## 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 Ho norable Pasco M. Bowman became Chief Judge of the United State s 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., Southwester n Bell Telephone Co., and U S WEST, I nc. (collectively referred to as the "BellSouth petitioners"); (2) Bel l Atlantic and int

ervenor Ameritech Corp. (collectively referred to as the "Bell Atlantic par ties"); (3) MCI Telecommunications Corp., Cable & Wireless, Inc., and LC I International Telecom Corp. (collectivel y 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 petition ers, some supporting the Commissi on, and some of shifting allegiance depending upon the issue unde r 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-

Commu nications Commission ("FCC" or "Commission") issued pursuant to th e Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (to be codifie d as amended in scattered sections of 47 U.S.C. ) [hereinafter Act or 1996 Act], revising the regu latory scheme under which local exchange carriers ("LECs") assess costs t o long-distance ("IXCs") and other carriers for use of the LECs' lo cal telephone networks to complete interstate telephone calls, see In re Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure an d Prici ng; 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 (release d May 16, 1997) [hereinafter Order ]. Petitioners contend that various specific action s taken by the FCC in the Order that directly affect the application and calculation o f

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 th at the Order does not make the transition to competitive access rates quickly enough and is to o 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 universa l 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 ex ercise of its authority to regulate rates for interstate services under the Tele communications Act of 1996, and are not arbitrary and capricious. The FC C contends that it charted a proper mid dle course, "taking account of the complementary but s ometimes diverging goals of competition and universal service support." FC C Brief at 37.
We review agency ac tion under the Administrative Procedure Act to determine whether it is "arbitrary, capricious, an abuse of discretion, or otherwise not i n accordance with law," 5 U.S.C. § 706(2)(A) (19 94), rejecting only such administrative constructi ons of the law as are "contrary to clear congressional intent," Chevro n U.S.A. Inc. v. Natural Resources Defense Council, Inc. , 467 U.S. 837, 843 n.9 (1984).Allreferences in this opinion to sections and subsections of th e 3 Telecommunications Act of 1 996 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 obtai n 4
revenues from sources at levels above 'cost' . . . and to price other services allegedly below c ost." In re Federal-State Joint Board on Universal Service , First Report an d Order (CC Docket No. 96-45), FCC 97-157 12 FCC Rcd No. 16 8776 ¶ 10 n.1 5 (release d May 8, 1997) [hereinafter Universal Service Order ], petitions for revie w 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 executiv e de partment's construction of a statutory scheme it is entrusted to administer." Id. a t 844 . Where, as here, Congress has specifically assigned to the administrative agency the responsibility of interp reting and administering the statute at issue, "[t]he Supreme Cour t 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. Depar tment

of Transp. , 936 F.2d 1528, 1533 (8th Cir. 1991). The question for thi s Court is not

whether there might have been a better way for the agency to resolve the confl icting 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 addres s the conte ntions of each petitioner or group of petitioners in order. For the sake o f simplicity, we will not attempt to identify the intervenors who have joined in th e 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 B ellSouth petitioners contend that the Order violates 47 U.S.C.A. § 25 4 (WestSupp. 1998) (1) by failing immediately to remove all implicit subsidies fro m 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 universa l 5 service support until at least January 1, 1999 and has concluded th at, 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 univer sal service support subsidies

en compassed within interstate access charges from competition until a new universal service su pport regime is operational, in contravention of the requirement that th e mechanis ms to implement universal service support be "sufficient," id. ; and (3) b y 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 cont ravention of the requirement that contributions be "nondiscriminatory," id

. § 254(b)(4). The FCC's actions, according to the BellSouth petitioners, will preven t LECs from recovering the costs of universal service support traditionally included as implicit su bsidies within interstate access charges and will unfairly burden incumbent LECs with the costs of universal service support while e xempting new entrants into the market from bearing their share of these costs.
A. Immediate Replacement of Existing System The Be llSouth petitioners first argue that the Commission's Order violates th e statutory mandate of § 254 that all "mechanisms to preserve and advance universa l service subsidies" be "specific" and "predictable." Id. § 254(b)(5). By delaying th e impl ementation of a new regime of explicit universal service subsidies until at leas t 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 clos ely in line with actual costs, the BellSouth petitioners contend that the FCC has ens ured 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 t o implement the po licies of the 1996 Act, including the promotion of competition in the local exchange mar

ket, the elimination of implicit universal service support subsidies, and the preservation of univ ersal service. The Commission argues specifically that its dec isionto open local exchange markets to competition in compliance with 4 7 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 la

nguage, the Act contemplates sequential implementation of, initially, the market op ening provisions of § 251, followed by the new explicit universal servic e support mechanisms of § 254. The decision to promote competition in the loca l exch ange market prior to the enactment of a new universal support mechanism i s therefore reasonable, according to the FCC.
We agree that the FC C's decision to adjust the computation of interstate access charges to elimin ate implicit subsidies and promote competition in the local exchange mark etbefore an explicit universal service support mechanism is fully operational i s reasonable in light of the specific language of the 1996 Act. Sect ion 251(d)(1) required the Commission to adopt rules implementi ng 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 Fed eral-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 r ules promulgated under § 254 immediately impl ement

a new, explicit universal service support mechanism. Rather, the rule s 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), FC C 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, th e Commission has proceeded in a manner contemplated by the Act. The Commiss ion has made a predictive judgment, based on evidence i n the record and adequately explained in the Order, that comp etitive pressures in the local exchange market will not threaten univers al service during the interim period until the permanent, explicit universa l service sup port mechanism has been fully implemented. See City of St. Louis , 93 6 F.2d at 1534 ("Such forecasts must be accepted 'if they are rational, based on a
cons ideration of all the relevant factors, and adequately explained.'") (citations t o quoted cases omitted).
The Commission's decision to promote competition in the local exchange market and eliminate implicit subs idies embedded in interstate access charges prior to the full implem entation of a new, explicit mechanism for universal service support does no t violate the provisions of the 1996 Act, nor does it represent an unreasonabl e interpretation of the Act.
B. New Implicit Subsidies and Erosion Th e BellSouth petitioners further argue that the FCC, in addition to delayin g impermissibly the imp lementation 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 th e 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 BellSouthExcept for mandatory referral of proceedings regarding jurisdictiona l 6 separations, the FCC "may refer any matter arisin g in the administration of this chapter to a joint b oard" 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 SL C 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 ass ociated 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 busin ess lines and benefiting customers with only primary residential lines. This , according to the BellSouth petitioners, is in direct contravention of § 254's directiv e that support for universal service be "explicit." 47 U.S.C.A. § 254(e).

We canno t agree that the FCC's decisions to increase SLCs on non-primar y residential and mul ti-line business lines and to maintain the current ceiling on primary residential lines are in violation of the 1996 Act. The Commission, relying o n recommendations from the Federal-State Universal Service Joint Board [hereinafte r 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 mul ti-line business lines simply would not. See Order ¶ 70 (n oting Joint Board's conclusion that "the SLC . . . has an impact o n unive rsal service concerns such as affordability" and its recommendation "that th e Commission leave the current SLC cei lings in place for primary residential and singleline business lines"). The courts have recognized that universal service concerns are valid justification s for FCC action. See, e.g. , Competitive Telecomms. Ass'n v. FCC , 117 F.3d 1 068, 1074 (8th Cir. 1997); Rural Tel. Coalition v. FCC , 838 F.2d 1307 , 1315 (D.C. Cir. 19 88); 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-

ackn owledges 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 ¶ 10 1 (emphasis added), we note that this temporary, transitional arrangement is not a n unreasonable solution to the implicit tension between the FCC's goals of m oving toward cost-based rates and protecting universal service, see Competitive Telecomms. , 11 7 F.3dat 1073-74 ("Although temporary agency rules are subject to judicial revie w notwithstanding t

heir transitory nature, 'substantial deference by courts is accorded to an age ncy when the issue concerns interim relief.'") (quoting MCI Telecomms. Corp.

v. FCC , 75 0 F.2d 135, 140 (D.C. Cir. 1984)); City of St. Louis , 936 F.2d at 154 3 ("[T]he weighing of one public-interest factor against another is preemin ently a function for an expert agency, not a court.").

Furth ermore, 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 th e SLC, that will increase incremen tally until the SLC and PICC combined recover all costs associated with prima ry residential lines. See Order paras. 94, 99 (imposing PICC on primar y
re sidential and single-line business lines at a maximum of $0.53 per month, on non

primary 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 pha sed-in plan of PICC ceiling increases on primary residential lines (combined with correspo nding PICC cap decreases on multi-line business lines), the aggregate flat

rated charges (the combination of both SLC and PICC) imposed upon primary
re sidential lines will be the same per line as those imposed upon multi-line busines s lines. See id. ¶ 102.

Forthe rea sons stated, we conclude that the FCC's decision to maintain th e current SLC ceiling on primary residential lines does not amount to the creation of a-34-

new implici t subsidy for the benefit of primary residential line customers and to th e detriment of non-primary line and multi-line business line customers, in violation o f § 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 acces s 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 per

minut e access carrier common line charge ("CCLC") and a per-minute residua l tran sport interconnection charge ("TIC") assessed on originating access minute s (charges i mposed on carriers for outgoing calls), rather than on terminating acces s minutes, is in violation of the 1996 Act. They argue that the higher degree o f competition for originating access minute s will prevent them from imposing the CCLC

or the TIC to recoup costs lest they risk losing customers to competitors who ca n under cut their prices. This approach, according to the BellSouth petitioners, i s 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 non discriminatory contribution to . . . universal service."). Furthermore, th e BellSouthpetitioners and the Bell Atlantic parties argue, the Commission's decision to employ a per-minute charge to recover non-traffi c-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 d efends its decision to allow recovery of non-traffic-sensitive residual costs through per-minute access charges as an interim solution that will b e phased out as flat-rated PICC caps increase to allow for such recovery. See id. ¶ 102. Pri or to the changes implemented in the Order, these residual costs were recovere d 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 promot e the agency's objective of allowing the marketplace to move LECs' access rates tow ard competitive levels. See id. ¶ 100. The decision to continue employing a traffic-sensitive mech anism to recover these nontraffic-sensitiv e costs is justified by universal service concerns. Until flat-rated PICC ceilin gs rise sufficiently over time to allow recovery of these residual, non-traffic

sensit ive costs, the FCC has opted to maintain the non-cost-causative, per-minut e 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 towar d

com petitive levels. As the Commission points out, a phased-in transition from non

cost -causative per-minute rates to cost-causative flat rates has been adopted in th e Order.
We find that the Commission's decision to impose the residual p er-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 discretio nary authority to balance competing statutory goals. See National Ass'n o f Regul atory Util. Comm'rs , 737 F.2d at 1134 (noting that FCC has broad "statutor y 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 level s necessary to recoup these residual costs. "The shift from one type of nondiscriminatory rate structure to another may certainly be accomplished gradual ly to permit the affected carriers , subscribers and state regulators to adjust to the new pricing system, thu s preserv ing the efficient operation of the interstate telephone network during th e interim." Id. at 1135-36. We cannot conclude that thi s 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 determina tion that th e above transitional method of accounting for residual costs would increas e competit ionand move costs toward competitive levels is a reasonable one. Se e Competi tive Telecomms. , 117 F.3d at 1073-75 (according substantial deference t o transitiona lplan to preserve universal service). "It is not the Commission's chore t o convince us that what it has done is the best that could be done, but that what it ha s done is re asonable 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 BellSout

h petitioners next argue that the Commission's decision to exempt purcha sers of unbundled network elements ("UNEs") from contributing to universa l 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 tha t 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,

un til the new universal service support mechanism was fully operational. See In r e Implementation of the Local Competition Provisions in the Telecommunications Ac t of 1 996; Interconnection between Local Exchange Carriers and Commercial Mobil e 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 Lo cal Competition Order ], petition denied in part and order vacated in part , Comp etitive 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 o n UNE purchasers, however, was explicitlytime-limited and expired on June 30, 1997. See Order ¶ 339.
As the BellSouth petitioners acknowledge, the FCC cre ated 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 andthe consequent termination of its application signifies an abrupt change in FC C policy. In fact, the FCC emphasized in the Local Competition Order that it coul d "co nceive of no circumstances" under which the temporary assessment of acces s charges on UNE purchasers would be extended beyond June 30, 1997. Loca l Competition Order

¶ 725. That the FCC has no w made good on its promise to exempt purchasers of UNEs fro m access charges should come as no surprise to the BellSouth petitioners.

Nor is t he Commission's decision to exempt purchasers of UNEs from acces s charges that are imposed by incumbent LECs in contravention of § 254's directive to ensure equitable and nondiscriminatory contributions to universal service support. The Bel lSouthpetitioners argue that allowing UNE purchasers access to their network s without the imposition of access charges guarantees discriminatory and inequitabl e contribution to universal service support by LECs who must continue to contribute , despite their inability to c ollect a fair contribution from UNE purchasers. As the FCC has explained, however, "payment of cost-based rates represents full compensation to the inc umbent LEC for use of the network elements that carriers purchase. . .

. Allowing incumbent LECs to recover access c harges in addition to the reasonable cost of such facilities would constitute double recovery because the abil ity 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-base d rates for such elements will not allow the providers to recover u niversal service support subsidies, which are implicitly built into the access charge regime. The FCC points out that pu rchasers of UNEs will contribute to universal service pursuant to § 254--the y receive no exemption from univers al 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 no t 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 in dustry-wide access service[s]." In re Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure an d 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 relativel y insignificant headway UNE purchasers have made in the telecommunications market, univers al service will not be threatened by the exemption of UNE purchasers fro m access cha

rges. The Commission also has explained that rate structure modifications adopted in the Order will allow incumbent LECs to recover costs, including thos e associated with universal service support obligations. See Order ¶ 338.

We conc lude that the Commission's decision to exempt purchasers of UNE s frominter state access charges is not an arbitrary and capricious departure fro m sta tutory standards, nor has the FCC violated its statutory mandate to ensur e contributions to universal service that are equitable and nondiscriminatory.The BellSouth petitioners, except for GTE, which takes no posi tion, endorse the 7 arguments made by the Bell Atlantic parties on this issue. In formationservice providers previously were referred to in FCC regulation s 8 and in cases as "enhanced service providers," or "ESPs."
-39- Co nsequently, we will defer to the agency's expertise and leave intact its decisio n regarding the imposition of interstate access charges on purchasers of UNEs.

E. Permanent Exemption for ISPs Finally, the BellSouth petitioners, jo ined by the Bell Atlantic parties, argue that 7 the Commission's decision to grant information service providers ("ISPs") a n 8

ex emptionfrom interstate access charges creates a new, implicit, and discriminator y subsidy in viola

tion of the 1996 Act; impermissibly forces state regulators to set rates for the recovery of interstate costs; and converts a transiti onal access charge exemption for ISPs into a perm anent one. The FCC denies these assertions and contends that its determi nationto prohibit the assessment of interstate access charges on ISPs is a reasonable one under the 1996 Act.

Th e BellSouth petitioners initially maintain that the FCC's refusal to exten d inters tate access charges to ISPs constitutes a new, implicit, and discriminator y subsidy in violation of § 254. They assert that the exemption excu ses ISPs from paying the access charges associated with their traffic over the LECs' local networks. Their argument is that the FCC's explanati on for this decision--avoiding the disruption of an evolving industry--cannot justif y 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 decli ning 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 transi tion into universal service support fu ndedsolely through explicit subsidies, unavoidably includes residual implici t subsidies. See Order

¶ 345. We agree that the FCC's decision to exempt ISPs fromI SPs subscribe to LEC facilities in order to receive local calls from customers 9 who want to ac cess the ISP's data, which may or may not be stored in computer s outside t he state in which the call was placed. An IXC, in contrast, uses the LE C facilitie s as an element in an end-to-end long-distance call that the IXC sells as it s 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 pas t fourteen years, refusingto 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 Ac cess Charge Subelements for Open Network Architecture; Policy and Rule s Conce rning Rates for Dominant Carriers , Report and Order (CC Docket Nos. 89-79, 87-313), FC C 91-186, 6 FCC Rcd No. 15 4524 ¶ 60 (released July 11, 1991) (noting that access system in which ISPs do not pay interstate p er-minute charges is the " status quo "). F urthermore, 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 sam e purposes as other customers who are assessed per-minute interstate access charges. 9 As this Court noted in Competitive Telecommunications , e ven where two different sets of c arriers seek to use LEC network services and facilities that might b e "technolo gically identical," the services and facilities provided by the LEC ar e "distinc t" if the carriers are making different uses of them. 117 F.3d at 1073

. Conseque ntly, different regulatory treatment of LEC services and facilities in suc h 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 ¶ 34 5, and conclude, therefore, that the Commission's refusal to impose access charges o n ISPs does not violate § 254's requirement that contributions to universa l service be nondiscriminatory.-41-

Neither does the Commission's decision to exempt ISPs from interstate access charges violate § 254(e)'s requirement that "exp licit" support mechanisms for universal service be implemented. The Universal Service Order outlines the FCC's plan fo r eradicating implicit subsidies. Section 254, as we previously have discussed, does not require th e immediate elimination of implicit subsidies, only the establishment of a specific timetable to move from implicit to explicit universal service support subsidies. We conclu de that the Commission's decision to exempt ISPs from interstate acces s 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 allege d shortfalls, and identified sources of rev enue 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 eac h imperfect. When an agency has gone to considerable length s to amass information, sift thro ugh the record for pertinent facts, and reach a temporary conclusion, it has no t acted arbitrarily or capriciously.

The BellSouth petitioners and the Bell Atlantic parties next allege that th e inte rstate access charge exemption for ISPs impermissibly requires state regulator y 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. BellAtlantic Brief at12. Moreover, they argue that there is no dispute that the interstate costs imposed on LECs by these services have increased dramatically in rec ent years as a result of the expa nsionof traffic on the Internet. The LECs contend that, as a result of thi s increased traffic, they have been required to spend "billions of dollars to enhanc e network capacity." Id. at 13. While the increased burd ens on local networks generate, according to the BellSout

h petitioners and Bell Atlantic parties, "undeniably interstate costs," they co mplain that the ISP access charge exemption precludes recovery of the-42-

majority of those costs. Id. Instead, ISPs, which are classified as end users, "ma y 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 associa ted 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 jurisdict ion over interstate communications and forces state regulatory c ommissions 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 prov iding 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 t he local network and thereby generate interstate costs susceptible to FC C regulation. See id. ¶ 343 (noting that FCC "tentatively concluded" in notice o f pr oposed rulemaking that "ISPs should not be subjected to an interstate regulator y sys tem designed for circuit-switched interexchange voice telephony solely becaus e ISPs use incumbent LEC networks to receive calls from their customers."). Contrary to the petitioners' assertions, there is some disagreement as to the m anner 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 elemen ts. See California v. FCC , 905 F.2d 1217, 1244 (9th Cir. 1990). Consequently, the FCC has determine d that the facilities used by ISPs are " jurisdictionally mixed," carrying both interstate and intrastate traffic. FCC Brief at 79. Bec ause the FCC cannot reliably separate the two components involved i n completing a particular call, or even determine what percentage of overall ISP traffic is interst ate or intrastate, see id. (noting that at least some ISP services are purel y intrastat e and not susceptible to FCC regulation), the Commission has appropriatel y exercised its discretion to require an ISP to pay intrastate c harges for its line and to pay the SLC (which has been increased in the Order to cover a greater proportion of-43-

interstate allocated loo p 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 sa y that the FCC has shirked its responsibility to regulate interstat e tele communications, nor can we conclude that it has directed the States to inflat e intrastate tari ffs 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. gran ted , 118 S. Ct. 879 (1998).

Moreover, the FCC has not issued its final determination with regard to th e treatment of ISPs. As noted in the Order, the Commission has initiated a Notice o f Inquiry ("NOI") to investigate further what changes, if any, shou ld be made with regard to the regulation of ISPs. S ee Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure and Prici ng; Usage of the Public Swit ched Network by Information Service and Internet Access Providers , Propose d 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 th e NOI, we will address a range of fundamental issues about th e 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 informatio n services more broadly, and to craft proposals fora subsequent NPRM [Notice of Proposed Rulemaking] that ar e se nsitive 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 IS Ps 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' uncompen sated burden on their local networks, they, as well as other LECs, are welcome to address their continued c oncerns to the FCC through the NOI process.Because of the transfer of the present cases to this Court, the D.C. Circui t 10 denied as moot AT&T's motion to enforce the mandate in Competitiv e Tele communications Association v. FCC , 87 F.3d 522 (D.C. Cir. 1996). Se e Co mpetitive 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 arg ue that the FCC has permanently abandoned its st ated policy that all those who use the local telephone networks to provide interstate services should bear their fair share of interstate access char ges. The petitioners cite Competitive Telecommunications Association v. FCC , 87 F .3d 522 (D.C. Cir. 1996) ( CompTel ), as support for their position that ISP s 10 sho uld be subject to interstate access charges. In the 1983 Access Charge Order a t issue in CompTel , the FCC had instituted transitional rules favoring smaller long

distance carriers in an effort to promote competition in the long-dista nce market. These transitional rules were extended by the Commission for thirteen years under th e justi ficationthat sufficient cost information necessary to determine appropriate rate s
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 wit h which we are faced here. In CompTel , th e FCC was imposing inconsistent, allegedly transitional rates on enti ties--incumbent

long-distance carriers and smaller long-distance carriers--tha t essenti ally provided identical services. Here, the FCC is exempting from interstat e access charges ISPs that, according to the FCC, utilize the local networks differently than do IXCs. The FCC has ju stified its decision to exempt ISPs from access charges paid by IXCs by noting the distinction between the manner in which these separat e entities utilize the local networks. See, e.g. , Order ¶¶ 343, 345.-45-

The FCC explained in the Order that "[m]aintaining the exi sting pricing structure for [ISP] services avoids disrupting the sti ll-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 disc retion in evaluating the releva nt 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

a r bitrary and capricious only "if the agency has relied on factors which Congress has

no t intended it to consider, entirely failed to consider an important aspect of th e problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so im

plausible 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 decl ine to interfere with the FCC's determination to grant ISPs an exemption from interstate access charges.

II. Bell Atlantic Parties The B ell Atlantic parties argue that the FCC acted arbitrarily, abandoning it s long-held position to the contrary, when it announced in the Order that LECs subject to pri ce-cap regulation must adjust their price-cap indices downward to reflect th e 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 an d noting that agency failed to explain its decision). Because we are satisfied that th e 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 19 85, the FCC directed that certain expenses associated with equal acces s conversion, ordinarily fully accounted for in the year in which the expenses wereThe FCC required amortization of these expenses out of "concern[] that these 11 expendi tures will cause irregular and substantial fluctuations in revenue requirements associated with equal access." Equal Access and Network Reconfiguration Co sts , 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, endin g 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

co nversion expenses, the FCC converted from rate of return regulation to price-cap regulation. In conjunction with this co nversion, 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 , S econd 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 ], petiti ons dismissed , National Rural Telecom Ass'n

v. FCC , 988 F.2d 174 (D.C. Cir. 1993). The one-time equal access expenses tha t 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 F CC allowed subsequent increases. The FCC now concedes that, in prio r decisions, it has not addressed properly th e question of whether equal access expenses tha t were embedded within original baseline rates pursuant to the one-tim e
am ortizations should have been removed through downward adjustments when th e amortiza tions expired. In the Order, however, the FCC reversed the position it ha d taken on th is issue and determined that price-cap LECs should be required to mak e downward price-cap adjustments to reflect the expir ation of their equal access expense amortizations. See Order ¶ 309. The FCC likened the equal access amortizations to the depre ciation reserve deficiency and inside wiring cost amortizations that "wer e given e xogenous cost treatment when they expired because they reflected temporary, one-time treatment of costs under R OR [rate of return] regulation that, due to the mid-The FCC explains that these amortized costs were "ex traordinary" in that "they 12 did not r eflect the 'normal' operation of rate of return regulation, but rather create d aberrant spikes in rates, which wo uld 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 regula tion, 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 equ al access amortizations cannot be compared to the depreciation reserve deficiency and inside wiring amortizati ons because the costs associated with the latter amortizations were incurred entirely before th e switch to price-cap regulation, while LECs continued to incur equal access costs after the price-cap regime commenced. As the FCC explained, ho wever, 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 ar e distingu ishable from "normal recurring expenses" due to the "unusually hig h concentration of expen ses . . . incurred over a limited time." Petitions for Recovery of Equal Access Costs ¶ 24; see also , Equal Access and Network Reconfiguration Costs , FCC 8 5-628, 50 Fed. Reg. 50910, 50914 ¶ 33 (Dec. 13, 1985); Order ¶ 300. W e cannot conclude that the FCC improperly determined that the one-time equal acces s
conv ersion amortizations should be subject to treatment similar to that accorde d depreciation reserve deficiency and inside wiring amortizations.
The Bell Atlantic parties further cri ticize the FCC's decision to refuse an upward cost adjustment for "subsequent equal access costs," while requiring a downward cost adjus tment

to reflect the expiration of the original equal access conversio n amortizations. Bell Atlantic Brief at 33. This argu ment, 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 equa l access as part of the normal costs of providing telephone service. Exogenous-48-

treat ment of these costs is unnecessary." Order ¶ 312. The FCC's refusal to allow an upward cost adjustment to account for ongoing costs associated wi th equal access is not arbitrary.

We conc lude that the FCC's decision to require LECs to adjust their price-cap indic es downward to reflect the completed amortizations of extraordinary, one-tim e equal access conversion expenses is neither arbitrary nor capricious. "[T]he mer e change of

an administrative opinion after a lawful reconsideration can hardly b e arbitrary and capricious on its face." Southwestern Bell Tel. Co. v. FCC , 138 F.3d 746, 753 (8th C ir. 1998). Upon further reflection, the FCC determined that this downward adj ustment, 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 n o 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, ca pricious, and inconsistent with the FCC's responsibility to promulgate reg ulations that best serve the public interest. They contend that the existing access charge system, rife with non-cost-based rates an d im plicit subsidies, violates FCC precedent and various provisions of the 1996 Act

. Furthe rmore, 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 curren t system is lawful and that the market-based approach adopted in the Order represents a

reasona ble attempt to "shift from one type of [lawful regulatory system] to another. . . gradually to permit the affected carriers, subscribers an d state regulators to adjust to the new pricing system." National Ass'n of Regulatory Util. Comm'rs , 737 F.2d at-49-

1135-36 (uphol ding 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 reasone d 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 a t economic co st levels. The FCC's explanation for declining to prescribe access charge

ra tes--the impracticability of developing a forward-looking cost model necessary t o deter minethe economic costs of the services--is, according to the IXC petitioners , contrary to the Commission's position taken in an identical regulatory situation. Th e IX C petitioners contend that the FCC has directed states to determine the economi c costs of certain unbundled network elements in order to develop a forward-looking cost model for local services to be used in determ ining 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 th e Implementation of the Local Competiti on 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 elem ents involved in the local-services project are, according to the IXC petitioners, identic al to those necessary to develop a reliable cost model for interstat e access charges. Therefore, the IXCs contend, the FCC's assertion that i t cannot d evelop the cost model necessary to establish prescriptive rates for interstat e access charges is unavailing.
The FCC argues that the two projects are distinguishable and that its position in regar d to access charges is supported by long recognized regulatory problem s
asso ciated 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 "separat e telecommu nications services are typically provided over shared network facilities, the costs of which may be joint or common with respect to some services." Local-50-

Competition Order

¶ 678 (emphasis added). The FCC notes, f or example, that the local loop i s used to provide virtually all telephone services, but, in setting rates for th e various services, regulations must allocate a portion of the common loop cost to each indivi dual service that uses the loop. By contrast, unbundled network elements ar e generally treated as distinct facilities, the entire cost of which is reflected in the rate for that particular element. Due to the diff iculty in creating a reliable forward-looking cost model for interstate access services, a prescriptive plan would not be feasible at th e 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 ref usal to set prescriptive rates for interstate access service. Given our deferentia l standard of review, this is all that is required.
The IXC petitioners further argue that, even if the Commissio n'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 a n absence of evidence that local telephone service markets have developed the level of competition necessary to drive interstate access charges to economic cost s, 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 towar d competitive levels in a way that was pragmatic, would preserve univers al service, would avoid unnecessary eco nomic dislocation, and was consonant with Congress's directive that the Commission replace regulatio n 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 se ek to promote the policies and purposes of this chaptor favoring diversity o f medi avoices, vigorous economic competition, technological advancement, an d promotion of the publ ic 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. Ci r. 1980)) (alteration by this Court), cert. denied , 451 U.S. 920, 976 (1981))

. The Commi ssion explained that "competitive markets are far better than regulator y agenci es at allocating resources and services efficiently for the maximum benefit o f 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 pres cribing rates only when, among other things, the rates currently charge d are "or will be in violation of any of the provisions" of the Act. 47 U.S.C. § 205(a) (1994). The FC C has reasonably exercised its predictive judgment in c oncluding that competition in the local telephone services market will effectivel y dri ve interstate access charges to economic costs. See City of St. Louis , 936 F.2d a t 153 4 (noting that judicial deference to agency action is "especially important" whe n agency' s judgments are "predictive"). If, in light of actual market developments, th e Commission determin es that competition is not having the anticipated effect on access charges, the agency presumably will revi sit this issue. We cannot conclude at this time th atthe FCC's decision to adopt a market-based approach to interstate access refor m
was arbitrary, capricious, or in derogation of the public interest in light of the broa d discretion Congress has given the Commission in setting interstate rates.

The IXC petitioners next contend that the FCC failed to explain adequately it s decision to retain "inflated" access charges to the detriment of long-distance carriers in orde r to avoid the negative consequences to LECs of imposing cost-based rate s 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 o n forw ard-looking economic costs. The FCC has acknowledged that non-cost-base d

access charges harm both long-distance companies and their customers and imped e 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 IX C petitioners, the only effect on the long-distance market that the FC C addressed was the effect these rates have on competition when local telephon e companies also provide long-distance services directly or through an affiliate. The y arg ue that, although a LEC would impose the same "inflated" access charge on it s affiliate as it woul d on unaffiliated long-distance companies, because of the affiliation, the tr ansaction has no true economic effect. The IXC petitioners contend tha t per petuating "inflated" access charges allows LECs and their affiliate long-distanc e 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. Further more, unaffiliated long-distance companies would be inclined to purchas e ineff icient, but less expensive, access arrangements from alternative providers, whil e LE C-affiliatedlong-distance companies would always use the most efficient acces s
arr angements and incur only actual, rather than "inflated," costs. The IXC petitioners contend that the FCC's rational e 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" stan dard under § 251 of the 1996 Act). Furthermore, the Co mmission disputes the correlation the IXC pet itioners claim exists between the LECs 1996 earnings levels and "inflated" acces s
ra tes under the current price-cap regime. The FCC points out that higher returns fo r pr ice-cap carriers do not necessarily indicate imposition of unlawful rates under th e price-cap regime. Rather, the purpose of price-cap regulation is to p romote efficient use of the network while ensuring that rates , as opposed to earnings , are no greater tha n 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-lookingThe Commission lists, for example, GTE, Southern New England Telephone 13 Company, and Sprint as independent incu mbent LECs offering in-region long-distance service.
-53- economic costs is not statutorily required, and the FCC could impose an alternativ e 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 create s conditions for an anticompetitive price squeeze when a LEC affiliate offer s interexchange servic e, 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 Com mission notes that independent (non-Bell Operating Company) incumben t 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 experti se in this highly technical area, we conclude that the FCC adequa tely explained its decision not to prescribe access charges at forward

looking 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 curi am) (noting that "reviewing court may not substitute its judgment for that of the agency and must give substantial deference to agency determinations").

Th e IXCs next contend that the FCC's failure to prescribe access charges a t forward-looking economic costs leaves implicit universal subsi dies embedded in current

acce ss charges in violation of the 1996 Act. These subsidies allegedly violate (1) § 25 4(d) because, being recovered primarily from IXCs, they are not "equitable an d nondiscriminatory"; (2) § 254(e) b ecause 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-54-

universal s upport mechanism. As we noted above, § 254 requires merely that th e Com missionestablish a "specific timetable for implementation" of the new universa l support regime, 47 U.S.C.A. § 254(a)(2), and the FCC has complied with this mandate,

see Order ¶ 47.

In a r elated argument, the IXCs contend that the FCC's regulatory choice of a market-based approach to drive access charges to economic costs cannot be justifie d

on the basis of universal service support needs, because the Commission did not rel y 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, th e IXCs argue that even were this Court permitted to consider this untimely justification, universal service needs cannot supply a reasoned basis for permitting inflated acces s charge s after January 1999, when the new universal service mechanism will b e 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" becaus e "eliminating [such support] all at once might have an inequitable impact on th e incumbent local exchang e carriers," a statement that can be read to implicate universal service su pport needs. Order ¶ 9; see also id. ¶ 46 (noting that a prescription "coul d result in a substantial decrease in revenue for incumbent LECs, which could prov e highly disruptive to business operations, even when new explicit universal servic e support mechanisms a

re 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 Commi ssion believed that pres cribing rates was, in any circumstances, an inferior solution to the problem. Th e FCC wa s informed by Congress's directive to "promote competition and reduc e regulation," Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (to-55-

be co dified as amended in scattered sections of 47 U.S.C.), and elected the market

based appr oach based on this mandate, in addition to any universal service support considerations.

We have reviewed carefully the FCC's justifications for retaining the curren t interstate access charge regime and find its decision base d on these factors to be neither arbi trary nor capricious. We find that the Commission's discretionary authority t o
ex ercise its expertise necessarily includes the discretion to adopt a market-base d approach rather than a prescriptive approach to driving interstate access rates toward economic costs. As this Court has noted, "it i s clear from the [1996] Act that Congress didnot intend all access charges to move to [forward-looking] cost-based pricing, a t least not immediately." Competitive Telecomms. , 117 F.3d at 1072.
B. TIC Charges The IX C petitioners next argue that the FCC's refusal to abolish the non-cost

based transport interconnection charge (a per-minute charge assessed on all switched

access minutes) despite its adverse effect on the long-distance market is arbitrary , capr icious, inconsistent with the Commission's own policy, and a violation of th e District of Columbia Circuit's order in CompTel . They argue that, althou gh the FCC has acknowledgedthat the TIC is not cost-based, and "adversely affects the development of compet ition in the interstate access market," Order ¶ 212, it has refused to mov e imme diately to eliminate these non-cost-based transport charges and has failed t o explai n its reasons for not doing so. In CompTel , the District of Columbia Circui t 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-base d 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 thatIn this context, the jurisdictional separations process refer s 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.
-56- could be separated out

and charged to long-distance carriers on a cost-causative basis. See Or der

¶¶ 167, 170-73, 217, 219-21 (including SS7 signalling costs, ¶ 217 , "multiplexing costs," ¶ 173, and "[h]ost/remote trunking costs," ¶ 220). As to th e remaining cost s 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 wer e instruc ted to "migrate" their remaining per-minute TIC charges to flat-rated pre

subs cribedinterexchange carrier charges, id. , and to target their annual price-cap p roductivity 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 prove d elusive, the FCC has explained adequately its reasons for not acting immediately.

The Commi ssion explained in the Order that its goal was "to establish a mechanism to reduce and eliminate the TIC in a manner that fosters competition an d responds to the D.C. Ci rcuit's remand." Id. Consistent with this objective, the agency properly adopted a number of short-term, transitional solutions to protect agains t 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 theThese r ules 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 dir ect investment allocated to the categories, see id. §§ 69.309, 69.411 (1997), and direct expenses are allocated to the category to whi ch the expenses are related, see id. § 69.401-69.409 (1997) (We refer to §§ 69.305, 69.306, 69.309, and 69.411, a s they were amended effective January 1, 1998. They are published in the 1997 C.F.R.).

-57- res idual TIC through, among other methods, price-cap targeting and the PICC, and to refer jurisdictional separations concerns to th e Joint Board are not arbitrary, capricious, incons istent

with the agency's policies, or in violation of the District of Columbi a 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 directl y attributed to a particular service--to the tandem-switched transport relied upon b y smallerlon g-distance carriers in a manner different from the way in which overhea d 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 IX C petitioners, do not distribute the LECs' overhead proportionately

am ong interstate service categories. These rules allocate a predominant share o f overheadto switched access (including switched transport), while special acces s (including direct-trunked transport) is assig ned comparatively little overhead. The IXC petitio ners claim that the FCC failed to consider new cost data, failed to gathe r additional information in light of the CompTel remand , and failed to undertake any type of empi rical review of tandem switching costs and overhead before reaching it s conclusion in the Order. The FCC's explanation that "it is reasonable to have set-58-

ov erhead loadings for tandem switching consistently with the overhead loadings fo r local sw itching" misses the point, according to the IXC petitioners. Order ¶ 203

. Finally, they object to the Commission's decision to reassign some TIC costs to th e tandem switching charge as exacerbating the problem, and to the FCC's reliance o n 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, in cluding those associated with tandem-switched transport, we conclude that they lie well within th e 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. Circui t ordered the FCC to "substantiatethat its current method of allocating overhead is costbased, or choose a method that is." 87 F.3d a t 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 t hat 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 no t criticize any particular rule of Part 69, but rather assert tha t the effect of these allocation

ru les as a whole is a discriminatory underallocation of overhead to special access and an overallocation of overhead to other access elements including tandem swi tching. 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 categor y
revenue requirements that included overheads allocated generally based on relativ e costs." Id. ¶ 203. It further stated:

We find that it is reasonable to have set overhead loadings for tande m switching consistently with the overhead loadings for local switching, and disagree with those part

ies 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 dir ect costs of transmission consist of outside plant and circui t equ ipment

and certain central office equipment. So long as consisten t
ove rheadloading methodologies were used across switching functions , and across transmission functions, we find that a reasonable cross-over is establishedfor access customers between direct-trunked transport an d tandem-switched transport. As competit ion develops, we can also rely on market forces to pressure incumbent LECs to allocate overheads amon g rate elements in economically efficient ways.

Id. In other words, the Commission concluded that similar access functions shoul d receive s imilar overhead loadings. The Commission reasonably determined that there was no need to change the overhead loading attributed to tandem-switching because the "cur rent 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 o r adopted in the Order is reasonable and based on cost-causative principles, and it s explanation for this belief, lead us to conclude that the agency's new rules for th e 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 I XC petitioners next challenge the FCC's decision to eliminate the unitary rate option for tandem-s witched transport as arbitrary and capricious in that it imposes inconsistent distance measurements for si milar transmission services. According to the IXC petiti oners, both tandem-switched transport and direct-trunked transport services gen erally 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 directtrunke d transport unaltered, but eliminated the likewise distance-sensitive unitary rate option for tandem-switched transport. Under the unitary rate option, long-distanc e carriers paid for tandem-switched transport in the same manner they paid for direct

trunkedtransport: through an end-to-end charge, with mileage measured as airlin e 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-switche d 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 switch ing function itself; and (3) a flat-rated charge for transport over "dedicate d 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 t hey are not computed on an end-to-end basis. The IXC petitioners c ontend 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 ord er to increase artificially the distance involved in completing the transmission , thereby inflating the costs to tandem-switched transport customers. Th e 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 ma ximum incentive for IXCs to use transport facili ties efficiently." Id. ¶ 178. Furthermore, the unitary rate option "inhibits th e development of competitive alternatives to incumbent LEC tandem-switched transport." Id. ¶ 179. The Commission concluded that the three-part rate structure "most closely reflec ts the manner in which LECs incur the costs of each component of the overal l tandem-swi tched transport service." Id. ¶ 181. As the IXC petitioners recognize , purch asers of direct-trunked transport purchase transport capacity between two en d po ints 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 an d spec ifically 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 in cur the costs of transmitting their traffic between the serving wire center and th e tandem, tandem-switched transport customers should, as a matter of cost-causation, pay the c osts of reaching the tandem." Order ¶ 182. "While the incumbent LEC ma y choose to route direct-trunked traffic through the tandem office based on its ow n assessment of whether it is economically efficient to do so," tandem-switched trafficUn der 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 offi ce link, and assuming circuit loading of 9000 minutes of use per month per voice-grade circuit." Order ¶ 206.
-61- must be routed to the tan dem 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 Commissi onin the Order and dismissed as unlikely since such behavior would plac e 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 fo r tan dem-switchedtransport was neither arbitrary nor capricious. The Commissio n
reaso nably concluded that the three-part rate structure would "encourage efficient use of transport facil ities 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 th e 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 Accord ing to the IXC petitioners, the method adopted by the FCC in the Order-

- compiling ac tual minutes of use per circuit in a "year prior to implementation" of th e Order and using this figure as an estimate for future years--is incompatible with th e agency's prior determination that the benefits to be obtained from a more individualized calculation were outweighed by the administrative convenience of a uni form figure. IXC Petitioners' Joint Brief at 68. The FCC justifies its position on the belief that its-62-

900 0 minute usage estimate is too high; but the IXC petitioners contend that, because competition presumably will increase usage of these circuits, the new method o f 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 forselecting this option over other, more suitable alternatives. According to th e petitioners, because the Commission failed to state any purpose for its decision t o change meth ods, other than the inaccuracies of the old method, its choice of an eve n more inaccurate method is arbitrary and capricious.

The IXC petitioners' central argument fundamentally misapprehends the FCC's Order. Contrary to their assertion tha t 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 an nual recalculation of usage estimates based on the actual minutes of use durin g "the prior year[]." Id. (emphasis added). The FCC explained that its shift from a n arbitrary usage estimate number that consistently overstates minutes of use to a more precis e measure of actual usage is consistent with the Commission's goals of movin g toward co st-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 Th e 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 fro m the LECs' interstate customers--both end users and long-distance carriers--b y increasing interstate access charge price caps imposed on interstate customers by th e amount LECs contribute to the fund. The new univer sal service regime requires that all telecommunications carriers providing interstate telecommunicat ions services contribute to the new universal service fund a proportion of their revenues derived from-63-

endusers. See Universal Service Order ¶ 39-40. Since both LECs and IXCs receive

revenue fr om end users, both types of carriers must contribute to the fund. The IX C 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 Pe titioners' Joint Brief at 70. This, according to the IXC petitioners, amounts to an implicit subsidy that discriminates agai nst 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 c ustomers the normal cost s of providing telecommunications services to those customers amounts to

crea ting a discriminatory implicit subsidy. As the FCC points out, mandatory contributions to the new universal service fund a re real costs of doing business that will be incurred by both LECs and IXCs. The agency determined that "[u]nder our recovery

me chanism, carriers will be permitted, but not required, to pass through thei r contributions to their interstate access and interexchange custo mers." Universal Service Order ¶ 829. Under this scheme, IXCs have the option of recovering their universa l

ser vice contributions through rates to their long-distance customers. LECs have th e 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 L ECs' universal service cost are not "above cost" since universal servic e
con tributions are a real cost of doing business. The flow-through of LEC universa l 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 vio lation of § 254(e). The IXC petitioners' argument that long-distance carrier s 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 competit ively 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 bus iness; if a LEC decides not to pass through such costs to its long-distance affilia te, 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 b y passing through it s contribution costs to non-affiliates while absorbing the costs for its affiliates. See Univer sal 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 us ers alone will be subject to the pass-through of LECs' universal servic e

17 contributions through increases in SLCs paid by end users. As the FCC notes, however, the pass-t hrough of universal service costs generally will not result in any immediat e increases in SLCs paid by end users because the calculation of the SLC is not currently affe cted by changes in the price-cap index. Furthermore, contrary to Texas Counsel's argum ents, the FCC properly allowed price-cap increases only on interstate end-use r revenues since the universal s ervice contribution cost being passed through is assessed on the basis of end-user revenues. See Order ¶ 379 ("[P] rice cap LECs recovering their uni versal service obligation through interstate access charges must recover thos e contributions in the b askets for services that generate end-user interstate revenues. . . . The baskets containing end-user interstate services a re the common line, interexchange, and trunkin g baskets."). Under the Commission's plan, the LECs have flexibility t o determine how to recover their universal service contr ibutions 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 throughDEM, or di al equipment minutes of use, "is defined as the minutes of holding 18 ti meof the originating and terminating local switching equipment." 47 C.F.R

. § 36.125(a)(3) (1997).
-65- an incr ease in the price-cap indices for baskets that generate end-user interstat e revenues is not arbitrary or capricious or in violation o f the 1996 Act. We note that this deter mination, based on extremely technical factors, has been made by the exper t agency in charge of monitoring the telecommunications market and is entitled t o deference--particularly because it involves an area requiring expertise. We further note that "[t]his co urt . . . 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 a uthority, then it is our duty to accept that judgment if it is rational an d not unreasonable." National Ass'n of Regulatory Util. Comm'rs. , 737 F.2dat 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 carrier s receiving funds from the new federal universal service mec hanism apply those funds "to reduce o r satisfy the interstate revenue requirement otherwise collected throug h inte rstate access charges." Order ¶ 381. They argue that universal service will b e threatene d by the Commission's decision, that the elimination of high-cost and DEM 18 weig hting mechanisms will bring about an intrastate revenue shortfall, and that th e existing federal-state jurisdictional cost-shifting mechanisms should be retained. The FCC conte nds that this requirement is reasonably necessary to ensure that universa l service subsidies are made explicit as required by § 254(e) and to prevent doubl e 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 perce nt division for the federal share of universal service support; (2) the extent t o which federal universal service support should be applied to the intrastate jurisdiction; and(3) the method, if any, by which providers may recover universal servic e contributions through rates, surcharges, or other means. See In re Federal-State Joint Board on U niversal Service , Order and Order on Reconsideration (CC Docket No

. 96-45), FCC 98-160, 13 FCC Rcd No. 19 13749 (released Jul y 17, 1998). In addition, the Commission extended "the implementation date for the revised high cost support
-66- In the Universal Service Order, the Commission moved tow ard achieving its goal of elimin ating implicit subsidies and replacing them with subsidies that are "explicit " and "su fficient," 47 U.S.C.A. § 254, by requiring all interstate telecommunication s carriers to contribute to the federal share (twenty-five percent) of universal servic e support. See Universal Service Order ¶ 269. After a transition period, the new system ado pted in the Universal Service Order will replace current funding mechanisms , incl uding high-cost and DEM weighting mechanisms, by which small and high-cos t LECs have been allowed to shift a greater proportion of certain intrastate costs to the interstate jurisdiction and then recover those costs, directly orindirectly, through abovecost int erstate access charges imposed on IXCs. See id. ¶¶ 209-212. The FC C main tains that the gradual elimination of high-cost and DEM weighting mechanism s
nece ssitates corresponding reductions in the access charges of carriers receiving th e new universal funds. If no such adjustments were mad e, according to the FCC, carriers receiving the new f

unds 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 acces s charges." Order

¶ 381. This language advises LECs that once carriers begin receiving funds from the new federal universal service mechanism, they must lower t heir interstate

access c harges to the extent that those access charges reflect implicit subsidies o f universal service. 19mechan ism

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.
-67- Texas Counsel's concern that the elimination of high-cost and DEM weightin g mechanisms will bring about a n 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 Univ ersal Service Order , we conclude that, until universal service
su pport is based on forward-looking economic cost, carriers shoul d continue to receive amounts from the new universal service mechanisms comparable to existing high cost and DEM weighting support. In tha t order, we do not alter the existing revenue-shifting mechanisms in plac e for the current high cost support and DEM weighting at this time. Thus, no intrastate revenue shortfall wil l 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 th e jurisd ictional allocation will remain roughly constant, Texas Counsel's fear of a n intrastate reve nue shortfall is speculative, at best. The requirement that a certain level of in trastate universal service be maintained and whether that requirement will b e 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 th e 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 basi c rationale of the ripeness doctrine is to prevent the courts , thr oughthe avoidance of premature adjudication, from entanglin g themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an-68-

adm inistrative 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).

Assum ing for the sake of argument that Texas Counsel's complaint is ripe fo r review, we nonetheless wou ld conclude that the Commission acted within its authority to require LECs to adjust their interstate access charges to reflect changes in th e universal service support mechanisms. Texas Counsel makes a number of arguments advancing its position that the current juri sdictional 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 s hifted to the interstate jurisdiction through the hi gh-cost and DEM weighting programs. These arguments are not persuasive. Th e Commi ssion is authorized to determine and alter allocations between interstate an d in trastate jurisdictions after consulting with the Federal-State Joint Board, and court s consistently have upheld the FCC's determinations as to what pro portion of shared costs will be recovered in the interstate jurisdictio n. See, e.g. , Rural Tel. Coalition , 838 F.2d at 1313- 15 (upholding FCC decision to allocate twenty-five percent of non-traffic

sensitive 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).

Likewi se, we reject Texas Counsel's argument that the FCC was compelled t o refer to a joint board its proposal to require LECs to use funds from the new federa l universal service mechanism to reduce the interstate revenue requirement. Joint board consultat ion 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-69-

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 th e proportions for allocating jointly used plant to interstate and intrastate jurisdictions. The Commissiondecided only that federal support for universal service should be applied to sati sfy the interstate revenue requirement, with the details remaining to b e determined. See Order

¶¶ 381, 387.
Texas Counsel's argument that § 254(e) prevents the Commission from requiring the ap plication of federal universal service funds to the interstate jurisdiction is als o without merit. Section 254( e) provides that "[a] carrier that receives [federal universal service ] support shall use that support only for the provision, maintenance, an d 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"

se rvices intended to be supported by universal service mechanisms included "single

party ser vice; voice grade access to the public switched network; . . . access t o emergency services; access to operator services; access to interexchang e service; access to directory assistance; and toll limitation services for qualifying low-incom e
co nsumers." Universal Service Order ¶ 61. Contrary to Texas Counsel's argument , funds from the new federal universal service mechanism will be applied toward th e portion of costs allo cated to the interstate jurisdiction that is associated with providing the above services. Section 254(e) is not violated by the Commission's decision t o require amounts received under the new federal universal s ervice mechanism be applied "to reduce or s atisfy the interstate revenue requirement" for the above "core" services. Order ¶ 381.

The langu age to which Texas Counsel objects is a general statement of a fundamental premise underlying the reform of impl icit subsidies: that carriers receiving new fe deral universal service support will be required correspondingly to reduce their in terstate access charges to the extent those charges include implicit universal service-70-

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 inten ded to demonstrate that the FCC's de cision to increase to nine dollars the SLC cap for multi-line business an d secondary residential lines is arbitra ry 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 a nd competition by making the structure

more cost-causative while maintaining affordable rates for basic telephone services in high-cos t areas. See id. ¶ 82. To advance these goals, and keeping in mind th e obligation topreserve universal service, the Commission reduced the per-minute CCL charge paid by IXCs (and passed on to long-distance customers) in favor of highe r SLCs for end users. See id. ¶¶ 69-71. The FCC contends that it charted a reasonable middle course in the face of c alls 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 o f universal service," id. ¶ 70, universal

se rvice concerns for non-primary residential and multi-line business users are not a s 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

commo n line costs were generally below the nine dollar SLC ceiling and that this rate

w o uld 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-l ine customers." Id. , ¶ 80. The Commission contends that its decision i s 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 th e Commission, while citing rates of inflation as support for the increa se, failed to take into consideration "the offsetting impact of ten-years [sic] of productivity gains" in-71-

setting the new SLC cap. Texas Counsel Brief at 34. Texas Counsel's argument s misapprehendthe purpose and application of the SLC price cap. LECs have bee n required to s et their SLCs at "the lesser of the per-line average common line cost s allocated to the interstate jurisdiction" or the existing SLC cap. Order ¶ 68. The SLC cap represents the maxi mum that a carrier may charge an end-user for its common line cost--if the carrier's per-line average costs are lower tha n the SLC ceiling, it may charge only the amount of those costs. If t hese amounts are less than the SLC ceiling, carriers

mus t 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 whe n increasin g the SLC ceilings after taking into account inflation rates. Therefore, th e 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 busines s 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 co nducted. By funding these lines, Texas Counsel contends, the Commission "implicitly acknowledges tha t there a re in fact at this time significant affordability concerns with respect to secon d li nes," and that the FCC failed to explain its statement in the Order that affordabilit y 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 t o basic te lephone services are not as great for non-primary residential and multi-lin e business lines as they are for primary residentia l and single-line business lines, we must take action to remove the implicit subsidies contained in our current interstate acces s 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

su pport for all lines currently receiving support should be retained at least until th e January 1, 1999 implementation of the new funding mechanism for non-rural carriers.-72-

See Unive rsal 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 busin ess lines] may be inconsistent with the goals of universal service in tha t business and resi dential consumers that presumably can afford to pay rates that reflect the carrier's costs to provide services nevertheless w ould receive supported rates."); see also Order ¶ 74. While primary residential and single-line busines s lines are clearly part of the basic telephone services to which universal service provisions of the 1996 Ac t apply, the FCC is not convinced that secondar y residential and multi-line business lines warrant the same treatment. The Commission specifically declined to address thes e issues in the Universal Service Order, and is continuing "to evaluate the Joint Board's recommendation to limit universal service support to primary residential connection s and businesses with single connection s." Order ¶ 74; see also Universal Service Order ¶ 96. We con clude 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 w ill result in a "free ride by the IXCs on the comm on line facilities." Texas Counsel Brief at 43. They contend that the recover

y 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 th e Commission explained in the Order, however, its "long range goal was to hav e incumb ent

LECs recover a large share of the NTS common line costs [directly] fro m endusers instead of carriers, and to recover these costs on a flat-rated, rather than on a usage-sensitive, basis." Order ¶ 68. This de cision resulted from recognition that "'[a] subscriber w ho does not use the subscriber line to place or receive [interstate] call s 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. 2 8, 1983). Thus, simply by requesting telephone service, the subscriber "causes" local loop costs, whether it uses the service for intrastate o r inter state calls. See id. at 1113-14. It is therefore appropriate and rational for th e 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-lin e business li nes does not result in a windfall for IXCs. The FCC has exhaustivel y 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 no t competiti ve to subsidize services that are subject to competition. Th e Commiss ion, with respect to interstate services, and the States, with respect to intrastate serv ices, shall establish any necessary cost allocation rules , accounting safeguards, and guidelines to ensure that service s in cludedin the definition of universal service bear no more than a reasonabl e share of the joint and common costs of facilities used t o provide those services.

47 U.S.C.A. § 254(k). Texas Counsel argues that, by virtue of this provision of th e 1996 Act, the recovery of joint and common costs, such as NTS loop costs, must b e bo rne mutually both by end users and by IXCs, and that the FCC is seeking to shif t additi onal NTS loop cost recovery from the rates LECs charge IXCs for interstat e
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-74-

co strecovery by the IXCs through competitive services will be reduced throug h increases on end users for basic services.
When the Commission implemented the language of § 254(k) in its accompanyi ng regulations, it noted that "the Commission has focused its attention on the incentive s that carriers m ay have to recover the costs of competitive services from subscribers to less c ompetitive, regulated services by misallocating the costs of their competitiv e services." In re Implementation of Section 254(k) of the Communications Act of 1934, as Amended , F CC 97-163, 12 FCC Rcd No. 11 6415 ¶ 2 (released May 8, 1997). To prevent su ch misallocations of costs, the FCC established a system of safeguards , inclu ding cost allocation rules, "designed to inhibit carriers with market power i n regulatedservice 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 th e prohibition again st using non-competitive services to subsidize competitive services is unpersuasive. As the FCC noted, t he first sentence of § 254(k) "addresses the concern that [incumb ent LECs] may attempt to gain an unfair market advantage in competitive markets by all ocating to their less competitive services, for which subscribers have no available alternative, an excessive portion of the costs incurred by their competitiv e operations." Id. ¶ 7. Whether a LEC allocates al l 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 faciliti es 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 invo lve 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 def initionof universal service to bear more than a reasonable share of the joint an d common costs of facilities used to provide those services. Section 254(k) separates-75-

telecommunications services into those that are supported by universal service, an d those that are not. The statute empowers the FCC to establish rules to prevent LECs from overallocating to supported ser vices the costs of facilities that are used to provide servic es in both categories. See id. ¶ 8. Because the SLC is a method of recoverin g 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,

a n d 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 choic e 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 Aeron autical 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 th e Legislature's design, we give that reading controllingweight, even if it is not the answer 'the court would have reached if the question initially had arisen in a judicia l proceeding.'" Regi ons 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 FC C reasonably exercised its authority under the Telecommunications Act of 1996 t o regulate rates for interstate services. Accordingly, the petitions for review are denied.-76-

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.