United States Court of Appeals

FOR THE EIGHTH CIRCUIT

 ____________

 No. 97-2618

 ____________

Southwestern Bell Telephone Company, *

*

Petitioner, *

*

Southern New England Telephone *

Company; Texas Office of Public *

Utility Counsel; United States Telephone *

Association; Ameritech Corporation; *

U S West, Inc.; Rural Telephone *

Coalition; Cincinnati Bell Telephone *

Company; GTE Service Corporation; *

GTE Alaska, Incorporated; GTE *

Arkansas, Incorporated; GTE *

California, Incorporated; GTE Florida, * Petitions for Review of an Order of the

Incorporated; GTE Midwest, * Federal Communications Commission

Incorporated; GTE South Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Hawaiian *

Telephone Company, Incorporated; *

GTE West Coast, Incorporated; Contel *

of Minnesota, Inc.; Contel of the South, *

Inc.; Missouri Public Service *

Commission; GTE Northwest, *

Incorporated; Pacific Bell; Nevada Bell, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *
-2- *
-3-

Respondents, *

*

Association for Local Tele- *

communications Services; American *

Telephone and Telegraph Company; *

Telecommunications Resellers *

Association; The Competition Policy *

Institute; Information Technology *

Association of America; National Cable *

Television Association, Inc.; Internet *

Access Coalition; Ad Hoc Tele- *

communications Users Committee; *

WorldCom, Inc.; Sprint Corporation; *

Teleco Communications Group, Inc.; *

Excel Telecommunications, Inc.; Bell *

Atlantic Telephone Companies; Time *

Warner Communications Holdings, Inc.; *

MCI Telecommunications Corporation; *

New York Telephone; New England *

Telephone and Telegraph Company, *

*

Intervenors on Appeal, *

*

--------------------- *

*

America’s Carriers Telecommunication *

Association, *

*

Intervenors on Appeal, *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *
-4-

 ____________

 No. 97-2661

 ____________

GTE Midwest, Incorporated, *

*

Petitioner, *

*

The Southern New England Telephone *

Company; U S West, Inc.; Ameritech *

Corporation; Texas Office of Public *

Utility Counsel; United States Telephone *

Association; Southwestern Bell *

Telephone Company; Rural Telephone *

Coalition; Cincinnati Bell Telephone *

Company; Missouri Public Service *

Commission; Pacific Bell; Nevada Bell, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

American Telephone and Telegraph *

Company; Telecommunications * 

Resellers Association; The Competition *

Policy Institute; Excel Tele- *

communications, Inc.; Telco *

Communications Group, Inc.; Sprint *

Corporation; WorldCom, Inc.; Ad Hoc *

Telecommunications Users Committee; *

Internet Access Coalition; National *
-5-

Cable Television Association, Inc.; *

Information Technology Association of *

America; Association for Local Tele- *

communications Services; Bell Atlantic *

Telephone Companies; Time Warner *

Communications Holdings, Inc.; MCI *

Telecommunications Corporation; *

New York Telephone; New England *

Telephone and Telegraph Company, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

America’s Carriers Telecommunication *

Association, *

*

Intervenors on Appeal, *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-2856

 ____________

Bell Atlantic-Virginia, Incorporated, *

*

Petitioner, *

*

Southern New England Telephone *

Company; Ameritech Corporation; *

Texas Office of Public Utility Counsel; *

United States Telephone Association; *
-6-

Southwestern Bell Telephone Company; *

U S West, Inc.; Rural Telephone *

Coalition; Bell Atlantic Telephone *

Companies; Cincinnati Bell Telephone *

Company; GTE Service Corporation; *

GTE Alaska, Incorporated; GTE *

Arkansas, Incorporated; GTE California, *

Incorporated; GTE Florida, *

Incorporated; GTE Midwest, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *

Coast, Incorporated; Contel of *

Minnesota, Inc.; Contel of the South, * 

Inc.; Missouri Public Service *

Commission; Pacific Bell; Nevada Bell, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

The Competition Policy Institute; *

America’s Carriers Telecommunication *

Association; Excel Telecommunications, *

Inc.; Telco Communications Group, Inc.; *

Sprint Corporation; WorldCom, Inc.; *

Ad Hoc Telecommunications Users *

Committee; Internet Access Coalition; *

National Cable Television Association, *

Inc.; Information Technology *
-7-

Association of America; American *

Telephone and Telegraph Company; *

Association for Local Tele- *

communications Services; Tele- *

communications Resellers Association; *

Time Warner Communications Holdings,*

Inc.; MCI Telecommunications *

Corporation, *

*

Intervenors on Appeals *

*

----------------------------- *

*

Commercial Internet Exchange *

Association. *

*

Amicus Curiae.

 ____________

 No. 97-2866

 ____________

Cable & Wireless, Inc., *

*

Petitioner, *

*

Competitive Telecommunications *

Association; America’s Carriers *

Telecommunication Association; Excel *

Telecommunications, Inc.; Telco *

Communications Group, Inc.; *

WorldCom, Inc.; Texas Office of Public *

Utility Counsel; Telecommunications *

Resellers Association; Missouri Public *

Service Commission, *

*
-8-

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

The Competition Policy Institute; *

Ameritech Corporation; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

Internet Access Coalition; National *

Cable Television Association, Inc.; *

Information Technology Association of *

America; Southwestern Bell Telephone *

Company; American Telephone and *

Telegraph Company; Association for *

Local Telecommunications Services; *

U S West, Inc.; Rural Telephone *

Coalition; Southern New England *

Telephone Company; Bell Atlantic *

Telephone Companies; Cincinnati Bell *

Telephone Company; GTE Service *

Corporation; GTE Alaska, Incorporated; *

GTE Arkansas, Incorporated; GTE *

California, Incorporated; GTE Florida, *

Incorporated; GTE Midwest, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *

Coast, Incorporated; Contel of *

Minnesota, Inc.; Contel of the South, *

Inc.; Time Warner Communications * 
-9-

Holdings, Inc.; Pacific Bell; Nevada *

Bell; BellSouth Corporation; BellSouth *

Telecommunications, Inc.; New York *

Telephone Company; New England *

Telephone and Telegraph Company, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-2873

 No. 97-2875

 ____________

MCI Telecommunications Corporation; *

*

Petitioner, *

*

Telecommunications Resellers *

Association; Allied Associated Partners, *

LP; GELD Information Systems; *

Competitive Telecommunications *

Association; America’s Carriers Tele- *

communication Association; Excel Tele- *

communications, Inc.; Telco *

Communications Group, Inc.; *

WorldCom, Inc.; Texas Office of Public *

Utility Counsel; Cable & Wireless, Inc.; *

Frontier Corporation; Missouri Public *

Service Commission, *
-10-

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

Association for Local Tele- *

communications Services; American *

Telephone and Telegraph Company; *

The Competition Policy Institute; *

Ameritech Corporation; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

Internet Access Coalition; National *

Cable Television Association, Inc.; *

Information Technology Association of *

America; Southwestern Bell Telephone *

Company, U S West, Inc.; Rural *

Telephone Coalition; Southern New *

England Telephone Company; Bell *

Atlantic Telephone Companies; *

Cincinnati Bell Telephone Company; *

GTE Service Corporation; GTE Alaska, *

Incorporated; GTE Arkansas, *

Incorporated; GTE California, *

Incorporated; GTE Florida, *

Incorporated; GTE Midwest, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *

Coast, Incorporated; Contel of *
-11-

Minnesota; Contel of the South; Time *

Warner Communications Holdings, Inc.; *

Pacific Bell; Nevada Bell; BellSouth *

Corporation; BellSouth Tele- *

communications, Inc.; New York *

Telephone Company; New England *

Telephone and Telegraph Company, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-2877

 ____________

U S West, Inc., *

*

Petitioner, *

*

Southern New England Telephone *

Company; Ameritech Corporation; *

Texas Office of Public Utility Counsel; *

United States Telephone Association; *

Southwestern Bell Telephone Company; *

Rural Telephone Coalition; Bell Atlantic *

Telephone Companies; Cincinnati Bell *

Telephone Company; GTE Service *

Corporation; GTE Alaska, Incorporated; *

GTE Arkansas, Incorporated; GTE *

California, Incorporated; GTE Florida, *
-12-

Incorporated; GTE Midwest, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *

Coast, Incorporated; Contel of *

Minnesota, Inc.; Contel of the South, * 

Inc.; Missouri Public Service *

Commission; Pacific Bell; Nevada Bell, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

American Telephone and Telegraph *

Company; The Competition Policy *

Institute; Excel Telecommunications, *

Inc.; Telco Communications Group, Inc.; *

Sprint Corporation; WorldCom, Inc.; *

Ad Hoc Telecommunications Users *

Committee; Internet Access Coalition; *

National Cable Television Association, *

Inc.; Information Technology *

Association of America; Association *

for Local Telecommunications Services; *

Telecommunications Resellers *

Association; Bell Atlantic-Washington, *

D.C.; Time Warner Communications *

Holdings, Inc.; MCI Tele- *

communications Corporation; New York *

Telephone Company; New England *
-13-

Telephone and Telegraph Company, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

America’s Carriers Telecommunication *

Association, *

*

Intervenors on Appeal, *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-3012

 ____________

LCI International Telecom Corporation, *

*

Petitioner, *

*

Competitive Telecommunications *

Association; America’s Carriers Tele- *

communication Association; Excel Tele- *

communications, Inc.; Telco *

Communications Group, Inc.; *

WorldCom, Inc.; Texas Office of Public *

Utility Counsel; Telecommunications *

Resellers Association; Missouri Public *

Service Commission, *

*

Intervenors on Appeal, *

*
-14-

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

The Competition Policy Institute; *

Ameritech Corporation; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

Internet Access Coalition; National *

Cable Television Association, Inc.; *

Information Technology Association of *

America; Southwestern Bell Telephone *

Company; American Telephone and *

Telegraph Company; Association for *

Local Telecommunications Services; *

U S West, Inc.; Rural Telephone *

Coalition; Southern New England *

Telephone Company; Bell Atlantic *

Telephone Companies; Cincinnati Bell *

Telephone Company; GTE Service, *

Corporation; GTE Alaska, Incorporated; *

GTE Arkansas, Incorporated; GTE *

California, Incorporated; GTE Florida, *

Incorporated; GTE Midwest, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *

Coast, Incorporated; Contel of *

Minnesota, Inc.; Contel of the South, *

Inc.; Time Warner Communications *

Holdings, Inc.; Pacific Bell; Nevada *

Bell; BellSouth Corporation; BellSouth *
-15-

Telecommunications, Inc.; New York *

Telephone Company; New England *

Telephone and Telegraph Company, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-3271

 ____________

GTE Service Corporation; GTE Alaska, *

Incorporated; GTE Arkansas, *

Incorporated; GTE California, *

Incorporated; GTE Florida, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company; GTE West Coast, *

Incorporated; Contel of California, Inc.; *

Contel of Minnesota, Inc.; Contel of the *

South, Inc., *

*

Petitioners, *

*

Ameritech Corporation; Texas Office of *

Public Utility Counsel; Rural Telephone *

Coalition; Southern New England *

Telephone Company; U S West, Inc.; *
-16-

Southwestern Bell Telephone Company; *

United States Telephone Association; *

Missouri Public Service Commission; *

Pacific Bell; Nevada Bell, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

WorldCom, Inc.; American Telephone *

and Telegraph Company; Tele- *

communications Resellers Association; *

Association for Local Tele- *

communications Services; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

National Cable Television Association; *

Internet Access Coalition; Information *

Technology Association of America; *

The Competition Policy Institute; Excel *

Telecommunications, Inc.; Telco *

communications Group, Inc.; Bell *

Atlantic Telephone Companies; Time *

Warner Communications Holdings, Inc.; *

MCI Telecommunications Corporation; *

New York Telephone Company; New *

England Telephone and Telegraph *

Company, *

*

Intervenors on Appeal, *

*

----------------------------- *
-17-

*

America’s Carriers Telecommunication *

Association; *

*

Intervenors on Appeal, *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-3272

 ____________

Bell Atlantic Telephone Companies; *

*

Petitioner, *

*

Ameritech Corporation; Texas Office of *

Public Utility Counsel; Rural Telephone *

Coalition; Southern New England *

Telephone Company; U S West, Inc.; *

Southwestern Bell Telephone Company; *

United States Telephone Association; *

Bell Atlantic Telephone Companies; *

GTE Service, Corporation; GTE Alaska, *

Incorporated; GTE Arkansas, *

Incorporated; GTE California, *

Incorporated; GTE Florida, *

Incorporated; GTE Midwest, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated, GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *
-18-

Coast, Incorporated; Contel of *

Minnesota; Contel of the South; *

Missouri Public Service Commission; *

Pacific Bell; Nevada Bell, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

WorldCom, Inc.; American Telephone *

and Telegraph Company, Tele- *

communications Resellers Association; *

Association for Local Tele- *

communications Services; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

National Cable Television Association; *

Internet Access Coalition; Information *

Technology Association of America; *

The Competition Policy Institute; Excel *

Telecommunications, Inc.; Telco *

Communications Group, Inc.; America’s *

Carriers Telecommunication *

Association; Time Warner *

Communications Holdings, Inc.; MCI *

Telecommunications Corporation, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

Commercial Internet Exchange *
-19-

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-3274

 ____________

New York Telephone Company; New *

England Telephone and Telegraph *

Company, *

*

Petitioners, *

*

Ameritech Corporation; Texas Office of *

Public Utility Counsel; Rural Telephone *

Coalition; Southern New England *

Telephone Company; U S West, Inc.; *

Southwestern Bell Telephone Company; *

United States Telephone Association; *

Bell Atlantic Telephone Companies; *

GTE Service, Corporation; GTE Alaska, *

Incorporated; GTE Arkansas, *

Incorporated; GTE California, *

Incorporated; GTE Florida, *

Incorporated; GTE Midwest, *

Incorporated; GTE South, Incorporated; *

GTE Southwest, Incorporated; GTE *

North, Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *

Coast, Incorporated; Contel of *

Minnesota; Contel of the South; *

Missouri Public Service Commission; *

Pacific Bell; Nevada Bell, *

*
-20-

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

WorldCom, Inc.; American Telephone *

and Telegraph Company; Tele- *

communications Resellers Association; *

Association for Local Tele- *

communications Services; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

National Cable Television Association; *

Internet Access Coalition; Information *

Technology Association of America; *

The Competition Policy Institute; Excel *

Telecommunications, Inc.; Telco *

Communications Group, Inc.; America’s *

Carriers Telecommunication *

Association; Time Warner *

Communications Holdings, Inc.; MCI *

Telecommunications Corporation, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *
-21-

 ____________

 No. 97-3477

 ____________

Texas Office of Public Utility Counsel; *

*

Petitioner, *

*

Rural Telephone Coalition; Missouri *

Public Service Commission; Missouri *

Office of the Public Counsel; Florida *

Office of the Public Counsel; Indiana *

Office of Utility Consumer Counselor; *

Iowa Office of Consumer Advocate; *

District of Columbia Office of Public *

Counsel; New Jersey Division of the *

Ratepayer Advocate; The Utility Reform *

Network; Maryland Office of People’s *

Counsel; Minnesota Office of Attorney *

General; Pennsylvania Office of *

Consumer Advocate; Washington *

Office of Attorney General Public *

Counsel Section, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

American Telephone and Telegraph *

Company; WorldCom, Inc.; Ad Hoc *
-22-

Telecommunications Users Committee; *

Telecommunications Resellers *

Association; Association for Local *

Telecommunications Services; Sprint *

Corporation; National Cable Television *

Association; Internet Access Coalition; *

Information Technology Association of *

America; The Competition Policy *

Institute; Excel Telecommunications, *

Inc.; Telco Communications Group, *

Inc.; America’s Carriers Tele- *

communication Association; Time *

Warner Communications Holdings, Inc.; *

BellSouth Corporation; BellSouth Tele- *

communications, Inc.; GTE Service *

Corporation; GTE Alaska, Incorporated; *

GTE California, Incorporated; *

GTE Florida, Incorporated; GTE *

Midwest, Incorporated; GTE South, *

Incorporated; GTE Southwest, *

Incorporated; GTE Northwest, *

Incorporated; GTE Hawaiian Telephone *

Company, Incorporated; GTE West *

Coast, Incorporated; Contel of *

Minnesota, Inc.; Contel of the South, *

Inc.; Southwestern Bell Telephone *

Company; U S West, Inc.; Pacific Bell; *

Nevada Bell; MCI Telecommunications *

Corporation, *

*

Intervenors on Appeal, *

*

----------------------------- *

*

Commercial Internet Exchange *

Association, *

*
-23-

Amicus Curiae. *

 ____________

 No. 97-3557

 ____________

Cincinnati Bell Telephone Company, *

*

Petitioner, *

*

Texas Office of Public Utility Counsel; *

Rural Telephone Coalition; United *

States Telephone Association; South- *

western Bell Telephone Company; *

Missouri Public Service Commission; *

Pacific Bell; Nevada Bell, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

WorldCom, Inc.; American Telephone *

and Telegraph Company; Tele- *

communications Resellers Association; *

Association for Local Tele- *

communications Services; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

National Cable Television Association; *

Internet Access Coalition; Information *
-24-

Technology Association of America; *

The Competition Policy Institute; Excel *

Telecommunications, Inc.; Telco *

Communications Group, Inc.; Time *

Warner Communications Holdings, Inc.; *

MCI Telecommunications Corporation; *

Bell Atlantic Telephone Companies; *

New York Telephone Company; New *

England Telephone and Telegraph *

Company; Ameritech Corporation, *

*

Intervenors on Appeal, *

*

------------------------------ *

*

America’s Carriers Telecommunication *

Association, *

*

Intervenors on Appeal, *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

 ____________

 No. 97-3720

 ____________

BellSouth Corportion; BellSouth Tele- *

communications, Inc., *

*

Petitioners, *

*

Texas Office of Public Utility Counsel; *

Rural Telephone Coalition; United *
-25-

States Telephone Association; Missouri *

Public Service Commission, *

*

Intervenors on Appeal, *

*

v. *

*

Federal Communications Commission; *

United States of America, *

*

Respondents, *

*

WorldCom, Inc.; American Telephone *

and Telegraph Company; Tele- *

communications Resellers Association; *

Association for Local Tele- *

communications Services; Sprint *

Corporation; Ad Hoc Tele- *

communications Users Committee; *

National Cable Television Association; *

Internet Access Coalition; Information *

Technology Association of America; *

The Competition Policy Institute; Excel *

Telecommunications, Inc.; Telco *

Communications Group, Inc; Time *

Warner Communications Holdings, *

Inc.; MCI Telecommunications *

Corporation; Bell Atlantic Telephone *

Companies; New York Telephone *

Company; New England Telephone and *

Telegraph Company; Ameritech *

Corporation, *

*

Intervenors on Appeal, *

*

----------------------------- *

*
The Honorable Pasco M. Bowman became Chief Judge of the United States

1

Court of Appeals for the Eighth Circuit on April 18 1998.

Opening briefs have been filed by four petitioners or groups of petitioners: (1) 2

BellSouth Corp, Cincinnati Bell Telephone Co., Southwestern Bell Telephone Co., and

U S WEST, Inc. (collectively referred to as the "BellSouth petitioners"); (2) Bell

Atlantic and intervenor Ameritech Corp. (collectively referred to as the "Bell Atlantic

parties"); (3) MCI Telecommunications Corp., Cable & Wireless, Inc., and LCI

International Telecom Corp. (collectively referred to as "the IXC petitioners"); and (4)

the Texas Office of Public Utility Counsel ("Texas Counsel"). We also have received

briefs from numerous intervenors, some supporting the petitioners, some supporting the

Commission, and some of shifting allegiance depending upon the issue under

discussion. 

-26-

America’s Carriers Telecommunication *

Association, *

*

Intervenors on Appeal, *

*

Commercial Internet Exchange *

Association, *

*

Amicus Curiae. *

_____________

Submitted: January 15, 1998

Filed: August 19, 1998

_____________

Before BOWMAN , WOLLMAN, and HANSEN, Circuit Judges. 1

_____________

BOWMAN, Circuit Judge.

In these consolidated cases, referred to this Court by order of the Judicial Panel 2

on Multidistrict Litigation, numerous petitioners challenge an order of the Federal
-27-

Communications Commission ("FCC" or "Commission") issued pursuant to the

Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (to be codified

as amended in scattered sections of 47 U.S.C.) [hereinafter Act or 1996 Act], revising

the regulatory scheme under which local exchange carriers ("LECs") assess costs to

long-distance ("IXCs") and other carriers for use of the LECs' local telephone networks

to complete interstate telephone calls, see In re Access Charge Reform; Price Cap

Performance Review for Local Exchange Carriers; Transport Rate Structure and

Pricing; End User Common Line Charges, First Report and Order (CC Docket Nos.

96-262, 94-1, 91-213, 95-72), FCC 97-158, 12 FCC Rcd No. 27 15982 (released

May 16, 1997) [hereinafter Order]. Petitioners contend that various specific actions

taken by the FCC in the Order that directly affect the application and calculation of

access charges are in violation of the 1996 Act, and that other decisions made the by

FCC in the Order are arbitrary and capricious. The IXCs argue generally that the Order

does not make the transition to competitive access rates quickly enough and is too

cautious in its concern for universal service. The incumbent LECs, on the other hand,

argue that the FCC was insufficiently cautious with respect to protecting universal

service and left them exposed to inefficient competitive entry in the short term. 

The FCC counters that the challenged provisions of the Order are the result of

a reasonable exercise of its authority to regulate rates for interstate services under the

Telecommunications Act of 1996, and are not arbitrary and capricious. The FCC

contends that it charted a proper middle course, "taking account of the complementary

but sometimes diverging goals of competition and universal service support." FCC

Brief at 37. 

We review agency action under the Administrative Procedure Act to determine

whether it is "arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law," 5 U.S.C. § 706(2)(A) (1994), rejecting only such administrative

constructions of the law as are "contrary to clear congressional intent," Chevron

U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 n.9 (1984).
All references in this opinion to sections and subsections of the

3

Telecommunications Act of 1996 in West's United States Code Annotated (U.S.C.A.)

are to the 1998 supplement.

An implicit subsidy occurs when "a single company is expected to obtain

4

revenues from sources at levels above 'cost' . . . and to price other services allegedly

below cost." In re Federal-State Joint Board on Universal Service, First Report and

Order (CC Docket No. 96-45), FCC 97-157 12 FCC Rcd No. 16 8776 ¶ 10 n.15

(released May 8, 1997) [hereinafter Universal Service Order], petitions for review

pending, Texas Office of Pub. Util. Counsel v. FCC, 5th Cir. No. 97-60421. 

-28-

We are mindful "that considerable weight should be accorded to an executive

department's construction of a statutory scheme it is entrusted to administer." Id. at

844. Where, as here, Congress has specifically assigned to the administrative agency

the responsibility of interpreting and administering the statute at issue, "[t]he Supreme

Court has many times made clear that this sort of question of law is for the agency to

decide, so long as its interpretation of the statute is reasonable," City of St. Louis v.

Department of Transp., 936 F.2d 1528, 1533 (8th Cir. 1991). The question for this

Court is not whether there might have been a better way for the agency to resolve the

conflicting issues with which it was faced, but whether the agency's choice is a

reasonable one. See MCI Telecomms. Corp. v. FCC, 675 F.2d 408, 413 (D.C. Cir.

1982). Bearing in mind our considerably deferential standard of review, we address

the contentions of each petitioner or group of petitioners in order. For the sake of

simplicity, we will not attempt to identify the intervenors who have joined in the

arguments made by either the petitioners or the FCC except in the case of Bell Atlantic

and Ameritech Corporation, who filed a joint brief.

I. The BellSouth Petitioners

The BellSouth petitioners contend that the Order violates 47 U.S.C.A. § 254

(West Supp. 1998) (1) by failing immediately to remove all implicit subsidies from

3 4

interstate access charges, in contravention of the requirement that the mechanisms to

implement universal service support be "specific [and] predictable," 47 U.S.C.A.
The FCC has delayed implementation of a new, explicit regime for universal

5

service support until at least January 1, 1999 and has concluded that, until the new fund

is operational, "the existing system of largely implicit subsidies" will have to "continue

to serve its purpose." Universal Service Order ¶ 17.

-29-

§ 254(b)(5); (2) by neglecting to protect the implicit universal service support subsidies

encompassed within interstate access charges from competition until a new universal

service support regime is operational, in contravention of the requirement that the

mechanisms to implement universal service support be "sufficient," id.; and (3) by

continuing to impose on incumbent LECs, but not new entrants into the local exchange

market, the obligation to support universal service through interstate access charges,

in contravention of the requirement that contributions be "nondiscriminatory," id.

§ 254(b)(4). The FCC's actions, according to the BellSouth petitioners, will prevent

LECs from recovering the costs of universal service support traditionally included as

implicit subsidies within interstate access charges and will unfairly burden incumbent

LECs with the costs of universal service support while exempting new entrants into the

market from bearing their share of these costs.

A. Immediate Replacement of Existing System

The BellSouth petitioners first argue that the Commission's Order violates the

statutory mandate of § 254 that all "mechanisms to preserve and advance universal

service subsidies" be "specific" and "predictable." Id. § 254(b)(5). By delaying the

implementation of a new regime of explicit universal service subsidies until at least

January 1, 1999, while at the same time promoting immediate competition in the local 5

exchange market as a means of bringing access charges more closely in line with actual

costs, the BellSouth petitioners contend that the FCC has ensured that universal service

support subsidies will be detrimentally deflated to such an extent that they will cease

to serve their purpose.
-30-

The FCC replies that changes to interstate access charges made in the Order are

well within the discretionary authority granted to the Commission by Congress to

implement the policies of the 1996 Act, including the promotion of competition in the

local exchange market, the elimination of implicit universal service support subsidies,

and the preservation of universal service. The Commission argues specifically that its

decision to open local exchange markets to competition in compliance with 47

U.S.C.A. § 251(d) (requiring completion by August 1996 of regulations to implement

market opening provisions) prior to the full implementation of a new, explicit regime

of universal service support pursuant to § 254, is permissible under the 1996 Act. By

its specific language, the Act contemplates sequential implementation of, initially, the

market opening provisions of § 251, followed by the new explicit universal service

support mechanisms of § 254. The decision to promote competition in the local

exchange market prior to the enactment of a new universal support mechanism is

therefore reasonable, according to the FCC.

We agree that the FCC's decision to adjust the computation of interstate access

charges to eliminate implicit subsidies and promote competition in the local exchange

market before an explicit universal service support mechanism is fully operational is

reasonable in light of the specific language of the 1996 Act. Section 251(d)(1) required

the Commission to adopt rules implementing the market opening provisions by August

1996. Section 254(a)(2), however, did not require the FCC to adopt universal service

rules until May 1997. See id. ("The Commission shall initiate a single proceeding to

implement the recommendations from the [the Federal-State] Joint Board [on universal

service] . . . and shall complete such proceeding within 15 months after February 8,

1996."). The Act does not require that the rules promulgated under § 254 immediately

implement a new, explicit universal service support mechanism. Rather, the rules

enacted by the FCC must establish "a specific timetable for implementation." Id. By

establishing an explicit universal service support regime in the In re Federal-State Joint

Board on Universal Service, First Report and Order (CC Docket No. 96-45), FCC

97-157, 12 FCC Rcd No. 16 8776 (released May 8, 1997) [hereinafter Universal
-31-

Service Order], petitions for review pending, Texas Office of Public Utility Counsel v.

FCC, 5th Cir. No. 97-60421, that will be fully operational by January 1999, the

Commission has proceeded in a manner contemplated by the Act. The Commission has

made a predictive judgment, based on evidence in the record and adequately explained

in the Order, that competitive pressures in the local exchange market will not threaten

universal service during the interim period until the permanent, explicit universal

service support mechanism has been fully implemented. See City of St. Louis, 936

F.2d at 1534 ("Such forecasts must be accepted 'if they are rational, based on a

consideration of all the relevant factors, and adequately explained.'") (citations to

quoted cases omitted). 

The Commission's decision to promote competition in the local exchange market

and eliminate implicit subsidies embedded in interstate access charges prior to the full

implementation of a new, explicit mechanism for universal service support does not

violate the provisions of the 1996 Act, nor does it represent an unreasonable

interpretation of the Act. 

B. New Implicit Subsidies and Erosion

The BellSouth petitioners further argue that the FCC, in addition to delaying

impermissibly the implementation of an explicit universal service support mechanism,

has created new implicit subsidies in violation of the 1996 Act while, at the same time,

exposing these subsidies to competitive forces that will render them ineffective.

The BellSouth petitioners first take issue with the FCC's decision to maintain the

flat-rated (as opposed to per-minute) subscriber line charge ("SLC") ceiling of $3.50

per month on primary residential lines while increasing the SLC ceiling for both nonprimary residential lines and multi-line business lines. See Order ¶ 78 (raising the

multi-line business line SLC ceiling to $9.00 per month and allowing an increase of up

to $1.50 per month in the non-primary residential line SLC ceiling beginning January

1, 1998 with additional phased-in increases in the future). According to the BellSouth
Except for mandatory referral of proceedings regarding jurisdictional

6

separations, the FCC "may refer any matter arising in the administration of this chapter

to a joint board" comprised of agency representatives and representatives of States in

which the proposed regulation will have effect. 47 U.S.C. § 410(a) (1994).

-32-

petitioners, preserving the current SLC cap on primary residential lines prevents LECs

from recovering the costs associated with serving those lines, while increasing the SLC

cap on non-primary and multi-line business lines above actual cost forces users of these

lines to subsidize expenses associated with the under-funded primary residential lines.

The ultimate result of these changes is the creation of a new, implicit subsidy funded

by the increased rate ceilings on customers with non-primary residential or multi-line

business lines and benefiting customers with only primary residential lines. This,

according to the BellSouth petitioners, is in direct contravention of § 254's directive

that support for universal service be "explicit." 47 U.S.C.A. § 254(e). 

We cannot agree that the FCC's decisions to increase SLCs on non-primary

residential and multi-line business lines and to maintain the current ceiling on primary

residential lines are in violation of the 1996 Act. The Commission, relying on

recommendations from the Federal-State Universal Service Joint Board [hereinafter

6

Joint Board], justifiably determined that an increase in the SLC ceiling for primary

residential lines would threaten universal service in ways that an increase in the SLC

ceiling for non-primary residential and multi-line business lines simply would not. See

Order ¶ 70 (noting Joint Board's conclusion that "the SLC . . . has an impact on

universal service concerns such as affordability" and its recommendation "that the

Commission leave the current SLC ceilings in place for primary residential and singleline business lines"). The courts have recognized that universal service concerns are

valid justifications for FCC action. See, e.g., Competitive Telecomms. Ass'n v. FCC,

117 F.3d 1068, 1074 (8th Cir. 1997); Rural Tel. Coalition v. FCC, 838 F.2d 1307,

1315 (D.C. Cir. 1988); National Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d

1095, 1108 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985). While the FCC
-33-

acknowledges that its decisions regarding SLC ceilings "will require customers with

multiple telephone lines to contribute, for a limited period, to the recovery of common

line costs that incumbent LECs incur to serve single-line customers," Order ¶ 101

(emphasis added), we note that this temporary, transitional arrangement is not an

unreasonable solution to the implicit tension between the FCC's goals of moving toward

cost-based rates and protecting universal service, see Competitive Telecomms., 117

F.3d at 1073-74 ("Although temporary agency rules are subject to judicial review

notwithstanding their transitory nature, 'substantial deference by courts is accorded to

an agency when the issue concerns interim relief.'") (quoting MCI Telecomms. Corp.

v. FCC, 750 F.2d 135, 140 (D.C. Cir. 1984)); City of St. Louis, 936 F.2d at 1543

("[T]he weighing of one public-interest factor against another is preeminently a function

for an expert agency, not a court."). 

Furthermore, as the FCC points out, the decision to retain the $3.50 per month

SLC ceiling on primary residential lines was made in conjunction with the introduction

of a flat-rated presubscribed interexchange carrier charge ("PICC"), assessed directly

on IXCs rather than on users to recoup costs not covered by the SLC, that will increase

incrementally until the SLC and PICC combined recover all costs associated with

primary residential lines. See Order paras. 94, 99 (imposing PICC on primary

residential and single-line business lines at a maximum of $0.53 per month, on nonprimary residential lines at a maximum of $1.50 per month, and on multiple business

lines at a maximum of $2.75 per month). Upon completion of the Commission's

phased-in plan of PICC ceiling increases on primary residential lines (combined with

corresponding PICC cap decreases on multi-line business lines), the aggregate flatrated charges (the combination of both SLC and PICC) imposed upon primary

residential lines will be the same per line as those imposed upon multi-line business

lines. See id. ¶ 102. 

For the reasons stated, we conclude that the FCC's decision to maintain the

current SLC ceiling on primary residential lines does not amount to the creation of a
-34-

new implicit subsidy for the benefit of primary residential line customers and to the

detriment of non-primary line and multi-line business line customers, in violation of

§ 254's direction that subsidies be "explicit." 

C. Originating Minutes

Both the BellSouth petitioners and the Bell Atlantic parties challenge the FCC's

actions with respect to the imposition of per-minute charges on originating access

minutes. They contend that the requirement to recoup non-traffic-sensitive costs not

fully recovered under the flat-rated SLC and PICC price ceilings by applying a perminute access carrier common line charge ("CCLC") and a per-minute residual

transport interconnection charge ("TIC") assessed on originating access minutes

(charges imposed on carriers for outgoing calls), rather than on terminating access

minutes, is in violation of the 1996 Act. They argue that the higher degree of

competition for originating access minutes will prevent them from imposing the CCLC

or the TIC to recoup costs lest they risk losing customers to competitors who can

undercut their prices. This approach, according to the BellSouth petitioners, is

inherently discriminatory--it places a disproportionate burden of paying for universal

service support on incumbent LECs in violation of the Act. See 47 U.S.C.A.

§ 254(b)(4) ("All providers of telecommunications services should make an equitable

and nondiscriminatory contribution to . . . universal service."). Furthermore, the

BellSouth petitioners and the Bell Atlantic parties argue, the Commission's decision

to employ a per-minute charge to recover non-traffic-sensitive, or flat, costs is contrary

to the agency's stated goal of imposing access charges in a cost-causative manner--"in

a way that reflects the way the costs are incurred." Order passim. 

The Commission defends its decision to allow recovery of non-traffic-sensitive

residual costs through per-minute access charges as an interim solution that will be

phased out as flat-rated PICC caps increase to allow for such recovery. See id. ¶ 102.

Prior to the changes implemented in the Order, these residual costs were recovered

through per-minute charges assessed on both originating and terminating access
-35-

minutes. The Commission, realizing that greater competition would exist for provision

of originating rather than terminating access minutes, determined that recovery of these

residual costs on originating minutes would promote the agency's objective of allowing

the marketplace to move LECs' access rates toward competitive levels. See id. ¶ 100.

The decision to continue employing a traffic-sensitive mechanism to recover these nontraffic-sensitive costs is justified by universal service concerns. Until flat-rated PICC

ceilings rise sufficiently over time to allow recovery of these residual, non-trafficsensitive costs, the FCC has opted to maintain the non-cost-causative, per-minute

charges that, in addition to permitting recovery of otherwise lost residual costs, have

the added advantage of promoting Congress's goal of moving access rates toward

competitive levels. As the Commission points out, a phased-in transition from noncost-causative per-minute rates to cost-causative flat rates has been adopted in the

Order. 

We find that the Commission's decision to impose the residual per-minute CCLC

and TIC on originating, rather than terminating, access minutes is not in violation of the

1996 Act. This transitional solution is a reasonable exercise of the Commission's

discretionary authority to balance competing statutory goals. See National Ass'n of

Regulatory Util. Comm'rs, 737 F.2d at 1134 (noting that FCC has broad "statutory

discretion to balance the multiple goals embodied in the Communications Act"). Rather

than jeopardize universal service support by immediately eliminating any per-minute

charges currently associated with flat costs, the FCC elected to eliminate these noncost-causative charges over time, gradually increasing the flat-rated PICC to levels

necessary to recoup these residual costs. "The shift from one type of nondiscriminatory

rate structure to another may certainly be accomplished gradually to permit the affected

carriers, subscribers and state regulators to adjust to the new pricing system, thus

preserving the efficient operation of the interstate telephone network during the

interim." Id. at 1135-36. We cannot conclude that this solution is contrary to the 1996

Act.
-36-

Furthermore, we cannot second-guess the FCC's decision to impose the CCLC

and the TIC on originating access minutes. The 1996 Act was intended to encourage

competition in the telecommunications market, and the Commission's determination that

the above transitional method of accounting for residual costs would increase

competition and move costs toward competitive levels is a reasonable one. See

Competitive Telecomms., 117 F.3d at 1073-75 (according substantial deference to

transitional plan to preserve universal service). "It is not the Commission's chore to

convince us that what it has done is the best that could be done, but that what it has

done is reasonable under difficult circumstances." National Ass'n of Regulatory Util.

Comm'rs, 737 F.2d at 1141. 

D. Extension of Implicit Subsidies to Purchasers of Unbundled Networks

The BellSouth petitioners next argue that the Commission's decision to exempt

purchasers of unbundled network elements ("UNEs") from contributing to universal

service support through interstate access charges represents an arbitrary and capricious

reversal of agency policy and is contrary to § 254's requirement that contributions to

universal service support be equitable and nondiscriminatory.

After passage of the 1996 Act, the Commission initially determined that

purchasers of UNEs would be required to contribute to universal service by paying a

portion of access charges, i.e., the entire CCLC and seventy-five percent of the TIC,

until the new universal service support mechanism was fully operational. See In re

Implementation of the Local Competition Provisions in the Telecommunications Act

of 1996; Interconnection between Local Exchange Carriers and Commercial Mobile

Radio Service Providers, First Report and Order (CC Docket Nos. 96-98, 95-185),

FCC 96-325, 11 FCC Rcd No. 28 15499 ¶ 720 (released August 8, 1996) [hereinafter

Local Competition Order], petition denied in part and order vacated in part,

Competitive Telecomms. Ass'n, 117 F.3d at 1068 (addressing only CC Docket No.

96-98). The FCC reasoned that new entrants into the local service market otherwise

could avoid contributing to universal service support "by serving their local customers
-37-

solely through the use of unbundled network elements rather than through resale,"

thereby circumventing imposition of access charges. Id. ¶ 719. The Commission's

decision to permit the imposition of some interstate access charges on UNE purchasers,

however, was explicitly time-limited and expired on June 30, 1997. See Order ¶ 339.

As the BellSouth petitioners acknowledge, the FCC created a general exemption

from the assessment of access charges by LECs on purchasers of UNEs, and permitted

LECs to assess the CCLC and seventy-five percent of the TIC from such purchasers

until June 30, 1997, see 47 C.F.R. § 51.515(a)-(b) (1997). The BellSouth petitioners

cannot now complain that passage of the expiration date for this temporary exception

and the consequent termination of its application signifies an abrupt change in FCC

policy. In fact, the FCC emphasized in the Local Competition Order that it could

"conceive of no circumstances" under which the temporary assessment of access

charges on UNE purchasers would be extended beyond June 30, 1997. Local

Competition Order ¶ 725. That the FCC has now made good on its promise to exempt

purchasers of UNEs from access charges should come as no surprise to the BellSouth

petitioners. 

Nor is the Commission's decision to exempt purchasers of UNEs from access

charges that are imposed by incumbent LECs in contravention of § 254's directive to

ensure equitable and nondiscriminatory contributions to universal service support. The

BellSouth petitioners argue that allowing UNE purchasers access to their networks

without the imposition of access charges guarantees discriminatory and inequitable

contribution to universal service support by LECs who must continue to contribute,

despite their inability to collect a fair contribution from UNE purchasers. As the FCC

has explained, however, "payment of cost-based rates represents full compensation to

the incumbent LEC for use of the network elements that carriers purchase. . . .

Allowing incumbent LECs to recover access charges in addition to the reasonable cost

of such facilities would constitute double recovery because the ability to provide access
-38-

services is already included in the cost of the access facilities themselves." Order ¶

337. 

The FCC specifically addresses in the Order the BellSouth petitioners' argument

that access charges should be imposed on UNEs because charging only cost-based

rates for such elements will not allow the providers to recover universal service support

subsidies, which are implicitly built into the access charge regime. The FCC points out

that purchasers of UNEs will contribute to universal service pursuant to § 254--they

receive no exemption from universal service support obligations by purchasing UNEs.

See Order ¶ 338. Furthermore, having observed the market-opening provisions of the

1996 Act in operation for ten months, the FCC has predicted that an extension of the

temporary application of interstate access charges to purchasers of UNEs is not

necessary to protect the universal service support system from marked losses.

According to the FCC, purchasers of UNEs are "providing no more than a de minimis

share of industry-wide access service[s]." In re Access Charge Reform; Price Cap

Performance Review for Local Exchange Carriers; Transport Rate Structure and

Pricing; End User Common Line Charges, Order (CC Docket Nos. 96-262, 94-1,

91-213, 95-72), FCC 97-216, 12 FCC Rcd No. 17 10175 ¶ 15 (released June 18,

1997). It is not unreasonable for the FCC to conclude that, given the relatively

insignificant headway UNE purchasers have made in the telecommunications market,

universal service will not be threatened by the exemption of UNE purchasers from

access charges. The Commission also has explained that rate structure modifications

adopted in the Order will allow incumbent LECs to recover costs, including those

associated with universal service support obligations. See Order ¶ 338.

We conclude that the Commission's decision to exempt purchasers of UNEs

from interstate access charges is not an arbitrary and capricious departure from

statutory standards, nor has the FCC violated its statutory mandate to ensure

contributions to universal service that are equitable and nondiscriminatory. 
The BellSouth petitioners, except for GTE, which takes no position, endorse the 7

arguments made by the Bell Atlantic parties on this issue.

Information service providers previously were referred to in FCC regulations

8

and in cases as "enhanced service providers," or "ESPs." 

-39-

Consequently, we will defer to the agency's expertise and leave intact its decision

regarding the imposition of interstate access charges on purchasers of UNEs. 

E. Permanent Exemption for ISPs

Finally, the BellSouth petitioners, joined by the Bell Atlantic parties, argue that 7

the Commission's decision to grant information service providers ("ISPs") an

8

exemption from interstate access charges creates a new, implicit, and discriminatory

subsidy in violation of the 1996 Act; impermissibly forces state regulators to set rates

for the recovery of interstate costs; and converts a transitional access charge exemption

for ISPs into a permanent one. The FCC denies these assertions and contends that its

determination to prohibit the assessment of interstate access charges on ISPs is a

reasonable one under the 1996 Act. 

The BellSouth petitioners initially maintain that the FCC's refusal to extend

interstate access charges to ISPs constitutes a new, implicit, and discriminatory

subsidy in violation of § 254. They assert that the exemption excuses ISPs from paying

the access charges associated with their traffic over the LECs' local networks. Their

argument is that the FCC's explanation for this decision--avoiding the disruption of an

evolving industry--cannot justify acting in violation of the 1996 Act. The FCC, on the

other hand, argues that it did not create a new, implicit, and discriminatory subsidy by

declining to extend to ISPs (which never have paid per-minute access rates under the

old rules) a rate structure that, as a result of the transition into universal service support

funded solely through explicit subsidies, unavoidably includes residual implicit

subsidies. See Order ¶ 345. We agree that the FCC's decision to exempt ISPs from
ISPs subscribe to LEC facilities in order to receive local calls from customers 9

who want to access the ISP's data, which may or may not be stored in computers

outside the state in which the call was placed. An IXC, in contrast, uses the LEC

facilities as an element in an end-to-end long-distance call that the IXC sells as its

product to its own customers.

-40-

interstate access charges while continuing to investigate potential future changes in this

area is a reasonable exercise of the agency's discretion under the 1996 Act.

Initially we note that the FCC has maintained the same position for the past

fourteen years, refusing to permit the assessment of interstate access charges on ISPs.

See In re Amendments of Part 69 of the Commission's Rules Relating to the Creation

of Access Charge Subelements for Open Network Architecture; Policy and Rules

Concerning Rates for Dominant Carriers, Report and Order (CC Docket Nos. 89-79,

87-313), FCC 91-186, 6 FCC Rcd No. 15 4524 ¶ 60 (released July 11, 1991) (noting

that access system in which ISPs do not pay interstate per-minute charges is the "status

quo"). Furthermore, the Commission's actions do not discriminate in favor of ISPs,

which do not utilize LEC services and facilities in the same way or for the same

purposes as other customers who are assessed per-minute interstate access charges.9

As this Court noted in Competitive Telecommunications, even where two different sets

of carriers seek to use LEC network services and facilities that might be

"technologically identical," the services and facilities provided by the LEC are

"distinct" if the carriers are making different uses of them. 117 F.3d at 1073.

Consequently, different regulatory treatment of LEC services and facilities in such

circumstances does not have "a discriminatory impact." Id. Here, we agree with the

FCC that "it is not clear that ISPs use the . . . network in a manner analogous to IXCs,"

Order ¶ 345, and conclude, therefore, that the Commission's refusal to impose access

charges on ISPs does not violate § 254's requirement that contributions to universal

service be nondiscriminatory.
-41-

Neither does the Commission's decision to exempt ISPs from interstate access

charges violate § 254(e)'s requirement that "explicit" support mechanisms for universal

service be implemented. The Universal Service Order outlines the FCC's plan for

eradicating implicit subsidies. Section 254, as we previously have discussed, does not

require the immediate elimination of implicit subsidies, only the establishment of a

specific timetable to move from implicit to explicit universal service support subsidies.

We conclude that the Commission's decision to exempt ISPs from interstate access

charges does not constitute the creation of a new, implicit, and discriminatory subsidy

in contravention of the 1996 Act. 

The petitioners also argue that there are uncompensated costs associated with

the LECs' service to ISPs. The FCC, however, was not convinced of the alleged

shortfalls, and identified sources of revenue that are available to the LECs to cover the

interstate costs generated by the ISPs. See Order ¶ 346. The FCC has made a rational

choice regarding the treatment of ISPs from a number of alternatives that are each

imperfect. When an agency has gone to considerable lengths to amass information, sift

through the record for pertinent facts, and reach a temporary conclusion, it has not

acted arbitrarily or capriciously. 

The BellSouth petitioners and the Bell Atlantic parties next allege that the

interstate access charge exemption for ISPs impermissibly requires state regulatory

commissions to recover interstate costs. They argue that "[t]here is no question" that

ISPs, like IXCs, use the local network to provide interstate services. Bell Atlantic Brief

at 12. Moreover, they argue that there is no dispute that the interstate costs imposed

on LECs by these services have increased dramatically in recent years as a result of the

expansion of traffic on the Internet. The LECs contend that, as a result of this

increased traffic, they have been required to spend "billions of dollars to enhance

network capacity." Id. at 13. While the increased burdens on local networks generate,

according to the BellSouth petitioners and Bell Atlantic parties, "undeniably interstate

costs," they complain that the ISP access charge exemption precludes recovery of the
-42-

majority of those costs. Id. Instead, ISPs, which are classified as end users, "may

purchase services from incumbent LECs under the same intrastate tariffs available to

end users," without paying equitable rates to compensate LECs for the increased costs

associated with the services provided. Order ¶ 342. The petitioners contend that the

FCC's suggestion that LECs "address their concerns to state regulators," amounts to a

dereliction of the Commission's obligation to retain exclusive jurisdiction over interstate

communications and forces state regulatory commissions to overstep their authority by

recovering interstate costs. Id. ¶ 346 ("To the extent that some intrastate rate structures

fail to compensate incumbent LECs adequately for providing service to customers with

high volumes of incoming calls, incumbent LECs may address their concerns to state

regulators."). 

We disagree with the petitioners' characterization of the manner in which ISPs

utilize the local network and thereby generate interstate costs susceptible to FCC

regulation. See id. ¶ 343 (noting that FCC "tentatively concluded" in notice of

proposed rulemaking that "ISPs should not be subjected to an interstate regulatory

system designed for circuit-switched interexchange voice telephony solely because

ISPs use incumbent LEC networks to receive calls from their customers."). Contrary

to the petitioners' assertions, there is some disagreement as to the manner in which ISPs

make use of the local network. As the FCC argues, the services provided by ISPs may

involve both an intrastate and an interstate component and it may be impractical if not

impossible to separate the two elements. See California v. FCC, 905 F.2d 1217, 1244

(9th Cir. 1990). Consequently, the FCC has determined that the facilities used by ISPs

are "jurisdictionally mixed," carrying both interstate and intrastate traffic. FCC Brief

at 79. Because the FCC cannot reliably separate the two components involved in

completing a particular call, or even determine what percentage of overall ISP traffic

is interstate or intrastate, see id. (noting that at least some ISP services are purely

intrastate and not susceptible to FCC regulation), the Commission has appropriately

exercised its discretion to require an ISP to pay intrastate charges for its line and to pay

the SLC (which has been increased in the Order to cover a greater proportion of
-43-

interstate allocated loop costs), but not to pay the per-minute interstate access charge.

The states are free to assess intrastate tariffs as they see fit. In these circumstances, we

cannot say that the FCC has shirked its responsibility to regulate interstate

telecommunications, nor can we conclude that it has directed the States to inflate

intrastate tariffs to cover otherwise unrecoverable interstate costs, thereby exceeding

its statutory authority. See Iowa Utils. Bd. v. FCC, 120 F.3d 753, 796 (8th Cir. 1997)

(holding that FCC lacks authority to determine intrastate rates), cert. granted, 118 S. Ct.

879 (1998).

Moreover, the FCC has not issued its final determination with regard to the

treatment of ISPs. As noted in the Order, the Commission has initiated a Notice of

Inquiry ("NOI") to investigate further what changes, if any, should be made with regard

to the regulation of ISPs. See Access Charge Reform; Price Cap Performance Review

for Local Exchange Carriers; Transport Rate Structure and Pricing; Usage of the Public

Switched Network by Information Service and Internet Access Providers, Proposed

Rule (CC Docket Nos. 96-262, 94-1, 91-213, 96-263), FCC 96-488, 62 Fed. Reg.

4670, 4712-13 (1997) (to be codified at 47 C.F.R. pts. 61 and 69). 

In the NOI, we will address a range of fundamental issues about the

Internet and other information services, including ISP usage of the public

switched network. The NOI will give us an opportunity to consider the

implications of information services more broadly, and to craft proposals

for a subsequent NPRM [Notice of Proposed Rulemaking] that are

sensitive to the complex economic, technical, and legal questions raised

in this area.

Order ¶ 348 (footnote omitted). The FCC thus has not foreclosed the possibility that

ISPs will be subjected to additional regulation under a scheme yet to be determined.

To the extent that the BellSouth petitioners and the Bell Atlantic parties complain about

the ISPs' uncompensated burden on their local networks, they, as well as other LECs,

are welcome to address their continued concerns to the FCC through the NOI process.
Because of the transfer of the present cases to this Court, the D.C. Circuit

10

denied as moot AT&T's motion to enforce the mandate in Competitive

Telecommunications Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996). See

Competitive Telecomms. Ass'n v. FCC, Nos. 95-1168, 95-1170, 97-1678, 97-1681,

1998 WL 135461 (D.C. Cir. Feb. 20, 1998).

-44-

Finally, the BellSouth petitioners and the Bell Atlantic parties argue that the FCC

has permanently abandoned its stated policy that all those who use the local telephone

networks to provide interstate services should bear their fair share of interstate access

charges. The petitioners cite Competitive Telecommunications Association v. FCC,

87 F.3d 522 (D.C. Cir. 1996) (CompTel), as support for their position that ISPs

10

should be subject to interstate access charges. In the 1983 Access Charge Order at

issue in CompTel, the FCC had instituted transitional rules favoring smaller longdistance carriers in an effort to promote competition in the long-distance market. These

transitional rules were extended by the Commission for thirteen years under the

justification that sufficient cost information necessary to determine appropriate rates

was not yet developed. The D.C. Circuit struck down the rules acknowledging that,

while the FCC is not required to impose purely cost-based rates for all services, it must

"specially justify any rate differential that does not reflect cost." Id.

The facts in CompTel are distinguishable from the facts with which we are faced

here. In CompTel, the FCC was imposing inconsistent, allegedly transitional rates on

entities--incumbent long-distance carriers and smaller long-distance carriers--that

essentially provided identical services. Here, the FCC is exempting from interstate

access charges ISPs that, according to the FCC, utilize the local networks differently

than do IXCs. The FCC has justified its decision to exempt ISPs from access charges

paid by IXCs by noting the distinction between the manner in which these separate

entities utilize the local networks. See, e.g., Order ¶¶ 343, 345.
-45-

The FCC explained in the Order that "[m]aintaining the existing pricing structure

for [ISP] services avoids disrupting the still-evolving information services industry and

advances the goals of the 1996 Act to 'preserve the vibrant and competitive free market

that presently exists for the Internet and other interactive computer services, unfettered

by Federal or State regulation.'" Order ¶ 344 (footnote omitted) (quoting 47 U.S.C.A.

§ 230(b)(2)). The Commission reasonably has exercised its discretion in evaluating the

relevant data and in concluding that, at least for the present, ISPs should be excluded

from the imposition of interstate access charges. We will overturn an agency rule as

arbitrary and capricious only "if the agency has relied on factors which Congress has

not intended it to consider, entirely failed to consider an important aspect of the

problem, offered an explanation for its decision that runs counter to the evidence before

the agency, or is so implausible that it could not be ascribed to a difference in view or

the product of agency expertise." Motor Vehicle Mfrs. Ass'n of the United States v.

State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). We find no such fault with

the Commission's decision and we decline to interfere with the FCC's determination to

grant ISPs an exemption from interstate access charges.

II. Bell Atlantic Parties

The Bell Atlantic parties argue that the FCC acted arbitrarily, abandoning its

long-held position to the contrary, when it announced in the Order that LECs subject

to price-cap regulation must adjust their price-cap indices downward to reflect the

completed amortizations of extraordinary, one-time equal access conversion expenses.

While it is true that this decision marks a change in course by the FCC, such a change,

if satisfactorily explained, is permissible. Cf. id. at 57 (reversing agency action and

noting that agency failed to explain its decision). Because we are satisfied that the

Commission has adequately justified its changed position and its decision to require this

downward adjustment, we conclude that the FCC has not acted arbitrarily. 

In 1985, the FCC directed that certain expenses associated with equal access

conversion, ordinarily fully accounted for in the year in which the expenses were
The FCC required amortization of these expenses out of "concern[] that these 11

expenditures will cause irregular and substantial fluctuations in revenue requirements

associated with equal access." Equal Access and Network Reconfiguration Costs, FCC

85-628, 50 Fed. Reg. 50910, 50914-15 ¶ 33 (Dec. 13, 1985). 

-46-

incurred, be identified separately and amortized over a period of eight years, ending

December 31, 1993. See In re Petitions for Recovery of Equal Access and Network 11

Reconfiguration Costs, Memorandum Opinion and Order FCC No. 86-470, 1 FCC Rcd

No. 3 434, ¶ 25 (released Nov. 5, 1986) [hereinafter Petitions for Recovery of Equal

Access Costs]. On January 1, 1991, during the recovery period for these equal access

conversion expenses, the FCC converted from rate of return regulation to price-cap

regulation. In conjunction with this conversion, the FCC chose a set of "baseline" rate

levels, those in effect on July 1, 1990, to which the price-cap indices were tied as the

starting point for measuring subsequent incremental cost changes. See In re Policy and

Rules Concerning Rates for Dominant Carriers, Second Report and Order (CC Docket

No. 87-313) FCC 90-314, 5 FCC Rcd No. 23 6786, ¶ 230 (released Oct. 4, 1990)

[hereinafter LEC Price Cap Order], petitions dismissed, National Rural Telecom Ass'n

v. FCC, 988 F.2d 174 (D.C. Cir. 1993). The one-time equal access expenses that

would have been recovered in the same year in which they were incurred were reflected

in these 1990 baseline figures, resulting in an artificially high starting point from which

the FCC allowed subsequent increases. The FCC now concedes that, in prior

decisions, it has not addressed properly the question of whether equal access expenses

that were embedded within original baseline rates pursuant to the one-time

amortizations should have been removed through downward adjustments when the

amortizations expired. In the Order, however, the FCC reversed the position it had

taken on this issue and determined that price-cap LECs should be required to make

downward price-cap adjustments to reflect the expiration of their equal access expense

amortizations. See Order ¶ 309. The FCC likened the equal access amortizations to

the depreciation reserve deficiency and inside wiring cost amortizations that "were

given exogenous cost treatment when they expired because they reflected temporary,

one-time treatment of costs under ROR [rate of return] regulation that, due to the mid-
The FCC explains that these amortized costs were "extraordinary" in that "they 12

did not reflect the 'normal' operation of rate of return regulation, but rather created

aberrant spikes in rates, which would have returned to normal levels had rate of return

regulation remained in effect." FCC Brief at 68 (citing Order ¶¶ 303-05).

-47-

stream switch to price-cap regulation, would have become permanent (even though the

costs already had been recovered) absent an exogenous cost adjustment." Id. ¶ 310. 

The Bell Atlantic parties first claim that the equal access amortizations cannot be

compared to the depreciation reserve deficiency and inside wiring amortizations because

the costs associated with the latter amortizations were incurred entirely before the

switch to price-cap regulation, while LECs continued to incur equal access costs after

the price-cap regime commenced. As the FCC explained, however, the amortized costs

in all three instances were extraordinary and were reflected in the baseline rate levels 12

adopted by the FCC as the starting point from which future adjustments would be made.

As the FCC explained when it categorized these expenses as extraordinary, they are

distinguishable from "normal recurring expenses" due to the "unusually high

concentration of expenses . . . incurred over a limited time." Petitions for Recovery of

Equal Access Costs ¶ 24; see also, Equal Access and Network Reconfiguration Costs,

FCC 85-628, 50 Fed. Reg. 50910, 50914 ¶ 33 (Dec. 13, 1985); Order ¶ 300. We

cannot conclude that the FCC improperly determined that the one-time equal access

conversion amortizations should be subject to treatment similar to that accorded

depreciation reserve deficiency and inside wiring amortizations. 

The Bell Atlantic parties further criticize the FCC's decision to refuse an upward

cost adjustment for "subsequent equal access costs," while requiring a downward cost

adjustment to reflect the expiration of the original equal access conversion

amortizations. Bell Atlantic Brief at 33. This argument, however, fails to acknowledge

that the original conversion costs, unlike any subsequent costs, were extraordinary, onetime costs. Furthermore, the FCC categorizes "the ongoing costs of providing equal

access as part of the normal costs of providing telephone service. Exogenous
-48-

treatment of these costs is unnecessary." Order ¶ 312. The FCC's refusal to allow an

upward cost adjustment to account for ongoing costs associated with equal access is not

arbitrary. 

We conclude that the FCC's decision to require LECs to adjust their price-cap

indices downward to reflect the completed amortizations of extraordinary, one-time

equal access conversion expenses is neither arbitrary nor capricious. "[T]he mere

change of an administrative opinion after a lawful reconsideration can hardly be

arbitrary and capricious on its face." Southwestern Bell Tel. Co. v. FCC, 138 F.3d 746,

753 (8th Cir. 1998). Upon further reflection, the FCC determined that this downward

adjustment, although rejected in past decisions, was an equitable and necessary one.

As the Commission explained, "[R]atepayers should not be forced to pay for a cost that,

were it not for the way price-cap regulation occurred in this instance, they would no

longer be paying." Order ¶ 311. We cannot fault the Commission for reconsidering

its position and ordering the necessary adjustment.

III. IXC Petitioners

A. Access Charges 

The IXC petitioners argue that the Commission's decision not to lower interstate

access charges to equal economic cost is arbitrary, capricious, and inconsistent with the

FCC's responsibility to promulgate regulations that best serve the public interest. They

contend that the existing access charge system, rife with non-cost-based rates and

implicit subsidies, violates FCC precedent and various provisions of the 1996 Act.

Furthermore, they claim that by adopting a market-based, rather than a prescriptive,

approach to driving access rates toward economic costs, the Order fails to remedy the

defects in the current system. The FCC, on the other hand, argues that the current

system is lawful and that the market-based approach adopted in the Order represents a

reasonable attempt to "shift from one type of [lawful regulatory system] to another. . .

gradually to permit the affected carriers, subscribers and state regulators to adjust to the

new pricing system." National Ass'n of Regulatory Util. Comm'rs, 737 F.2d at
-49-

1135-36 (upholding gradual shift to flat-rate end-user access charges in order to avoid

excessively burdening carriers).

The IXC petitioners first argue that the FCC failed to provide a reasoned

explanation for its decision to adopt a market-based approach to interstate access charge

reform rather than a prescriptive approach under which the Commission sets rates at

economic cost levels. The FCC's explanation for declining to prescribe access charge

rates--the impracticability of developing a forward-looking cost model necessary to

determine the economic costs of the services--is, according to the IXC petitioners,

contrary to the Commission's position taken in an identical regulatory situation. The

IXC petitioners contend that the FCC has directed states to determine the economic

costs of certain unbundled network elements in order to develop a forward-looking cost

model for local services to be used in determining universal service support needs. But

see Iowa Utils. Bd., 120 F.3d at 793-800 (holding that FCC lacks jurisdiction to issue

pricing rules for local telecommunications traffic, and vacating the provisions of the

Implementation of the Local Competition Provisions in the Telecommunications Act of

1996, CC Docket No. 96-98 (Aug. 8, 1996), that attempted to impose pricing rules on

the states). The network elements involved in the local-services project are, according

to the IXC petitioners, identical to those necessary to develop a reliable cost model for

interstate access charges. Therefore, the IXCs contend, the FCC's assertion that it

cannot develop the cost model necessary to establish prescriptive rates for interstate

access charges is unavailing. 

The FCC argues that the two projects are distinguishable and that its position in

regard to access charges is supported by long recognized regulatory problems

associated with the allocation of common costs that are not as prevalent in a

determination of the economic costs of unbundled network elements. See, e.g., MCI

Telecomms. Corp., 675 F.2d at 410. The Commission has explained that "separate

telecommunications services are typically provided over shared network facilities, the

costs of which may be joint or common with respect to some services." Local
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Competition Order ¶ 678 (emphasis added). The FCC notes, for example, that the local

loop is used to provide virtually all telephone services, but, in setting rates for the

various services, regulations must allocate a portion of the common loop cost to each

individual service that uses the loop. By contrast, unbundled network elements are

generally treated as distinct facilities, the entire cost of which is reflected in the rate for

that particular element. Due to the difficulty in creating a reliable forward-looking cost

model for interstate access services, a prescriptive plan would not be feasible at the

present time, even if the agency believed such a plan were preferable. We find that the

FCC's explanation is an adequate, although perhaps not compelling, justification for its

refusal to set prescriptive rates for interstate access service. Given our deferential

standard of review, this is all that is required.

The IXC petitioners further argue that, even if the Commission's stated reason for

rejecting prescribed cost-based rates was satisfactory, the FCC was required to explain

why a market-based approach was likely to meet the public interest by lowering access

charges to an amount equal to economic costs. Citing an absence of evidence that local

telephone service markets have developed the level of competition necessary to drive

interstate access charges to economic costs, the IXC petitioners contend that the FCC's

decision to adopt a market-based approach is arbitrary and capricious. 

The FCC counters that its objective was to drive access charges toward

competitive levels in a way that was pragmatic, would preserve universal service, would

avoid unnecessary economic dislocation, and was consonant with Congress's directive

that the Commission replace regulation with competition to the greatest extent possible

consistent with the public interest. See, e.g., 47 U.S.C.A. § 257(b) ("[T]he Commission

shall seek to promote the policies and purposes of this chaptor favoring diversity of

media voices, vigorous economic competition, technological advancement, and

promotion of the public interest, convenience, and necessity."); see also Order ¶¶ 1, 9,

42, 44, 47, 262, 263. The IXC petitioners' claim ignores the FCC's "'broad discretion

in selecting methods . . . to make and oversee rates.'" MCI Telecomms.
-51-

Corp., 675 F.2d at 413 (quoting Aeronautical Radio, Inc. v. FCC, 642 F.2d 1221, 1228

(D.C. Cir. 1980)) (alteration by this Court), cert. denied, 451 U.S. 920, 976 (1981)).

The Commission explained that "competitive markets are far better than regulatory

agencies at allocating resources and services efficiently for the maximum benefit of

consumers." Order ¶ 42. Furthermore, this approach appears to be consistent with

Congress's preference for "a pro-competitive, deregulatory national policy framework"

for the telecommunications industry. Id., ¶ 1. We note further that § 205(a) permits the

FCC to take the extreme action of prescribing rates only when, among other things, the

rates currently charged are "or will be in violation of any of the provisions" of the Act.

47 U.S.C. § 205(a) (1994). 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. See City of St. Louis, 936 F.2d at

1534 (noting that judicial deference to agency action is "especially important" when

agency's judgments are "predictive"). If, in light of actual market developments, the

Commission determines that competition is not having the anticipated effect on access

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

that the FCC's decision to adopt a market-based approach to interstate access reform

was arbitrary, capricious, or in derogation of the public interest in light of the broad

discretion Congress has given the Commission in setting interstate rates. 

The IXC petitioners next contend that the FCC failed to explain adequately its

decision to retain "inflated" access charges to the detriment of long-distance carriers in

order to avoid the negative consequences to LECs of imposing cost-based rates

immediately. They argue that the LECs have enjoyed excessive and unlawful earnings

as a result of access charges based on historical rate-of-return costs rather than on

forward-looking economic costs. The FCC has acknowledged that non-cost-based

access charges harm both long-distance companies and their customers and impede

competition in the long-distance market. See, e.g., Order ¶ 30. Yet, according to the

IXC petitioners, the Commission has failed to explain why these concerns have not
-52-

been alleviated through an immediate move to cost-based access charges. According

to the IXC petitioners, the only effect on the long-distance market that the FCC

addressed was the effect these rates have on competition when local telephone

companies also provide long-distance services directly or through an affiliate. They

argue that, although a LEC would impose the same "inflated" access charge on its

affiliate as it would on unaffiliated long-distance companies, because of the affiliation,

the transaction has no true economic effect. The IXC petitioners contend that

perpetuating "inflated" access charges allows LECs and their affiliate long-distance

companies to take advantage of their lower real cost of access to cherry pick the IXCs'

most lucrative customers or to engage in price squeezing to undercut the IXCs' prices.

Furthermore, unaffiliated long-distance companies would be inclined to purchase

inefficient, but less expensive, access arrangements from alternative providers, while

LEC-affiliated long-distance companies would always use the most efficient access

arrangements and incur only actual, rather than "inflated," costs. The IXC petitioners

contend that the FCC's rationale and its reliance on alleged safeguards to prevent these

situations are insufficient to justify its decision.

The FCC initially notes that the access rates charged by incumbent LECs, while

based on historical costs rather than forward-looking economic costs, are permissible

under the "just and reasonable" standard prescribed by § 201(b) of the Act. Cf., e.g.,

Competitive Telecomms., 117 F.3d at 1072 (noting "just and reasonable" standard under

§ 251 of the 1996 Act). Furthermore, the Commission disputes the correlation the IXC

petitioners claim exists between the LECs 1996 earnings levels and "inflated" access

rates under the current price-cap regime. The FCC points out that higher returns for

price-cap carriers do not necessarily indicate imposition of unlawful rates under the

price-cap regime. Rather, the purpose of price-cap regulation is to promote efficient use

of the network while ensuring that rates, as opposed to earnings, are no greater than

they would have been under historical rate of return regulation. See Order ¶¶ 292-93.

Furthermore, even if LECs were earning unlawfully high returns as a result of current

historic-cost-based access charges, setting rates on the basis of forward-looking
The Commission lists, for example, GTE, Southern New England Telephone 13

Company, and Sprint as independent incumbent LECs offering in-region long-distance

service. 

-53-

economic costs is not statutorily required, and the FCC could impose an alternative

solution that effectively and permissibly reduced rates. As to the IXCs' argument that

the Commission's failure to prescribe access charges to forward-looking economic costs

creates conditions for an anticompetitive price squeeze when a LEC affiliate offers

interexchange service, the FCC responds that these concerns are unwarranted because

adequate safeguards are in place to prevent such an occurrence. See Id. ¶¶ 278-79, 281.

The Commission notes that independent (non-Bell Operating Company) incumbent

LECs have been providing long-distance service for some time "with no substantiated 13

complaints of a price squeeze." Id. ¶ 279. In addition, the FCC expects that increasing

access service competition will give unaffiliated IXCs alternative sources of access that

would lessen the risk of a price squeeze by incumbent LECs. See Id., ¶ 280. Deferring,

as we must, to the agency's expertise in this highly technical area, we conclude that the

FCC adequately explained its decision not to prescribe access charges at forwardlooking economic costs and that its decision is not arbitrary or capricious. See Downer

v. United States, 97 F.3d 999, 1002 (8th Cir. 1996) (per curiam) (noting that "reviewing

court may not substitute its judgment for that of the agency and must give substantial

deference to agency determinations").

The IXCs next contend that the FCC's failure to prescribe access charges at

forward-looking economic costs leaves implicit universal subsidies embedded in current

access charges in violation of the 1996 Act. These subsidies allegedly violate (1) §

254(d) because, being recovered primarily from IXCs, they are not "equitable and

nondiscriminatory"; (2) § 254(e) because they do not provide universal service support

that is "explicit"; and (3) § 254(k) because they constitute prohibited subsidies. These

claims, like the BellSouth claims addressed earlier in this opinion, are premised upon

the mistaken assumption that § 254 requires immediate implementation of a new
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universal support mechanism. As we noted above, § 254 requires merely that the

Commission establish a "specific timetable for implementation" of the new universal

support regime, 47 U.S.C.A. § 254(a)(2), and the FCC has complied with this mandate,

see Order ¶ 47. 

In a related argument, the IXCs contend that the FCC's regulatory choice of a

market-based approach to drive access charges to economic costs cannot be justified

on the basis of universal service support needs, because the Commission did not rely

on this rationale in the Order. "If the agency itself has not provided a reasoned basis for

its action, the court may not supply one." Downer, 97 F.3d at 1002. Moreover, the

IXCs argue that even were this Court permitted to consider this untimely justification,

universal service needs cannot supply a reasoned basis for permitting inflated access

charges after January 1999, when the new universal service mechanism will be

implemented. 

We note that the Commission explained in the Order that it would "not remove

all implicit [universal service] support from all access charges immediately" because

"eliminating [such support] all at once might have an inequitable impact on the

incumbent local exchange carriers," a statement that can be read to implicate universal

service support needs. Order ¶ 9; see also id. ¶ 46 (noting that a prescription "could

result in a substantial decrease in revenue for incumbent LECs, which could prove

highly disruptive to business operations, even when new explicit universal service

support mechanisms are taken into account"). While the FCC, in the Order, may have

made only passing, nonspecific reference to universal service support needs as grounds

for this decision, we cannot say that the Commission is precluded from advancing the

universal service rationale for its decision not to prescribe forward-looking economic

costs. Moreover, the IXCs' argument ignores the fact that the Commission believed that

prescribing rates was, in any circumstances, an inferior solution to the problem. The

FCC was informed by Congress's directive to "promote competition and reduce

regulation," Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (to
-55-

be codified as amended in scattered sections of 47 U.S.C.), and elected the marketbased approach based on this mandate, in addition to any universal service support

considerations. 

We have reviewed carefully the FCC's justifications for retaining the current

interstate access charge regime and find its decision based on these factors to be neither

arbitrary nor capricious. We find that the Commission's discretionary authority to

exercise its expertise necessarily includes the discretion to adopt a market-based

approach rather than a prescriptive approach to driving interstate access rates toward

economic costs. As this Court has noted, "it is clear from the [1996] Act that Congress

did not intend all access charges to move to [forward-looking] cost-based pricing, at

least not immediately." Competitive Telecomms., 117 F.3d at 1072. 

B. TIC Charges

The IXC petitioners next argue that the FCC's refusal to abolish the non-costbased transport interconnection charge (a per-minute charge assessed on all switched

access minutes) despite its adverse effect on the long-distance market is arbitrary,

capricious, inconsistent with the Commission's own policy, and a violation of the

District of Columbia Circuit's order in CompTel. They argue that, although the FCC has

acknowledged that the TIC is not cost-based, and "adversely affects the development

of competition in the interstate access market," Order ¶ 212, it has refused to move

immediately to eliminate these non-cost-based transport charges and has failed to

explain its reasons for not doing so. In CompTel, the District of Columbia Circuit

directed the FCC "to move expeditiously upon remand to a cost-based alternative to the

[TIC], or to provide a reasoned explanation of why a departure from cost-based

ratemaking is necessary and desirable in this context." 87 F.3d at 532. 

Contrary to the IXCs' contention that the FCC has not made a concerted effort

to determine and allocate the costs improperly included in the TIC, the Commission has

found a series of service-specific costs that had been incorporated in the TIC, but that
In this context, the jurisdictional separations process refers to the determination 14

of "whether certain costs currently allocated to the interstate jurisdiction and recovered

through the TIC more properly should be allocated to the intrastate jurisdiction." Order

¶ 213. 

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could be separated out and charged to long-distance carriers on a cost-causative basis.

See Order ¶¶ 167, 170-73, 217, 219-21 (including SS7 signalling costs, ¶ 217,

"multiplexing costs," ¶ 173, and "[h]ost/remote trunking costs," ¶ 220). As to the

remaining costs that could not be assigned to a particular facility--the "residual TIC"--

the FCC implemented a plan designed to eliminate those costs "as quickly as possible

consistent with avoiding short-term market distortions." Id. ¶ 234. LECs were

instructed to "migrate" their remaining per-minute TIC charges to flat-rated presubscribed interexchange carrier charges, id., and to target their annual price-cap

productivity adjustments to the TIC, see id. ¶¶ 234-38. The result of these regulatory

changes, according to the FCC, is "that the per-minute TIC charge will be eliminated

in two to three years." Id. ¶ 64. In addition, to the extent that the residual TIC raises

issues concerning the jurisdictional separations process, the Commission stated that 14

it will refer such issues to a Federal-State Joint Board, as required by the 1996 Act. See

id. ¶ 213. In our opinion, the FCC has made reasonable progress toward establishing

a cost-based alternative to the TIC, and, in cases where this objective has proved

elusive, the FCC has explained adequately its reasons for not acting immediately. 

The Commission explained in the Order that its goal was "to establish a

mechanism to reduce and eliminate the TIC in a manner that fosters competition and

responds to the D.C. Circuit's remand." Id. Consistent with this objective, the agency

properly adopted a number of short-term, transitional solutions to protect against

needless disruption and unfairness, while pursuing its goal of moving toward cost-based

rates. See, e.g., Rural Tel. Coalition v. FCC, 838 F.2d 1307, 1314-15 (D.C. Cir. 1988).

We conclude that the FCC's decisions temporarily to retain the TIC after reallocating

identifiable costs to their particular elements, to eliminate gradually the
These rules allocate interstate direct investment to certain categories. See 47 15

C.F.R. §§ 69.301-69.307 (1997). Other investment and expenses, including overhead

in both cases, are allocated among these categories in proportion to the dollar amounts

of net direct investment allocated to the categories, see id. §§ 69.309, 69.411 (1997),

and direct expenses are allocated to the category to which the expenses are related, see

id. § 69.401-69.409 (1997) (We refer to §§ 69.305, 69.306, 69.309, and 69.411, as

they were amended effective January 1, 1998. They are published in the 1997 C.F.R.).

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residual TIC through, among other methods, price-cap targeting and the PICC, and to

refer jurisdictional separations concerns to the Joint Board are not arbitrary, capricious,

inconsistent with the agency's policies, or in violation of the District of Columbia

Circuit's CompTel order.

C. Tandem Switch Charges

The IXC petitioners next argue that the FCC's decision to retain non-cost-based

tandem switching charges is arbitrary, capricious, inconsistent with the Commission's

policy, and a violation of the D.C. Circuit's order in CompTel. They contend that the

FCC failed to explain its decision to allocate overhead expenses--those not directly

attributed to a particular service--to the tandem-switched transport relied upon by

smaller long-distance carriers in a manner different from the way in which overhead

costs are allocated to the direct-trunked transport relied upon by AT&T, and failed to

remedy the discriminatory results of this decision. The FCC's Part 69 allocation rules,15

according to the IXC petitioners, do not distribute the LECs' overhead proportionately

among interstate service categories. These rules allocate a predominant share of

overhead to switched access (including switched transport), while special access

(including direct-trunked transport) is assigned comparatively little overhead. The IXC

petitioners claim that the FCC failed to consider new cost data, failed to gather

additional information in light of the CompTel remand, and failed to undertake any type

of empirical review of tandem switching costs and overhead before reaching its

conclusion in the Order. The FCC's explanation that "it is reasonable to have set
-58-

overhead loadings for tandem switching consistently with the overhead loadings for

local switching" misses the point, according to the IXC petitioners. Order ¶ 203.

Finally, they object to the Commission's decision to reassign some TIC costs to the

tandem switching charge as exacerbating the problem, and to the FCC's reliance on

market forces to reduce the tandem switch charges to cost as unreasonable and without

supporting evidence.

After reviewing the FCC's revisions to the transport rate structure, including those

associated with tandem-switched transport, we conclude that they lie well within the

agency's authority and discretion, are consistent with Congress's cost-causation goal,

and reflect a reasonable outcome in light of that goal. In CompTel, the D.C. Circuit

ordered the FCC to "substantiate that its current method of allocating overhead is costbased, or choose a method that is." 87 F.3d at 536. The Commission reviewed its Part

69 cost allocation rules, made some changes that it determined would produce a

reasonable allocation of interstate costs, and concluded that no alternative that had been

suggested by the responding parties during the rulemaking proceeding would ensure a

more accurate cost allocation. See Order ¶¶ 202-205. The IXC petitioners do not

criticize any particular rule of Part 69, but rather assert that the effect of these allocation

rules as a whole is a discriminatory underallocation of overhead to special access and

an overallocation of overhead to other access elements including tandem switching. The

IXC petitioners, however, do not present any direct evidence of this alleged disparity

in allocation. As the FCC explained in the Order, these rules "established category

revenue requirements that included overheads allocated generally based on relative

costs." Id. ¶ 203. It further stated:

We find that it is reasonable to have set overhead loadings for tandem

switching consistently with the overhead loadings for local switching, and

disagree with those parties that argue that there is no cost justification for

the current allocation of overheads to the tandem switch. The direct costs

of both kinds of switching are fundamentally the same in that both types

of switches are comprised of ports and a switching matrix. By contrast,
-59-

the direct costs of transmission consist of outside plant and circuit

equipment and certain central office equipment. So long as consistent

overhead loading methodologies were used across switching functions,

and across transmission functions, we find that a reasonable cross-over is

established for access customers between direct-trunked transport and

tandem-switched transport. As competition develops, we can also rely on

market forces to pressure incumbent LECs to allocate overheads among

rate elements in economically efficient ways.

Id. In other words, the Commission concluded that similar access functions should

receive similar overhead loadings. The Commission reasonably determined that there

was no need to change the overhead loading attributed to tandem-switching because the

"current methods allocate overhead in a reasonable, cost-based manner." Id. ¶ 202.

The Commission's conclusion that each of the Part 69 cost allocation rules refined or

adopted in the Order is reasonable and based on cost-causative principles, and its

explanation for this belief, lead us to conclude that the agency's new rules for the

computation of tandem switching charges are not arbitrary and capricious and are not

in violation of the D.C. Circuit's order in CompTel. 

D. Unitary Rate Structure

The IXC petitioners next challenge the FCC's decision to eliminate the unitary

rate option for tandem-switched transport as arbitrary and capricious in that it imposes

inconsistent distance measurements for similar transmission services. According to the

IXC petitioners, both tandem-switched transport and direct-trunked transport services

generally follow the same transmission paths and therefore should be subjected to the

same rates. In the Order, the FCC left the distance-sensitive rate structure for directtrunked transport unaltered, but eliminated the likewise distance-sensitive unitary rate

option for tandem-switched transport. Under the unitary rate option, long-distance

carriers paid for tandem-switched transport in the same manner they paid for directtrunked transport: through an end-to-end charge, with mileage measured as airline

mileage from the LEC's wire center to the end office. See Order ¶¶ 158, 159. With the
-60-

imposition of the new three-part rate structure, tandem-switched service is broken down

into its component parts and rates are applied as follows: (1) a per-minute charge for

transmission from the end office to the tandem; (2) a per-minute charge for the tandem

switching function itself; and (3) a flat-rated charge for transport over "dedicated

transport facilities" from the tandem to the serving wire center. Id. ¶ 175. The charges

for transmission from the end office to the tandem and from the tandem to the serving

wire center remain distance-sensitive, although they are not computed on an end-to-end

basis. The IXC petitioners contend that by allowing the LECs to charge separately for

each of the three legs of the transmission, the LECs will route this traffic inefficiently

in order to increase artificially the distance involved in completing the transmission,

thereby inflating the costs to tandem-switched transport customers. 

The FCC justified its elimination of the unitary rate option because it "does not

accurately reflect the manner in which LECs incur costs in providing tandem-switched

transport and, therefore, does not provide maximum incentive for IXCs to use transport

facilities efficiently." Id. ¶ 178. Furthermore, the unitary rate option "inhibits the

development of competitive alternatives to incumbent LEC tandem-switched transport."

Id. ¶ 179. The Commission concluded that the three-part rate structure "most closely

reflects the manner in which LECs incur the costs of each component of the overall

tandem-switched transport service." Id. ¶ 181. As the IXC petitioners recognize,

purchasers of direct-trunked transport purchase transport capacity between two end

points from the LEC. Tandem-switched transport customers, on the other hand,

purchase use of the tandem switch to route traffic to their point of presence and

specifically obligate the LEC to transport their traffic between the serving wire center

and the tandem serving a particular end office. "Because they cause the incumbent LEC

to incur the costs of transmitting their traffic between the serving wire center and the

tandem, tandem-switched transport customers should, as a matter of cost-causation, pay

the costs of reaching the tandem." Order ¶ 182. "While the incumbent LEC may

choose to route direct-trunked traffic through the tandem office based on its own

assessment of whether it is economically efficient to do so," tandem-switched traffic
Under the interim rate structure, LEC per-minute tandem-switched transport

16

rates are presumed reasonable if they are set based on "a weighted average of DS1 and

DS3 rates reflecting the relative numbers of circuits of each type in use in the tandemto-end office link, and assuming circuit loading of 9000 minutes of use per month per

voice-grade circuit." Order ¶ 206. 

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must be routed to the tandem office, and so should bear the costs reaching the tandem.

Id. ¶ 186. The IXCs' contention that LECs would circuitously route tandem-switched

traffic in order to increase distances and artificially inflate rates was addressed by the

Commission in the Order and dismissed as unlikely since such behavior would place

greater costs on the LEC in an environment that is designed to encourage competition.

See id. ¶¶ 183-84. 

We conclude that the FCC's decision to eliminate the unitary rate option for

tandem-switched transport was neither arbitrary nor capricious. The Commission

reasonably concluded that the three-part rate structure would "encourage efficient use

of transport facilities by allowing pricing that reflects the way costs are incurred," id.,

¶ 177, and "permit the fullest development of competitive alternatives" for each distinct

element of tandem-switched transport, id. ¶ 179. 

E. 9000 Minutes Per Circuit

The IXC petitioners next argue that the Commission's decision to abandon the

admittedly imperfect interim rate structure for tandem-switched local transport that was

based on an estimated 9000 minutes of use for each circuit is arbitrary and capricious. 16

According to the IXC petitioners, the method adopted by the FCC in the Order--

compiling actual minutes of use per circuit in a "year prior to implementation" of the

Order and using this figure as an estimate for future years--is incompatible with the

agency's prior determination that the benefits to be obtained from a more individualized

calculation were outweighed by the administrative convenience of a uniform figure. IXC

Petitioners' Joint Brief at 68. The FCC justifies its position on the belief that its
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9000 minute usage estimate is too high; but the IXC petitioners contend that, because

competition presumably will increase usage of these circuits, the new method of

calculating rates "based on the prior year's annual use" virtually guarantees that these

usage estimates will be low by a substantial amount for every LEC. Order ¶ 206.

Moreover, the IXC petitioners argue that the Commission has not explained its rationale

for selecting this option over other, more suitable alternatives. According to the

petitioners, because the Commission failed to state any purpose for its decision to

change methods, other than the inaccuracies of the old method, its choice of an even

more inaccurate method is arbitrary and capricious. 

The IXC petitioners' central argument fundamentally misapprehends the FCC's

Order. Contrary to their assertion that the FCC's new method contemplates calculating

a fixed usage estimate based on circuit usage for the year prior to implementation of the

Order, and in turn applying that figure to all future years, the FCC's new rules require

an annual recalculation of usage estimates based on the actual minutes of use during

"the prior year[]." Id. (emphasis added). The FCC explained that its shift from an

arbitrary usage estimate number that consistently overstates minutes of use to a more

precise measure of actual usage is consistent with the Commission's goals of moving

toward cost-causational rates. The agency's choice of a reasonable solution from a

number of acceptable alternatives is within the agency's discretion and is not arbitrary

or capricious. 

F. Recovery of Universal Service Subsidies from IXCs

The IXC petitioners and Texas Counsel object to the Commission's decision to

allow price-cap LECs to recover their contributions to the new universal service fund

from the LECs' interstate customers--both end users and long-distance carriers--by

increasing interstate access charge price caps imposed on interstate customers by the

amount LECs contribute to the fund. The new universal service regime requires that all

telecommunications carriers providing interstate telecommunications services contribute

to the new universal service fund a proportion of their revenues derived from
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end users. See Universal Service Order ¶ 39-40. Since both LECs and IXCs receive

revenue from end users, both types of carriers must contribute to the fund. The IXC

petitioners contend that, as a result of the agency's decision, "long distance companies

are required to pay their share of universal service support directly, and to also pay the

LECs' share of universal service support through access charges." IXC Petitioners' Joint

Brief at 70. This, according to the IXC petitioners, amounts to an implicit subsidy that

discriminates against IXCs in violation of § 254(e), and is not competitively neutral as

required by § 254(d). 

We cannot agree that allowing LECs to recoup from their interstate customers the

normal costs of providing telecommunications services to those customers amounts to

creating a discriminatory implicit subsidy. As the FCC points out, mandatory

contributions to the new universal service fund are real costs of doing business that will

be incurred by both LECs and IXCs. The agency determined that "[u]nder our recovery

mechanism, carriers will be permitted, but not required, to pass through their

contributions to their interstate access and interexchange customers." Universal Service

Order ¶ 829. Under this scheme, IXCs have the option of recovering their universal

service contributions through rates to their long-distance customers. LECs have the

same option of passing on the costs of contributions to their interstate customers--both

end users and IXCs. See Order ¶ 379. Access charges imposed on IXCs that include

the LECs' universal service cost are not "above cost" since universal service

contributions are a real cost of doing business. The flow-through of LEC universal

service costs to its IXC customers is akin to the flow-through of IXC universal service

costs to its long-distance customers--neither can be categorized as an implicit subsidy

in violation of § 254(e). The IXC petitioners' argument that long-distance carriers

affiliated with a LEC will have a competitive advantage over unaffiliated long-distance

carriers because the flow-through of LEC universal service contributions to a subsidiary

is not a "real" cost fails to persuade us that the FCC's decision is in contravention of §

254(d)'s requirement that rates be competitively neutral. As noted above, contributions

to the new universal service fund are real costs
"End user" is defined for our purposes as "any customer of an interstate . . .

17

telecommunications service that is not a carrier." 47 C.F.R. § 69.2(m) (1997). 

-64-

of doing business; if a LEC decides not to pass through such costs to its long-distance

affiliate, it must absorb the cost itself--which it is free to do under the Commission's

rules. Moreover, a LEC may not discriminate against similarly situated carriers by

passing through its contribution costs to non-affiliates while absorbing the costs for its

affiliates. See Universal Service Order ¶ 851 (noting that LECs are "permitted to pass

through their contribution requirements to all of their customers of interstate services in

an equitable and nondiscriminatory fashion"). 

Texas Counsel, on the other hand, apparently interprets the Order to mean that

end users alone will be subject to the pass-through of LECs' universal service

17

contributions through increases in SLCs paid by end users. As the FCC notes, however,

the pass-through of universal service costs generally will not result in any immediate

increases in SLCs paid by end users because the calculation of the SLC is not currently

affected by changes in the price-cap index. Furthermore, contrary to Texas Counsel's

arguments, the FCC properly allowed price-cap increases only on interstate end-user

revenues since the universal service contribution cost being passed through is assessed

on the basis of end-user revenues. See Order ¶ 379 ("[P]rice cap LECs recovering their

universal service obligation through interstate access charges must recover those

contributions in the baskets for services that generate end-user interstate revenues. . . .

The baskets containing end-user interstate services are the common line, interexchange,

and trunking baskets."). Under the Commission's plan, the LECs have flexibility to

determine how to recover their universal service contributions and to decide how much,

if any, of those contributions to pass through to their customers. Id. 

We conclude that the FCC's decision to allow LECs to recover their contributions

to the new universal service fund from their interstate customers through
DEM, or dial equipment minutes of use, "is defined as the minutes of holding 18

time of the originating and terminating local switching equipment." 47 C.F.R.

§ 36.125(a)(3) (1997). 

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an increase in the price-cap indices for baskets that generate end-user interstate

revenues is not arbitrary or capricious or in violation of the 1996 Act. We note that this

determination, based on extremely technical factors, has been made by the expert

agency in charge of monitoring the telecommunications market and is entitled to

deference--particularly because it involves an area requiring expertise. We further note

that "[t]his court . . . patrols the perimeters of an agency's discretion. If an agency . . .

does not attempt either to close itself off from informed opinion or to extend its reach

beyond the scope of permissible authority, then it is our duty to accept that judgment if

it is rational and not unreasonable." National Ass'n of Regulatory Util. Comm'rs., 737

F.2d at 1140. We find that the FCC's decision is a rational and reasonable one under

the 1996 Act. 

IV. Texas Counsel

A. Intrastate Revenue Shortfall

Petitioner Texas Counsel first objects to the FCC's requirement that carriers

receiving funds from the new federal universal service mechanism apply those funds "to

reduce or satisfy the interstate revenue requirement otherwise collected through

interstate access charges." Order ¶ 381. They argue that universal service will be

threatened by the Commission's decision, that the elimination of high-cost and DEM18

weighting mechanisms will bring about an intrastate revenue shortfall, and that the

existing federal-state jurisdictional cost-shifting mechanisms should be retained. The

FCC contends that this requirement is reasonably necessary to ensure that universal

service subsidies are made explicit as required by § 254(e) and to prevent double

recovery by carriers receiving funds from the new federal universal service mechanism.
The FCC recently referred to a Federal-State Joint Board a number of issues 19

originally addressed in the Universal Service Order: (1) the propriety of the twenty-five

percent division for the federal share of universal service support; (2) the extent to

which federal universal service support should be applied to the intrastate jurisdiction;

and (3) the method, if any, by which providers may recover universal service

contributions through rates, surcharges, or other means. See In re Federal-State Joint

Board on Universal Service, Order and Order on Reconsideration (CC Docket No.

96-45), FCC 98-160, 13 FCC Rcd No. 19 13749 (released July 17, 1998). In addition,

the Commission extended "the implementation date for the revised high cost support

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In the Universal Service Order, the Commission moved toward achieving its goal

of eliminating implicit subsidies and replacing them with subsidies that are "explicit"

and "sufficient," 47 U.S.C.A. § 254, by requiring all interstate telecommunications

carriers to contribute to the federal share (twenty-five percent) of universal service

support. See Universal Service Order ¶ 269. After a transition period, the new system

adopted in the Universal Service Order will replace current funding mechanisms,

including high-cost and DEM weighting mechanisms, by which small and high-cost

LECs have been allowed to shift a greater proportion of certain intrastate costs to the

interstate jurisdiction and then recover those costs, directly or indirectly, through abovecost interstate access charges imposed on IXCs. See id. ¶¶ 209-212. The FCC

maintains that the gradual elimination of high-cost and DEM weighting mechanisms

necessitates corresponding reductions in the access charges of carriers receiving the

new universal funds. If no such adjustments were made, according to the FCC, carriers

receiving the new funds could obtain a double recovery--once through the new federal

universal service fund, and again through above-cost access charges imposed on IXCs.

Consequently, the Commission directed "incumbent LECs to use any [federal] universal

service support received from the new universal service mechanisms to reduce or satisfy

the interstate revenue requirement otherwise collected through interstate access

charges." Order ¶ 381. This language advises LECs that once carriers begin receiving

funds from the new federal universal service mechanism, they must lower their interstate

access charges to the extent that those access charges reflect implicit subsidies of

universal service.19
mechanism for non-rural carriers . . . by six months from January 1, 1999, to July 1,

1999." Id. These actions do not change our resolution of the issues presented here. 

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Texas Counsel's concern that the elimination of high-cost and DEM weighting

mechanisms will bring about an intrastate revenue shortfall are premature. Whether or

not intrastate revenue shortfalls actually will occur depends upon a number of factors

not yet decided by the FCC. The Commission noted in the Order:

In the Universal Service Order, we conclude that, until universal service

support is based on forward-looking economic cost, carriers should

continue to receive amounts from the new universal service mechanisms

comparable to existing high cost and DEM weighting support. In that

order, we do not alter the existing revenue-shifting mechanisms in place

for the current high cost support and DEM weighting at this time. Thus,

no intrastate revenue shortfall will occur, because no revenue requirement

is being shifted back to the intrastate jurisdiction.

Id. ¶ 387 (footnote omitted). Because the level of universal service funding and the

jurisdictional allocation will remain roughly constant, Texas Counsel's fear of an

intrastate revenue shortfall is speculative, at best. The requirement that a certain level

of intrastate universal service be maintained and whether that requirement will be

satisfied, depend on a number of factors that have yet to be decided. See, e.g.,

Universal Service Order ¶¶ 248-249. Texas Counsel offers no reason to find at the

present time that the combined state and federal funding mechanisms--once their details

have been determined--will not provide sufficient levels of universal service support

after the transition period has passed. This Court recently reaffirmed that 

[t]he basic rationale of the ripeness doctrine is to prevent the courts,

through the avoidance of premature adjudication, from entangling

themselves in abstract disagreements over administrative policies, and also

to protect the agencies from judicial interference until an
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administrative decision has been formalized and its effects felt in a

concrete way by the challenging parties.

California v. FCC, 124 F.3d at 943 (citations to all quoted cases omitted). 

Assuming for the sake of argument that Texas Counsel's complaint is ripe for

review, we nonetheless would conclude that the Commission acted within its authority

to require LECs to adjust their interstate access charges to reflect changes in the

universal service support mechanisms. Texas Counsel makes a number of arguments

advancing its position that the current jurisdictional arrangement is required by the Act.

Under that arrangement, some portion of the loop and switching costs above the level

that would be justified by relative use is shifted to the interstate jurisdiction through the

high-cost and DEM weighting programs. These arguments are not persuasive. The

Commission is authorized to determine and alter allocations between interstate and

intrastate jurisdictions after consulting with the Federal-State Joint Board, and courts

consistently have upheld the FCC's determinations as to what proportion of shared costs

will be recovered in the interstate jurisdiction. See, e.g., Rural Tel. Coalition, 838 F.2d

at 1313-15 (upholding FCC decision to allocate twenty-five percent of non-trafficsensitive costs to interstate jurisdiction); Hawaiian Tel. Co. v. Public Utils. Comm'n,

827 F.2d 1264, 1274-76 (9th Cir. 1987) (holding FCC separations decision preempted

independent proceedings by Hawaiian Public Utilities Commission), cert. denied, 487

U.S. 1218 (1988). 

Likewise, we reject Texas Counsel's argument that the FCC was compelled to

refer to a joint board its proposal to require LECs to use funds from the new federal

universal service mechanism to reduce the interstate revenue requirement. Joint board

consultation is required only in proceedings "regarding the jurisdictional separation of

common carrier property and expenses between interstate and intrastate operations."

47 U.S.C.A. § 410(c). "'Jurisdictional separation' is a procedure that determines what

proportion of jointly used plant should be allocated to the interstate and intrastate
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jurisdictions for ratemaking purposes." MCI Telecomms. Corp., 750 F.2d at 137. In

its Order, the FCC was not allocating jointly used plant, nor was it changing the

proportions for allocating jointly used plant to interstate and intrastate jurisdictions. The

Commission decided only that federal support for universal service should be applied

to satisfy the interstate revenue requirement, with the details remaining to be

determined. See Order ¶¶ 381, 387. 

Texas Counsel's argument that § 254(e) prevents the Commission from requiring

the application of federal universal service funds to the interstate jurisdiction is also

without merit. Section 254(e) provides that "[a] carrier that receives [federal universal

service] support shall use that support only for the provision, maintenance, and

upgrading of facilities and services for which the support is intended." 47 U.S.C.A.

§ 254(e). In the Universal Service Order, the Commission determined that the "core"

services intended to be supported by universal service mechanisms included "singleparty service; voice grade access to the public switched network; . . . access to

emergency services; access to operator services; access to interexchange service; access

to directory assistance; and toll limitation services for qualifying low-income

consumers." Universal Service Order ¶ 61. Contrary to Texas Counsel's argument,

funds from the new federal universal service mechanism will be applied toward the

portion of costs allocated to the interstate jurisdiction that is associated with providing

the above services. Section 254(e) is not violated by the Commission's decision to

require amounts received under the new federal universal service mechanism be applied

"to reduce or satisfy the interstate revenue requirement" for the above "core" services.

Order ¶ 381. 

The language to which Texas Counsel objects is a general statement of a

fundamental premise underlying the reform of implicit subsidies: that carriers receiving

new federal universal service support will be required correspondingly to reduce their

interstate access charges to the extent those charges include implicit universal service
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subsidies. We conclude that the FCC has not acted arbitrarily or capriciously in making

this determination.

B. Increase in SLC for Secondary Residential and Multi-Line Business Lines

Texas Counsel advances a number of arguments intended to demonstrate that the

FCC's decision to increase to nine dollars the SLC cap for multi-line business and

secondary residential lines is arbitrary and capricious. The FCC responds that changes

made in access charge rate structure rules, including those associated with the SLC,

were intended to promote economic efficiency and competition by making the structure

more cost-causative while maintaining affordable rates for basic telephone services in

high-cost areas. See id. ¶ 82. To advance these goals, and keeping in mind the

obligation to preserve universal service, the Commission reduced the per-minute CCL

charge paid by IXCs (and passed on to long-distance customers) in favor of higher

SLCs for end users. See id. ¶¶ 69-71. The FCC contends that it charted a reasonable

middle course in the face of calls both to increase the SLC ceilings and to decrease the

SLC ceilings. The Joint Board determined that while "primary residential and singleline business lines are essential to the provision of universal service," id. ¶ 70, universal

service concerns for non-primary residential and multi-line business users are not as

pressing. See id. ¶ 75. The Commission decided, therefore, to increase the SLC cap

only for the latter groups. See id. Based on data in the record, the FCC determined that

common line costs were generally below the nine dollar SLC ceiling and that this rate

would ensure that incumbent LECs were not prevented from recouping their common

line revenues and, at the same time, would prevent "widespread discontinuance of lines

by multi-line customers." Id., ¶ 80. The Commission contends that its decision is

rational given the statutory imperatives, and that Texas Counsel's criticisms fall short

of establishing otherwise. 

First, Texas Counsel contends that the FCC's decision is faulty because the

Commission, while citing rates of inflation as support for the increase, failed to take into

consideration "the offsetting impact of ten-years [sic] of productivity gains" in
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setting the new SLC cap. Texas Counsel Brief at 34. Texas Counsel's arguments

misapprehend the purpose and application of the SLC price cap. LECs have been

required to set their SLCs at "the lesser of the per-line average common line costs

allocated to the interstate jurisdiction" or the existing SLC cap. Order ¶ 68. The SLC

cap represents the maximum that a carrier may charge an end-user for its common line

cost--if the carrier's per-line average costs are lower than the SLC ceiling, it may charge

only the amount of those costs. If these amounts are less than the SLC ceiling, carriers

must charge their actual costs; they are not permitted to impose the higher SLC cap.

We conclude that the FCC did not impermissibly ignore productivity gains when

increasing the SLC ceilings after taking into account inflation rates. Therefore, the

Commission's decision is not arbitrary or capricious. 

Texas Counsel next argues that the agency's decision to increase the SLC cap on

secondary residential and multi-line business lines is inconsistent with its determination

in the Universal Service Order that universal service funding for such lines should be

continued while further investigation into permanent subsidies is conducted. By funding

these lines, Texas Counsel contends, the Commission "implicitly acknowledges that

there are in fact at this time significant affordability concerns with respect to second

lines," and that the FCC failed to explain its statement in the Order that affordability

concerns are not as great for secondary residential lines. Texas Counsel Brief at 39; see

Order ¶ 75 ("Because universal service concerns about ensuring affordable access to

basic telephone services are not as great for non-primary residential and multi-line

business lines as they are for primary residential and single-line business lines, we must

take action to remove the implicit subsidies contained in our current interstate access

charges."). 

Texas Counsel's argument is without merit. In the Universal Service Order, the

FCC followed the recommendations of the Joint Board that existing universal service

support for all lines currently receiving support should be retained at least until the

January 1, 1999 implementation of the new funding mechanism for non-rural carriers.
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See Universal Service Order ¶ 245; see also, Order ¶ 74. The Commission expressed

doubt, however, that support for secondary residential lines was consistent with

universal service goals. See Universal Service Order ¶ 95 ("We share the Joint Board's

concern that providing universal service support [for secondary residential and multiline business lines] may be inconsistent with the goals of universal service in that

business and residential consumers that presumably can afford to pay rates that reflect

the carrier's costs to provide services nevertheless would receive supported rates."); see

also Order ¶ 74. While primary residential and single-line business lines are clearly part

of the basic telephone services to which universal service provisions of the 1996 Act

apply, the FCC is not convinced that secondary residential and multi-line business lines

warrant the same treatment. The Commission specifically declined to address these

issues in the Universal Service Order, and is continuing "to evaluate the Joint Board's

recommendation to limit universal service support to primary residential connections

and businesses with single connections." Order ¶ 74; see also Universal Service Order

¶ 96. We conclude that the FCC's determination in the Order to increase the SLC cap

for secondary residential and multi-line business lines does not contradict actions taken

by the agency in the Universal Service Order. 

Third, Texas Counsel argues that the increased SLC cap will result in a "free ride

by the IXCs on the common line facilities." Texas Counsel Brief at 43. They contend

that the recovery of NTS loop costs must be shared by the consumer through end-user

charges and the IXC through access charges. Increasing the SLC cap imposed on end

users allows IXCs to evade their fair share of these common line costs. As the

Commission explained in the Order, however, its "long range goal was to have

incumbent LECs recover a large share of the NTS common line costs [directly] from

end users instead of carriers, and to recover these costs on a flat-rated, rather than on

a usage-sensitive, basis." Order ¶ 68. This decision resulted from recognition that "'[a]

subscriber who does not use the subscriber line to place or receive [interstate] calls

imposes the same NTS costs as a subscriber who does use the line.'" National Ass'n of

Regulatory Util. Comm'rs, 737 F.2d at 1108 (quoting In re MTS and WATS Market
-73-

Structure, Third Report and Order (CC Docket No. 78-72), FCC 82-579, 93 FCC 2d

241 ¶ 121 (released Feb. 28, 1983). Thus, simply by requesting telephone service, the

subscriber "causes" local loop costs, whether it uses the service for intrastate or

interstate calls. See id. at 1113-14. It is therefore appropriate and rational for the

Commission to impose those costs on the end user. See Order ¶ 75. We conclude that

the FCC's decision to increase the SLC cap on secondary residential and multi-line

business lines does not result in a windfall for IXCs. The FCC has exhaustively

explained its reasons for raising the cap on these lines, see id. ¶¶ 73-87, and we find that

these reasons are rational. 

Finally, Texas Counsel argues that the FCC's decision to increase the SLC cap

for non-primary lines, allegedly resulting in loop costs being shifted from competitive

services to basic services, is contrary to the intent of § 254(k) of the 1996 Act. Section

254(k) provides:

A telecommunications carrier may not use services that are not

competitive to subsidize services that are subject to competition. The

Commission, with respect to interstate services, and the States, with

respect to intrastate services, 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 those services.

47 U.S.C.A. § 254(k). Texas Counsel argues that, by virtue of this provision of the

1996 Act, the recovery of joint and common costs, such as NTS loop costs, must be

borne mutually both by end users and by IXCs, and that the FCC is seeking to shift

additional NTS loop cost recovery from the rates LECs charge IXCs for interstate

access onto the rates end users pay for secondary telephone lines. This, according to

Texas Counsel, is in violation of § 254(k) in that the existing proportion of NTS loop
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cost recovery by the IXCs through competitive services will be reduced through

increases on end users for basic services. 

When the Commission implemented the language of § 254(k) in its accompanying

regulations, it noted that "the Commission has focused its attention on the incentives

that carriers may have to recover the costs of competitive services from subscribers to

less competitive, regulated services by misallocating the costs of their competitive

services." In re Implementation of Section 254(k) of the Communications Act of 1934,

as Amended, FCC 97-163, 12 FCC Rcd No. 11 6415 ¶ 2 (released May 8, 1997). To

prevent such misallocations of costs, the FCC established a system of safeguards,

including cost allocation rules, "designed to inhibit carriers with market power in

regulated service markets from imposing the costs and risks of nonregulated ventures

on subscribers to regulated interstate services." Id. ¶ 6. 

Texas Counsel's contention that increasing the SLC price ceiling violates the

prohibition against using non-competitive services to subsidize competitive services is

unpersuasive. As the FCC noted, the first sentence of § 254(k) "addresses the concern

that [incumbent LECs] may attempt to gain an unfair market advantage in competitive

markets by allocating to their less competitive services, for which subscribers have no

available alternative, an excessive portion of the costs incurred by their competitive

operations." Id. ¶ 7. Whether a LEC allocates all of its local loop costs to the end-user

or to the IXC, the LEC's competitive position as compared to other suppliers of local

exchange facilities remains the same. Section 254(k) was not designed to regulate the

apportionment of loop costs between end-users and IXCs because this allocation does

not involve improperly shifting costs from a competitive to a non-competitive service.

Likewise without merit is Texas Counsel's argument that an increase in the SLC

price cap violates the second sentence of § 254(k) by causing services included in the

definition of universal service to bear more than a reasonable share of the joint and

common costs of facilities used to provide those services. Section 254(k) separates
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telecommunications services into those that are supported by universal service, and

those that are not. The statute empowers the FCC to establish rules to prevent LECs

from overallocating to supported services the costs of facilities that are used to provide

services in both categories. See id. ¶ 8. Because the SLC is a method of recovering

loop costs, not an allocation of those costs between supported and unsupported services,

§ 254(k) is not implicated.

V. Conclusion

We have considered carefully the briefs filed by the petitioners, the intervenors,

and the FCC, and we conclude that the actions taken by the Commission in the Order

are within the agency's discretion as authorized by Congress in the 1996 Act, and are

not arbitrary, capricious, or contrary to law. As we have noted previously, the question

presented for our decision is not whether the Commission made the best choice, or even

the choice that this Court would have made, but rather "'whether the FCC made a

reasonable selection from among the available alternatives.'" MCI Telecomms. Corp.,

675 F.2d at 413 (quoting Aeronautical Radio, Inc., 642 F.2d at 1228). "If the agency's

reading [of a statute] fills a gap or defines a term in a reasonable way in light of the

Legislature's design, we give that reading controlling weight, even if it is not the answer

'the court would have reached if the question initially had arisen in a judicial

proceeding.'" Regions Hosp. v. Shalala, 118 S. Ct. 909, 915 (1998) (quoting Chevron

U.S.A., 467 U.S. at 843 n.11). We conclude that, in adopting the Order, the FCC

reasonably exercised its authority under the Telecommunications Act of 1996 to

regulate rates for interstate services. Accordingly, the petitions for review are denied.
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A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.