Opinion ID: 757345
Heading Depth: 1
Heading Rank: 3

Heading: IXC Petitioners

Text: 43 The IXC petitioners argue that the Commission's decision not to lower interstate access charges to equal economic cost is arbitrary, capricious, and inconsistent with the FCC's responsibility to promulgate regulations that best serve the public interest. They contend that the existing access charge system, rife with non-cost-based rates and implicit subsidies, violates FCC precedent and various provisions of the 1996 Act. Furthermore, they claim that by adopting a market-based, rather than a prescriptive, approach to driving access rates toward economic costs, the Order fails to remedy the defects in the current system. The FCC, on the other hand, argues that the current system is lawful and that the market-based approach adopted in the Order represents a reasonable attempt to shift from one type of [lawful regulatory system] to another ... gradually to permit the affected carriers, subscribers and state regulators to adjust to the new pricing system. National Ass'n of Regulatory Util. Comm'rs, 737 F.2d at 1135-36 (upholding gradual shift to flat-rate end-user access charges in order to avoid excessively burdening carriers). 44 The IXC petitioners first argue that the FCC failed to provide a reasoned explanation for its decision to adopt a market-based approach to interstate access charge reform rather than a prescriptive approach under which the Commission sets rates at economic cost levels. The FCC's explanation for declining to prescribe access charge rates--the impracticability of developing a forward-looking cost model necessary to determine the economic costs of the services--is, according to the IXC petitioners, contrary to the Commission's position taken in an identical regulatory situation. The IXC petitioners contend that the FCC has directed states to determine the economic costs of certain unbundled network elements in order to develop a forward-looking cost model for local services to be used in determining universal service support needs. But see Iowa Utils. Bd., 120 F.3d at 793-800 (holding that FCC lacks jurisdiction to issue pricing rules for local telecommunications traffic, and vacating the provisions of the Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, CC Docket No. 96-98 (Aug. 8, 1996), that attempted to impose pricing rules on the states). The network elements involved in the local-services project are, according to the IXC petitioners, identical to those necessary to develop a reliable cost model for interstate access charges. Therefore, the IXCs contend, the FCC's assertion that it cannot develop the cost model necessary to establish prescriptive rates for interstate access charges is unavailing. 45 The FCC argues that the two projects are distinguishable and that its position in regard to access charges is supported by long recognized regulatory problems associated with the allocation of common costs that are not as prevalent in a determination of the economic costs of unbundled network elements. See, e.g., MCI Telecomms. Corp., 675 F.2d at 410. The Commission has explained that separate telecommunications services are typically provided over shared network facilities, the costs of which may be joint or common with respect to some services. Local Competition Order p 678 (emphasis added). The FCC notes, for example, that the local loop is used to provide virtually all telephone services, but, in setting rates for the various services, regulations must allocate a portion of the common loop cost to each individual service that uses the loop. By contrast, unbundled network elements are generally treated as distinct facilities, the entire cost of which is reflected in the rate for that particular element. Due to the difficulty in creating a reliable forward-looking cost model for interstate access services, a prescriptive plan would not be feasible at the present time, even if the agency believed such a plan were preferable. We find that the FCC's explanation is an adequate, although perhaps not compelling, justification for its refusal to set prescriptive rates for interstate access service. Given our deferential standard of review, this is all that is required. 46 The IXC petitioners further argue that, even if the Commission's stated reason for rejecting prescribed cost-based rates was satisfactory, the FCC was required to explain why a market-based approach was likely to meet the public interest by lowering access charges to an amount equal to economic costs. Citing an absence of evidence that local telephone service markets have developed the level of competition necessary to drive interstate access charges to economic costs, the IXC petitioners contend that the FCC's decision to adopt a market-based approach is arbitrary and capricious. 47 The FCC counters that its objective was to drive access charges toward competitive levels in a way that was pragmatic, would preserve universal service, would avoid unnecessary economic dislocation, and was consonant with Congress's directive that the Commission replace regulation with competition to the greatest extent possible consistent with the public interest. See, e.g., 47 U.S.C.A. § 257(b) ([T]he Commission shall seek to promote the policies and purposes of this chaptor favoring diversity of media voices, vigorous economic competition, technological advancement, and promotion of the public interest, convenience, and necessity.); see also Order pp 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. Corp., 675 F.2d at 413 (quoting Aeronautical Radio, Inc. v. FCC, 642 F.2d 1221, 1228 (D.C.Cir.1980)) (alteration by this Court, cert. denied, 451 U.S. 920, 101 S.Ct. 1999, 68 L.Ed.2d 311 (1981)). The Commission explained that competitive markets are far better than regulatory agencies at allocating resources and services efficiently for the maximum benefit of consumers. Order p 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., p 1. We note further that § 205(a) permits the FCC to take the extreme action of prescribing rates only when, among other things, the rates currently charged are or will be in violation of any of the provisions of the Act. 47 U.S.C. § 205(a) (1994). The FCC has reasonably exercised its predictive judgment in concluding that competition in the local telephone services market will effectively drive interstate access charges to economic costs. See City of St. Louis, 936 F.2d at 1534 (noting that judicial deference to agency action is especially important when agency's judgments are predictive). If, in light of actual market developments, the Commission determines that competition is not having the anticipated effect on access charges, the agency presumably will revisit this issue. We cannot conclude at this time that the FCC's decision to adopt a market-based approach to interstate access reform was arbitrary, capricious, or in derogation of the public interest in light of the broad discretion Congress has given the Commission in setting interstate rates. 48 The IXC petitioners next contend that the FCC failed to explain adequately its decision to retain inflated access charges to the detriment of long-distance carriers in order to avoid the negative consequences to LECs of imposing cost-based rates immediately. They argue that the LECs have enjoyed excessive and unlawful earnings as a result of access charges based on historical rate-of-return costs rather than on forward-looking economic costs. The FCC has acknowledged that non-cost-based access charges harm both long-distance companies and their customers and impede competition in the long-distance market. See, e.g., Order p 30. Yet, according to the IXC petitioners, the Commission has failed to explain why these concerns have not been alleviated through an immediate move to cost-based access charges. According to the IXC petitioners, the only effect on the long-distance market that the FCC addressed was the effect these rates have on competition when local telephone companies also provide long-distance services directly or through an affiliate. They argue that, although a LEC would impose the same inflated access charge on its affiliate as it would on unaffiliated long-distance companies, because of the affiliation, the transaction has no true economic effect. The IXC petitioners contend that perpetuating inflated access charges allows LECs and their affiliate long-distance companies to take advantage of their lower real cost of access to cherry pick the IXCs' most lucrative customers or to engage in price squeezing to undercut the IXCs' prices. Furthermore, unaffiliated long-distance companies would be inclined to purchase inefficient, but less expensive, access arrangements from alternative providers, while LEC-affiliated long-distance companies would always use the most efficient access arrangements and incur only actual, rather than inflated, costs. The IXC petitioners contend that the FCC's rationale and its reliance on alleged safeguards to prevent these situations are insufficient to justify its decision. 49 The FCC initially notes that the access rates charged by incumbent LECs, while based on historical costs rather than forward-looking economic costs, are permissible under the just and reasonable standard prescribed by § 201(b) of the Act. Cf., e.g., Competitive Telecomms., 117 F.3d at 1072 (noting just and reasonable standard under § 251 of the 1996 Act). Furthermore, the Commission disputes the correlation the IXC petitioners claim exists between the LECs 1996 earnings levels and inflated access rates under the current price-cap regime. The FCC points out that higher returns for price-cap carriers do not necessarily indicate imposition of unlawful rates under the price-cap regime. Rather, the purpose of price-cap regulation is to promote efficient use of the network while ensuring that rates, as opposed to earnings, are no greater than they would have been under historical rate of return regulation. See Order pp 292-93. Furthermore, even if LECs were earning unlawfully high returns as a result of current historic-cost-based access charges, setting rates on the basis of forward-looking economic costs is not statutorily required, and the FCC could impose an alternative solution that effectively and permissibly reduced rates. As to the IXCs' argument that the Commission's failure to prescribe access charges to forward-looking economic costs creates conditions for an anticompetitive price squeeze when a LEC affiliate offers interexchange service, the FCC responds that these concerns are unwarranted because adequate safeguards are in place to prevent such an occurrence. See Id. pp 278-79, 281. The Commission notes that independent (non-Bell Operating Company) incumbent LECs 13 have been providing long-distance service for some time with no substantiated complaints of a price squeeze. Id. p 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., p 280. Deferring, as we must, to the agency's expertise in this highly technical area, we conclude that the FCC adequately explained its decision not to prescribe access charges at 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 curiam) (noting that reviewing court may not substitute its judgment for that of the agency and must give substantial deference to agency determinations). 50 The IXCs next contend that the FCC's failure to prescribe access charges at forward-looking economic costs leaves implicit universal subsidies embedded in current access charges in violation of the 1996 Act. These subsidies allegedly violate (1) § 254(d) because, being recovered primarily from IXCs, they are not equitable and nondiscriminatory; (2) § 254(e) because they do not provide universal service support that is explicit; and (3) § 254(k) because they constitute prohibited subsidies. These claims, like the BellSouth claims addressed earlier in this opinion, are premised upon the mistaken assumption that § 254 requires immediate implementation of a new universal support mechanism. As we noted above, § 254 requires merely that the Commission establish a specific timetable for implementation of the new universal support regime, 47 U.S.C.A. § 254(a)(2), and the FCC has complied with this mandate, see Order p 47. 51 In a related argument, the IXCs contend that the FCC's regulatory choice of a market-based approach to drive access charges to economic costs cannot be justified on the basis of universal service support needs, because the Commission did not rely on this rationale in the Order. If the agency itself has not provided a reasoned basis for its action, the court may not supply one. Downer, 97 F.3d at 1002. Moreover, the IXCs argue that even were this Court permitted to consider this untimely justification, universal service needs cannot supply a reasoned basis for permitting inflated access charges after January 1999, when the new universal service mechanism will be implemented. 52 We note that the Commission explained in the Order that it would not remove all implicit [universal service] support from all access charges immediately because eliminating [such support] all at once might have an inequitable impact on the incumbent local exchange carriers, a statement that can be read to implicate universal service support needs. Order p 9; see also id. p 46 (noting that a prescription could result in a substantial decrease in revenue for incumbent LECs, which could prove highly disruptive to business operations, even when new explicit universal service support mechanisms are taken into account). While the FCC, in the Order, may have made only passing, nonspecific reference to universal service support needs as grounds for this decision, we cannot say that the Commission is precluded from advancing the universal service rationale for its decision not to prescribe forward-looking economic costs. Moreover, the IXCs' argument ignores the fact that the Commission believed that prescribing rates was, in any circumstances, an inferior solution to the problem. The FCC was informed by Congress's directive to promote competition and reduce regulation, Telecommunications Act of 1996, Pub.L. No. 104-104, 110 Stat. 56 (to be codified as amended in scattered sections of 47 U.S.C.), and elected the market-based approach based on this mandate, in addition to any universal service support considerations. 53 We have reviewed carefully the FCC's justifications for retaining the current interstate access charge regime and find its decision based on these factors to be neither arbitrary nor capricious. We find that the Commission's discretionary authority to exercise its expertise necessarily includes the discretion to adopt a market-based approach rather than a prescriptive approach to driving interstate access rates toward economic costs. As this Court has noted, it is clear from the [1996] Act that Congress did not intend all access charges to move to [forward-looking] cost-based pricing, at least not immediately. Competitive Telecomms., 117 F.3d at 1072.
54 The IXC 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, capricious, inconsistent with the Commission's own policy, and a violation of the District of Columbia Circuit's order in CompTel. They argue that, although the FCC has acknowledged that the TIC is not cost-based, and adversely affects the development of competition in the interstate access market, Order p 212, it has refused to move immediately to eliminate these non-cost-based transport charges and has failed to explain its reasons for not doing so. In CompTel, the District of Columbia Circuit directed the FCC to move expeditiously upon remand to a cost-based alternative to the [TIC], or to provide a reasoned explanation of why a departure from cost-based ratemaking is necessary and desirable in this context. 87 F.3d at 532. 55 Contrary to the IXCs' contention that the FCC has not made a concerted effort to determine and allocate the costs improperly included in the TIC, the Commission has found a series of service-specific costs that had been incorporated in the TIC, but that could be separated out and charged to long-distance carriers on a cost-causative basis. See Order pp 167, 170-73, 217, 219-21 (including SS7 signalling costs, p 217, multiplexing costs, p 173, and [h]ost/remote trunking costs, p 220). As to the remaining costs that could not be assigned to a particular facility--the residual TIC--the FCC implemented a plan designed to eliminate those costs as quickly as possible consistent with avoiding short-term market distortions. Id. p 234. LECs were instructed to migrate their remaining per-minute TIC charges to flat-rated pre-subscribed interexchange carrier charges, id., and to target their annual price-cap productivity adjustments to the TIC, see id. pp 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. p 64. In addition, to the extent that the residual TIC raises issues concerning the jurisdictional separations process, 14 the Commission stated that it will refer such issues to a Federal-State Joint Board, as required by the 1996 Act. See id. p 213. In our opinion, the FCC has made reasonable progress toward establishing a cost-based alternative to the TIC, and, in cases where this objective has proved elusive, the FCC has explained adequately its reasons for not acting immediately. 56 The Commission explained in the Order that its goal was to establish a mechanism to reduce and eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's remand. Id. Consistent with this objective, the agency properly adopted a number of short-term, transitional solutions to protect against needless disruption and unfairness, while pursuing its goal of moving toward cost-based rates. See, e.g., Rural Tel. Coalition v. FCC, 838 F.2d 1307, 1314-15 (D.C.Cir.1988). We conclude that the FCC's decisions temporarily to retain the TIC after reallocating identifiable costs to their particular elements, to eliminate gradually the residual TIC through, among other methods, price-cap targeting and the PICC, and to refer jurisdictional separations concerns to the Joint Board are not arbitrary, capricious, inconsistent with the agency's policies, or in violation of the District of Columbia Circuit's CompTel order.
57 The IXC petitioners next argue that the FCC's decision to retain non-cost-based tandem switching charges is arbitrary, capricious, inconsistent with the Commission's policy, and a violation of the D.C. Circuit's order in CompTel. They contend that the FCC failed to explain its decision to allocate overhead expenses--those not directly attributed to a particular service--to the tandem-switched transport relied upon by smaller long-distance carriers in a manner different from the way in which overhead costs are allocated to the direct-trunked transport relied upon by AT & T, and failed to remedy the discriminatory results of this decision. The FCC's Part 69 allocation rules, 15 according to the IXC petitioners, do not distribute the LECs' overhead proportionately among interstate service categories. These rules allocate a predominant share of overhead to switched access (including switched transport), while special access (including direct-trunked transport) is assigned comparatively little overhead. The IXC petitioners claim that the FCC failed to consider new cost data, failed to gather additional information in light of the CompTel remand, and failed to undertake any type of empirical review of tandem switching costs and overhead before reaching its conclusion in the Order. The FCC's explanation that it is reasonable to have set overhead loadings for tandem switching consistently with the overhead loadings for local switching misses the point, according to the IXC petitioners. Order p 203. Finally, they object to the Commission's decision to reassign some TIC costs to the tandem switching charge as exacerbating the problem, and to the FCC's reliance on market forces to reduce the tandem switch charges to cost as unreasonable and without supporting evidence. 58 After reviewing the FCC's revisions to the transport rate structure, including those associated with tandem-switched transport, we conclude that they lie well within the agency's authority and discretion, are consistent with Congress's cost-causation goal, and reflect a reasonable outcome in light of that goal. In CompTel, the D.C. Circuit ordered the FCC to substantiate that its current method of allocating overhead is cost-based, or choose a method that is. 87 F.3d at 536. The Commission reviewed its Part 69 cost allocation rules, made some changes that it determined would produce a reasonable allocation of interstate costs, and concluded that no alternative that had been suggested by the responding parties during the rulemaking proceeding would ensure a more accurate cost allocation. See Order pp 202-205. The IXC petitioners do not criticize any particular rule of Part 69, but rather assert that the effect of these allocation rules as a whole is a discriminatory underallocation of overhead to special access and an overallocation of overhead to other access elements including tandem switching. The IXC petitioners, however, do not present any direct evidence of this alleged disparity in allocation. As the FCC explained in the Order, these rules established category revenue requirements that included overheads allocated generally based on relative costs. Id. p 203. It further stated: 59 We find that it is reasonable to have set overhead loadings for tandem switching consistently with the overhead loadings for local switching, and disagree with those parties that argue that there is no cost justification for the current allocation of overheads to the tandem switch. The direct costs of both kinds of switching are fundamentally the same in that both types of switches are comprised of ports and a switching matrix. By contrast, the direct costs of transmission consist of outside plant and circuit equipment and certain central office equipment. So long as consistent overhead loading methodologies were used across switching functions, and across transmission functions, we find that a reasonable cross-over is established for access customers between direct-trunked transport and tandem-switched transport. As competition develops, we can also rely on market forces to pressure incumbent LECs to allocate overheads among rate elements in economically efficient ways. 60 Id. In other words, the Commission concluded that similar access functions should receive similar overhead loadings. The Commission reasonably determined that there was no need to change the overhead loading attributed to tandem-switching because the current methods allocate overhead in a reasonable, cost-based manner. Id. p 202. The Commission's conclusion that each of the Part 69 cost allocation rules refined or adopted in the Order is reasonable and based on cost-causative principles, and its explanation for this belief, lead us to conclude that the agency's new rules for the computation of tandem switching charges are not arbitrary and capricious and are not in violation of the D.C. Circuit's order in CompTel.
61 The IXC petitioners next challenge the FCC's decision to eliminate the unitary rate option for tandem-switched transport as arbitrary and capricious in that it imposes inconsistent distance measurements for similar transmission services. According to the IXC petitioners, both tandem-switched transport and direct-trunked transport services generally follow the same transmission paths and therefore should be subjected to the same rates. In the Order, the FCC left the distance-sensitive rate structure for direct-trunked transport unaltered, but eliminated the likewise distance-sensitive unitary rate option for tandem-switched transport. Under the unitary rate option, long-distance carriers paid for tandem-switched transport in the same manner they paid for direct-trunked transport: through an end-to-end charge, with mileage measured as airline mileage from the LEC's wire center to the end office. See Order pp 158, 159. With the imposition of the new three-part rate structure, tandem-switched service is broken down into its component parts and rates are applied as follows: (1) a per-minute charge for transmission from the end office to the tandem; (2) a per-minute charge for the tandem switching function itself; and (3) a flat-rated charge for transport over dedicated transport facilities from the tandem to the serving wire center. Id. p 175. The charges for transmission from the end office to the tandem and from the tandem to the serving wire center remain distance-sensitive, although they are not computed on an end-to-end basis. The IXC petitioners contend that by allowing the LECs to charge separately for each of the three legs of the transmission, the LECs will route this traffic inefficiently in order to increase artificially the distance involved in completing the transmission, thereby inflating the costs to tandem-switched transport customers. 62 The FCC justified its elimination of the unitary rate option because it does not accurately reflect the manner in which LECs incur costs in providing tandem-switched transport and, therefore, does not provide maximum incentive for IXCs to use transport facilities efficiently. Id. p 178. Furthermore, the unitary rate option inhibits the development of competitive alternatives to incumbent LEC tandem-switched transport. Id. p 179. The Commission concluded that the three-part rate structure most closely reflects the manner in which LECs incur the costs of each component of the overall tandem-switched transport service. Id. p 181. As the IXC petitioners recognize, purchasers of direct-trunked transport purchase transport capacity between two end points from the LEC. Tandem-switched transport customers, on the other hand, purchase use of the tandem switch to route traffic to their point of presence and specifically obligate the LEC to transport their traffic between the serving wire center and the tandem serving a particular end office. Because they cause the incumbent LEC to incur the costs of transmitting their traffic between the serving wire center and the tandem, tandem-switched transport customers should, as a matter of cost-causation, pay the costs of reaching the tandem. Order p 182. While the incumbent LEC may choose to route direct-trunked traffic through the tandem office based on its own assessment of whether it is economically efficient to do so, tandem-switched traffic must be routed to the tandem office, and so should bear the costs reaching the tandem. Id. p 186. The IXCs' contention that LECs would circuitously route tandem-switched traffic in order to increase distances and artificially inflate rates was addressed by the Commission in the Order and dismissed as unlikely since such behavior would place greater costs on the LEC in an environment that is designed to encourage competition. See id. pp 183-84. 63 We conclude that the FCC's decision to eliminate the unitary rate option for tandem-switched transport was neither arbitrary nor capricious. The Commission reasonably concluded that the three-part rate structure would encourage efficient use of transport facilities by allowing pricing that reflects the way costs are incurred, id., p 177, and permit the fullest development of competitive alternatives for each distinct element of tandem-switched transport, id. p 179.
64 The IXC petitioners next argue that the Commission's decision to abandon the admittedly imperfect interim rate structure for tandem-switched local transport that was based on an estimated 9000 minutes of use for each circuit 16 is arbitrary and capricious. According to the IXC petitioners, the method adopted by the FCC in the Order--compiling actual minutes of use per circuit in a year prior to implementation of the Order and using this figure as an estimate for future years--is incompatible with the agency's prior determination that the benefits to be obtained from a more individualized calculation were outweighed by the administrative convenience of a uniform figure. IXC Petitioners' Joint Brief at 68. The FCC justifies its position on the belief that its 9000 minute usage estimate is too high; but the IXC petitioners contend that, because competition presumably will increase usage of these circuits, the new method of calculating rates based on the prior year's annual use virtually guarantees that these usage estimates will be low by a substantial amount for every LEC. Order p 206. Moreover, the IXC petitioners argue that the Commission has not explained its rationale for selecting this option over other, more suitable alternatives. According to the petitioners, because the Commission failed to state any purpose for its decision to change methods, other than the inaccuracies of the old method, its choice of an even more inaccurate method is arbitrary and capricious. 65 The IXC petitioners' central argument fundamentally misapprehends the FCC's Order. Contrary to their assertion that the FCC's new method contemplates calculating a fixed usage estimate based on circuit usage for the year prior to implementation of the Order, and in turn applying that figure to all future years, the FCC's new rules require an annual recalculation of usage estimates based on the actual minutes of use during the prior year[ ]. Id. (emphasis added). The FCC explained that its shift from an arbitrary usage estimate number that consistently overstates minutes of use to a more precise measure of actual usage is consistent with the Commission's goals of moving toward cost-causational rates. The agency's choice of a reasonable solution from a number of acceptable alternatives is within the agency's discretion and is not arbitrary or capricious. 66
67 The IXC petitioners and Texas Counsel object to the Commission's decision to allow price-cap LECs to recover their contributions to the new universal service fund from the LECs' interstate customers--both end users and long-distance carriers--by increasing interstate access charge price caps imposed on interstate customers by the amount LECs contribute to the fund. The new universal service regime requires that all telecommunications carriers providing interstate telecommunications services contribute to the new universal service fund a proportion of their revenues derived from end users. See Universal Service Order p 39-40. Since both LECs and IXCs receive revenue from end users, both types of carriers must contribute to the fund. The IXC petitioners contend that, as a result of the agency's decision, long distance companies are required to pay their share of universal service support directly, and to also pay the LECs' share of universal service support through access charges. IXC Petitioners' Joint Brief at 70. This, according to the IXC petitioners, amounts to an implicit subsidy that discriminates against IXCs in violation of § 254(e), and is not competitively neutral as required by § 254(d). 68 We cannot agree that allowing LECs to recoup from their interstate customers the normal costs of providing telecommunications services to those customers amounts to creating a discriminatory implicit subsidy. As the FCC points out, mandatory contributions to the new universal service fund are real costs of doing business that will be incurred by both LECs and IXCs. The agency determined that [u]nder our recovery mechanism, carriers will be permitted, but not required, to pass through their contributions to their interstate access and interexchange customers. Universal Service Order p 829. Under this scheme, IXCs have the option of recovering their universal service contributions through rates to their long-distance customers. LECs have the same option of passing on the costs of contributions to their interstate customers--both end users and IXCs. See Order p 379. Access charges imposed on IXCs that include the LECs' universal service cost are not above cost since universal service contributions are a real cost of doing business. The flow-through of LEC universal service costs to its IXC customers is akin to the flow-through of IXC universal service costs to its long-distance customers--neither can be categorized as an implicit subsidy in violation of § 254(e). The IXC petitioners' argument that long-distance carriers affiliated with a LEC will have a competitive advantage over unaffiliated long-distance carriers because the flow-through of LEC universal service contributions to a subsidiary is not a real cost fails to persuade us that the FCC's decision is in contravention of § 254(d)'s requirement that rates be competitively neutral. As noted above, contributions to the new universal service fund are real costs of doing business; if a LEC decides not to pass through such costs to its long-distance affiliate, it must absorb the cost itself--which it is free to do under the Commission's rules. Moreover, a LEC may not discriminate against similarly situated carriers by passing through its contribution costs to non-affiliates while absorbing the costs for its affiliates. See Universal Service Order p 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). 69 Texas Counsel, on the other hand, apparently interprets the Order to mean that end users 17 alone will be subject to the pass-through of LECs' universal service contributions through increases in SLCs paid by end users. As the FCC notes, however, the pass-through of universal service costs generally will not result in any immediate increases in SLCs paid by end users because the calculation of the SLC is not currently affected by changes in the price-cap index. Furthermore, contrary to Texas Counsel's arguments, the FCC properly allowed price-cap increases only on interstate end-user revenues since the universal service contribution cost being passed through is assessed on the basis of end-user revenues. See Order p 379 ([P]rice cap LECs recovering their universal service obligation through interstate access charges must recover those contributions in the baskets for services that generate end-user interstate revenues.... The baskets containing end-user interstate services are the common line, interexchange, and trunking baskets.). Under the Commission's plan, the LECs have flexibility to determine how to recover their universal service contributions and to decide how much, if any, of those contributions to pass through to their customers. Id. 70 We conclude that the FCC's decision to allow LECs to recover their contributions to the new universal service fund from their interstate customers through an increase in the price-cap indices for baskets that generate end-user interstate revenues is not arbitrary or capricious or in violation of the 1996 Act. We note that this determination, based on extremely technical factors, has been made by the expert agency in charge of monitoring the telecommunications market and is entitled to deference--particularly because it involves an area requiring expertise. We further note that [t]his court ... patrols the perimeters of an agency's discretion. If an agency ... does not attempt either to close itself off from informed opinion or to extend its reach beyond the scope of permissible authority, then it is our duty to accept that judgment if it is rational and not unreasonable. National Ass'n of Regulatory Util. Comm'rs., 737 F.2d at 1140. We find that the FCC's decision is a rational and reasonable one under the 1996 Act.