Texas Office of Public Utility Counsel v. Federal Communications Commission

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_______________

No. 97-60421
_______________

TEXAS OFFICE OF PUBLIC UTILITY COUNSEL; CELPAGE, INC.;
SOUTHWESTERN BELL TELEPHONE COMPANY; GTE MIDWEST, INC.;
LOUISIANA PUBLIC SERVICE COMMISSION, an Executive Branch
Department of the State of Louisiana; COMSAT CORPORATION;
PEOPLE OF THE STATE OF CALIFORNIA;
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA;
IOWA UTILITIES BOARD; SOUTH DAKOTA PUBLIC UTILITIES COMMISSION;
PENNSYLVANIA PUBLIC UTILITY COMMISSION;
BELL ATLANTIC TELEPHONE COMPANIES;
VERMONT DEPARTMENT OF PUBLIC SERVICE; 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 INCORPORATED;
GTE WEST COAST INCORPORATED; CONTEL OF CALIFORNIA, INC.;
CONTEL OF MINNESOTA, INC.; CONTEL OF THE SOUTH, INC.;
PUBLIC SERVICE COMMISSION OF NEVADA;
CINCINNATI BELL TELEPHONE COMPANY;
FLORIDA PUBLIC SERVICE COMMISSION;
PEOPLE OF THE STATE OF NEW YORK;
PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK;
and
THE STATE CORPORATION COMMISSION OF THE STATE OF KANSAS,

Petitioners,

VERSUS

FEDERAL COMMUNICATIONS COMMISSION
and
UNITED STATES OF AMERICA,

Respondents.

_________________________
 Petitions for Review of a Final Order
of the Federal Communications Commission
_________________________
July 30, 1999

Before SMITH, DUHÉ, and EMILIO M. GARZA, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

This is a consolidated challenge to the most recent attempt of

the Federal Communications Commission ("FCC") to implement pro-

visions of the landmark 1996 Telecommunications Act (the “Act”).1

Petitioners, joined by numerous intervenors, challenge several

aspects of the FCC’s Universal Service Order (the “Order”) imple-

menting the provisions of the Act codified at 47 U.S.C. § 254. We

grant the petition for review in part, deny it in part, affirm in

part, reverse in part, and remand in part.

I. BACKGROUND.

A. THE 1996 ACT AND THE UNIVERSAL SERVICE ORDER.

Beginning with the passage of the Communications Act of 1934

(the "1934 Act"), Congress has made universal service a basic goal

of telecommunications regulation. As Section 1 of the 1934 Act

stated, the FCC was created

[f]or the purpose of regulating interstate and foreign
commerce in communication by wire and radio so as to make
available, so far as possible, to all the people of the
United States, without discrimination on the basis of
race, color, religion, national origin, or sex, a rapid,

1
Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (to be
codified as amended in scattered sections of title 47, United States Code).

2
 efficient, Nation-wide, and world-wide wire and radio
communication service with adequate facilities at
reasonable charges . . . .

47 U.S.C. § 151 (as amended).

Armed with this statutory mandate, the FCC historically has

focused on increasing the availability of reasonably priced, basic

telephone service via the landline telecommunications network.2

Rather than relying on market forces alone, the agency has used a

combination of implicit and explicit subsidies to achieve its goal

of greater telephone subscribership. Explicit subsidies provide

carriers or individuals with specific grants that can be used to

pay for or reduce the charges for telephone service. This form of

subsidy includes using revenues from line charges on end-users to

subsidize high-cost service directly and to support the Lifeline

Assistance program for low-income subscribers.

Implicit subsidies are more complicated and involve the

manipulation of rates for some customers to subsidize more afford-

able rates for others. For example, the regulators may require the

carrier to charge “above-cost” rates to low-cost, profitable urban

customers to offer the “below-cost” rates to expensive,

unprofitable rural customers.

2
In economic terms, universal service programs are justified as a way to
address a “market failure.” While the carriers have little incentive to expand
the telecommunications infrastructure into areas of low population density or
geographic isolation, each individual user of the network benefits from the
greatest possible number of users. See Eli M. Noam, Will Universal Service and
Common Carriage Survive the Telecommunications Act of 1996?, 97 COLUM. L. REV.
955, 958-59 (1997).

3
 For obvious reasons, this system of implicit subsidies can

work well only under regulated conditions. In a competitive en-

vironment, a carrier that tries to subsidize below-cost rates to

rural customers with above-cost rates to urban customers is vul-

nerable to a competitor that offers at-cost rates to urban cus-

tomers. Because opening local telephone markets to competition is

a principal objective of the Act, Congress recognized that the

universal service system of implicit subsidies would have to be re-

examined.

To attain the goal of local competition while preserving

universal service, Congress directed the FCC to replace the patch-

work of explicit and implicit subsidies with “specific, predictable

and sufficient Federal and State mechanisms to preserve and advance

universal service.” 47 U.S.C. § 254(b)(5). Congress also speci-

fied new universal service support for schools, libraries, and

rural health care providers. See 47 U.S.C. § 254(h). It then

directed the FCC to define such a system and to establish a

timetable for implementation within fifteen months of the passage

of the Act.

The Federal-State Joint Board (the “Joint Board”), created by

the Act to coordinate federal and state regulatory interests,

issued two recommendations on how to implement the universal

service provisions.3 The FCC met the statutory deadline when it

3
The first Recommended Decision was issued on November 8, 1996
(continued...)

4
issued the Order on May 8, 1997.4 Since that time, the agency has

issued seven reconsideration orders (the last one on May 28, 1999)

and has made two reports to Congress regarding the Order.

The FCC designated a set of core services eligible for

universal service support, proposed a mechanism for supporting

those services, and established a timetable for implementation.

See Order ¶¶ 21-42. Pursuant to the Act, the agency developed

rules for modifying the existing system of support for high-cost

service areas and created new support programs for schools,

libraries, and health care facilities.

1. HIGH-COST SUPPORT.

The FCC’s plans for changing the high-cost support system

required it to resolve a number of complicated issues, including

(1) what methodology to use for calculating high-cost support;

(2) how to allocate costs between the states and the federal

(...continued)
(12 FCC Rcd 87 (1996)), the second Recommended Decision on November 25, 1998 (13
FCC Rcd 24744 (1998)).
4
Congress also directed that the FCC establish rules to achieve the local
competition goals of the Act within six months of the Act’s enactment. The
agency met this deadline when it issued the Local Competition Order on August 8,
1996. Almost all parts of this order were affirmed by the Supreme Court. See
AT&T v. Iowa Utils. Bd., 119 S. Ct. 721 (1999).

On the same day it issued the Order, the FCC released the Access Charge
Order. Access charges are the charges assessed between local exchange companies
(LEC's) and interexchange companies (IXC's) for the use of one network by
callers from the other network. Challenges to this order were also consolidated
before the Eighth Circuit. See Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523
(8th Cir. 1998).

5
government; (3) which carriers should be required to contribute to

the support system; and (4) when to implement the high-cost support

program. The agency resolved the question of how to calculate the

proper amount of high-cost support by accepting the Joint Board’s

second recommendation to identify areas where the forward-looking

cost of service exceeds a cost-based benchmark and to provide extra

support to any state that cannot maintain reasonable

comparability.5 See Second Recommended Decision ¶ 19; Seventh

Report and Order ¶ 61 n.157.

Most importantly, the FCC decided to use the “forward-looking”

costs to calculate the relevant costs of a carrier serving a given

geographical area. In other words, to encourage carriers to act

efficiently, the agency would base its calculation on the costs an

efficient carrier would incur (rather than the costs the incumbent

carriers historically have incurred).6

5
This methodology is a departure from the revenue-based national benchmark
proposed in the Order. The revenue-based benchmark was challenged for including
discretionary revenues in its calculation and for its nationwide scope. Because
of the revisions proposed by the Joint Board’s Second Recommended Decision, we
now consider those challenges to the prior revenue-based methodology moot. See
infra part III.A.1.b.
6
The agency made a decision to provide only 25% of the funds for high-cost
support, leaving the state commissions (“the states”) to provide the rest of the
funds. According to the FCC, the states traditionally have provided a majority
of universal service support, and if the agency were to fund all the high-cost
support, it would overcompensate carriers. Moreover, the FCC claims that the 25%
figure approximates the costs that historically have been assigned to the
interstate jurisdiction. See Order ¶ 201.

The Joint Board, however, recommended that the FCC scrap the 25%/75%
division of responsibility in favor of a more flexible plan of allocation. See
Second Recommended Decision ¶¶ 4-5, 41-46. The FCC accepted the Joint Board’s
recommendation and eliminated the 25/75 rule on May 27, 1999, thereby mooting the
(continued...)

6
 The FCC developed rules for determining which carriers should

be required to contribute to the interstate universal service

support system and how their contributions should be calculated.

It decided to require all telecommunications carriers and certain

non-telecommunications carriers to contribute in proportion to

their share of end-user telecommunications revenues. See Order

¶¶ 39-42. The agency determined that to reduce the burden on

individual carriers’ prices, the carriers' contribution base should

be as broad as possible. See Order ¶ 783. Therefore, the agency

required contributing carriers to include their international tele-

communications revenues in their contribution base and rejected

claims by certain carriers,7 which do not receive direct subsidies

from the support program, seeking an exemption from making any

contributions. See Order ¶ 805.

Finally, the FCC adopted a timetable for implementing its

high-cost support plan. Because it has not yet developed an accu-

rate assessment of forward-looking costs, it delayed implementation

of its support program for non-rural carriers until January 1,

(...continued)
issue for this court. See infra part III.A.1.c. See also Seventh Report and
Order ¶ 3 (“We explicitly reconsider and repudiate any suggestion in the First
Report and Order that federal support should be limited to 25 percent of the
difference between the benchmark and forward-looking cost estimates . . . .”).

7
These carriers include wireless service providers of paging and
commercial mobile radio service ("CMRS"). The FCC also rejected a claim by CMRS
providers seeking an exemption from making contributions to state support funds.

7
2000.8 Additionally, because the agency believes it will take even

longer to develop accurate forward-looking cost models for rural

carriers, it delayed the implementation of its new support plan for

rural carriers to “no sooner than January 1, 2001." See Order

¶ 204.

During this delay in implementation, the FCC decided that

carriers will continue to receive support at the levels generated

by existing universal support programs. According to the agency,

this gradual, phased-in plan for implementing its new high-cost

support system meets the Act’s requirement of a “specific timetable

for completion.” See 47 U.S.C. § 254(a)(2).

2. SCHOOLS AND LIBRARIES.

Pursuant to § 254(h), the FCC adopted rules implementing new

programs for schools, libraries, and health care facilities, in

particular by providing universal service support for internet

access and internal connections in schools and libraries. See

Order ¶ 436. The agency decided that any entity, including non-

telecommunications carriers, that provides internet access or

internal connections to schools and libraries will receive uni-

versal service support. See Order ¶ 594.

To fund the new § 254(h) programs, the FCC accepted the Joint

8
In the original order, the FCC had planned implementation by January 1,
1999. This date was delayed until July 1, 1999, and again to January 1, 2000.
See Seventh Report and Order ¶ 5.

8
Board’s recommendation to assess the interstate and intrastate

revenues of providers of interstate telecommunications service.

See Order ¶ 808. Because many states do not already have similar

support programs for schools and libraries, the agency justified

its inclusion of intrastate revenues as necessary to ensure

adequate funding for § 254(h) programs.

B. CHALLENGES TO THE ORDER.

On September 5, 1997, petitioner Celpage Inc. filed a motion

in this court to stay the Order. We denied that motion on

October 16, 1997, and rejected a similar motion by various rural

telephone companies on December 31, 1997. Their petitions, along

with challenges to the Order by other petitioners, were

consolidated in this court.

There are two sets of challenges to the Order. The first

regards the FCC’s plan for replacing the current mixture of

explicit and implicit subsidies with an explicit universal service

support system for high-cost areas. On both statutory and con-

stitutional grounds, petitioners attack (1) the methodology for

calculating support under the plan; (2) the allocation of funding

responsibilities between the FCC and the states; and (3) the

agency’s restrictions on how carriers can recover universal service

costs.

Other petitioners attack the FCC’s high-cost support plan as

9
an encroachment on state authority over intrastate

telecommunications regulation because it restricts state

eligibility requirements and imposes a “no disconnect” rule for

low-income telephone subscribers. Petitioners also challenge, for

lack of specificity and for failing to delay implementation of the

plan for some rural carriers, the FCC’s timetable for implementing

the new universal service plan. Additionally, petitioners

challenge the FCC’s system for assessing contributions, arguing

that it improperly includes CMRS providers and unfairly assesses

carriers on the basis of their international and interstate

revenues.

The second set of challenges regards the FCC’s proposal for

implementing § 254(h) programs supporting schools, libraries, and

health care providers. Petitioners claim that the FCC imper-

missibly expanded the scope of § 254(h) support to include the

provision of internet access and internal connections. Moreover,

they attack the FCC’s statutory authority to provide such support

to non-telecommunications providers.

Additionally, petitioners charge that the agency encroached on

state authority to implement state support programs for schools and

libraries and failed to designate which telecommunications services

will receive § 254(h) support. They also argue that the FCC

exceeded its statutory authority by requiring subsidies for toll-

free telephone calls to internet service providers by non-rural

health care providers. Finally, they attack the FCC’s § 254(h)

10
contribution system because it assesses both the intrastate and

interstate revenues of carriers.9

We affirm most of the FCC’s decisions regarding its

implementation of the high-cost support system, concluding, for the

most part, that the Order violates neither the statutory

requirements nor the Constitution. We remand for further

consideration, however, as to the FCC’s decision to assess

contributions from carriers based on both international and

interstate revenues. We also reverse (1) the requirement that

ILEC's recover their contributions from access charges and (2) the

blanket prohibition on additional state eligibility requirements

for carriers receiving high-cost support.

On jurisdictional grounds, we reverse the rule prohibiting

local telephone service providers from disconnecting low-income

subscribers. We also conclude that the agency exceeded its juris-

dictional authority when it assessed contributions for § 254(h)

“schools and libraries” programs based on the combined intrastate

and interstate revenues of interstate telecommunications providers

9
The FCC also determined that it could require carriers to contribute,
based on both interstate and intrastate revenues, to high-cost support as well
as § 254(h) support. But for policy reasons, it decided to assess contributions
on both interstate and intrastate revenues for support of § 254(h) programs only.
It maintains, however, that it may impose similar assessments for high-cost
support as well. See Seventh Report and Order ¶¶ 87-90.

We review the states’ challenge to the FCC’s claim of jurisdictional
authority over intrastate rates in the context of its actions regarding support
of the § 254(h) programs, but we also discuss its implications for FCC
jurisdictional authority for support of high-cost programs. See infra, part
III.B.5.

11
and when it asserted its jurisdictional authority to do the same on

behalf of high-cost support.

II. STANDARD OF REVIEW.

When deciding whether the FCC has the statutory authority to

adopt the rules included in the Order, we review the agency’s in-

terpretation under Chevron U.S.A., Inc. v. Natural Resources De-

fense Council, Inc., 467 U.S. 837 (1984), by first deciding whether

“Congress has directly spoken to the precise question at issue,”

id. at 842. If so, we “give effect to the unambiguously expressed

intent of Congress.” Id. at 842-43. In this situation, we reverse

an agency’s interpretation if it does not conform to the plain

meaning of the statute. This level of review is often called

“Chevron step-one” review.

Where the statute is silent or ambiguous, however, “the

question for the court is whether the agency’s answer is based on

a permissible construction of the statute.” Id. at 843. We may

reverse the agency’s construction of an ambiguous or silent

provision only if we find it “arbitrary, capricious or manifestly

contrary to the statute.” Id. at 844. That is to say, we will

sustain an agency interpretation of an ambiguous statute if the

interpretation “is based on a permissible construction of the

statute.” Id. at 843. We refer to this more deferential level of

review as “Chevron step-two” review.

12
 The Administrative Procedure Act (“APA”) also authorizes us to

reverse an agency’s action if it acted arbitrarily or capriciously

in adopting its interpretation by failing to give a reasonable

explanation for how it reached its decision. See 5 U.S.C. § 706

(2)(A) (1994); see also Harris v. United States, 19 F.3d 1090 (5th

Cir. 1994). “Arbitrary and capricious” review under the APA

differs from Chevron step-two review, because it focuses on the

reasonability of the agency’s decision-making processes rather than
10
on the reasonability of its interpretation.

Finally, we do not give the FCC’s actions the usual deference

when reviewing a potential violation of a constitutional right.

“The intent of Congress in 5 U.S.C. § 706(2)(B) was that courts

should make an independent assessment of a citizen's claim of

constitutional right when reviewing agency decision-making.”

Porter v. Califano, 592 F.2d 770, 780 (5th Cir. 1979).

10
See Arent v. Shalala, 70 F.3d 610, 614-16 (D.C. Cir. 1995); see also Gary
Lawson, Outcome, Procedure and Process: Agency Duties of Explanation for Legal Con-
clusions, 48 RUTGERS L. REV. 313 (1996). We recognize the difference between Chevron
step-two review and the APA’s arbitrary and capricious review is not always obvious.
Indeed, the different standards of review overlap, because both require a reviewing
court to decide whether the agency action is “manifestly contrary to the statute”
(Chevron) or “otherwise not in accordance with law.” (APA). See Arent, 70 F.3d at
615 & n.6.

13
 III. ANALYSIS.

A. HIGH-COST SUPPORT.

1. METHODOLOGY FOR CALCULATING SUPPORT FOR HIGH-COST AREAS.

a. FORWARD-LOOKING COST-OF-SERVICE METHODOLOGY.

GTE and Southwestern Bell (collectively “GTE”) and the FCC

engage in a fairly complex economic debate over the merits of

calculating costs using the forward-looking cost models based on

the “least cost, most efficient” carrier.11 Because incumbent local

11
As an initial matter, the FCC asks us to dismiss all challenges to its
methodology for calculating high-cost support, claiming that such challenges are
not ripe in light of the Joint Board’s Second Recommended Decision. The Joint
Board advised the agency to make substantial revisions in the high-cost support
methodology, including the elimination of the 25%/75% division between federal
and state contributions and the modification of the revenue benchmark used to
calculate high-cost support. The FCC accepted these recommendations, and we
dismiss challenges to those issues as moot. See infra parts III.A.1.b and c.

But the FCC did not modify other portions of the Order, including its use
of forward-looking cost models. See Seventh Report and Order ¶ 48. We agree
with GTE that the mere existence of a Joint Board recommendation does not permit
the FCC to block all judicial review of its high-cost methodology, especially
after the agency has issued its order implementing these recommendations.

The Supreme Court has consistently endorsed judicial review of final agency
actions. “Although . . . the FCC regulation could properly be characterized as
a statement only of intentions, the Court held that 'such regulations have the
force of law before their sanctions are invoked as well as after. When, as here,
they are promulgated by order of the Commission and the expected conformity to
them causes injury cognizable by a court of equity, they are appropriately the
subject of attack . . . .'” Abbott Lab. v. Gardner, 387 U.S. 136, 150 (1967)
(quoting Columbia Broadcasting Sys. v. United States, 316 U.S. 407, 418-19
(1942)).

Additionally, we consider four factors when evaluating a claim of lack of
ripeness in the administrative context: (1) whether the issues are purely legal;
(2) whether the issues are based on a final agency action; (3) whether the
controversy has a direct and immediate impact on the plaintiff; and (4) whether
the litigation will expedite, rather than delay or impede, effective enforcement
by the agency. See Dresser Indus. v. United States, 596 F.2d 1231, 1235 (5th
Cir. 1979). To find a case ripe, we require the party bringing the challenge
(here, GTE) to establish all four factors in seeking judicial review. See
Merchants Fast Motor Lines, Inc. v. Interstate Commerce Comm’n, 5 F.3d 911, 920
(5th Cir. 1993).
(continued...)

14
exchange carriers (“ILEC's”) such as GTE will receive their

subsidies, under the new system, based on the difference between

the costs of providing service to a high-cost region and the

revenue that could be derived from that service, GTE fears that

using the costs of a hypothetical most-efficient carrier will

significantly reduce the amount of universal service support it

receives.

i. STATUTORY INTERPRETATION.

The question, of course, is not whether it is good policy for

the FCC to use such cost models,12 but whether the decision to adopt

(...continued)
The FCC does not claim that the issues presented are not purely legal, and
we have already explained why, under Abbott Laboratories, the Order remains a
final agency action. There is no indication that the petitioners are currently
unaffected by the legal force of the Order. Finally, we agree with GTE that
because the FCC has had ample time (three years) and opportunity to implement the
Order, judicial guidance on the legality of the Order will not delay or impede
the agency’s ability to carry out its statutory duties.
12
GTE refers us to Justice Brandeis’s dissent (joined by Justice Holmes)
in Missouri ex rel. Southwestern Bell Tel. Co. v. Public Serv. Comm’n, 262 U.S.
276 (1922), criticizing use of “fair value” (another version of forward-looking
cost models) in ratemaking. GTE notes that Justice Breyer has endorsed Justice
Brandeis’s criticisms. Even in his separate opinion in Iowa Utilities, however,
Justice Breyer did not advocate that the Court prohibit the FCC from adopting
forward-looking cost models. See Iowa Utilities, 119 S. Ct. at 752 (Breyer, J.,
concurring in part and dissenting in part) (“These examples do not show that the
FCC’s rules are themselves unreasonable”).

Most importantly, the Brandeis criticism of “fair value” has never
reflected the view of a majority of the Court, which on several occasions has
declined to adopt Justice Brandeis’s views on this question. See Federal Power
Comm’n v. Texaco Inc., 417 U.S. 380 (1974); Federal Power Comm’n v. Hope Natural
Gas Co., 320 U.S. 591 (1944). Instead, the Court consistently has refused to
“designat[e] [] a single theory of ratemaking [that] would unnecessarily
foreclose alternatives which could benefit both consumers and investors.”
Duquesne Light Co. v. Barasch, 488 U.S. 299, 316 (1989).

(continued...)

15
this methodology conforms to the plain language of the statute. If

the language is ambiguous, we must then ask whether the use of

forward-looking cost models is reasonable given the terms of the

statute and the deference the FCC must be afforded under Chevron.

Additionally, we must consider whether the agency's actions in

reaching its decision are “arbitrary and capricious” under the APA.

See 5 U.S.C. § 706(2)(A).

We conclude that the plain language is ambiguous as to whether

the FCC’s cost models are permitted. We then decide that under

Chevron step-two, the FCC’s forward-looking cost models are au-

thorized under their reasonable interpretations of the statutory

language. Finally, we do not conclude that the FCC acted in a

“arbitrary and capricious” manner in reaching its decision to adopt

forward-looking cost models.

GTE argues that the methodology violates the “equitable and

nondiscriminatory” language in § 254(b)(4). We disagree with GTE’s

claim that the plain language of § 254(b)(4) prohibits the FCC from

adopting its methodology.

The section of the statute that GTE relies on represents one

of seven principles identified by the statute as the basis for the

agency’s universal service policies. Rather than setting up

(...continued)
In fact, the Court has explicitly sustained similar cost models not based
on historical costs. See Mobil Oil Exploration & Producing Southeast Inc. v.
United Distrib. Cos., 498 U.S. 211, 224-25 n.5 (1991) (indicating that similar
non-historical based cost model was not arbitrary, capricious, or manifestly
contrary to the statute at issue.).

16
specific conditions or requirements, § 254(b) reflects a

Congressional intent to delegate these difficult policy choices to

agency discretion: “The Joint Board and the Commission shall base

policies for the preservation and advancement of universal service

on the following principles . . . .” (Emphasis added.) 47 U.S.C.

§ 254(b).

Moreover, the FCC has offered reasonable explanations for how

its use of the forward-looking cost models cannot be characterized

as inequitable and discriminatory. For instance, the FCC points

out that all carriers, including interexchange carriers (“IXC's”)

such as AT&T and MCI, are subject to the same cost methodology and

must move toward the same efficient cost level to maximize the

benefits of universal service support.

The term “sufficient” appears in § 254(e), and the plain

language of § 254(e) makes sufficiency of universal service support

a direct statutory command rather than a statement of one of

several principles. Still, we do not find that the use of the

single word “sufficient,” even in the language of command, demon-

strates Congress’s unambiguous intent regarding the forward-looking

cost models. We therefore review under Chevron step-two and

conclude that the agency has offered reasonable justifications for

its adoption of the “most efficient” methodology.

The FCC points to cases in which agencies have adopted similar

17
methodologies to encourage competition.13 It also argues that noth-

ing in the statute defines “sufficient” to mean that universal

service support must equal the actual costs incurred by ILEC's.

These reasons suffice to survive the reasonableness requirement of

Chevron step-two.

To be sure, the FCC’s reason for adopting this methodology is

not just to preserve universal service. Rather, it is also trying

to encourage local competition by setting the cost models at the

“most efficient” level so that carriers will have the incentive to

improve operations. As long as it can reasonably argue that the

methodology will provide sufficient support for universal service,

however, it is free, under the deference we afford it under Chevron

step-two, to adopt a methodology that serves its other goal of

encouraging local competition.

ii. “ARBITRARY AND CAPRICIOUS.”

Arguing that the FCC has departed from its own stated

methodology, GTE charges the agency with “arbitrary and capricious”

actions under the APA. See 5 U.S.C. § 706(2)(A). The APA's

“arbitrary and capricious” standard of review is narrow and

requires only a finding that the agency “articulate[d] a rational

13
See, e.g., West Tex. Util. Co. v. Burlington N.R.R., Docket No. 41191
(Surface Transp. Bd. May 3, 1996), aff’d sub nom. Burlington N.R.R. v. Surface
Transp. Bd., 114 F.3d 206, 213 (D.C. Cir. 1997) (sustaining, as reasonable,
agency application of “stand alone cost constraints” based on rates that a
hypothetical carrier would have to charge to earn a reasonable return).

18
relationship between the facts found and the choice made.” Harris

v. United States, 19 F.3d 1090, 1096 (5th Cir. 1994).

GTE points out that while the agency has wedded itself to the

“most efficient” carrier cost methodology, it used current depre-

ciation schedules to develop its models for projecting forward-

looking costs. These schedules are not based on the actual costs

of the current regulated system, but, GTE contends, have been

artificially deflated by state regulators so that local carriers

recover less than they would in a real, competitive market. Using

these artificially-deflated schedules in the cost models

disadvantages the ILEC's, because they will not be able to recover

their capital costs as they would if free from regulation.

Actually, the FCC has departed from its general “most

efficient” methodology by making a number of adjustments to its

cost model. For instance, instead of assuming the “most efficient”

wire center locations in its cost models, the agency simply made

calculations based on whatever wire centers already exist. See

Order ¶ 251(1). This allowance actually benefits the ILEC's.

While GTE argues that the FCC’s failure to adhere tightly to

its “most efficient” methodology fails the “arbitrary and

capricious” test, that test, properly understood, is far less

onerous. If the FCC's departures from its methodology “articulate

a rational relationship,” we will not apply the “arbitrary and

capricious” remedy.

19
 The FCC seeks to mitigate the effect of the “most efficient”

methodology by accounting for wire centers that already exist.

Additionally, and contrary to GTE’s assertions, the agency is

prescribing a range within which the depreciation schedules must

fall, rather than simply adopting the schedules that already exist.

For the time being, the FCC will rely on the actual depreciation

schedules, because it does not see a prospect of significant

competition in the near future in the high-cost markets. See Order

¶ 250(5). Moreover, the agency has committed itself to re-

prescribe the range for these schedules every three years. See id.

¶ 250(5) n.662. These reasons establish enough of a “rational

relationship” with facts presented for the forward-looking cost

methodology to pass the APA’s arbitrary and capricious test.14

b. METHODOLOGY FOR CALCULATING THE REVENUE BENCHMARK.

GTE challenged the inclusion of revenues from “discretionary”

services in the revenue benchmark used to compare costs and

14
GTE claims that implementing the forward-looking cost methodology will
force ILEC’s to operate at a loss, and this constitutes an unconstitutional
taking under Brooks-Scanlon. GTE's claim has no merit; it has not shown that a
taking has occurred or that any taking will be permanent or would be so serious
as to be considered “confiscatory.” See Duquesne, 488 U.S. at 314. (“[A]n
otherwise reasonable rate is not subject to constitutional attack by questioning
the theoretical consistency of the method that produced it.”).

Unlike the situation in Brooks-Scanlon, the circumstance here is that the
regulatory entity setting the rules, the FCC, is not requiring the ILEC’s to
remain open or to charge low rates, thereby forcing them to operate at a
permanent loss. See Continental Airlines v. Dole, 784 F.2d 1245, 1251 (5th Cir.
1986) (distinguishing Brooks-Scanlon where agency required loss-making operation
for a limited time only).

20
revenues for the purposes of universal service support. The Joint

Board, however, recently proposed eliminating the entire revenue

benchmark in favor of a single national cost benchmark. See Second

Recommended Decision ¶¶ 41-50. The FCC accepted this

recommendation. See Seventh Report and Order ¶ 61 (“[W]e

reconsider and reject the determination in the First Report and

Order that federal support for rate comparability should be

determined using a revenue-based benchmark.”).15 This decision

moots GTE’s challenge to the inclusion of discretionary revenues,

because no revenues will be used in the calculation of the

benchmark.16

A case becomes moot if (1) there is no reasonable expectation

that the alleged violation will recur and (2) interim relief or

events have completely and irrevocably eradicated the effects of

the alleged violation. County of Los Angeles v. Davis, 440 U.S.

15
Vermont has filed a petition for review of the Seventh Report and Order
in the District of Columbia Circuit. See No. 99-1243 (D.C. Cir.). Pursuant to
28 U.S.C. § 2349(a), it thereby has vested that court with exclusive jurisdiction
to review the Seventh Report and Order. Unless the District of Columbia Circuit
transfers the petition to this court pursuant to 28 U.S.C. § 2112(a), we lack
jurisdiction to consider the order on its merits.

We still retain jurisdiction to the extent that the new order changes or
affects the Order that is the subject of this consolidated proceeding. As we
explain below, the FCC’s repudiation of its revenue benchmarks and the 25%
allocation moot the petitioners’ challenges for purposes of this appeal. Peti-
tioners, however, are not precluded, by our dismissal in this proceeding, from
filing appeals of the new cost-based benchmark and the new allocation methodology
in another proceeding.
16
Mootness goes to the heart of our jurisdiction under Article III of the
Constitution. Therefore, we must consider mootness even if the parties do not
raise it, because “resolution of this question is essential if federal courts are
to function within their constitutional spheres of authority.” North Carolina
v. Rice, 404 U.S. 244, 245 (1971).

21
625, 631 (1979).17 The FCC’s new approach eradicates any possible

effect of discretionary revenues on the levels of the petitioners’

universal service support.18 We therefore dismiss, as moot, GTE’s

challenge to the use of discretionary revenues in the high-cost

support benchmark.

GTE also challenged the FCC’s use of a national benchmark for

purposes of revenue calculations. Because GTE’s challenge focused

on the problems of a national revenue benchmark, the FCC’s elim-

17
Even if these conditions are met, there are at least three exceptions
to the mootness doctrine. First, courts may assert jurisdiction if the official
action being challenged is capable of “repetition, yet evading review.” See
Nader v. Volpe, 475 F.2d 916, 917 (D.C. Cir. 1973). Second, courts also have
adjudicated otherwise moot issues if the defendant has voluntarily ceased the
challenged activity to avoid judicial resolution and there is a reasonable
possibility that the challenged conduct will resume. See Gulth v. Kangas,
951 F.2d 1504, 1507-08 (9th Cir. 1991) (refusing to hold voluntary cessation of
prison library restrictions moot in light of long history of policy). Finally,
courts have avoided mootness where the mooted issue still has collateral or
future consequences. See Super Tire Eng’g Co. v. McCorckle, 416 U.S. 115, 122
(1974) (refusing to moot employer’s challenge to state benefits for strikers even
though strike had ended, because issue would affect employer’s future relations
with union).

Only the first and second exceptions are arguably applicable to the FCC’s
new order, and we do not think either exception applies. The “repetition”
exception will not apply unless there is a reasonable expectation that the same
litigant will again be subjected to the same action. See DeFunis v. Odegaard,
416 U.S. 312, 315-17 (1974) (mooting student’s lawsuit because he will graduate
regardless of outcome of litigation). The second exception requires a showing
that the challenged conduct will resume. There is little basis for suggesting
that the FCC, after a long and torturous process involving a recommendation from
the Joint Board and months of deliberation, will reverse itself on the question
of revenue benchmarks.

18
Reconsideration of agency actions by the implementing agency can moot
issues otherwise subject to judicial review because the reviewing court can no
longer grant effective relief. See, e.g., Center for Science in the Pub.
Interest v. Regan, 727 F.2d 1161, 1164 (D.C. Cir. 1984) (holding that a change
in position of Department of Treasury regarding labeling of alcoholic beverages
mooted federal appeal); see also 15 JAMES W. MOORE, MOORE’S FEDERAL PRACTICE § 101.96,
at 101-179 (3d ed. 1998) (“[A] parallel proceeding in another forum and []
resolution of that controversy in that forum will moot the issues presented in
the federal action. . . . regardless of whether or not that parallel forum is an
administrative proceeding.”).

22
ination of the revenue benchmark also moots its challenge to the

national benchmark.

GTE’s basic attack on the national revenue benchmark is that

ILEC’s operating in states with below-average revenues will be

systematically undercompensated by a universal service support

system based on a national revenue benchmark. But none of these

arguments necessarily applies to a cost-based national benchmark.19

Indeed, the FCC adopted the cost-based national benchmark because

it agreed that “revenues may not accurately reflect the level of

need for support to enable reasonably comparable rates because

states have varying rate-setting methods and goals.” Seventh Report

and Order ¶ 62.

Because the subject matter of GTE’s appealSSa national revenue

benchmarkSSno longer has any legal force, “[a]ny further judicial

pronouncements . . . would be purely advisory.” See Center for

Science in the Public Interest, 727 F.2d at 1164. “We cannot

assume jurisdiction to decide a case on the ground that it is the

same case as one presented to us, when it is admitted that it is

not and when it presents different issues.” Id. at 1166 n.6

(emphasis added). Therefore, we also dismiss, as moot, the

19
Accord Center for Science in the Pub. Interest, 727 F.2d at 1164 (“Most
of the issues presented in these appeals are not necessarily pertinent to
examination of the second [administrative action] and may well prove irrelevant
in that context.”).

23
challenges to the FCC’s national revenue benchmark.20

c. LIMITING THE FEDERAL MECHANISM TO TWENTY-FIVE PERCENT OF
UNIVERSAL SERVICE COSTS.

The third step in the FCC’s methodology for calculating

support to high-cost, non-rural areas allocates 25% of the funding

responsibility to the agency, leaving 75% to be provided by the

states. In other words, only 25% of the overall funds for the

explicit universal support program for high-cost areas will be

provided from the funds collected from interstate telephone calls;

the rest must be provided by the states, usually through charges on

20
Our conclusion regarding mootness does not conflict with Natural Re-
sources Defense Council v. EPA, 489 F.2d 390 (5th Cir. 1974), in which we refused
to moot a challenge to the EPA’s approval of Georgia’s Clean Air Act
implementation plan despite the EPA’s later decision to withdraw its approval.
Because the EPA’s reasons for withdrawing approval showed that it still
fundamentally disagreed with the petitioners’ interpretation of the Clean Air
Act’s requirements, we asserted jurisdiction.

In this case, the FCC’s new order not only alters, but explicitly re-
pudiates, the reasoning behind its use of revenues in calculating the benchmark.
All of the petitioners’ challenges to the benchmark calculations focused on the
unreliability or unfairness of such revenue-based calculations. By eliminating
the use of revenues, the petitioners and the FCC no longer fundamentally disagree
on the problems that revenues cause in calculating the benchmark for high-cost
support.

Thus, Natural Resources Defense Council does not conflict with the
reasoning of Center for Science in the Public Interest, 727 F.2d at 1166, in
which the court mooted a challenge after the Treasury had implemented a new,
superseding regulation containing different reasoning and substantive provisions
different from the challenged regulation. In both cases, the courts analyzed
whether the intervening agency action represented a substantive shift in an
agency’s interpretation of its statutory duties.

24
intrastate service. Certain states,21 GTE, and Kansas and Vermont22

challenged this allocation on statutory grounds. Specifically,

they question the 25% rule for failing to provide “sufficient”

support under § 254(e). Kansas and Vermont also challenged the

FCC’s 25% allocation decision for lack of notice and for failing to

ensure reasonable comparability between rural and urban rates.

As in the case of arguments against the revenue benchmark, we

do not consider these challenges, because the FCC has accepted the

Joint Board’s recommendation to scrap the 25%/75% rule.23 The

Seventh Report and Order proposes a new methodology that places “no

artificial limits on the amount of federal support that is avail-

able” when a state cannot by itself maintain reasonable

comparability. Seventh Report and Order ¶ 34. This new framework

is “a different regulation, containing on its face reasoning not

previously articulated by the agency as its policy.” Center for

Science in the Pub. Interest, 727 F.2d at 1166. Therefore, we

21
Nine state commissionsSSfrom Texas, California, Florida, Iowa, Louisi-
ana, New York, Nevada, Pennsylvania, and South DakotaSShave presented a joint
appeal, and we refer to them as “the states.”
22
The state commissions of Kansas and Vermont filed a separate appeal.
Although both Kansas and Vermont challenge the 25% allocation, only Vermont
maintains its challenge to the FCC’s transitional support rules for rural
carriers. See infra part III.A.6.c.i.
23
See Seventh Report and Order § 3 (“We explicitly reconsider and repudiate
any suggestion in the First Report and Order that federal support should be limited
to 25 percent of the difference between the benchmark and the forward-looking cost
estimates. . . .”).

25
dismiss the challenges by all of the petitioners as moot.24

d. PROPERLY CONSULTING WITH THE JOINT BOARD
BEFORE AMENDING JURISDICTIONAL SEPARATIONS RULES.

GTE raises an administrative procedural objection to the FCC’s

adoption of new jurisdictional separations rules25 that propose to

end existing high-cost fund support for non-rural carriers on

January 1, 1999.26 Instead of arguing that the new rule is arbi-

trary and capricious, GTE claims that the agency failed properly to

refer the matter to the Joint Board, in violation of 47 U.S.C.

§ 410(c), which states that “[t]he Commission shall refer any pro-

ceeding regarding the jurisdictional separation of common carrier

property and expenses between interstate and intrastate operations

. . . to a Federal-State Joint Board.”

The FCC responds that it did make a general referral to the

Joint Board in March 1996 and that the Joint Board subsequently

24
Vermont invites us to review the Seventh Report and Order’s
interpretation of reasonable comparability in the context of that recent order’s
revised approach to allocating costs between the different states and between the
state and federal funds. To the extent that Vermont’s “reasonable comparability”
arguments were based on a challenge to the 25% allocation, we dismiss its
arguments as moot. To the extent its arguments focused on the alleged failure
of the FCC to articulate a definition of “reasonable comparability,” we would
have to examine the merits of the Seventh Report and Order. As we explained,
supra n. 16, we cannot review the merits of that order, because we lack juris-
diction over the merits of the new allocation methodology until it is transferred
to this court by the District of Columbia Circuit.
25
“Beginning January 1, 1999, non-rural carriers shall no longer receive
support pursuant to this [program].” 47 C.F.R. § 36.601(c).
26
This implementation date has now been delayed until January 1, 2000.
See Seventh Report and Order ¶ 5.

26
recommended that the agency replace the existing support mechanisms

for non-rural carriers with a new universal service system. The

plan to replace the existing support mechanism, the FCC argues,

requires a change in the method of jurisdictional separation, and

by recommending the plan, the Joint Board had already considered

the jurisdictional effects.27

GTE and the FCC disagree on the level of specificity needed to

fulfill the Joint Board consultation requirement of § 410(c). GTE

argues that simply identifying the broad subject of universal

service reform did not raise the issue of altering the system that

is used to shift costs in many high-cost areas to the interstate

jurisdiction. In particular, GTE contends that the Joint Board

failed to consider the amounts of the fund allocation between the

interstate and intrastate jurisdictions when it considered the plan

to implement a new support mechanism.

Although the FCC does not have to raise every possible detail

in its referral to the Joint Board, it must show that the Joint

Board was aware of the effects on the jurisdictional separations

rules of replacing the existing high-cost support system. The

plain language of the statute shows that any shift in the

27
Jurisdictional separations rules are part of a process whereby it “may
be determined what portion of an asset is employed to produce or deliver
interstate as opposed to intrastate service.” Louisiana Pub. Serv. Comm’n v.
FCC, 476 U.S. 355, 356 (1986). Section 410(c) requires the FCC to consult the
Joint Board, but it does not “dictate how costs must be recovered . . . .” See
National Ass'n of Regulatory Util. Comm’rs v. FCC, 737 F.2d 1095, 1112 n.19
(D.C. Cir. 1984).

27
allocation of jurisdictional responsibility lies at the heart of

§ 410(c)’s consultation requirement.

The Joint Board was aware that replacing the existing high-

cost support system will affect the jurisdictional separations

rules. This is shown by the fact, for instance, that the Joint

Board made a detailed discussion of the current jurisdictional

separations rules, acknowledging that they “currently assign 25

percent of each LEC’s loop costs to the interstate jurisdiction.”

See First Recommended Decision ¶ 188.

In discussing the comments submitted by affected parties, the

Joint Board recognized that the jurisdictional separations rules

are part of the old regime of “embedded” or “historical” costs.

See id. ¶ 207. Thus, the Joint Board does seem to recognize that

the jurisdictional separations rules are part of the old “embedded

cost” system and were developed in the context of allocating the

actual costs of developing the local and long-distance networks.

By recommending replacing the historical cost system with a

forward-looking “most efficient” cost model, the Joint Board must

have considered that the jurisdictional separations rules no longer

would apply in the same way. Although no detailed discussion

appears in the First Recommended Decision, the Joint Board’s

recognition that the jurisdictional separations rules would be

affected by adopting a new cost model fulfills § 410(c)’s

28
consultation requirement.28

2. ELIGIBILITY REQUIREMENTS FOR CARRIERS
SEEKING UNIVERSAL SERVICE SUPPORT.

The states and intervenor Southwestern Bell (“SBC”) challenge

the FCC’s reading of the Act’s provisions governing eligibility

requirements for carriers seeking universal service support. In

general, they question the agency's interpretation of § 214(e) as

too narrow and restrictive of the ability of state commissions to

set their own criteria and exercise their own discretion over a

carrier’s eligibility.

a. LIMITING THE CRITERIA THAT STATE COMMISSIONS
MAY CONSIDER WHEN ASSESSING A CARRIER’S ELIGIBILITY.

Section 214(e) governs the designation of carriers eligible to

receive federal universal service support. Section 214(e)(1)(A)

and (B) set out the eligibility requirements, and § 214(e)(2)29

28
The FCC did not arbitrarily and capriciously fail to explain the reason
for its amendment of rule 36.601(c). It stated that the new universal service
mechanism will replace the old high-cost fund subsidies and that the change will
occur on January 1, 1999 (later extended to July 1, 1999 and then to January 1,
2000). The agency's general explanations of the effect of the new support
mechanism provide enough of a reason to survive GTE’s attack.
29
The subsection reads:

A State commission shall upon its own motion or upon request
designate a common carrier that meets the requirements of paragraph (1)
as an eligible telecommunications carrier for a service area designated
by the State commission. Upon request and consistent with the public
interest, convenience, and necessity, the State commission may, in the
case of an area served by a rural telephone company, and shall, in the
case of all other areas, designate more than one common carrier as an
eligible telecommunications carrier for a service area designated by
(continued...)

29
governs the designation of eligible carriers by state commissions.

In the Order, the FCC interpreted § 214(e)(2) in this way.

With limited exceptions for rural areas, a state commission has no

discretion when assessing a carrier’s eligibility for federal sup-

port. If a carrier satisfies the terms of § 214(e)(1), a state

commission must designate it as eligible. Thus, the FCC ruled that

a state commission may not impose additional eligibility

requirements on a carrier seeking universal service support in non-

rural service areas. See Order ¶ 135. The agency does permit the

states to impose service quality obligations on local carriers if

those obligations are unrelated to a carrier’s eligibility to

receive federal universal service support. According to the FCC,

this interpretation “gives effect to the unambiguously expressed

intent of Congress.” See Chevron, 467 U.S. at 842-43.

The states and SBC offer two lines of attack. First, they

argue that the plain language of § 214(e)(2) does not support the

FCC’s blanket prohibition on additional state eligibility

requirements. Second, they say that the FCC exceeded its

jurisdictional authority, in violation of 47 U.S.C. § 152(b), by

purporting to interfere with the states’ regulation of intrastate

service. Because we conclude that the agency erred in prohibiting

(...continued)
a State commission, so long as each additional requesting carrier meets
the requirements of paragraph (1). Before designating an additional
eligible telecommunications carrier for an area served by a rural
telephone company, the State commission shall find that the designation
is in the public interest.

30
the states from imposing additional eligibility requirements, we do

not reach the states’ jurisdictional challenges.

On the plain language front, the states argue that § 214(e)(2)

does not unambiguously prohibit them from regulating carriers re-

ceiving federal universal support. Specifically, they contend

that Congress did not mean to prohibit the states from imposing

service quality standards on eligible carriers. According to the

states, the language on which the FCC reliesSS“[a] State Commission

shall upon its own motion or upon request designate a common

carrier that meets the requirements of paragraph (1) as an eligible

telecommunications carrier”SSdoes not expressly circumscribe state

authority to add additional eligibility requirements.

The agency's best hope for express authority for its action

rests on the statute’s use of the word “shall” in § 214(e)(2).

Generally speaking, courts have read “shall” as a more direct

statutory command than words such as “should” and “may.”30 Though

we agree that the use of the word “shall” indicates a congressional

command, nothing in the statute indicates that this command

prohibits states from imposing their own eligibility requirements.

Instead, we read § 214(e)(2) as addressing how many carriers a

state may designate for a given service area, and not how much

discretion a state commission retains to impose eligibility

standards.

30
See MCI Telecomm. Corp. v. FCC, 765 F.2d 1186, 1191 (D.C. Cir. 1985)
(holding that “shall” is “the language of command”).

31
 The first sentence requires state commissions to designate at

least one common carrier as eligible, but that carrier must still

meet the eligibility requirements in § 214(e)(1). The second sen-

tence then confers discretion on the states to designate more than

one carrier in rural areas, while requiring them to designate

eligible carriers in non-rural areas consistent with the “public

interest” requirement. Nothing in the statute, under this reading

of the plain language, speaks at all to whether the FCC may prevent

state commissions from imposing additional criteria on eligible

carriers.31

Thus, the FCC erred in prohibiting the states from imposing

additional eligibility requirements on carriers otherwise eligible

to receive federal universal service support. The plain language

of the statute speaks to the question of how many carriers a state

commission may designate, but nothing in the subsection prohibits

the states from imposing their own eligibility requirements.32 This

reading makes sense in light of the states' historical role in

31
To be sure, if a state commission imposed such onerous eligibility
requirements that no otherwise eligible carrier could receive designation, that
state commission would probably run afoul of § 214(e)(2)’s mandate to “designate”
a carrier or “designate more than one carrier.”
32
Additionally, §152(b) of Act instructs us to construe the Act to avoid
giving the FCC jurisdiction over “charges, classifications, practices, services,
facilities, or regulations for and in connection with intrastate communications
services. . . .” 47 U.S.C. § 152(b). See Louisiana Pub. Serv. Comm’n v. FCC, 476
U.S. 355, 376 n.5 (1988) (“[Section] 152(b) not only imposes jurisdictional
limits on the power of a federal agency, but also, by stating that nothing in the
Act shall be construed to extend FCC jurisdiction to intrastate service, provides
its own rule of statutory construction.”); see also discussion of “no disconnect”
rule, infra part III.A.3.

32
ensuring service quality standards for local service. Therefore,

we reverse that portion of the Order prohibiting the states from

imposing any additional requirements when designating carriers as

eligible for federal universal service support.

b. THE TERMS OF SECTION 214(e)(5)
GOVERNING THE DEFINITION OF SERVICE AREAS.

In their initial brief, the states argued that the FCC had

impermissibly encroached on their exclusive authority to designate

service areas for universal service support. The FCC, however,

pointed out that ¶ 185 of the Order had only encouraged the states

to make certain decisions33 when designating service areas. The

agency explicitly denies that the paragraph requires the states to

follow its “encouragements.” Thus, it appears that the states

misinterpreted the FCC’s intentions in ¶ 185 and that there is no

issue left for us to address.

The states, however, continue to contest one aspect of the

Order regarding the definition of service areas. The FCC maintains

that it may establish a different definition of service areas for

rural carriers, with the agreement of the states, without having to

33
In order to promote competition, the FCC encourages
states to
adopt the existing study areas of ILECs as service areas for non-rural
areas because it would create a significant barrier to entry. The FCC
further encourages states to consider designating service areas that the
ILECs have not traditionally served, this limiting the ILEC advantage over
new entrants.

Order ¶ 185.

33
submit such a new definition first to the Joint Board. The states

argue that the plain language of § 214(e)(5) allows the agency to

act only “after taking into account recommendations of [the Joint

Board] . . . .”

The FCC has two procedural responses and one substantive

defense. Because we agree with the FCC that the states have no

standing, we do not reach the FCC’s other defenses.

The agency argues that the states have no standing to chal-

lenge its ruling, because the states have failed to show any harm.34

After all, as the FCC points out, it must still garner the approval

of each respective state before a rural service area can be re-

defined. The states argue that they are harmed because the state

members of the Joint Board are denied a chance to participate in

the decisionmaking process, so the states are less able to co-

ordinate with each other. They further contend that bypassing the

Joint Board denied the states any meaningful participation in

revising service area definitions for rural territories.

This claim is weak, because the states’ independent ability to

veto particular service areas seems to provide them with a sub-

stantial amount of “meaningful participation.” This is unlike the

situation in the cases the states rely on, in that the states here

are not challenging a federal preemption order that threatens their

34
We review the FCC’s standing defense, like all constitutional questions,
under a de novo standard of review. See 5 U.S.C. § 706 (stating that “a
reviewing court shall decide all relevant questions of law [and] interpret
constitutional and statutory provisions”).

34
sovereign authority. See California v. FCC, 75 F.3d 1350, 1361

(9th Cir. 1996). Therefore, the states lack standing to challenge

this portion of the Order.

c. DECLINING TO REQUIRE ELIGIBLE CARRIERS
TO OFFER SUPPORTED SERVICES ON AN UNBUNDLED BASIS.

GTE argues that the FCC’s failure to require carriers to

“unbundle” their offerings when receiving universal service support

violates the congressional intent expressed in § 214(e)(1) under

Chevron step-one. “Bundling” refers to a carrier’s practice of

offering different services together as one package. For instance,

a carrier might offer basic phone service as part of a package that

includes call-waiting and voicemail.

GTE fears that a new carrier could “cherry pick” high-profit

customers by offering only bundled local telephone service pack-

ages. Because the intended beneficiaries of universal service are,

by definition, less able to afford even basic service, offering ex-

pensive bundled packages will allow new carriers to steal

wealthier, low-cost customers while leaving ILEC's such as GTE to

provide service to everyone else. GTE reasons that Congress, by

requiring carriers receiving federal universal service support to

advertise the availability of its supported services, intended to

require new carriers to participate in universal serviceSSan intent

that would be thwarted by Allowing the new carriers to offer

bundled services.

35
 The FCC responds that the plain language of the statute is

satisfied as long as a carrier offers “services that are supported

by Federal universal service mechanisms.” 47 U.S.C. 214(e)(1)(A).

Except for the advertising requirement, the statute makes no

mention of “bundling” or other eligibility criteria. In fact, the

FCC argues that because of the exclusive grant of eligibility

authority conferred on the states by § 214(e)(2), it cannot impose

additional eligibility criteria. Because the statute is silent on

the question of bundling, and because the statute seems to prohibit

further eligibility criteria, the agency asks us to give deference

to its interpretation of § 214(e) under Chevron step-two.

We agree that the statute’s plain language does not reveal

Congress’s unambiguous intent. It is not evident, however, that

the FCC’s interpretation of the statute meets even the minimum

level of reasonability required in step-two review.

Section 214(e)(1) plainly requires carriers receiving uni-

versal service support to offer such supported services to as many

customers as possible. Thus, an eligible carrier must offer such

services “throughout the service area” and “advertise the

availability of such services.” This requirement makes sense in

light of the new universal service program’s goal of maintaining

affordable service in a competitive local market. Allowing

bundling, however, would completely undermine the goal of the first

two requirements, because a carrier could qualify for universal

36
service support by simply offering and then advertising expensive,

bundled services to low-income customers who cannot afford it.

The FCC suggests that GTE’s problems stem not from bundling

but from state-imposed “carrier of last resort” ("COLR")

requirements, which prohibit ILEC's such as GTE from disconnecting

low-profit consumers and leave ILEC's vulnerable to outside

competition. But the elimination of COLR requirements would only

further undermine the goal of making basic services available to

low income consumers and those in “rural, insular, and high cost

areas.” See 47 U.S.C. § 254(b)(3). This again would violate the

express intent of the universal service program. Without a better

explanation for its unreasonable interpretation, we would be

inclined to find the FCC’s implementation “arbitrary and capricious

and manifestly contrary to the statute.” See Chevron, 467 U.S. at

844.

Fortunately, the agency also has explained that “only an

eligible carrier that succeeds in attracting and/or maintaining a

customer base to whom it provides universal service will receive

universal service support.” Order ¶ 138. Therefore, it reasons

that if offering only bundled services would price low-income

customers out of the market, the carrier offering bundled services

would eventually lose universal service support. Thus, the FCC can

avoid the problem of providing universal service support to car-

riers that do not serve high-cost customers for which the support

37
is intended. This explanation supports the FCC’s claim that its

decision to allow bundling is reasonable under Chevron step-two

review.

Though the decision is a close one, we conclude that the FCC’s

refusal to require eligible carriers to provide unbundled services

is neither “arbitrary, capricious,” nor “manifestly contrary to the

statute.” See Chevron, 467 U.S. at 844. Because the agency will

prevent companies from using bundling to receive federal support

while avoiding high-cost customers, we do not find its

interpretation “so implausible that it could not be ascribed to a

difference in view or the product of agency expertise.” Motor

Vehicle Mfrs.' Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S.

29, 43 (1983).

3. AUTHORITY TO PROHIBIT CARRIERS FROM DISCONNECTING LOCAL SERVICE
TO LOW-INCOME CONSUMERS WHO FAIL TO PAY TOLL CHARGES.

Bell Atlantic and the states challenge the FCC’s adoption of

a regulation35 prohibiting carriers receiving universal service

support from disconnecting Lifeline services36 from low-income

consumers who have failed to pay toll charges. See Order ¶ 390.

The petitioners charge that the “no disconnect” rule exceeds the

35
47 C.F.R. § 54.401(b).

36
The Lifeline program refers to the FCC’s efforts to expand telephone
services to qualifying low-income subscribers. The agency defines Lifeline
services to include single-party service, voice-grade access to the public
switched telephone network, BTMF or its functional digital equivalent, access to
directory assistance, and toll-limitation services. See Order ¶ 390.

38
agency’s jurisdictional authority under § 2(b) of the 1934 Act,37

which prohibits FCC regulation of intrastate telecommunications

service. Because the plain language of the statute expresses

Congress’s unambiguous intent, we review the agency’s

interpretation under Chevron step-one.

The agency has three responses. First, it argues that § 2(b)

does not apply where Congress has given the FCC an “unambiguous or

straightforward” grant of authority. See Louisiana Pub. Serv.

Comm'n, 476 U.S. at 377. The agency argues that Congress granted

such express authority in § 254(b)(3), which directs the FCC to

base its policies on the principle that “low-income consumers and

those in rural, insular, and high cost areas, should have access to

telecommunications and information services . . . .”

As we have discussed, § 254(b) identifies seven principles the

FCC should consider in developing its policies; it hardly

constitutes a series of specific statutory commands. Indeed, we

have avoided relying on the aspirational language in § 254(b) to

bind the FCC to adopt certain cost methodologies for calculating

universal service support.38

Just as we declined to read § 254(b) as an inexorable statu-

37
“[N]othing in this subchapter shall be construed to apply or to give the
Commission jurisdiction with respect to (1) charges, classifications, practices,
services, facilities, or regulations for or in connection with intrastate
communication service by wire or radio of any carrier . . . .” 47 U.S.C.
§ 152(b) (as amended).

38
See supra part III.A.1.a.i.

39
tory command against the FCC, we decline to read it as a grant of

plenary power overriding other portions of the Act. The agency has

no “unambiguous or straightforward” grant of authority to override

the limits set by § 2(b), and, accordingly, it has no jurisdiction

to adopt the “no disconnect” rule on the basis of the vague,

general language of § 254(b)(3).39

Second, the FCC contends that the petitioners’ jurisdictional

challenge is inapposite because the “no disconnect” rule does not

purport to regulate intrastate service, but merely prevents the

disconnection of interstate service (and, as a consequence, of

intrastate service) for failure to pay toll charges.40 As Bell

Atlantic rightly responds, however, the “no disconnect” rule is a

“regulation,” because it dictates the circumstances under which

local service must be maintained. Therefore, the FCC, by issuing

the rule, has acted “with respect to” and “in connection with”

interstate service within the meaning of § 2(b).

The FCC points out that even if the “no disconnect” rule is a

39
The SBC intervenors challenge a related FCC rule prohibiting the prac-
tice of requiring deposits from customers initiating service with toll-blocking
for interstate service. Unfortunately for SBC, none of the petitioners on this
issue (the states and Bell Atlantic) raised a challenge to this similar but
separate rule in the FCC proceeding. Therefore, we cannot consider it on appeal.
See United Gas Pipe Line Co. v. FERC, 824 F.2d 417, 437 (5th Cir. 1987).
40
Bell Atlantic argues that the FCC has waived this argument on appeal.
We do not agree. The FCC’s brief states that the “no disconnect” rule “does not
purport to regulate intrastate service . . . but merely to prevent the dis-
connection of service (including interstate access service) to customers who have
failed to pay toll charges.” Though weak, this statement preserves the FCC’s
attempt to exceed its jurisdictional boundaries on the ground that it cannot
regulate an interstate matter without also regulating an intrastate matter.

40
“regulation” within the meaning of § 2(b), courts have sustained

agency jurisdiction over similar rules under the “impossibility”

exception. In North Carolina Utils. Comm'n v. FCC, 552 F.2d 1036

(4th Cir. 1977), the court upheld FCC regulations permitting local

subscribers to connect their telephones to the local loop to make

interstate calls. North Carolina previously had required

subscribers to use leased telephones and argued that § 2(b)

prevented FCC intervention because the vast majority of these calls

were intrastate. The court rejected this argument, holding that

“the FCC has jurisdiction to prescribe the conditions under which

terminal equipment may be interconnected with the interstate

telephone line network.” Id. at 1048.

Essentially, the FCC asks us to find that the “no disconnect”

rule, aimed at regulating interstate service, is impossible to

separate from intrastate service. In similar cases, the District

of Columbia Circuit has permitted the FCC to intervene in

relatively localized service issues41 and has developed a useful

framework for analyzing what the petitioners refer to as the

“impossibility” exception to § 2(b). See Public Serv. Comm’n v.

FCC (“Maryland PSC”), 909 F.2d 1510, 1515 (D.C. Cir. 1990).

To permit the FCC to preempt state regulation of whether to

cut off low-income subscribers, that circuit requires the agency to

41
See, e.g., Public Util. Comm’n v. FCC, 886 F.2d 1325 (D.C. Cir. 1989);
Illinois Bell Tel. Co. v. FCC, 883 F.2d 104 (D.C. Cir. 1989); National Ass’n of
Regulatory Util. Comm’rs v. FCC, 880 F.2d 422 (D.C. Cir. 1989).

41
show that “(1) the matter to be regulated has both interstate and

intrastate aspects; (2) FCC preemption is necessary to protect a

valid federal regulatory objective; and (3) state regulation would

negate the exercise by the FCC of its own lawful authority because

regulation of the interstate aspects of the matter cannot be

unbundled from regulation of intrastate aspects.” Maryland PSC,

909 F.2d at 1515 (internal quotations and citations omitted). This

framework creates a properly narrow exception to § 2(b) that allows

the FCC to preempt state regulation only when it has shown it

cannot carry out its authorized federal objectives without en-

croaching on state autonomy.

Applying this framework to the “no disconnect” rule, we agree

with Bell Atlantic that the FCC has failed to show why allowing the

states to control disconnections from local service would “negate

the exercise of the FCC’s lawful authority . . . .” As Bell

Atlantic points out, the agency offered only a brief explanation of

what lawfully authorized federal objectives are being served by the

“no disconnect” rule and why it is necessary to preempt local

authority to achieve these objectives.

In the Order, the FCC simply states that the “no disconnect”

rule advances its goal of increasing subscribership and that it

will improve the competitiveness of the market for billing and col-

lection of toll charges. See Order ¶¶ 390-391. But the agency has

not adequately explained, in either its brief or its Order, why

42
these goals would be “negated” by allowing the states to control

disconnection of local subscribers. In contrast to what occurred

in Maryland PSC, where the court allowed the FCC to assert juris-

diction to prevent ILEC's from shifting local costs to interstate

consumers, the FCC has offered no similar explanation of how

protecting interstate service requires imposition of a “no dis-

connect” rule. Therefore, we decline to allow the agency to assert

jurisdiction over the disconnection of local service based on the

impossibility exception.

Finally, the FCC argues that in the wake of Iowa Utilities, it

has jurisdiction over all areas, including intrastate matters, to

which the Act applies. In Iowa Utilities, the Court rejected ju-

risdictional challenges to the portions of the FCC’s Local Com-

petition Order implementing §§ 251 and 252 of the Act, which govern

the interconnection of new local service carriers with the ILEC's

and establish procedures for negotiating, arbitrating, and approv-

ing any interconnection agreements. As in the instant case,

petitioners challenged the FCC’s jurisdiction to implement the Act,

arguing that much of the authority to enforce the provisions

(§§ 251 and 252) remain with the state commissions by virtue of

§ 2(b). Specifically, they contended that the Act gives the FCC

jurisdiction over intrastate matters only when the statute ex-

plicitly applies to intrastate services and specifically confers

agency jurisdiction over intrastate services.

43
 The Court brushed aside these attempts to raise the § 2(b)

jurisdictional fence and squarely held that Ҥ 201(b)42 explicitly

gives the FCC jurisdiction to make rules governing matters to which

the 1996 Act applies.” Iowa Utilities, 119 S. Ct. at 730. Though

§ 2(b)’s language stating that “nothing in this Act shall be con-

strued to apply or to give the Commission jurisdiction” implies

that FCC jurisdiction does not always follow where the Act applies,

the Court held that “the term 'apply' limits the substantive reach

of the statute . . . and the phrase 'or Commission jurisdiction'

limits . . . the FCC’s ancillary jurisdiction.” Id. at 731.

Relying on this holding, the FCC argues that because § 254 applies

to intrastate as well as interstate matters, § 201(b) confers the

necessary jurisdiction to implement the “no disconnect” rule.

Though the Court’s broad language seems to support the FCC’s

position, Bell Atlantic finds comfort in the Court’s preservation

of Louisiana PSC. In reconciling its holding with Louisiana PSC,

the Court held that the FCC must show that the meaning of a

statutory provision applies to intrastate matters in an

“unambiguous and straightforward” manner as “to override the

command of § 2(b).” Iowa Utilities, 119 S. Ct. at 731 (quoting

Louisiana PSC, 476 U.S. at 377). If the agency fails in this

initial task, it cannot use its normally broad regulatory authority

42
“The Commission may prescribe such rules and regulations as may be
necessary in the public interest to carry out the provisions of this Act.”
47 U.S.C. § 201(b).

44
to assert what is now only ancillary jurisdiction because of the

still-intact jurisdictional fence created by § 2(b). See id.

Therefore, after Iowa Utilities, § 2(b) still serves as (1) a rule

of statutory construction43 requiring the FCC to find unambiguous

statutory authority applying to intrastate matters and (2) a

jurisdictional barrier restricting the agency from using its

plenary authority to assert ancillary jurisdiction by “taking

intrastate action solely because it further[s] an interstate goal.”

See Iowa Utilities, 119 S. Ct. at 731 (citing Louisiana PSC, 476

U.S. at 374).

The question is whether § 254 does indeed “apply” to

intrastate matters in a sufficiently “unambiguous” manner. Without

such a finding, Iowa Utilities flatly holds that the FCC cannot use

its plenary authority to assert ancillary jurisdiction.

Unfortunately, Iowa Utilities provides little guidance for

resolving the question whether § 254 applies to intrastate ser-

vices. For the Supreme Court, “the question . . . is not whether

the Federal Government has taken the regulation of local tele-

communications competition away from the States. With regard to

the matters addressed by the 1996 Act, it unquestionably has.”

Iowa Utilities, 119 S. Ct. at 730 n.6. The Court did not further

43
Accord Louisiana PSC, 476 U.S. at 376 n.5 (“[Section] 152(b) not only
imposes jurisdictional limits on the power of a federal agency, but also, by
stating that nothing in the Act shall be construed to extend FCC jurisdiction to
intrastate service, provides its own rule of statutory construction.”)

45
explain why it felt §§ 251 and 252 “unquestionably” applied to

intrastate matters.

The FCC bases its contention that § 254 plainly applies to

intrastate as well as interstate matters on § 254(b)(3),(c),

and (j). According to the agency, § 254(b)(3) applies to

intrastate service by stating that “low income consumers . . .

should have access to telecommunications and information services,

including interexchange services and advanced telecommunications

and information services.”

The use of the word “including,” the FCC argues, indicates

that the object of § 254 is to provide access to more than just

interexchange services. Furthermore, § 254(c) instructs the agency

to consider, in the process of establishing what constitutes

universal service, whether such services “have . . . been

subscribed to by a substantial majority of residential customers.”

Finally, § 254(j) specifically preserves the Lifeline Assistance

program, which has always provided subsidies for both intrastate

and interstate services.

We have already discussed our reluctance to rely on the aspi-

rational language of § 254(b).44 Moreover, the phrase “including

interexchange carriers” cannot be said unambiguously to mean that

§ 254 applies to local services, and § 254(c)’s mention of a

“majority of residential customers” is far from straightforward.

44
See supra part III.A.3.

46
Neither is there much guidance from § 254(j), which specifically

protects the Lifeline Assistance program from being affected by any

other part of § 254 but does not in any way clarify to what degree

§ 254 applies to intrastate universal service.

Instead, there is substantial support in the statute for a

dual regulatory structure in the administration of the universal

service program. Section 254(d) specifically instructs interstate

carriers to contribute to the FCC’s universal service mechanisms,

while § 254(f) instructs intrastate carriers to contribute to the

states’ individual universal service mechanisms. This section

contains the only discussion of intrastate universal service mecha-

nisms and directs intrastate carriers to report to the states

rather than to the FCC.

In light of Iowa Utilities and Louisiana PSC, therefore, we

conclude that, “while it is, no doubt, possible to find some sup-

port in the broad language of the section for [the FCC’s] position,

we do not find the meaning of the section so unambiguous or

straightforward as to override the command of § 152(b).” Louisiana

PSC, 476 U.S. at 377. Unlike §§ 251 and 252, which were solely

concerned with intrastate issues (i.e., interconnection of new

entrants into the local telephone market), § 254 applies to both

interstate and intrastate services. It does so, however, only to

the extent that it gives exclusive authority over intrastate

contributions to the state commissions. We find it incongruous to

47
use this explicit limitation on FCC authority as the hook to

provide it with jurisdiction.

Therefore, the FCC exceeded its jurisdiction when it imposed

the “no disconnect” rule. Because there is no express grant of

statutory authority, a proper showing of “impossibility,” or a

persuasive explanation of how § 254 applies to intrastate service,

we reverse, for want of agency jurisdiction, those portions of the

Order implementing the “no disconnect” rule.

4. RECOVERY OF UNIVERSAL SERVICE CONTRIBUTIONS.

a. REQUIRING INCUMBENTS TO RECOVER
CONTRIBUTIONS THROUGH ACCESS CHARGES.

GTE and the FCC again wrangle over the meaning of “explicit”

in their dispute regarding the rule requiring most ILEC's to

recover their universal service contributions through access

charges. GTE contends that the rule violates § 254(e)’s command

that any support for universal service be “explicit,” because

recovering contributions through increased access charges is a form

of implicit subsidy.

GTE argues that the rule unfairly disadvantages ILEC's

because, unlike their potential new competitors, they cannot

recover their universal service contributions through explicit

charges on their end-users, but, instead, are required by the FCC

to increase their access charges on long-distance service

providers. Though they do not necessarily lose out in terms of

48
amounts recovered, GTE fears that this recovery method will put

them at a competitive disadvantage because, instead of than seeing

the costs of universal service on his bill as an explicit

surcharge, an ILEC consumer will pay for the costs of universal

service through higher rates.

The FCC advances a different understanding of “explicit.”

“Regardless of how carriers recover their contributions, the FCC’s

universal service system 'satisfies the statutory requirement that

support be explicit' by requiring each carrier to contribute a

specific percentage of its end user revenues” (quoting Order

¶ 854). As long as carriers know exactly how much they are

contributing to the support mechanisms, the subsidies are explicit.

The statute provides little guidance on whether “explicit”

means “explicit to the consumer” (as urged by GTE) or “explicit to

the carrier” (as urged by the FCC). The statute does state, how-

ever, that all universal service support should be “explicit.” We

read “explicit” to mean the opposite of “implicit.” See § 254(e).

By forcing GTE to recover its universal service contributions

from its access charges, the FCC’s interpretation maintains an

implicit subsidy for ILEC's such as GTE. In fact, requiring car-

riers to recover their contributions from access charges on inter-

state calls shifts the costs of intrastate universal service to the

interstate jurisdiction. These are precisely the sorts of implicit

subsidies currently used by the FCC in its DAM weighting program.

49
See Order ¶ 212 (discussing rules that permit small LEC's to

recover costs for intrastate services from interstate access

charges).

We are convinced that the plain language of § 254(e) does not

permit the FCC to maintain any implicit subsidies for universal

service support. Therefore, we will not afford the FCC any Chevron

step-two deference in light of this unambiguous Congressional

intent. Because the agency continues to require implicit subsidies

for ILEC's in violation of a plain, direct statutory command, we

reverse its decision to require ILEC's to recover universal service

contributions from their interstate access charges.

b. REQUIRING INTERSTATE CARRIERS TO REDUCE INTERSTATE ACCESS CHARGES
BY THE AMOUNT OF FEDERAL HIGH-COST SUPPORT THEY RECEIVE
UNDER THE NEW UNIVERSAL SERVICE SYSTEM.

The states contest an aspect of the Order’s effect on

interstate access charges, arguing that the requirement that

carriers reduce their interstate access charges by the amount of

direct federal high-cost support they receive will leave

insufficient funds for intrastate universal service. The states

make two unconvincing plain-language arguments. First, they point

to § 254(b)(5)’s language about “specific, predictable and

sufficient” mechanisms to “preserve and advance universal service.”

As we have observed, § 254(b) identifies a set of principles and

does not lay out any specific commands for the FCC. Even § 254(e),

50
which is framed as a direct, statutory command, is ambiguous as to

what constitutes “sufficient” support. Therefore, we do not

consider the language an expression of Congress’s “unambiguous

intent” allowing Chevron step-one review, and we review its

interpretation for reasonability under Chevron step-two.

The states argue that § 254(e) does not permit the application

of federal universal service funds for the interstate jurisdiction.

In essence, they seek to preserve state universal service support

by reading the statute to require all high-cost support to remain

intrastate. Though this might make compelling policy, nothing in

the plain language of § 254(e)45 unequivocally establishes the

states’ right to all of the federal universal support funds. The

statutory language is at best ambiguous as to Congress’s intent,

which, under Chevron step-two, leaves it to the FCC’s reasonable

interpretation.

The FCC has offered good reason to believe that its new

explicit support through direct subsidies will replace the amounts

lost through the reduction of access charges. See Report to

Congress ¶ 230. To be sure, the states and intervenor NASUCA46 make

a plausible argument that ILEC's will receive less under the new

plan than they did through implicit subsidies. As we have

45
“A carrier that receives such support shall use that support only for
the provision, maintenance, and upgrading of facilities and services for which
the support is intended.”

46
National Association of State Utility Consumer Advocates.

51
determined, however, because the FCC has offered reasonable

explanations of why it thinks the funds will still be “sufficient”

to support high-cost areas, we defer to the agency's judgment of

what is “sufficient.”

Under the agency's new universal service plan, it is possible

that the states will receive less support for intrastate universal

service costs than they did under the old plan. While this may

seem unfair as a matter of policy, the states have failed to show

that the FCC’s interpretation, which may possibly result in a

reduction of their level of support, is “arbitrary, capricious, or

manifestly contrary to the statute.” Chevron, 467 U.S. at 844.

5. CONTRIBUTIONS.

a. REQUIRING CMRS CARRIERS TO CONTRIBUTE
TO THE FEDERAL UNIVERSAL SERVICE FUND.47

Celpage Inc., a paging carrier, and intervenors representing

a number of wireless telecommunications companies (referred to in

general as commercial mobile radio service or “CMRS” providers),

challenge the FCC’s decision to subject them to the universal

service support scheme. Celpage raises a number of constitutional

and statutory challenges to the decision to require their

contributions to the universal service fund. Specifically, Celpage

47
Intervenor American Cable Television Association challenges the FCC for
failing to meet the requirements of the Regulatory Flexibility Act before
promulgating the Order. None of the petitioners raises this argument, nor does
the FCC respond to it, and therefore we do not consider it. See discussion of
MCI’s intervenor argument, infra part III.A.6.b.

52
attacks the agency's universal service contribution requirement as

an unconstitutional tax, a violation of equal protection, and an

uncompensated taking. Additionally, Celpage charges that the FCC’s

action violates § 254's plain language, is arbitrary and

capricious, and does not meet the agency’s own principle of

competitive neutrality.

i. CONSTITUTIONAL CHALLENGES.

(a). UNCONSTITUTIONAL TAX.

There are two ways in which the universal service contribution

requirement for paging carriers could constitute an

unconstitutional tax. First, the FCC’s application of the

universal service requirement to paging carriers such as Celpage

might be an unconstitutional delegation of Congress’s exclusive

taxing power under the Taxing Clause.48 Alternatively, because the

Act originated in the Senate,49 its requirement of universal service

contributions from paging carriers might violate the Origination

Clause’s requirement that all “[b]ills for raising [r]evenue”

originate in the House of Representatives”50

Despite their similarities, the Taxing Clause and Origination

48
U.S. CONST., art. I, § 8, cl. 1 (“The Congress shall have Power to lay
and collect Taxes. . . .”).
49
See Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56
(1996) (enacting S. 652).
50
U.S. CONST., art. I, § 7, cl. 1 (“All Bills for Raising Revenue shall
originate in the House of Representatives.”)

53
Clause challenges to the universal service contribution system

represent separate lines of analysis.51 In its initial brief,

however, Celpage raises only the Origination Clause challenge and

does not raise a Taxing Clause claim until its reply brief.

Therefore, we will not consider it,52 and we focus our efforts on

Celpage’s claim that the universal service contribution

requirement, as applied to paging carriers, is a violation of the

Origination Clause.53

Unfortunately for Celpage, its Origination Clause claim cannot

survive United States v. Munoz-Flores, 495 U.S. 385, 398 (1990).

There, the Court refused to find that a special assessment on cer-

tain federal criminals for a “crime victim’s” fund is a tax, be-

51
The Taxing Clause analysis focuses on whether the assessment is a tax
or a fee. This question is usually resolved based on whether the revenues are
used to primarily defray the expenses of regulating the act. See National Cable
Television Ass’n v. United States, 415 U.S. 336, 340 (1974). If it is a tax,
then courts will ask whether it has been properly delegated. Id. On the other
hand, the Origination Clause analysis asks whether (1) the revenues generated
from the assessment are for general revenues or for a particular program and
(2) there is a connection between the payors and the beneficiaries of the
program. See Munoz-Flores, 495 U.S. at 397. See infra part III.B.1.c. n.83.
52
Generally, we do not consider arguments raised for the first time in a
reply brief. See FED. R. APP. P. 28(c). Even if Celpage’s Taxing Clause argument
were properly before us, we find no basis for reversal. As applied to paging
carriers, the universal service contribution qualifies as a fee because it is a
payment in support of a service (managing and regulating the public
telecommunications network) that confers special benefits on the payees. See
National Cable, 415 U.S. at 340. Cf. Rural Tele. Coalition v. FCC, 838 F.2d
1307, 1314 (D.C. Cir. 1988) (upholding universal service contributions as a fee
supporting allocations between interstate and intrastate jurisdictions).
53
The Supreme Court has squarely held that Origination Clause challenges
are subject to judicial review and do not fall under the political question
doctrine. “A law passed in violation of the Origination Clause would thus be no
more immune from judicial scrutiny because it was passed by both Houses and
signed by the President than would a law passed in violation of the First
Amendment.” Munoz-Flores, 495 U.S. at 397.

54
cause “a statute that creates a particular governmental program and

that raises revenue to support that program . . . is not a 'Bil[l]

for raising Revenue' within the meaning of the Origination Clause.”

Id.

Celpage points out that the Congressional Budget Office has

treated universal service fund contributions as federal revenues.

But how the government classifies a program for accounting purposes

does not resolve whether the funds are used for a specific program

or for general revenues. Indeed, the Court in Munoz-Flores upheld

the special assessment even though the excess money collected was

deposited in the Treasury. Instead of looking at accounting desig-

nations, Munoz-Flores teaches us (1) to determine whether the funds

are “part of a particular program to provide money for that program

. . . .” and (2) to establish a connection between the payors and

the beneficiaries. Munoz-Flores, 495 U.S. at 399, 400 n.7.

With one exception,54 universal service contributions are part

of a particular program supporting the expansion of, and increased

access to, the public institutional telecommunications network. See

Order ¶ 8. Each paging carrier directly benefits from a larger and

larger network and, with that in mind, Congress designed the

universal service scheme to exact payments from those companies

54
See discussion of § 254(h) support for internet services, infra
part III.B.1. Unlike the circumstance in that case, the situation here is that
of a telecommunications service provider's (a paging carrier's) being required
to support the maintenance of a large telecommunications network.

55
benefiting from the provision of universal service.55 This design

prevents the sums being used to support the universal service

program from being classified as “revenue” within the meaning of

the Origination Clause.

Paging carriers are uniquely dependent on a widespread tele-

communications network for the maintenance and expansion of their

business. See Order ¶ 82. As in Munoz-Flores, the challenged

assessment targets a group “to which some part of the expenses” of

sustaining the universal service program “can fairly be

attributed.” See Munoz-Flores, 495 U.S. at 400 n.7. Therefore,

the application of the universal service contribution requirement

to paging carriers does not transform the Act into a “bill for

raising revenue” in violation of the Origination Clause.56

(b). EQUAL PROTECTION.

To invalidate the FCC’s actions on equal protection grounds,

55
See § 254(d) (“Every telecommunications carrier that provides interstate
telecommunications services shall contribute . . . to the . . . mechanisms estab-
lished by the Commission to preserve and advance universal service.”); § 254(f)
(“Every telecommunications carrier that provides intrastate telecommunications
services shall contribute . . . .”).
56
The Munoz-Flores Court does not discuss in great detail the importance,
in Origination Clause analysis, of some kind of relationship between the payors
and the beneficiaries. Still, it makes sense that the Court would insist on some
link, because an assessment on one group for the benefit of a completely unre-
lated group is how courts have distinguished taxes raised for general federal
outlays from fees raised for specific programs. Otherwise, Congress could always
avoid the Origination Clause requirement because, in theory, all revenue is
raised to fund some “particular program.” Thus, courts must establish some
relationship between the payors and the beneficiaries to avoid the strictures of
the Origination Clause.

56
we must find that there is no “basis for the action that bears a

debatably rational relationship to a conceivable legitimate govern-

mental end.” See Reid v. Rolling Fork Pub. Util. Dist., 979 F.2d

1084, 1087 (5th Cir. 1992). This is a tough burden, and Celpage

does not come close. Celpage argues there can be no rational

reason to include paging carriers in the universal service con-

tribution system, because its contributions will support services

that do not benefit Celpage. But the FCC has offered a reasonable

proposition: Paging carriers such as Celpage benefit from a larger

and more universal public network system, because it increases the

number of potential locations for paging use. Even if this propo-

sition is wrong, as Celpage suggests, it certainly meets the very

low “debatably rational” test.57

(c). TAKING.

Celpage advances an unconvincing takings claim. As an initial

matter, a takings claim is not ripe until a claimant has

unsuccessfully sought compensation from the state.58 Celpage does

not allege that it has used any of the FCC’s administrative

procedures to petition for compensation or that such procedures are

57
See Reid, 979 F.2d at 1087 (5th Cir. 1992) (stating that a “decision of a
governmental body does not violate equal protection guarantees if there is any basis
for the action that bears a debatably rational relationship to a conceivable
legitimate governmental end”).

58
See Williamson County Regional Planning Comm'n v. Hamilton Bank,
473 U.S. 172, 193 (1985).

57
so inadequate as to make resort to these procedures futile. “To

violate the [takings] clause, the state must not only take

someone’s property but also deny him compensation.” Samaad v. City

of Dallas, 940 F.2d 925, 934 (5th Cir. 1991).

As we did in the case of GTE’s challenge to the forward-

looking cost methodology, we reject Celpage’s takings claim as not

ripe for judicial review.59

ii. OTHER CHALLENGES.

Celpage attacks the FCC’s interpretation of the “equitable and

nondiscriminatory” language in § 254(b)(4). To be truly equitable,

Celpage asserts, the agency should not treat all carriers in the

same way for purposes of the universal service contribution system.

Additionally, Celpage accuses the agency of failing to consider

evidence of congressional intent, the record evidence, and other

evidence of why paging carriers should not be included in the

universal service contribution system.

The FCC has successfully dispensed with the plain language

challenge. First, as we have explained, the “equitable and non-

discriminatory” language in § 254(b) acts as only one of seven

59
Even if we considered Celpage’s takings claim, it would fail to demon-
strate how its claim comports with the three factors the Supreme Court has estab-
lished to analyze a regulatory takings claim: (1) the economic impact of the
regulation on the claimant; (2) the extent to which the regulation has inter-
fered with distinct investment-backed expectations; and (3) the character of the
governmental action. See Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211,
225 (1986). In particular, Celpage has failed to offer reasonably specific pre-
dictions of the size and scale of this taking, thereby failing to show the extent
to which the regulation has interfered with its distinct investment-backed
expectations.

58
guiding principles for FCC rulemaking. See supra part III.A.1.a.i.

That subsection also instructs the agency that “all providers of

telecommunications services should make an equitable and

nondiscriminatory contribution” to universal service. (Emphasis

added.) The language of § 254(b) directs us to give the FCC, in

addition to the usual Chevron deference, discretion here to fashion

a policy that is guided by both of these principles.

Celpage also challenges the FCC’s interpretation as arbitrary

and capricious under the APA because it is not supported by the

record, and the agency has provided no reason why its decision

should be made in the face of contrary record evidence.

Specifically, Celpage says that the FCC failed to consider ex parte

statements by legislators during the rulemaking proceedings urging

it to exclude CMRS carriers from the universal service contribution

system. Additionally, Celpage points to evidence in the record

supporting its position and claims the FCC failed to consider it.

To achieve reversal under the APA’s arbitrary and capricious

standard, Celpage must show that the FCC failed to “articulate[] a

rational relationship between the facts found and the choice made

. . . .” Harris, 19 F.3d at 1096. A reviewing court tries “to

determine whether the decision was based on a consideration of

relevant factors . . . .” Louisiana v. Verity, 853 F.2d 322, 327

(5th Cir. 1988).

The record does not show that the FCC failed to consider the

59
counter-arguments proffered by the CMRS providers and their allies.

The agency did take note of letters from Congress on behalf of CMRS

providers and from other legislators taking the opposite position.

See Report to Congress ¶ 129 & n.301. Moreover, the letters on

both sides have limited persuasiveness, because they are simply

“post-passage remarks” that “'represent only the personal views of

these legislators'” and “cannot serve to the change the legislative

intent of Congress expressed before the Act's passage.” Regional

Reorganization Act Cases, 419 U.S. 102, 132 (1974) (quoting

National Woodwork Mfrs. Ass’n v. NLRB, 386 U.S. 612, 639 n.34

(1967)).

The FCC offered a reasonable justification for including CMRS

providersSSthis time relying on statutory language, the Joint Board

recommendation, and the reasonable view that paging carriers do

receive benefits from the universal service system. Accordingly,

the agency's interpretation may not fairly be described as “arbi-

trary and capricious” under the APA.60

iii. IMPLEMENTING UNIVERSAL SERVICE ASSESSMENT REQUIREMENTS.

Celpage and the CMRS Providers challenge the FCC’s rules and

60
Celpage also challenges the FCC’s ruling for violating its own principle
of “competitive neutrality.” Because this term has been developed by the FCC
through regulation rather than through interpretation of the statute, we should
give the agency broad deference in applying this principle, and we can reverse
only if we find the FCC’s actions “arbitrary, capricious or manifestly contrary
to the statute.” Chevron, 467 U.S. at 844. The FCC’s decision to require paging
operators to contribute to the support of a network through which their business
operates is not so irrational or arbitrary as to merit reversal.

60
procedures for assessing contributions in the form of the Universal

Service Worksheet. Specifically, Celpage attacks the worksheet for

failing to distinguish between billed revenues and collected

revenues for purposes of calculating universal service

contributions. The CMRS Providers complain that the FCC’s failure

to provide guidance on how to adjust for the different nature of

CMRS revenues makes the assessment system unconstitutionally vague.

We do not reach the vagueness argument, because the FCC per-

suasively responds that these challenges are not yet ripe for

judicial review, for the reason that the agency has made a “ten-
61
tative decision.” Similar attacks on the Worksheet are currently

pending before the agency as petitions for reconsideration.62

Moreover, recognizing the difficulties that the Worksheet raises,

the FCC has already granted CMRS providers interim relief by

allowing them to provide good-faith estimates of the figures

required by the Worksheet.

Thus, the agency properly asks us to defer judicial review of

its tentative decision until all administrative remedies are ex-

61
See Pub. Citizen Health Research v. Commissioner, Food & Drug Admin.,
740 F.2d 21 (D.C. Cir. 1984) (refusing to exercise judicial review over tentative
agency actions absent excessive delay or extraordinary recalcitrance).

62
On October 26, 1998, the FCC released an order and a further notice of
proposed rulemaking on the question of how to assess wireless carriers’ revenues.
The agency made a tentative decision to provide wireless carriers with interim
guidelines for how to approximate their percentage of interstate wireless
revenues. Additionally, the agency sought comment on various proposals for a
final guideline on such calculations and comment on the relationship of wireless
communications providers to universal service. This order further supports the
FCC’s position that it has not yet made a final decision on how to handle these
issues.

61
hausted. In analogous situations, courts have postponed review

“until relevant agency proceedings have been concluded [to] per-

mit[] an administrative agency to develop a factual record, to

apply its expertise to the record, and to avoid piecemeal appeals.”

See Telecommunications Research & Action Ctr. v. FCC, 750 F.2d 70,

79 (D.C. Cir. 1984) (internal citations omitted).

iv. STATES' COLLECTION OF UNIVERSAL SERVICE ASSESSMENT FROM CMRS CARRIERS.

Celpage and the CMRS Providers make a convincing challenge in

contesting the FCC’s decision to permit states to impose universal

service contribution requirements on CMRS providers. They argue

that the plain language of 47 U.S.C. § 332(c)(3)(A) specifically

preempts states from doing so. Additionally, the CMRS Providers

contend that § 254(f)’s language, relied on by the FCC, does not

reach CMRS providers, because they are interstate carriers.

(a) Plain Language of § 332(c)(3)(A).

Celpage and the CMRS Providers argue that in § 332(c)(3)(A),

“Congress has spoken to the precise question at issue,” the ability

of states to assess CMRS providers for universal service

contributions. See Chevron, 467 U.S. at 842. Therefore, they

argue that the FCC's interpretation deserves no deference. The

plain language of § 332(c)(3)(A) does seem to apply to the issue at

62
hand:

Notwithstanding sections 152(b) and 221(b) of this
title, no State or local government shall have any au-
thority to regulate the entry of or the rates charged by
any commercial mobile service or any private mobile
service, except that this paragraph shall not prohibit a
State from regulating the other terms and conditions of
commercial mobile services. Nothing in this subparagraph
shall exempt providers of commercial mobile services
(where such services are a substitute for land line
telephone exchange service for a substantial portion of
the communications within such State) from requirements
imposed by a State commission on all providers of
telecommunications services necessary to ensure the uni-
versal availability of telecommunications service at
affordable rates.

Before we discuss the differing interpretations of the stat-

ute, we must decide on the proper standard of review. The Tenth

Circuit recently reviewed the FCC’s interpretation of this section

under the second step of Chevron, because the statute does not

expressly state how we should read § 332(c)(3)(A) in relation to

§ 254(f). See Sprint, 149 F.3d at 1061. This standard of review

is inappropriate, however, because it would allow the FCC to

receive Chevron deference in almost every situation in which two

sections of a statute must be read together. Indeed, the Act does

contain a specific rule of statutory construction in § 601(c)(1),

reprinted in 47 U.S.C. § 152 (Addendum A-1): "This Act and the

amendments made by this Act shall not be construed to modify,

impair or supersede Federal, State or local law unless expressly

provided in such Act or Amendments."

Thus, we disagree with the Sprint court that the lack of a

63
specific provision discussing the relation between §§ 332(c)(3)(A)

and 254(f) automatically triggers Chevron deference. To the con-

trary, § 601(c)(1) gives us explicit instruction to read § 254(f)

(“federal law”) as not conflicting with § 332(c)(3)(A). Therefore,

we conduct a Chevron step-one review and try to search out the

statute’s plain meaning.

Celpage and the CMRS Providers offer this “plain common sense”

reading: Assessments for universal service by state commissions

constitute regulation of rates or entry for purposes of the

statute. The first sentence of this subsection prohibits the

states from regulating rates or entry, and therefore prohibits

universal service assessments, relating to CMRS providers. The

second sentence explains that states may impose universal service

requirements “where such services are a substitute for land line

telephone exchange service . . . .” This plain language, Celpage

and the CMRS Providers argue, expressly prohibits states from

requiring universal service contributions from CMRS providers with-

out first making a finding that the CMRS services in question are

a substitute for landline telephone service.

The FCC points to plain language that requires it to make

“[e]very . . . carrier that provides intrastate telecommunications

service” contribute to the universal service programs as determined

by the states. See 47 U.S.C. § 254(f). It then contends that the

provisions of § 332(c)(3)(A) should not be read to trump the

64
express commands of § 254(f).

The FCC finds support for its reading in the second clause of

the first sentence of § 332(c)(3)(A). First, it concludes that

requiring universal service contributions is neither rate nor entry

regulation. See Fourth Reconsideration Order ¶ 301. It then notes

that this clause says that a state is not prohibited from

regulating “other terms and conditions of commercial mobile

services.” Based on this clause alone, the FCC argues, the states

retain the ability to compel universal service contributions as

long as it does not constitute regulation of rates or entry. The

second sentence simply clarifies that states can also regulate

“rates and entry” if they make a finding that CMRS providers are

substituting for landline service.

The Sprint court adopted this reading of § 332(c)(3)(A) and

added another argument for the FCC’s position. See Sprint,

149 F.3d at 1061. The second sentence’s introductory language,

“nothing in this subparagraph . . .,” limits the reach of the

landline substitution requirement to § 332(c)(3)(A). Therefore,

the landline substitution requirement “simply is not relevant to

§ 254(f).” Id.

The petitioners argue that the FCC’s reading violates the

maxim of statutory construction that all language of a statute must

65
be given effect.63 According to the petitioners, if we read the

clause “other terms and conditions” to enable states to impose

universal service requirements, then the entire second sentence

would be redundant. There would be no reason to create a statutory

requirement for when states may impose conditions for universal

service if the “other terms and conditions” clause already allows

states to impose universal service requirements on CMRS providers.

But the FCC persuasively responds that, under its reading, the

second sentence clarifies the ability of states to regulate rates

and entry in the name of universal service, while the “other terms

and conditions” clause opens the door to all other universal ser-

vice regulation. Thus, we do not conclude, as the petitioners im-

ply we should, that requiring universal service contributions nec-

essarily constitutes the regulation of rates and entry.64 Thus,

under the FCC’s reading, the states may generally regulate CMRS

providers as they please, but they may regulate the rates and entry

of CMRS providers only when they make a finding of substitu-

tability.

We disagree with the CMRS Providers’ further argument that

63
See Mississippi Poultry Ass’n v. Madigan, 31 F.3d 293, 304 (5th Cir. 1994)
(en banc) (“[A] statute should be interpreted so as not to render one part
inoperative.”).

64
A state commission could require a universal service contribution based
on end-user revenues but leave the carrier free to set its rates as it pleases
while not blocking new carriers from entering the market. On the other hand, a
state commission would be regulating “rates and entry” if it required the
carriers to lower rates for one group of customers as part of an implicit
subsidy.

66
even this reading, adopted in Cellular Telecomms. Indus. Ass'n v.

FCC, 168 F.3d 1332 (D.C. Cir. 1999),65 would render the second sen-

tence redundant because the third sentence of the subsection speci-

fically lays out the procedures under which a state can petition

for the right to regulate CMRS rates. The FCC’s reading would

still permit the following understanding of the statute: States

(1) in general can never regulate rates and entry requirements for

CMRS providers; (2) are free to regulate all other terms and

conditions of CMRS service; (3) may regulate CMRS rates and entry

requirements when they have made a substitutability finding in

connection with universal service programs; and (4) may also

regulate CMRS rates if they petition the FCC and meet certain

statutory requirements, including either substitutability or unjust

market rates. None of the provisions would have to be read as

inoperative or redundant.

Additionally, this reading would avoid conflict with § 254(f),

which requires that “every telecommunications carrier” contribute

to the universal service fund. This rendition of § 332(c)(3)(A)

allows the FCC to give effect to the plain language of § 254(f)

while not violating § 601(c)’s directive to construe the Act in

ways that do not “modify, impair, or supersede” federal law.

Therefore, the reading offered by Celpage and the CMRS Pro-

viders does not represent the unambiguous intent of Congress. The

65
See also Sprint Spectrum, L.P. v. State Corp. Comm'n, 966 F. Supp. 1043 (D.
Kan. 1997).

67
FCC’s reading reflects Congress's unambiguous intent as expressed

in the plain language of the statute and takes into account

Congress’s instruction that § 254 be construed in ways that do not

conflict with other federal laws.66 Therefore, we reject Celpage

and the CMRS providers’ challenges to this section of the Order.

(b) CMRS PROVIDERS AS INTERSTATE CARRIERS.

Celpage and the CMRS Providers raise a weak challenge to state

contribution requirements, contending that CMRS providers are

“jurisdictionally interstate” and therefore exempt from state

assessments. We agree with the FCC that the plain language of

§ 254(f) simply requires that “[e]very telecommunications carrier

that provides intrastate telecommunications services” contribute to

state mechanisms. As the agency found, a significant portion of

the CMRS providers’ services arise from providing intrastate tele-

communications services.67 This undeniably significant involvement

of CMRS providers in the provision of intrastate service is more

than sufficient to place them within the ambit of § 254(f).

66
Even if the CMRS providers are right that the plain language does not
unambiguously support the FCC’s reading, we would defer to the FCC’s reasonable
interpretation under Chevron step-two. Accord Cellular Telecommunications,
168 F.3d at 1336 (“The bottom line is that Cellular has not demonstrated that its
interpretation of § 332(c)(3)(A) is the only permissible one . . . .”).

67
According to one study, interstate revenues accounted for only 5.6% of
total revenues for cellular and personal communications service carriers and 24%
of total revenues for paging and other mobile service carriers. See Fourth
Reconsideration Order ¶ 303.

68
 b. DETERMINING THAT INTERSTATE CARRIERS MUST CONTRIBUTE
ON THE BASIS OF THEIR INTERNATIONAL REVENUES.

COMSAT, a small interstate carrier specializing in providing

international telephone service, challenges the FCC’s decision to

define the universal service base to include the international

revenues of interstate carriers. COMSAT derives such a small

portion of its revenues from interstate service that it would end

up with universal payment obligations exceeding its interstate

revenues. It argues that this bizarre outcome violates § 254(d)’s

requirement that all universal service contributions be “equitable

and nondiscriminatory” and the FCC’s own principle of competitive

neutrality. At the very least, COMSAT argues, this result shows

that the FCC’s action is arbitrary and capricious.

As a threshold matter, the FCC challenges the availability of

judicial review, because COMSAT failed to petition the agency for

reconsideration, as required by § 405 of the Act.68 COMSAT responds

that the absence of a § 405 petition for rehearing is not a bar to

judicial review if the petitioner was a party in the rulemaking

proceeding and the FCC was afforded an opportunity to rule on the

issue.69 Because COMSAT did participate in the rulemaking pro-

68
47 U.S.C. § 405(a).

69
“The filing of a petition for reconsideration shall not be a condition
precedent to judicial review of any such order, decision, report, or action,
except where the party seeking such review (1) was not a party to the proceedings
resulting in such order, decision, report, or action, or (2) relies on questions
of fact or law upon which the Commission, or designated authority within the
Commission, has been afforded no opportunity to pass.” 47 U.S.C. § 405(a).

69
ceeding and did file comments70 with the agency on this question,

we agree that § 405 does not bar our review.71

The FCC is more persuasive when it argues that COMSAT is

really asking for consideration of its individual circumstance

rather than challenging the rule as a whole. In this situation,

the FCC argues that waiver is a more appropriate remedy than is

judicial review. In fact, COMSAT did file a petition for waiver

but withdrew it without explanation shortly before the FCC filed

its brief in this case. COMSAT now claims to be bringing this

claim on behalf of all international carriers in similar

circumstances, but it fails to identify any such entities and

remains alone in its petition for review.

While waiver may be an appropriate remedy, the FCC cites no

authority for the proposition that consideration of a waiver is

required before judicial review may occur, and our research has

found no such authority. The case relied on by the FCC stands only

for the proposition that waiver will be allowed as long as the

underlying rule is rational.72 We see no statutory basis for

denying judicial review on the ground that a party must first seek

70
See generally Comments of COMSAT Corp., CC Docket No. 96-45 (filed
Dec. 19, 1996); Comments of COMSAT Corp., CC Docket No. 96-45 (filed April 12,
1996).

71
See Time Warner Entertainment Co., L.P. v. FCC, 144 F.3d 75, 80 (D.C. Cir.
1998) (“So long as the issue is necessarily implicated by the argument made to the
Commission, section 405 does not bar our review.”).

72
See National Rural Telecomm. Ass’n v. FCC, 988 F.2d 174, 181 (D.C. Cir.
1993).

70
a waiver. Therefore, we consider the rule on its merits.

COMSAT’s attack boils down to the argument that it is being

unfairly treated because it will be forced to pay more in universal

service contributions than it can generate in interstate revenues.73

It makes a compelling argument that this result alone violates the

equitable language of the statute. The FCC’s response to the

statutory challenge simply states that there is nothing

“inequitable” about requiring a carrier benefiting from universal

service from contributing to it.

Under this reading, however, it is difficult to know what the

FCC would consider inequitable, because any carrier could

conceivably benefit from universal service. Obviously, the

language also refers to the fairness in the allocation of

contribution duties. In this matter, COMSAT can show that it is

being forced to pay more under this rule than it can generate in

revenues, yet the FCC does not find even this situation

“inequitable.”

Moreover, the FCC dismisses COMSAT’s claim that the agency

violates the “nondiscriminatory” requirement of § 254(d) simply by

saying that the agency has recognized that some providers of

international service will be treated differently from others. But

this recognition of discrimination hardly saves the agency from the

73
COMSAT estimates that the application of the FCC’s interpretation would
require it to contribute more in universal service fees ($5 million) than it
would generate in interstate revenues ($3.8 million).

71
statutory requirement that contributions are collected on a non-

discriminatory basis.

The agency falls back on its discretion, under the statute, to

balance the competing concerns set forth in § 254(b), which include

the need for sufficient revenues to support universal service.

While the statute allows the FCC a considerable amount of

discretion, however, that discretion is not absolute. The heavy

inequity the rule places on COMSAT and similarly situated carriers

cannot simply be dismissed by the agency as a consequence of its

administrative discretion.

Therefore, the agency’s interpretation of “equitable and non-

discriminatory,” allowing it to impose prohibitive costs on car-

riers such as COMSAT, is “arbitrary and capricious and manifestly

contrary to the statute.” Chevron, 467 U.S. at 844. COMSAT and

carriers like it will contribute more in universal service payments

than they will generate from interstate service.74 Additionally,

the FCC’s interpretation is “discriminatory,” because the agency

concedes that its rule damages some international carriers like

COMSAT more than it harms others. The agency has offered no rea-

sonable explanation of how this outcome, which will require com-

panies such as COMSAT to incur a loss to participate in interstate

service, satisfies the statute’s “equitable and nondiscriminatory”

74
COMSAT also points out that much of the interstate service it provides
is at the request of the government, to ensure service to isolated locations such
as Guam and American Samoa.

72
language. We therefore reverse and remand this portion of the

Order for further consideration.

6. TIMING.

a. TIMETABLE FOR THE IMPLEMENTATION OF
AN EXPLICIT SYSTEM OF UNIVERSAL SERVICE SUPPORT.

On statutory and constitutional grounds, GTE attacks the FCC’s

timetable for implementation of an explicit system of universal

service support.75 First, GTE argues that the agency’s decision to

wait until January 1, 2000, before implementing its plan for pro-

viding explicit support for universal service violates the statu-

75
The FCC asks us to bar review of this question, arguing that GTE and SBC
are collaterally estopped from litigating it because they did so during chal-
lenges to the Access Charge Order in the Eighth Circuit. See Southwestern Bell,
153 F.3d at 537. Before applying collateral estoppel, we must first decide
whether (1) the issue under consideration is identical to that litigated in the
prior action; (2) the issue was fully and vigorously litigated in the prior
action; (3) the issue was necessary to support the judgment in the prior case;
and (4) there is no special circumstance that would make it unfair to apply the
doctrine. See Winters v. Diamond Shamrock Chem. Co., 149 F.3d 387, 391 (5th Cir.
1998), cert. denied, 119 S. Ct. 1286 (1999).

We agree with the petitioners that the challenge to the FCC’s high-cost
support timetable is not “identical,” for collateral estoppel purposes, to the
issue raised in that case. Although the petitioners challenge the coordination
between implicit subsidies in the access charge system and those in the new
support system, their challenge in this case involves a broader attack on the
timing of the entire universal service high-cost support system rather than on
just its interactions with the access charge system.

The Eighth Circuit did not consider the contention that GTE brings before
us: that the FCC violated § 254(a) by failing to implement an “explicit” and
“sufficient” universal service support system within “fifteen months” of the 1996
Act’s enactment. The Eighth Circuit relied on the fact that the deadline for
adopting rules on universal service came after the date for adopting rules on
opening the market to local competition. See Southwestern Bell, 153 F.3d at 537.
Therefore, there was no need for that court to decide whether § 254(a) requires
full implementation within “fifteen months” of the enactment, and GTE is not
collaterally estopped for pursuing its appeal of § 254(a) in this court. See
Winters, 149 F.3d at 391 n.3 (“[U]nless prior issue sought to be precluded from
relitigation was a 'critical or necessary part' integral to the prior judgment,
collateral estoppel may not apply.”).

73
tory requirements of § 254. Second, GTE asserts that the delay in

implementation results in an unconstitutional taking.

i. STATUTORY LANGUAGE.

GTE contends that the delay in implementation violates

§ 254(e) because it fails to provide “sufficient” funding to sup-

port universal service.76 In fact, between the Order’s release on

May 8, 1997, and its implementation on January 1, 2000, the FCC

will have provided no explicit support to the ILEC's, while it has

already exposed them to outside competition. In theory, then, new

entrants could begin “cherry-picking” the ILEC's' best low-cost,

high-profit customers, leaving the ILEC's stuck with the high-cost,

money-losing customers that are supposed to be supported by the new

universal service subsidy system. This would erode the old impli-

cit subsidy system before the FCC had implemented the new explicit

subsidy system.

The question is whether the statute’s language plainly re-

quires the FCC to have implemented explicit subsidies at the same

time that it issued the Order on May 8, 1997. GTE claims the

statute requires immediate implementation. But the plain language

of § 254(a)(2) requires us to reach the opposite result:

The Commission shall initiate a single proceeding to im-

76
GTE also claims that the FCC’s actions violate the “predictable” and
“nondiscriminatory” requirements of § 254(b). We see no merit to this contention
and focus instead on GTE’s best statutory argument, which relies on the use of the
term “sufficient” in § 254(e).

74
 plement the recommendations from the Joint Board required
by paragraph (1) and shall complete such proceeding with-
in 15 months after February 8, 1996. The rules
established by such proceeding shall include a definition
of the services that are supported by Federal universal
service support mechanisms and a specific timetable for
implementation.

47 U.S.C. § 254(a)(2)(emphasis added).

By instructing the FCC to establish a “timetable for

implementation” by the statutory deadline, Congress assumed the

implementation process would occur over a transition period after

the fifteen-month deadline. There is no reason to believeSSand GTE

does not offer a reasonSSthat the instruction to establish a

timetable actually means immediate implementation of the explicit

subsidy system at the statutory deadline.77

Not surprisingly, GTE falls back on the term “sufficient” and

argues that even if the FCC may slowly implement the high-cost

support program, the statute still requires the agency to ensure

that support is sufficient during the transition period. For

reasons that we have outlined, the FCC should be accorded a

substantial amount of deference when interpreting this word. See

supra part III.A.a.i.

GTE essentially asks us to hold that “sufficient” is violated

whenever there is a change (or the possibility of a change) from

77
Section 254(e) contemplates that universal support will be “explicit” and
“sufficient” “[a]fter the date on which Commission regulations implementing this
section [§ 254(e)] take effect.” This language further supports the FCC’s reading
that Congress did not require implementation of the high-cost support program
immediately after the 15-month deadline.

75
the current levels of universal service support. The plain meaning

of “sufficient” is far from unambiguous as it pertains to the

timing of the high-cost support program’s implementation. Cal-

culating how much support is sufficient to provide support for

universal service is a judgment the FCC is better able to make than

are we, and we therefore defer to its reasonable interpretation

under Chevron step-two.

As the agency explains, the amount of competition in local

markets depends on a number of different factors, of which the

implementation of the universal service plan is only one. To enter

a new market, entrants must invoke rights to interconnection

agreements under §§ 251 and 252.78 In almost all cases, these

agreements require lengthy arbitrations by state commissions. Even

after the completion of such arbitrations, there may be many court

challenges. Because only competition in local markets can erode

the current implicit subsidy system to an insufficient level, the

FCC made a reasonable determination that there was little chance of

such competition's emerging in the near future.

Where the statutory language does not explicitly command

otherwise, we defer to the agency's reasonable judgment about what

will constitute “sufficient” support during the transition period

78
The Supreme Court did not issue its final word on these sections until
January 25, 1999. See Iowa Utilities, 119 S. Ct. 721. In the meantime, many
potential entrants were stymied in the arbitration process and by the uncertainty
over the FCC’s jurisdiction to implement its local competition order. Therefore,
it is not surprising that the agency did not expect an onslaught of local
competition during the interim period.

76
from one universal service system to another. We follow the Eighth

Circuit’s recent holding on a similar issue: “The Commission has

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

adequately explained in the order, that competitive pressures in

the local exchange market will not threaten universal service

during the interim period until the permanent, explicit universal

service support mechanisms have been fully implemented.”

Southwestern Bell, 153 F.3d at 537.

ii. TAKING.

In some ways, GTE’s takings argument is simply another version

of its contention regarding lack of “sufficient” support. On both

issues, GTE argues that the FCC’s decision to leave ILEC's exposed

to local competition without first implementing the new universal

service plan results in a severe reduction of its revenues from

local service. Relying on Brooks-Scanlon v. Railroad Comm’n,

251 U.S. 396 (1920), GTE argues that a regulated entity cannot be

forced to operate one segment of its business at a loss on the

expectation that it can make up the shortfalls from another

competitive line of business. At the very least, GTE says, the FCC

should adopt a narrow construction of the statutory language to

avoid any constitutional infirmities.79

The FCC responds that before a narrowing construction should

79
See Edward J. DeBartolo Corp. v. Florida Gulf Coast Building & Constr.
Trades Council, 485 U.S. 568, 575 (1988).

77
be considered, GTE must show that a taking will “necessarily”

result from the regulatory actions. See United States v. Riverside

Bayview Homes, 474 U.S. 121, 128 n.5 (1985). Even if GTE can show

that some taking will result, it must demonstrate that its losses

are so significant that the “net effect” is confiscatory. See

Duquesne, 488 U.S. at 310-16.

GTE has failed to meet the requirements of Duquesne, because

it cannot show that it will lose any revenue at all, much less

enough to constitute a taking under more recent precedent. Its

attempt to distinguish Duquesne is misguided because, contrary to

GTE’s claim, the Duquesne Court did not base its finding of takings

on the fact that the market was no longer closed to competition.

Rather, Duquesne stands for the proposition that “no single

ratemaking methodology is mandated by the Constitution, which looks

to the consequences a governmental authority produces rather than

the techniques it employs.” Duquesne, 488 U.S. at 299 (Scalia, J.,

concurring). Duquesne does not require courts to engage in a

takings analysis whenever an agency opens a previously regulated

market to competition. Further, as we explained in sustaining the

forward-cost looking methodology, GTE’s reliance on Brooks-Scanlon

is misplaced, because we will not apply the rule in that case to

transitional or temporary periods. See Continental Airlines,

784 F.2d at 1251.

78
 b. ACCESS CHARGES AT FORWARD-LOOKING COST LEVELS
AS SOON AS COST MODELS ARE AVAILABLE.

MCI asks the FCC to reduce access chargesSSthe fees charged by

ILEC's on interstate callsSSto the forward-looking cost level used

by the agency to calculate support for high-cost areas. Under the

FCC’s plan, ILEC's will be required to reduce their access charges

by the amount they receive in the form of explicit universal

service subsidies. MCI argues that by permitting the ILEC's to

retain the amount of access charge revenue above cost, the FCC has

violated its statutory mandate to eliminate implicit subsidies when

it implements the new universal service plan.

This argument differs from GTE’s assertions. While GTE seeks

immediate implementation of the explicit subsidy program, MCI seeks

to include the elimination of implicit subsidies within the rubric

of the explicit subsidy program. In fact, GTE’s fear that implicit

subsidies will be eroded during the transition period is precisely

the goal of MCI’s intervention. Because GTE does not seek the

elimination of the implicit subsidies, it is making an argument

different from MCI's.

For this reason, we agree with the FCC that MCI cannot

properly intervene on this issue, because none of the petitioners

raised the same challenges to the Order. In United Gas Pipe Line,

824 F.2d at 437, we held that “intervenors may not challenge

aspects of the Commission’s orders not raised in the petitions for

review.” Because MCI’s challenge does not raise an issue brought

79
up by any of the petitioners, we do not consider its arguments on

appeal, but follow the District of Columbia Circuit and decline to

grant intervenor standing in a situation in which “we could grant

[the intervenor] the full relief it seeks while rejecting all of

the petitioners’ challenges, and vice versa.” Illinois Bell Tel.

Co. v. FCC, 911 F.2d 776, 786 (D.C. Cir. 1990).80

c. PLAN FOR TRANSITION TO A NEW UNIVERSAL SERVICE SYSTEM
FOR RURAL, INSULAR, AND HIGH-COST AREAS.

The FCC’s transition plan for its new explicit subsidy uni-

versal support system does not immediately apply to all ILEC's.

All carriers eligible for universal service support will become

part of the new system on January 1, 2000. Small rural carriers,

however, will not be required to move into the new system until

2001 at the earliest. See Order ¶ 204. Specifically, the agency

(1) has exempted rural carriers, defined as those carriers serving

study areas of less than 100,000 lines, from the new forward-

80
MCI claims that the FCC is trying to evade review of this question through
procedural maneuvering. When BellSouth, in its Eighth Circuit challenge to the
Access Charge Order, raised the issue of the FCC’s failure to remove all implicit
subsidies, the agency argued that this question should be addressed in this court
in challenges to the Universal Service Order. Now that MCI has raised that same
issue, MCI argues that the agency should not be allowed to dodge review again on
procedural grounds.

Unfortunately for MCI, it was not any manipulation of procedural rules by the
FCC that prevented MCI from properly raising this issue on appeal. There was no
legal reason that prevented MCI from filing a brief as a petitioner rather than as
an intervenor. Thus, the FCC’s procedural moves are irrelevant for purposes of
deciding whether MCI may properly intervene. The only question, then, is whether
MCI’s challenge to the Order for failing to reduce access charges immediately is the
same as GTE’s challenge to the Order for failing to implement explicit subsidies
immediately. We see no such resemblance.

80
looking cost methodology until at least January 1, 2001,81 and

(2) has allowed carriers with 200,000 or fewer working loops per

study area to continue recovering extra support from the high-cost

fund until implementation of the new methodology on January 1,

2000. See Order § 210.

i. ESTABLISHING A LONGER TRANSITION PERIOD
FOR RURAL CARRIERS WITH FEWER THAN 100,000 LINES.

Vermont82 attacks the small rural carrier exemption because it

does not permit large carriers who happen to serve rural areas the

same delayed transitional treatment that rural carriers with study

areas of less than 100,000 lines will receive. Vermont argues that

there is no statutory or reasonable basis for distinguishing among

rural carriers simply because of their size. For example, census

statistics show that Vermont has more residents living in rural

areas than does any other state, yet its carrier, Bell Atlantic,

does not qualify for the same treatment as do other rural carriers

as defined by the FCC’s 100,000-line distinctions.

Vermont does not point to any statutory authority for its

claim that the FCC must give all rural carriers the same treatment

under the plan. Instead, it simply argues there is no good reason

to treat Bell Atlantic differently from other rural carriers. For

81
See Order ¶ 273 (stating that “non-rural carriers” will come under the
new forward-looking cost methodology).
82
Kansas initially joined Vermont in this challenge but indicates, in its
reply brief, that it now withdraws from this portion of the appeal.

81
these reasons, it asks us to reverse on arbitrary-and-capricious

grounds under the APA.

A statute survives judicial scrutiny under the APA’s

“arbitrary and capricious” standard as long as the agency

“articulates a rational relationship between the facts found and

the choice made” and “so long as the agency gave at least minimal

consideration to relevant facts contained in the record.” Harris,

19 F.3d at 1096. The FCC provides at least two reasons that

articulate such a “rational relationship.”

First, because the agency delayed the transition for rural

carriers on the ground that its cost models for small carriers were

inadequate, it was reasonable to treat Bell Atlantic differently.

After all, Bell Atlantic is a large ILEC for which the FCC does

have cost models. Second, the FCC justifies its delay for small

rural carriers because it has found that they will have greater

difficulty adjusting to a new system. Again, such a finding would

not apply to Bell Atlantic. These reasons suffice.

ii. CONTINUING APPLICATION OF EXISTING HIGH-COST RULES
UNTIL THE NEW UNIVERSAL SERVICE SYSTEM TAKES EFFECT.

Vermont83 challenges the decision to maintain extra support for

ILEC's with study areas of 200,000 or fewer loops until the new

methodology is implemented on January 1, 2000. In other words, by

83
Kansas initially joined Vermont in this challenge, but has indicated in
its reply brief that it now withdraws from this portion of the appeal.

82
exempting carriers with 200,000 or fewer lines from the new high-

cost support methodology, the FCC again decided to give extra sup-

port to smaller carriers, in this case defined as those carriers

with study areas containing 200,000 or fewer loops. As it did in

challenging the 100,000 line distinction, Vermont asserts that the

distinction is arbitrary and capricious because the FCC ignores

evidence that size is not a reliable predictor of cost.

The FCC again argues that the 200,000-line rule is

transitional, interim relief. The agency has stated that the extra

support provided by this rule will expire when the new forward-

looking cost methodology goes into effect on January 1, 2000. It

asks us to accord it the “substantial deference” it needs to

develop transitional solutions to complex regulatory problems. See

MCI Telecomms. v. FCC, 750 F.2d 135, 140 (D.C. Cir. 1984).

In contrast to the situation involving the rural carrier

exemption, the FCC has set a specific date for the end of this

transitional period: January 1, 2000. Accordingly, the agency’s

commitment to a specific date for termination of the support re-

sulting from the 200,000-loop rule makes the rule sufficiently

transitional to avoid judicial review. Therefore, for lack of

ripeness, we will not review Vermont’s challenge to the effects of

the 200,000-loop distinction.84

84
Vermont argues that the 200,000-loop distinction will become permanent
through its incorporation into the “hold harmless” rule articulated in the Sev-
enth Report and Order. As we have discussed, supra, we do not have jurisdiction
(continued...)

83
 B. SUBSIDIZATION OF SERVICES FOR
SCHOOLS, LIBRARIES, AND HEALTH CARE PROVIDERS.

Section 254(h) adds a new wrinkle to the concept of universal

service by directing the FCC to provide support to elementary and

secondary schools, libraries, and health care providers. Thus, the

agency has a new statutory mandate to subsidize support for certain

beneficiaries, irrespective of whether they are high-cost

consumers. GTE raises objections to the agency’s implementation of

this broad statutory mandate,85 and Cincinnati Bell and the states

challenge the proposal to assess contributions to this new univer-

sal service fund.

1. MANDATING SUPPORT FOR INTERNET ACCESS
AND INTERNAL CONNECTIONS TO SCHOOLS AND LIBRARIES.

While section 254(h) plainly authorizes the FCC to support

discounted telecommunications services to schools and libraries,

GTE finds no equivalent statutory authority to support discounted

internet access and internal connections. Therefore, GTE argues

(...continued)
to consider the merits of that new Order except in the way that it affects our
review of the Order. The “hold harmless” principle was introduced in the Seventh
Report and Order and remains outside the scope of this proceeding.
85
As a threshold matter, GTE challenges the timing of the proposal,
because it would require support for schools, libraries, and health care
providers before the new system for explicit subsidies has been implemented. For
the same reasons we have discussed, see supra part III.A.6.1., we extend the FCC
greater discretion in deciding what will be “sufficient” during the transition
period, especially when there is little reason to believe that the old subsidy
system will break down during that period.

84
that the agency exceeded its statutory authority when it mandated

support for discounted internet services and internal connections.

Although we agree with GTE that the statute and its

legislative history do not support the FCC’s interpretation, the

language of the statute is ambiguous enough to require deference

under Chevron step-two. Because, however, the FCC’s decision to

extend universal service support to internet access and internal

connections raises grave doubts as to whether § 254(h) creates an

unconstitutional tax, we construe the statute narrowly to avoid

raising these constitutional problems.86

The FCC concedes that internet access and internal connections

cannot be defined as “telecommunications services” for purposes of

the section.87 It argues, however, that the plain language of

§ 254(h)(1)(B) and (c)(3) authorizes it to require discounted

internet access and internal connections to schools and libraries

86
Judge Garza does not join our analysis of the constitutional issues
raised by the FCC’s decision to provide discounts on internet services for
schools and libraries, set forth in note 97, infra. He would not address these
issues, because the parties did not raise them on appeal. See Carducci v. Regan,
714 F.2d 171, 177 (D.C. Cir. 1983) (refusing to consider a constitutional issue
of first impression “where counsel has made no attempt to address the issue” and
“where, as here, important questions of far-reaching significance are involved”).
But see United States Nat’l Bank v. Independent Ins. Agents of Am., 508 U.S. 439,
446 (1993) (approving lower court’s consideration of legal claim not argued by
either party as part of courts’ “independent power to identify and apply the
proper construction of governing law”)(internal quotations omitted); United
States v. Moore, 110 F.3d 99, 101 (D.C. Cir. 1997) (en banc) (Silberman, J.,
dissenting) (conceding that the “rigor and integrity of Carducci was severely
impaired by the unanimous decision of the Supreme Court” in Independent Insurance
Agents).
87
The FCC has recognized that internet access or internal connection ser-
vices are “information services” that cannot be equated with “telecommunications
services.” See Order ¶ 439 n.1145.

85
(but not to health care providers).

Subsection 254(h)(1)(B) requires all telecommunications pro-

viders to provide to elementary schools, secondary schools, and

libraries, on request, discounted services “that are within the

definition of universal service under subsection (c)(3) of this

section.” Subsection (c)(3) authorizes the FCC to designate

“additional services for such support mechanisms for schools,

libraries, and health care providers for the purposes of subsec-

tion (h) of this section.” These “additional services” are “[i]n

addition to services included in the definition of universal ser-

vice under paragraph (1),” which defines universal service as an

“evolving level of telecommunications services.”

The FCC points out that there is no language restricting these

“additional” services to telecommunications services. Furthermore,

Congress used the limiting term “telecommunications services” in

§ 254(h)(1)(A) when discussing the provision of universal service

support for rural health care providers. The agency argues that

“the varying uses of the terms 'telecommunications services' and

'services' in § 254(h)(1)(A) and (B) suggests that the terms were

used consciously to signify different meanings.” Order ¶ 439.

Therefore, the FCC concluded that the term “additional services” is

not limited to telecommunications services. It then decided that,

based on the legislative history and its understanding of the

purposes of the statute, it should require internet access and

86
internal connections88 support for schools and libraries.

We first consider whether the FCC’s interpretation conflicts

with the plain language of § 254(h)(1)(B) and (c)(3). Although

the best reading of the statute does not authorize the agency’s

actions, we find the statute sufficiently ambiguous to invoke step-

two of Chevron.

The statute restricts the FCC’s authority to interpret the

phrase “additional services” in subsection (c)(3) to “the purposes

of subsection (h) of this section.” The use of the phrase

“telecommunications services” in the title of § 254(h) indicates

that the “purposes of subsection (h)” are to provide discounted

support for telecommunications services.89

We find further support for this reading in the legislative

history of § 254(h): "New subsection (h) of section 254 is

intended to ensure that health care providers for rural areas,

elementary and secondary school classrooms, and libraries have af-

fordable access to modern telecommunications services . . . ."90

88
Calling “internal connections” a good and not a service, GTE separately
attacks the “internal connections” requirement. The FCC argues that courts have
recognized internal connections as services, see NARUC v. FCC, 880 F.2d 422, 430
(D.C. Cir. 1989), and that the legislative history’s emphasis on connections to
“classrooms” makes such a requirement reasonable. Given that the maintenance and
installation of regular telephone lines also is characterized as a “service,” we
reject GTE’s attempt to distinguish “internal connections.”

89
See United States v. Wallington, 889 F.2d 573, 577 (5th Cir. 1989) (stating
that the “section heading enacted by Congress in conjunction with statutory text [is
considered] to 'come up with the statute’s clear and total meaning.'” (citation
omitted)).

90
H.R. CONF. REP. 104-458, at 132 (1996) (emphasis added), reprinted in 1996
(continued...)

87
The House Conference Report also elaborates on the interaction

between subsections (h)(1)(B) and (c)(3):

New section (h)(1)(B) requires that any
telecommunications carrier shall, upon a bona fide
request, provide services for educational purposes
included in the definition of universal service under new
subsection (c)(3) for elementary and secondary schools
and libraries at rates that are less than the amounts
charged for similar services to other parties, and are
necessary to ensure affordable access to and use of such
telecommunications services.91

And while the legislative history of subsection (c)(3) supports

giving the FCC discretion when designating services for schools and

libraries, it nevertheless describes the subsection (c)(3) defi-

nition as “applicable only to public institutional

telecommunications users.”92 This language provides more evidence

that Congress intended that the FCC designate additional

telecommunications services under subsection (c)(3) rather than any

additional services that the agency deems desirable.

Indeed, the agency’s broad reading of “additional services”

would mean that the use of the word “services” in other parts of

§ 254(c) could be broadened to include non-telecommunications

services. For instance, § 254(c)(2) authorizes the Joint Board to

recommend modifications to the definition of “services.” Under the

(...continued)
U.S.C.C.A.N. 144.
91
H.R. CONF. REP. 104-458, at 133 (1996) (emphasis added), reprinted in 1996
U.S.C.C.A.N. 144.

92
Id.

88
FCC’s interpretation, the Joint Board (composed of state

telecommunications regulators and members of the FCC) could be free

to redefine “services” to include services unrelated to

telecommunications. This result is an implausible reading of

Congress’s intent.93

This is not the end of the analysis, however, because some

aspects of the statute’s language and legislative history also sup-

port the FCC’s reading. First, the plain language of § 254(c)(1)

invites the FCC periodically to re-define “universal service” to

“tak[e] into account advances in telecommunications and information

technologies and services.” Moreover, the “purposes of subsec-

tion (h)” language in subsection (c)(3) could include more than the

“telecommunications services” referred to in § 254(h)’s section

heading. After all, subsection (h)(2)(A), which is also one of the

“purposes of subsection (h),” instructs the FCC to establish com-

petitively neutral rules to “enhance . . . access to advanced tele-

communications and information services . . . .”

Finally, some of the legislative history implies that Congress

intended for subsection(h) to support internet access:

[T]he provisions of subsection (h) will help open new

93
We also agree with GTE that the FCC is asserting unlimited authority to
prescribe support for whatever it wishes. At oral argument, counsel for the FCC
could not point out how its interpretation could be limited even to internet access
services. For instance, the agency could not explain why satellite television
services or even janitorial services would not fit within its understanding of
“additional services.” In contrast, the plain language of § 254 provides an easily
recognizable limit on FCC authority by confining § 254(h) support to
telecommunications services. The superiority of GTE’s reading, however, does not
necessarily make Congress’s intent unambiguous.

89
 worlds of knowledge, learning and education to all
AmericansSSrich and poor, rural and urban. They are
intended, for example, to provide the ability to browse
library collections, review the collections of museums,
or find new information on the treatment of an illness,
to Americans everywhere via schools and libraries.94

The reference to “brows[ing] library collections” indicates that in

drafting subsection (h), Congress envisioned some kind of support

for internet access.

The best reading of the relevant statutory language

nonetheless indicates that the FCC exceeded its authority by

mandating discounts for internet access and internal connections.

The statutory invitation in subsection (c)(1) to “re-define”

universal service to include information services does not

necessarily relate to the FCC’s authority under subsection (c)(3).

Additionally, subsection (h)(2)(A) provides the agency only

with authority to “establish competitively neutral rules to enhance

access” to information services. It does not contain specific

language supporting provision of such services “at rates less than

the amounts charged for similar services to other parties,” as in

subsection (h)(1)(B). And finally, the legislative history does

not indicate whether Congress thought the statute would enhance

access to internet services through discounts on telecommunications

services or, instead, through direct subsidies for internet access.

94
H.R. CONF. REP. 104-458, at 132 (1996), reprinted in 1996 U.S.C.C.A.N.
144.

90
 Even though GTE has offered a persuasive reading of the stat-

ute, its plain language does not make Congress’s intent

sufficiently “unambiguous” for Chevron step-one review. Therefore,

we defer to the FCC’s interpretation under Chevron step-two and

affirm those aspects of the Order providing internet services and

internal connections to schools and libraries.95

2. AUTHORITY TO PROVIDE SUPPORT PAYMENTS
TO NON-TELECOMMUNICATIONS ENTITIES THAT PROVIDE INTERNET ACCESS
AND INTERNAL CONNECTIONS TO SCHOOLS AND LIBRARIES.

The FCC invokes its rulemaking power under § 254(h)(2)(A) and

95
Before we defer to the FCC’s interpretation of an ambiguously worded
statute under the deferential Chevron step-two standard of review, we consider
whether the agency’s approach raises constitutional problems that should lead us
to construe the statute in the manner urged by GTE. “[W]here a statute is
susceptible of two constructions, by one of which grave and doubtful
constitutional questions arise and by the other of which such questions are
avoided, our duty is to adopt the latter.” Jones v. United States, 119 S. Ct.
1215, 1222 (1999) (internal citations omitted). This rule “has for so long been
applied by this Court that it is beyond debate.” DeBartolo, 485 U.S. at 574-75.
It is also of such importance that a court will reject an agency interpretation
of a statute that would ordinarily receive deference under Chevron step-two if
it believes the agency’s reading raises serious constitutional doubts. Id.
(construing statute narrowly to avoid First Amendment problem).

We have identified two ways in which the agency’s interpretation could
raise constitutional concerns that might lead us to construe the statute more
narrowly. First, the FCC’s application of the universal service fund for non-
telecommunications services could constitute an improperly delegated tax.
Second, its interpretation of the reach of § 254(h)(1)(B) could have transformed
the Act into a “bil[l] for raising revenue” in violation of the Origination
Clause.

Though it is a close question, we conclude that the FCC’s interpretation
does not raise sufficiently serious constitutional doubts to override our normal
Chevron step-two deference. While the relationship between internet services and
the public telecommunications network is more attenuated than is that of paging
services, see supra part III.A.5.a, we are not convinced that even this atten-
uated relationship raises serious doubts under Munoz-Flores. For similar rea-
sons, this attenuated relationship does not raise serious doubts as to whether
the FCC’s interpretation makes the assessment an improperly delegated tax. See
Rural Tel. Coalition v. FCC, 838 F.2d 1307, 1314 (D.C. Cir. 1988) (rejecting
unconstitutional tax challenge to universal service support allocation finding).

91
its “necessary and proper” authority under § 154(i) to provide sup-

port payments to non-telecommunications entities that provide in-

ternet access and internal connections to schools and libraries.

GTE attacks this decision as violating the express intent of Con-

gress as read through the plain language of the statute.

The FCC does not argue that any specific provision of the

statute authorizes it to add non-telecommunications companies to

the universal service payment system. Rather, it avers that

(1) the statute gives it broad authority to establish competitively

neutral rules; (2) the statute does not speak directly to the issue

of non-telecommunications providers; and (3) the statute’s silence

indicates that the agency should receive Chevron deference.

GTE relies on the traditional maxim of statutory construction,

“expressio unius est exclusio alterius.”96 GTE points out that

§ 254(h)(1)(B) already discusses how carriers will be reimbursed

for providing discounted services: “[a] telecommunications carrier

providing service under this paragraph . . . .” According to GTE,

Congress’s choice of the phrase “telecommunications carrier”

precludes the FCC from providing those same payments to non-

telecommunications carriers.

We conclude that the combination of the FCC’s “necessary and

proper” authority under § 154(i) and the limited usefulness of the

96
“The expression of one thing implies the exclusion of another.” “Hence,
a statute that mandates a thing to be done in a given manner . . . normally implies
that it shall not be done in any other manner . . . .” 73 AM. JUR. 2D Statutes § 211
(1995).

92
expressio unius doctrine in the administrative context permit the

FCC to expand the reach of universal support to non-

telecommunications carriers. While courts have rightly warned

against using silence in a statute to give “agencies virtually

limitless hegemony,”97 we are convinced that Congress intended to

allow the FCC broad authority to implement this section of the Act.

In Iowa Utilities Board, the Eighth Circuit offered this ex-

planation of the reach of § 154(i) in denying the FCC jurisdiction

over the pricing of local telephone service: “[Section 154(i)]

merely suppl[ies] the FCC with ancillary authority to issue regu-

lations that may be necessary to fulfill its primary directives

contained elsewhere in the statute. [It does not] confer[] addi-

tional substantive authority.” 120 F.3d at 795. In this matter,

however, the FCC is not asserting additional substantive authority,

as it tried to do in Iowa Utilities. It is not asserting

additional jurisdictional authority, but, rather, is issuing a

regulation “necessary to fulfill its primary directives.”

The agency’s primary directive is to “enhance access to

advanced telecommunications and information services” for schools

and libraries. See § 254(h)(2)(A). It is taking modest steps to

ensure that Congress’s instructions on expanding universal service

in the form of internet access and internal connections will not be

97
Ethyl Corp. v. EPA, 51 F.3d 1053, 1060 (D.C. Cir. 1995).

93
frustrated by local monopolies.98 For these reasons, we affirm the

decision to permit support of non-telecommunications carriers

providing internet access and internal connections to schools and

libraries.

3. ENCROACHING ON STATE AUTHORITY TO SET DISCOUNT RATES
FOR INTRASTATE SERVICES TO SCHOOLS AND LIBRARIES.

Section 254(h)(1)(B) divides the regulation of discount rates

on services offered to schools and libraries between the FCC and

the states. “The discount shall be an amount that the Commission,

with respect to interstate services, and the States, with respect

to intrastate services, determine is appropriate and necessary to

ensure affordable access to and use of such services by such

entities.” § 254(h)(1)(B).

The FCC has decided to offer federal universal service funds

to help support the intrastate rate discounts. Predictably, the

agency has conditioned such funding on the states' “establish[ing]

intrastate discounts at least equal to the discounts on interstate

services.” Order ¶ 550. GTE challenges this condition as an en-

croachment on the states' statutory right to “determine [what is]

appropriate and necessary to ensure affordable access.”

GTE has failed to point to any statutory or other authority

98
The District of Columbia Circuit has upheld FCC actions under § 154(i)
that require payments from parties even without express statutory authorization.
See Mobile Communications Corp. of Am. v. FCC, 77 F.3d 1399 (D.C. Cir. 1996); New
England Tel. & Tel. Co. v. FCC, 826 F.2d 1101 (D.C. Cir. 1987).

94
prohibiting the FCC’s condition for funding. States are free to

refuse federal support for intrastate discounts and, therefore,

remain free to determine what is “appropriate and necessary,” con-

sistent with the plain language of the statute. In the Tenth

Amendment context, this court has refused to view similar federal

conditional grants as “equivalent to coercion.” See Texas v.

United States, 106 F.3d 661, 666 (5th Cir. 1997). Without express

statutory language prohibiting such a practice, we reject GTE’s

challenge to the FCC’s funding conditions.

4. EXERCISING AUTHORITY IN DECIDING THAT SCHOOLS AND LIBRARIES CAN OBTAIN
DISCOUNTS ON ALL COMMERCIALLY AVAILABLE TELECOMMUNICATIONS SERVICES.

The FCC has also decided that, pursuant to its authority under

§ 254(c)(3), it will allow schools and libraries to obtain sup-

ported discounts on all commercially available telecommunications

services. The agency believes that this approach will maximize

schools’ and libraries’ flexibility to purchase whatever package of

services they need.

GTE challenges the agency’s statutory authority to refuse to

limit the types of services that will be available for support. It

contends that the plain language of § 254(c)(3) requires the FCC to

“designate” which telecommunications services will receive univer-

sal service support and which telecommunications services will not.

The key to GTE's argument is the meaning of “designate.”

According to GTE, “designate” denotes some action of specific

95
selection. The standard dictionary definition of “designate” in-

cludes “to distinguish as to class” and “to indicate and set apart

for a specific purpose, office, or duty.” MERRIAM-WEBSTER’S COLLEGIATE

DICTIONARY 313 (10th ed. 1994). GTE claims that by using the word

“designate,” Congress instructed the FCC to “indicate and set

apart” which services may receive support under § 254(h). GTE also

finds support in the legislative history, which says the FCC should

“take into account the particular needs of . . . schools and li-

braries.”99

We disagree with GTE that the plain-meaning understanding of

“designate” demonstrates Congress’s unambiguous intent to require

the FCC to specify which services will be supported. By using the

word “designate,” Congress also could have meant for the agency to

authorize a broad class of services. Thus, by “designating” all

commercially available telecommunications service, the FCC can be

said to have “designated” which services may be supported. For

this reason, the designation “commercially available

telecommunications services” does not violate the plain meaning of

the statute under Chevron step-one.

Under Chevron step-two, the FCC has reasonably concluded that

it can fulfill its statutory duty to “designate” while giving

schools and libraries the maximum flexibility to choose which

99
See H. R. CONF. REP. 104-458, at 133 (emphasis added), reprinted at 1996
U.S.C.C.A.N. 144.

96
services they need. It is not unreasonable for the FCC to conclude

that it could best “take into account . . .the particular needs” of

schools and libraries by allowing support for all commercially

available telecommunications services.100 Because Congress’s use of

“designate” in subsection (c)(3) does not unambiguously require the

FCC to limit which services may be supported, and because the FCC’s

decision is reasonable under Chevron step-two, we reject GTE’s

request and affirm the decision to allow schools and libraries to

obtain support for all “commercially available telecommunications

services.”

5. AUTHORITY TO SUBSIDIZE TOLL-FREE TELEPHONE CALLS
TO INTERNET SERVICE PROVIDERS BY NON-RURAL HEALTH CARE PROVIDERS.

Congress directed the FCC to provide universal service support

for “any public or nonprofit health provider that serves persons

who reside in rural areas.” § 254(h)(1)(A). Congress also in-

structed the agency “to enhance, to the extent technically feasible

and economically reasonable, access to advanced telecommunications

and information services for all public and nonprofit . . . health

care providers.” The FCC has seized on the more general language

in the second provision as authority for subsidizing telephone

calls to internet service providers by both rural and non-rural

health care providers.

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The FCC further concluded that its decision will ensure that schools
and libraries can obtain discounted “state-of-the-art telecommunications
technologies as those technologies become available.” Order ¶ 433.

97
 GTE advances an argument based on the expressio unius canon.

Because the first provision gives specific instructions on provid-

ing subsidized support for health care providers and explicitly

limits that support to rural health care providers, GTE argues that

the FCC has no statutory authority to expand such support to non-

rural health care providers. In the agency's view, Congress could

have extended support to non-rural providers, but chose not to.

This signifies a Congressional decision that the FCC should

respect.

The FCC responds that the expressio unius canon should not

resolve a question of statutory interpretation in an administrative

law context. Additionally, it argues that § 254(h)(2)(A) obligates

the FCC to “enhance, to the extent technically feasible and eco-

nomically reasonable, access to advanced telecommunications and

information services.”

We do not read § 254(h)(2)(A)’s “enhancing” language to

require the FCC to act as it did here. But, we conclude that the

language in § 254(h)(2)(A) demonstrates Congress’s intent to au-

thorize expanding support to “advanced services,” when possible,

for non-rural health providers.

GTE has already established that § 254(h)(1)(A) requires sup-

port for telecommunications service to rural health care providers

only. We can then read § 254(h)(2)(A) as an instruction to the FCC

to work to support “advanced services” for non-rural health care

98
providers when “economically reasonable.” Importantly, the FCC’s

plan does not extend, to non-rural health providers, the same tele-

communications discounts enjoyed by § 254(h)(1)(A) rural health

providers. Rather, the agency chose to support access (through

subsidized telephone calls) to an “advanced . . . information

service” (an internet service provider), finding that this subsidy

was “economically reasonable” and “technically feasible.” Order

¶ 748.

The FCC has found a way to “enhance access,” as authorized by

the plain language of § 254(h)(2)(A), so we affirm this portion of

the Order.

6. CONTRIBUTION SYSTEM TO PROVIDE UNIVERSAL SERVICE FUNDING
FOR SCHOOLS, LIBRARIES, AND RURAL HEALTH PROVIDERS.

The FCC decided to fund the universal support mechanisms for

schools, libraries, and rural health care providers by “assessing

both the interstate and intrastate revenues of providers of

interstate telecommunications services.” Order ¶ 808. The uncer-

tainty of state support for the new § 254(h) subsidies and other

financial considerations, according to the FCC, justifies assessing

both the intrastate and interstate revenues of interstate carriers.

Cincinnati Bell (“CBT”), a small carrier with a mostly

intrastate revenue base, attacks the decision as a violation of

§ 2(b)’s prohibition on federal regulation of intrastate services.

The states challenge the FCC’s related assertion that it has the

99
authority to require carriers to recover their intrastate

contributions from the states.

a. AUTHORITY TO ASSESS CONTRIBUTIONS ON THE
COMBINED INTERSTATE AND INTRASTATE REVENUES OF CARRIERS
THAT PROVIDE INTERSTATE TELECOMMUNICATIONS SERVICES.

Along the same lines as Bell Atlantic’s challenge to the “no

disconnect” rule, CBT argues that the FCC’s decision to assess

intrastate revenues exceeds its jurisdiction, in violation of the

still-intact Louisiana PSC reading of § 2(b). CBT contends that

unlike the provisions considered in Iowa Utilities, § 254 does not

“apply” to intrastate matters in a sufficiently unambiguously

manner so as to confer federal jurisdiction.

As we have discussed, we understand § 2(b) to serve as both a

rule of statutory construction in considering whether a provision

applies to intrastate matters and as a jurisdictional fence against

assertions of the FCC’s ancillary jurisdiction. See Iowa

Utilities, 119 S. Ct. at 731. Like Bell Atlantic, CBT is using §

2(b) to challenge the FCC’s construction of § 254 to apply to

intrastate ratemaking.

The FCC’s first defense denies that its actions even

constitute a “regulation” that would fall under the rule of

statutory construction created by § 2(b) and Louisiana PSC. The

agency argues that simply factoring intrastate revenues into

calculations of universal service contributions does not constitute

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regulation of those services. The FCC has used both intrastate and

interstate revenues as a basis for imposing accounting obligations

or tariff requirements in other contexts without any court's

finding § 2(b) violations. Additionally, the FCC has stated that

carriers may recover their contributions only from interstate

rates. The agency believes this last requirement will prevent its

contribution requirements from improperly affecting intrastate

rates.

Despite the persuasiveness of this argument, we conclude that

§ 2(b)’s broad language encompasses the FCC’s decision to assess

intrastate revenues. The plain language of § 2(b) discusses

“jurisdiction with respect to . . . charges, classifications,

practices, services, facilities, or regulations for or in

connection with intrastate communication service . . . .” We agree

with CBT that the inclusion of intrastate revenues in the

calculation of universal service contributions easily constitutes

a “charge . . . in connection with intrastate communication

service.”

The plain language of § 2(b) directs courts to consider FCC

jurisdiction over a very broad swathe of intrastate services. We

decline to exempt the FCC’s assessment of intrastate revenues from

the ambit of § 2(b).101

101
The FCC’s decision to prohibit carriers from recovering through intrastate
rates does not save it from § 2(b) analysis. There is no question that the amount
of a carrier's universal service contributions will increase with the inclusion of
(continued...)

101
 The FCC then contends that § 254 does apply to intrastate mat-

ters, because it unambiguously authorizes the agency to develop

universal service mechanisms that are sufficient to support both

interstate and intrastate service. In support of this assertion,

the agency points to § 254(d)’s requirement that “[e]very

telecommunications carrier that provides interstate

telecommunications services shall contribute . . . to the specific,

predictable, and sufficient mechanisms established by the

Commission to preserve and advance universal service.” The FCC

then compares this language to § 254(f), which allows states to

adopt universal service regulations as long as they do not “rely on

or burden Federal universal service support mechanisms.” This

language, the FCC claims, shows that Congress intended for it to

bear the primary responsibility for ensuring the sufficiency of

universal service for both interstate and intrastate services.

These two provisions do not reflect enough of an unambiguous

grant of authority to overcome the presumption established by

§ 2(b). While, under Chevron step-two, we usually give the agency

deference in its interpretation of ambiguous statutory language,

(...continued)
intrastate revenues. This cost, even if recovered only through interstate revenues,
still constitutes a “charge in connection with intrastate service” under § 2(b).

If the point of § 2(b) was to protect state authority over intrastate service,
allowing the FCC to assess contributions based on intrastate revenues could
certainly affect carriers’ business decisions on how much intrastate service to
provide or what kind it can afford to provide. This federal influence over intra-
state services is precisely the type of intervention that § 2(b) is designed to
prevent.

102
the Supreme Court continues to require the agency to overcome the

§ 2(b) statutory presumption with unambiguous language showing that

the statute applies to intrastate matters. See Iowa Utilities,

119 S. Ct. at 731.

While the text of the statute does not impose any limitation

on how universal service will be funded, it also does not

explicitly state that the FCC has the responsibility to fund

intrastate universal services. The agency seeks authority “in the

broad language” of the statute, but “we do not find the meaning of

the section so unambiguous or straightforward as to override the

command of § 152(b).” See Iowa Utilities, 119 S. Ct. at 731

(quoting Louisiana PSC, 476 U.S. at 377).

Without a finding that § 254 applies, the FCC has no other

basis to assert jurisdiction, because Iowa Utilities explicitly

prohibits FCC jurisdiction over intrastate matters stemming from

the agency's plenary powers. See id. Therefore, we reverse that

portion of the Order that includes intrastate revenues in the

calculation of universal service contributions.

b. AUTHORITY TO REFER CARRIERS TO THE STATES
TO SEEK RECOVERY OF INTRASTATE CONTRIBUTIONS.

Though it stated that it had “the authority to refer carriers

to the states to seek authority to recover a portion of their

intrastate contribution from intrastate rates,” Order ¶ 818, the

FCC also declined to exercise this authority. Instead, it directed

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carriers to recover their contributions from interstate revenues

only.

The states and CBT challenge this assertion of authority on

the same grounds they question the inclusion of intrastate revenues

for universal service contributions. Because the FCC bases its

authority on the same provisions it cited on that issue, our

decision to deny the agency jurisdiction on that question applies

equally to the its claim of authority to assess intrastate rates.

The FCC also raises a prudential defense, arguing that because

it has not chosen to exercise its authority, the issue is not yet

ripe for judicial review. Additionally, the agency argues that

both petitioners lack standing. We do not accept either of these

prudential defenses.

i. RIPENESS.

Conceding that the FCC has not yet acted on its decision to

assert authority over intrastate services, the states reject the

agency’s ripeness claim because the “question presented is purely

legal.” See New Orleans Pub. Serv., Inc. v. Council of the City of

New Orleans, 833 F.2d 583, 587 (5th Cir. 1987).102 Pointing also to

102
In its most recent action, the FCC reaffirmed its jurisdictional
authority to require carriers to contribute based on both intrastate and inter-
state revenues. See Seventh Report and Order ¶¶ 87-90. In fact, the FCC appears
to be awaiting a decision by this court before taking further action: “Ac-
cordingly, pending further resolution of this matter by the Fifth Circuit, the
assessment base and recovery base for contributions to the high-cost and low-
income universal service support mechanism that we adopted in the First Report
(continued...)

104
Pacific Gas & Elec. Co. v. State Energy Resources Conservation &

Dev. Comm'n, 461 U.S. 190 (1983), the states argue that when the

FCC has asserted its authority in a final decision on a legal

question such as its jurisdiction over intrastate rates, “one does

not have to await the ultimate impact of the threatened injury to

obtain preventive relief.” See id. at 201.

This issue is ripe for judicial review. The two factors for

considering ripenessSSfitness for judicial decision and hardship to

the partiesSSsupport our consideration of this question. Courts

should be able to resolve a question such as jurisdiction and

authority under the Act. Additionally, the states already have

shown one example of the harm in withholding review. For instance,

MCI, in the face of state opposition, has already begun billing

some customers based on revenue from intrastate calls.103

ii. STANDING.

(...continued)
and Order shall remain in effect.” Seventh Report and Order ¶ 90. This
invitation to judicial action further undercuts the FCC’s ripeness defense.
103
MCI has filed a supplemental brief rejecting this characterization.
It relies on MCI Telecomm. Corp. v. Virginia State Corp. Comm’n, 11 F. Supp. 2d
669 (E.D. Va. 1998), vacated as moot, 1999 U.S. App. LEXIS 8749 (4th Cir. May 10,
1999) (unpublished), in which the court granted MCI’s motion for injunctive
relief from a Virginia state commission’s order and ruling that MCI’s disputed
charges were not charges for intrastate calls. MCI also points to the FCC’s
recent order rejecting Virginia’s administrative petition of the same issue. See
Virginia State Corp. Comm’n v. MCI Telecomm. Corp., No. E-99-01.FCC 99-42
(released Mar. 22, 1999). This ruling actually supports the states’ ripeness
argument, however, because the district court’s final order on this question,
along with the FCC’s recent order, further demonstrates the propriety of judicial
review of this question.

105
 The FCC’s standing defense has even less merit. First, states

have a sovereign interest in “the power to create and enforce a

legal code.” See Alfred L. Snapp & Son, Inc. v. Puerto Rico,

458 U.S. 592, 601 (1982). Moreover, the FCC’s refusal to exercise

its declared authority does not deprive states of standing. The

states point out that the District of Columbia Circuit will not

find a lack of standing simply because an agency has refused to

enforce its own regulations. See Alaska v. United States Dep't of

Transp., 868 F.2d 441, 444 (D.C. Cir. 1989). For the same reasons,

we also reject the FCC’s standing defense.

iii. MERITS.

Having disposed of the FCC’s prudential defenses, we reverse

its claim that it can refer these carriers to the states for

recovery of those contributions. This is for the same reasons that

we reject the agency's assertions of jurisdiction to assess

intrastate revenues for contributions. The FCC has failed to point

to any statutory authority that explicitly demonstrates how § 254

applies to intrastate universal service. Therefore, we deny the

agency’s claim of jurisdiction and reverse this portion of the

Order.104

104
Having concluded that the FCC has no jurisdiction over intrastate rates
for universal service purposes, we do not reach CBT’s final argument challenging
the agency’s requirement that carriers recover their contributions solely from
interstate revenues.

106
 IV. CONCLUSION.

It is difficult to disagree with the Supreme Court’s

assessment that the Act is “a model of ambiguity or indeed even

self-contradiction.” Iowa Utilities, 119 S. Ct. at 738. As the

Court notes, Congress realizes that many of these ambiguities will

be resolved by the FCC during its implementation of the statute,

and we, like the Court, generally defer to the agency's

interpretation of the sometimes-mysterious sections. See Chevron,

467 U.S. at 842-43. In this case, we have done so, and we affirm

most aspects of the Order implementing the universal service

program and dismiss challenges to several parts of the Order as

moot.

Still, our deferential approach does not require us to affirm

the FCC in every circumstance. In particular, the agency exceeded

its statutory authority in (1) prohibiting the states from imposing

eligibility requirements and (2) requiring ILEC's to recover their

contributions from access charges. Applying the Court’s most

recent pronouncements on the Act, we also deny the FCC jurisdiction

over state control of local service disconnections and universal

service contributions based on intrastate revenues. We remand one

petition to the agency for reconsideration, so it can reconsider

the propriety of assessing the international revenues of interstate

carriers.

For the reasons stated, the petitions for review are GRANTED

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IN PART and DENIED IN PART. The May 8, 1997, Universal Service

Order is AFFIRMED in part, REMANDED in part, and REVERSED in part,

in accordance with this opinion.

108