC and the CALLS Coalition suggest that the FCC had given

approval to the proposed order before considering public comment, according to the Petitioners. We

hold that the CALLS Order is the product of a valid, if not perfect, informal notice-and-comment

rulemaking proceeding. The APA requires federal agencies that conduct informal rulemaking to give

notice of a proposed rule and consider public comment on it. See 5 U.S.C. § 553. This process

allows “interested persons an opportunity to participate” in the rulemaking process through the

submission of written comments. See 5 U.S.C. § 553(c). An agency’s failure to comply with the

APArequirements “leadsin the direction of arbitrarydecision-making.” United States v. Nova Scotia

Food Prod. Corp., 568 F.2d 240, 250 (2d Cir. 1976). 
-17-

Before it promulgated the finalCALLS Order, the FCC held a round of notice-and-comment

proceedingsfor each of itstwo drafts of the proposed order. The FCC released the original CALLS

proposal for public comment on September 15, 1999. Over the course of the next few months, the

FCC solicited and received written submissions from dozens of interested parties. In all, the FCC

received commentsfrom36 parties, and reply commentsfrom 29 parties. The Petitioners apparently

do not dispute that this first round of notice-and-comment met the APA requirements.

After receiving and considering these comments, the FCC revised the proposed order and

released a modified CALLS proposalwhich took into account concerns about the affordability of the

increase in the SLC price cap. The FCC held an abbreviated notice-and-comment period for the

revised draft of the proposed order, and issued the finalCALLS Order about two months later. The

Petitioners complain that this shortened second round of notice-and-comment violated the APA.

Furthermore, they point to several ex parte contacts between the FCC and the CALLS Coalition.

According to the Petitioners, the abbreviated schedule for the revised draft of the proposed order,

along with the ex parte communication, suggests that the FCC gave “at least tacit approval [of the

revised proposed order] . . . lo ng before initiation of the second comment period.” In short, they

accuse the FCC of flouting the procedural safeguards that ensure meaningful participation by the

public in the rulemaking process. 

We find the Petitioners’ objections without merit. Even if we assume that the abbreviated

second round of notice-and-comment did not fully meet the APA requirements, it would not

undermine the validity of the CALLS Order because the FCC was not legally required to offer an

additional period of notice-and-comment. We have held that “[i]f, after notice and comment, the

agency alters the proposed rule, a new comment period will not be required so long as the modified
6 Similarly, the Petitioners’ complaint that theydid not have an opportunity to comment

on the late-filed Industry Analysis Division study lacks merit. They do not explain how they would

have responded to the IAD study, and how the lack of opportunity to comment prejudiced them. See

Lyng, 868 F.2d at 799. They also do not respond to the FCC’s assertion that the study relied on

publicly available data.

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rule is a ‘logicaloutgrowth ofthe published proceedings.’” United Steelworkers of Amer., AFL-CIOCLC v. Schuykill Metals Corp., 828 F.2d 314, 317-18 (5th Cir. 1987).

The revised version ofthe proposed order was a “logical outgrowth” ofthe original proposal,

which the Petitioners concede met the APA requirements. The modified proposal retained the

essential framework of the original proposal, but it added a few provisions to allay affordability

concerns (e.g., requiring a cost-study before increasing the SLC cap over five dollars). In other

words, had the FCC not even held a second notice-and-comment period, the Petitioners would have

no grounds for complaint. We believe that the FCC’s second notice-and-comment period, even if it

was abbreviated, went above and beyond what the APA legally requires.

Moreover, while interested parties should be able to participate meaningfully in the rulemaking

process, the public “need not have an opportunity to comment on every bit ofinformation influencing

an agency’s decision.” See State of Tex. v. Lyng, 868 F.2d 795, 800 (5th Cir. 1989) (allowing an

agency to withdraw regulations and announce modified ones without taking additional comments).

Accordingly, the petitioners must show how they were prejudiced by the FCC’s failure to solicit

additional comments, and how they would have responded had they been given the opportunity to

submit additional responses.6 See id. at 799. The Petitioners fail to meet this burden.

We also reject the Petitioners’ speculative and perhaps sinister scenario imputed to the ex

parte communication between the FCC and the interested parties. The APA permits ex parte contact

between an agency and private parties aslong asthe agency adequately gives notice ofsuch contact.
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See 47 C.F.R. § 1.1206(a) (stating that “ex parte presentations . . . to or from Commission decisionmaking personnel are permissible . . . provided that [they] . . . are disclosed”). The Petitioners

initiallycharged the FCC offailing to file such notices, but later retracted that accusation. The record

reflects that the FCC properly disclosed the ex parte contacts.

Generally, ex parte contact is not shunned in the administrative agency arena as it is in the

judicial context. In fact, agency action often demands it. As the D.C. Circuit explained, “Under our

system of government, the very legitimacy of general policymaking performed by unelected

administrators depends in no small part upon the openness, accessibility and amenability of these

officials to the needs and ideas of the public from whom their ultimate authority derives, and upon

whom their commands must fall.” Sierra Club v. Costle, 657 F.2d 298, 400-401 (D.C. Cir. 1981).

Finally, we do not agree with the Petitioners that the FCC’s private contact with interested

partiestriggered the procedural mandates of the Negotiated Rulemaking Act of 1990 (“NRA”). See

5 U.S.C. § 561. The plain language of the statute undermines the notion that the NRA’s procedures

are mandatory. The preface of the statute states that, “Nothing in this subchapter should be

construed as an attempt to limit innovation and experimentation with the negotiated rulemaking

process or with other innovative rulemaking procedures otherwise authorized by law.” 5 U.S.C. §

561. The substantive provisions of the statute further reinforce the permissive nature of the NRA.

See, e.g., 5 U.S.C. § 563(a) (“An agency may establish a negotiated rulemaking committee . . .”)

(emphasis added); 5 U.S.C. § 563(b) (“An agencymay use the services of a convener . . .”) (emphasis

added). The Petitioners fail to cite (and we do not find) any cases contravening the plain language

interpretation of the statute. 

B
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We hold that the FCC acted arbitrarily and capriciously in establishing the $650 million

amount for the Universal Service Fund. As a part of its goal to replace the implicit subsidy system

of rate-manipulation, the FCC promulgated the Universal Service Fund, a five-year transitional plan

designed to provide explicit subsidies to poor and rural end-users. In trying to determine the

appropriate amount for the Universal Service Fund, the FCC considered six studies, whose estimates

ranged from $250 million to $3.9 billion. The Petitioners accuse the FCC of arbitrarily averaging the

estimates of the six cost-studies without exercising any independent judgment of its own. See

Laclede Gas Co. v. FERC, 997 F.2d 936, 947 (D.C. Cir. 1993) (holding that FERC failed to exercise

independent judgment in approving a settlement amount merely because it fell within the range of

amounts in the record).

Although we do not agree with the Petitioners’ contention that the FCC merely averaged the

estimates, we find that the FCC failed to exercise sufficiently independent judgment in establishing

the $650 million amount. See id. The FCC does not explain how it actually derived that figure, and

instead seems to invoke the Goldilocks approach to rulemaking: noting that “[s]ome commentators

argue that the size of the interstate access universal service mechanism is too large [while] [o]ther

commentators argue that the size . . . is too small,” the FCC apparently believes that its approach is

just right because it falls reasonably within the range of estimates. CALLS Order, ¶ 204. The FCC

also relies heavily on the fact that both the IXCs and LECs, which traditionally have had opposing

interests, agree on the amount. See id. at ¶ 202 (“Because of the divergent interests of these parties,

we believe that the $650 million represents a sufficient amount . . .”). An agency abdicates its role

as a rational decision-maker if it does not exercise its own judgment, and instead cedes near-total

deference to private parties’ estimates—even if the parties agree unanimously as to the estimated
7 We find little merit asto the Petitioners’two other argumentsregarding the Universal

Service Fund. First, the FCC’s failure to consider the TOPUC’s cost-study is not a ground for

remand. An agency need not respond to every study, and only has to address “significant comments.”

See United States Satellite Broad. Co., Inc. v. FCC, 740 F.2d 1177, 1188 (D.C. Cir. 1984). Second,

we reject the Petitioners’ argument that the FCC improperly failed to consult with and receive

certification from the Federal-State Joint Board. The statute requires consultation with the Joint

Board for only the initial implementation of § 254’s universalservice requirement. See 47 U.S.C. §

254(a)(1). Any consultation afterwards is permissive. See 47 U.S.C. § 254(c)(2) (“The Joint Board

may, from time to time, recommend to the Commission modifications . . .”) (emphasis added).

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amount. Cf. Laclede, 997 F.2d at 946 (“Even when the customer support is unanimous, however,

FERC retains the responsibility of making an ‘independent judgment’ as to whether the settlement

amount constitutes a reasonable remedy.”).

We recognize that identifyinga specific amount is an“imprecise exercise,” and that our review

of the Universal Service Fund is especially deferential due to its transitional nature. See id. at ¶ 201.

However, the FCC must provide some explanation asto why it found one studymore persuasive than

the other, even if it does not determine a precise amount as the only “correct” figure. The CALLS

Order hints at some reasoned analysis, suggesting that the AT&T study applied the FCC’s synthesis

model, while the ALTS and TimeWarnerstudiesmade unwarranted assumptions. SeeCALLS Order

at ¶ ¶ 202, 204. But the CALLS Order fails to address other studies. See Natural Res. Def. Council

v. EPA, 859 F.2d 156, 194 (D.C. Cir. 1988) (requiring some independent analysis by the agency prior

to adoption of a rule).

We remand to the FCC for further analysis and explanation in regards to the $650 million

Universal Service Fund.7

C

We also remand the X-Factor issue, finding that the FCC lacked a rational basis in the record

to support the 6.5 percent figure. Prior to the CALLS Order, the FCC had designated the X-Factor
8 We reject the FCC’s claim that the Petitioners lack standing to raise the X-Factor

issue. An organization has standing to bring a suit if its members suffer an actual or threatened injury.

See Texans United for a Safe Econ. Educ. Fund v. Crown Cent. Petroleum Corp., 207 F.3d 789 (5th

Cir. 2000). As groups representing consumers, the Petitioners allege, among other things, that a nonproductivity-based X-Factor will harm consumers because it will no longer pass down the efficiency

savings to consumers, and indeed will eventually only offset inflation. The FCC counters that there

is no nexus between the new X-Factor and the supposed harm to consumers caused by the 6.5%

figure, because the D.C. Circuit had earlier rejected the consumer organizations’ argument that the

6.5% figure was too high. The alleged harm here is not the 6.5% figure per se, but rather the

revamped X-Factor’s failure to pass down efficiency savings to consumers.

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as a proxy for the increase in the LECs’ productivity minus the rate of inflation. The price caps for

localservices were reduced each year by the percentage represented by the X-Factor. The X-Factor

thus had the effect of passing down to consumers the savings from increased productivity. In 1997,

the FCC set the X-Factor at 6.5 percent . On a petition for review, the D.C. Circuit reversed and

remanded the X-Factor issue, holding that there was no rationalrelationship between the 6.5 percent

figure and the alleged increase in productivity. See USTA, 188 F.3d at 525. 

In its CALLS Order, the FCC reintroduced the same 6.5 percent X-Factor, but stated that the

revamped X-Factor serves a different function as a “transitional mechanism that operates to reduce

rates at a certain pace, and [is no longer] . . . linked to a specific measure of productivity.” CALLS

Order, ¶ 140. Therefore, the FCC argues that the CALLS Order does not conflict with the D.C.

Circuit’sremand order in USTA, because the court had only required further justification ofthe 6.5%

figure in light of its role as a productivity proxy. Now that the X-Factor no longer is tied to

productivity, the FCC claims that the 6.5 percent figure is acceptable. We disagree.

The new X-Factorsuffersfromthe same infirmityasthe prior one: the FCC hasfailed to show

a rational basis as to how it derived the 6.5 percent figure.8See State Farm at 56, 103 S.Ct. at 2873.

Even ifthe X-Factor is no longer tethered to any productivitymeasure, the FCC still needsto provide
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a rational explanation of how it derived the precise percentage. Otherwise, the FCC would have free

reign to set the X-Factor arbitrarily and capriciously. It must justify why a 6.5 percent X-Factor is

a more appropriate rate reduction measure, than, say, a .065 percent or 65 percent X-factor. 

IV

We uphold most parts of the CALLS Order, but remand to the FCC for further analysis and

explanation of two portions of the CALLS Order: the $650 million Universal Service Fund and the

6.5% X-Factor.

The petition for review is DENIED IN PART and GRANTED IN PART. The CALLS Order

is AFFIRMED IN PART, REVERSED IN PART, and REMANDED IN PART, in accordance with

this opinion.