In Re Core Communications, Inc.

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 27, 2005 Decided June 30, 2006

No. 04-1368

IN RE: CORE COMMUNICATIONS, INC.
PETITIONER

LEVEL 3 COMMUNICATIONS, LLC, ET AL.,
INTERVENORS

Consolidated with
04-1423, 04-1424

Michael B. Hazzard argued the cause for petitioner Core
Communications, Inc. With him on the briefs was Deborah J.
Israel.

Scott H. Angstreich argued the cause for petitioner
BellSouth Corporation and ILEC Intervenors. With him on the
briefs were Bennett L. Ross, Robert B. McKenna, Jr., Gary L.
Phillips, James P. Lamoureux, Michael E. Glover, and Edward
Shakin.

Joel Marcus, Counsel, Federal Communications
Commission, argued the cause for respondent. With him on the
brief were Thomas O. Barnett, Acting Assistant Attorney
General, U.S. Department of Justice, Robert B. Nicholson and
Robert J. Wiggers, Attorneys, Samuel L. Feder, Acting General
Counsel, Federal Communications Commission, Jacob M.
 2

Lewis, Associate General Counsel, John E. Ingle, Deputy
Associate General Counsel, and Laurence N. Bourne, Counsel.
Nandan M. Joshi, Counsel, entered an appearance.

Christopher J. Wright argued the cause for CLEC
Intervenors. With him on the brief were Richard M. Rindler,
John T. Nakahata, and Timothy J. Simeone.

Bennett L. Ross, Robert T. McKenna, Jr., Scott H.
Angstreich, Gary L. Phillips, James P. Lamoureux, Michael E.
Glover, and Edward Shakin were on the brief of ILEC
Intervenors in support of respondent.

Before: SENTELLE, TATEL, and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge GARLAND.

GARLAND, Circuit Judge: In its ISP Remand Order, the
Federal Communications Commission (FCC) adopted four
interim, intercarrier compensation rules to govern
telecommunications traffic bound for Internet service providers.
Core Communications, Inc., a competitive local exchange
carrier, filed a petition asking the FCC to forbear from applying
those rules pursuant to 47 U.S.C. § 160(a). The FCC denied
Core’s petition with respect to two of the rules and granted it
with respect to the other two. Core then filed a petition for
review in this court, seeking reversal of the FCC’s partial denial
of its petition for forbearance. We consolidated Core’s petition
for review with its mirror image: a petition for review filed by
BellSouth Corporation, an incumbent local exchange carrier,
seeking reversal of the FCC’s partial grant of Core’s petition for
forbearance. For the reasons discussed below, we now deny
both petitions.
 3

I

Before high-speed broadband connections (such as cable
modem and digital subscriber line (DSL) service) became
widely available, consumers generally gained access to the
Internet through “dial-up” connections provided by local
telephone companies. Under the dial-up method, a consumer
uses a line provided by a local exchange carrier (LEC) -- usually
an incumbent local exchange carrier (ILEC) -- to dial the local
telephone number of an Internet service provider (ISP), which
then connects the call to the Internet. Typically, the ISP does
not subscribe to the ILEC, but instead subscribes to another LEC
-- a competitive local exchange carrier (CLEC) -- that
interconnects with the incumbent. Accordingly, a consumer
who dials-up to the Internet usually obligates an originating
ILEC to transfer the call to a CLEC, which then delivers the call
to the ISP.

Although this relay is imperceptible to the caller, how the
call is paid for matters a great deal to the participating
telecommunications carriers. Section 251(b)(5) of the
Communications Act of 1934, as amended by the
Telecommunications Act of 1996 (the “Act”), requires LECs to
“establish reciprocal compensation arrangements for the
transport and termination of telecommunications.” 47 U.S.C. §
251(b)(5). Under a reciprocal compensation arrangement,
“[w]hen a customer of carrier A makes a local call to a customer
of carrier B, and carrier B uses its facilities to connect, or
‘terminate,’ that call to its own customer, the ‘originating’
carrier A is ordinarily required to compensate the ‘terminating’
carrier B for the use of carrier B’s facilities.” SBC Inc. v. FCC,
414 F.3d 486, 490 (3d Cir. 2005) (citing Global NAPS, Inc. v.
FCC, 247 F.3d 252, 254 (D.C. Cir. 2001)).
 4

If ISP-bound traffic were governed by § 251(b)(5), then
reciprocal compensation arrangements would be required for the
ILEC-to-CLEC hand-off described above, and ILECs would be
required to compensate CLECs for completing their customers’
calls to ISPs. Whether ISP-bound traffic is so governed is a
question that has been the subject of two prior FCC orders and
two prior decisions of this court. We briefly recount that history
and then describe Core’s subsequent petition for forbearance.

A

In 1996, the FCC construed the “reciprocal compensation
arrangements” provision of § 251(b)(5) to “apply only to traffic
that originates and terminates within a local area.”
Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, 11 FCC Rcd 15499, 16013, ¶
1034 (1996). Although that initial pronouncement did not
address whether dial-up calls to an ISP for connection to the
Internet are local or non-local, the Commission concluded in its
1999 Declaratory Ruling that such calls are non-local, and thus
that § 251(b)(5) is inapplicable. See Implementation of the
Local Competition Provisions in the Telecommunications Act of
1996, Inter-Carrier Compensation for ISP-Bound Traffic, 14
FCC Rcd 3689 (1999) (“Declaratory Ruling”). Instead, the FCC
concluded that ISP-bound calls constitute interstate traffic,
subject to FCC jurisdiction under § 201 of the Act.1 See id. at

1
Section 201 provides, in relevant part:

(a) It shall be the duty of every common carrier engaged
in interstate . . . communication by wire or radio to furnish
such communication service upon reasonable request
therefor; and, in accordance with the orders of the
Commission, in cases where the Commission . . . finds
such action necessary or desirable in the public interest, to
 5

3690, ¶ 1; Implementation of the Local Competition Provisions
in the Telecommunications Act of 1996, Intercarrier
Compensation for ISP-Bound Traffic, 16 FCC Rcd 9151, 9152,
¶ 1 (2001) (“ISP Remand Order”) (construing the Declaratory
Ruling). In Bell Atlantic Telephone Cos. v. FCC, however, this
court found that the Commission had inadequately explained its
conclusion that ISP-bound traffic is non-local, and therefore
vacated and remanded the Declaratory Ruling. See 206 F.3d 1,
7-8 (D.C. Cir. 2000).

In 2001, the FCC responded to our decision in Bell Atlantic
with the ISP Remand Order. Once again, the Commission
concluded that calls delivered to ISPs are not subject to the
mandatory reciprocal compensation obligations of § 251(b)(5).
See ISP Remand Order, 16 FCC Rcd at 9154, ¶ 3. Rather than
basing its conclusion on a determination that ISP-bound calls are
non-local and hence not subject to § 251(b)(5), this time the
Commission relied on a different statutory section, 47 U.S.C. §
251(g).2 See id. at 9153, ¶ 1. According to the FCC, § 251(g)

establish . . . charges applicable thereto and the divisions
of such charges . . . .

(b) All charges, practices, classifications, and regulations
for and in connection with such communication service,
shall be just and reasonable, and any such charge, practice,
classification, or regulation that is unjust or unreasonable
is declared to be unlawful . . . .

47 U.S.C. § 201.
2
Section 251(g) provides, in relevant part:

On and after [the date of enactment of the
Telecommunications Act of 1996,] each local exchange
carrier . . . shall provide exchange access, information
 6

was intended to exclude the kinds of traffic enumerated in that
subsection, specifically “‘exchange access, information access,
and exchange services for such access,’” from the reciprocal
compensation requirements of subsection (b)(5). Id. at 9166-67,
¶ 34 (quoting § 251(g)). And it found that calls made to ISPs
located within the caller’s local calling area fall within those
enumerated categories -- specifically, that they involve
“information access.” Id. at 9171, ¶ 42; see Bell Atlantic, 206
F.3d at 2. Those calls, the FCC concluded, are thus not subject
to § 251(b)(5), but are instead subject to the FCC’s regulatory
authority under § 201. See id. at 9152-53, ¶ 1; id. at 9165, ¶ 30;
id. at 9175-81, ¶¶ 52-65; see also supra note 1 (quoting § 201).

Having concluded “that intercarrier compensation for ISP-
bound traffic is within the jurisdiction of th[e] Commission
under section 201 of the Act,” the FCC sought “to establish an
appropriate cost recovery mechanism for delivery of this
traffic.” Id. at 9154, ¶ 4. In considering the possible
alternatives, the FCC noted that “the existing intercarrier
compensation mechanism . . . , in which the originating carrier
pays the carrier that serves the ISP, has created opportunities for
regulatory arbitrage and distorted the economic incentives
related to competitive entry into the local exchange and

access, and exchange services for such access to
interexchange carriers and information service providers
in accordance with the same equal access and
nondiscriminatory interconnection restrictions and
obligations (including receipt of compensation) that apply
to such carrier on the date immediately preceding [the date
of enactment] under any . . . regulation, order, or policy of
the Commission, until such restrictions and obligations are
explicitly superseded by regulations prescribed by the
Commission after [such date of enactment].

47 U.S.C. § 251(g).
 7

exchange access markets.” Id. at 9153, ¶ 2. The FCC explained
the different considerations attendant to traditional telephone
service and Internet dial-up in this way:

Traditionally, telephone carriers would interconnect
with each other to deliver calls to each other’s
customers. It was generally assumed that traffic back
and forth on these interconnected networks would be
relatively balanced. Consequently, to compensate
interconnecting carriers, mechanisms like reciprocal
compensation were employed, whereby the carrier
whose customer initiated the call would pay the other
carrier the costs of using its network.

[]Internet usage has distorted the traditional
assumptions because traffic to an ISP flows exclusively
in one direction, creating an opportunity for regulatory
arbitrage and leading to uneconomical results. Because
traffic to ISPs flows one way, so does money in a
reciprocal compensation regime. It was not long
before some LECs saw the opportunity to sign up ISPs
as customers and collect, rather than pay,
compensation because ISP modems do not generally
call anyone in the exchange.

Id. at 9162, ¶¶ 20-21. The Commission described the market
distortions that result from applying a reciprocal compensation
regime to such a “large volume[] of traffic that is virtually all
one-way -- that is, delivered to the ISP,” id. at 9153, ¶ 2, as
follows:

Because intercarrier compensation rates do not reflect
the degree to which the carrier can recover costs from
its end-users, payments from other carriers may enable
a carrier to offer service to its customers at rates that
 8

bear little relationship to its actual costs . . . . Carriers
thus have the incentive to seek out customers,
including but not limited to ISPs, with high volumes of
incoming traffic that will generate high reciprocal
compensation payments. To the extent that carriers
offer these customers below cost retail rates subsidized
by intercarrier compensation, these customers do not
receive accurate price signals. Moreover, because the
originating LEC typically charges its customers
averaged rates, the originating end-user receives
inaccurate price signals as the costs associated with the
intercarrier payments are recovered through rates
averaged across all of the originating carriers’ end
users.

Id. at 9182, ¶ 68 (internal citations omitted). “For these
reasons,” the Commission concluded, “we believe that the
application of . . . reciprocal compensation[] to ISP-bound traffic
undermines the operation of competitive markets.” Id. at 9183,
¶ 71.

After concluding that a reciprocal compensation mechanism
results in market distortions, the FCC announced that it was
issuing -- in tandem with its ISP Remand Order -- a notice of
proposed rulemaking to consider whether the Commission
should replace existing intercarrier compensation schemes with
a “bill-and-keep” regime. Id. at 9153, ¶ 2; see Notice of
Proposed Rulemaking, In the Matter of Developing a Unified
Intercarrier Compensation Regime, 16 FCC Rcd 9610 (2001)
(“NPRM”). Under such a regime, “neither of two
interconnecting networks charges the other for terminating
traffic that originates on the other network. Instead, each
network recovers [its costs] from its own end-users.” Id. at 9153
n.6. Thus, in the typical scenario discussed above, the
originating ILEC would recover its costs from its customer who
 9

initiated the call, while the CLEC would recover its costs from
its ISP customer to which it delivered the call. The Commission
concluded “that a bill and keep regime for ISP-bound traffic
may eliminate the[] incentives and concomitant opportunity for
regulatory arbitrage by forcing carriers to look only to their ISP
customers, rather than to other carriers, for cost recovery. As a
result, the rates paid by ISPs and, consequently, their customers
should better reflect the costs of services to which they
subscribe.” Id. at 9184, ¶ 74.

Although the FCC issued the NPRM looking toward a bill-
and-keep regime, the Commission nonetheless deemed it
“prudent to avoid a ‘flash cut’ to a new compensation regime
that would upset the legitimate business expectations of carriers
and their customers.” Id. at 9186, ¶ 77. It therefore adopted “an
interim intercarrier compensation regime for ISP-bound traffic
that serves to limit, if not end, the opportunity for regulatory
arbitrage, while avoiding a market-disruptive ‘flash cut’ to a
pure bill and keep regime.” Id. at 9186-87, ¶ 77. The interim
regime, the FCC said, “will govern intercarrier compensation for
ISP-bound traffic until we have resolved the issues raised in the
intercarrier compensation NPRM.” Id. at 9187, ¶ 77. Four
provisions of the interim regime are relevant to the instant
matter:

Rate Caps. The Commission adopted “rate caps,” which
established a gradually declining maximum rate that a carrier
(typically, a CLEC) could charge another carrier (typically, an
ILEC) for delivering a call to an ISP. See id. at 9187, ¶ 78.
Although the rate caps limited how much carriers could recover
from other carriers, the carriers remained free to recover “[a]ny
additional costs . . . from end-users,” that is, from their own
customers. Id. at 9156, ¶ 4; see id. at 9187, ¶ 78; see also
Petition of Core Communications, Inc. for Forbearance Under
 10

47 U.S.C. § 160(c) from Application of the ISP Remand Order,
19 FCC Rcd 20179, 20181, ¶ 6 (2004) (“Forbearance Order”).

Mirroring Rule. As an adjunct to the rate caps, the
Commission established a “mirroring rule,” which provided that
the rate caps on ISP-bound traffic would apply only if the ILEC
also offered to charge the CLEC the same capped rate to
terminate local traffic that originated on the CLEC’s network.
See ISP Remand Order, 16 FCC Rcd at 9193, ¶ 89; see also
Forbearance Order, 19 FCC Rcd at 20181-82, ¶ 8.

Growth Caps. In addition to the rate caps, the Commission
adopted “growth caps,” which imposed a limit on the total
number of ISP-bound minutes for which a carrier could receive
intercarrier compensation. See ISP Remand Order, 16 FCC Rcd
at 9191, ¶ 86. The caps were equal to the total ISP-bound
minutes for which the LEC was previously entitled to
compensation, plus a 10 percent annual growth factor for each
of the first two years under the interim regime. Beyond the
caps, ISP-bound traffic had to be exchanged on a bill-and-keep
basis. See id. at 9156, ¶ 7; id. at 9187, ¶78; see also
Forbearance Order, 19 FCC Rcd at 20181, ¶ 7; id. at 20187-88,
¶ 24.

New Markets Rule. Finally, the Commission adopted a
“new markets rule,” which denied intercarrier compensation for
ISP-bound traffic in markets where the carrier was “not
exchanging traffic pursuant to [an] interconnection agreement[]
prior to adoption” of the Order. ISP Remand Order, 16 FCC
Rcd at 9188, ¶ 81. “In such a case, . . . carriers shall exchange
ISP-bound traffic on a bill-and-keep basis during th[e] interim
period.” Id.; see Forbearance Order, 19 FCC Rcd at 20182, ¶
9.
 11

As the FCC explained, these four interim provisions were
intended “to eliminate arbitrage opportunities presented by the
existing recovery mechanism for ISP-bound [traffic] by
lowering payments and capping growth.” ISP Remand Order,
16 FCC Rcd at 9155, ¶ 7. The goal of the interim provisions
was “decreased reliance by carriers upon carrier-to-carrier
payments and an increased reliance upon recovery of costs from
end-users, consistent with the tentative conclusion in the NPRM
that bill and keep is the appropriate intercarrier compensation
mechanism for ISP-bound traffic.” Id. at 9156, ¶ 7.

We reviewed the ISP Remand Order in WorldCom, Inc. v.
FCC, 288 F.3d 429 (D.C. Cir. 2002). There, we rejected the
FCC’s conclusion that § 251(g) authorized the Commission to
carve out ISP-bound calls from the requirements of § 251(b)(5).
See id. at 430. “Because that section is worded simply as a
transitional device,” we held, the FCC cannot rely on § 251(g)
to exclude ISP-bound calls from the scope of § 251(b)(5). Id.
Nonetheless, in light of the possibility that there were “other
legal bases for adopting the rules chosen by the Commission . .
. , we neither vacate[d] the order nor address[ed] petitioners’
attacks on various interim provisions devised by the
Commission.” Id. Instead, we merely remanded the matter to
the Commission for further proceedings, which left the interim
rules in effect pending those proceedings. See id. at 434; see
also Forbearance Order, 19 FCC Rcd at 20182, ¶ 10.

B

The Telecommunications Act of 1996 requires the FCC to
“forbear from applying any regulation or any provision” of the
Act if it makes three determinations that we discuss in detail in
Part II.B below. 47 U.S.C. § 160(a). The Act authorizes any
telecommunications carrier to submit a petition to the FCC
requesting such forbearance. See id. § 160(c). The Commission
 12

must act upon the petition within one year, subject to its right to
extend that deadline by an additional 90 days. See id.

On July 14, 2003, Petitioner Core Communications -- a
CLEC -- filed a petition asking the FCC to forbear from
applying the four interim provisions of the ISP Remand Order
discussed above. After receiving the petition, the Commission
exercised its authority to extend the one-year deadline by 90
days. That extension moved the deadline to October 11, 2004.
On October 8, 2004, the Commission voted to adopt an order
granting in part and denying in part Core’s petition. In a press
release issued on the day of the vote, the FCC announced the
outcome of its decision and stated that “[a]n order detailing the
FCC’s analysis will be forthcoming.” Joint Appendix (J.A.)
135.3 On October 18, 2004, ten days after the vote and seven
days after the statutory deadline, the Commission released the
text of its Forbearance Order addressing Core’s forbearance
petition. See 19 FCC Rcd 20179. The Forbearance Order
stated that it “shall be effective” as of the October 8, 2004
adoption date. Id. at 20189, ¶ 30 (capitalization altered).

As the press release indicated it would, the FCC granted in
part and denied in part Core’s forbearance petition. The
Commission denied Core’s petition with respect to the rate caps
and mirroring rule, concluding that those provisions remained
necessary to avoid “[regulatory] arbitrage and market
distortions.” Id. at 20186, ¶ 18. However, the FCC granted the
request to forbear from enforcing the growth caps and new
markets rule, concluding that they were no longer needed
because “[m]arket developments since 2001 have eased the

3
The press release also contained the following routine
disclaimer: “This is an unofficial announcement of Commission
action. Release of the full text of a Commission order constitutes
official action.” J.A. 135.
 13

concerns about growth of dial-up ISP traffic that” had prompted
their adoption. Id. at 20186, ¶ 20.

We now have before us two petitions for review of the
FCC’s Forbearance Order. Core contends that the FCC should
not only have granted forbearance regarding the growth caps
and new markets rule, but should also have granted forbearance
regarding the rate caps and mirroring rule. A group of ILECs
led by BellSouth takes the opposite position. It contends that the
FCC should not have granted forbearance from enforcement of
any of the provisions, and hence challenges the FCC’s decision
to forbear from enforcing the growth caps and new markets rule.
We consider Core’s arguments in Part II and BellSouth’s
arguments in Part III.

II

Core raises two principal challenges to the FCC’s denial of
its request to forbear from enforcing the rate caps and mirroring
rule. First, Core argues that the FCC issued its denial belatedly,
and that under the statute the FCC’s tardiness must be regarded
as granting the forbearance petition in its entirety. Second, in
the event that its first argument fails, Core challenges the denial
of forbearance with respect to the rate caps and mirroring rule as
arbitrary and capricious.4

4
We reject, without further discussion, Core’s suggestion that the
denial of forbearance contravenes our decision in WorldCom. The
WorldCom court could not have been clearer in declaring: “[W]e do
not decide petitioners’ claims that the interim pricing limits imposed
by the Commission are inadequately reasoned.” 288 F.3d at 434. We
also summarily reject Core’s suggestion that its forbearance petition
asked the FCC to forbear from applying the ISP Remand Order in its
entirety -- not simply with respect to the four interim provisions that
the FCC addressed in its Forbearance Order -- and thus that all the
 14

A

The second sentence of § 160(c) declares that a petition for
forbearance “shall be deemed granted if the Commission does
not deny the petition” within one year of receiving it. 47 U.S.C.
§ 160(c). The third sentence permits the Commission to extend
the one-year period by an additional 90 days. Id. And the
fourth sentence states that the “Commission may grant or deny
a petition in whole or in part and shall explain its decision in
writing.” Id. Core asserts that the FCC missed the § 160(c)
deadline by not issuing a written order denying its petition until
October 18, seven days after the (extended) statutory deadline
of October 11. As a consequence, Core insists, its petition for
forbearance must be “deemed granted” in full.

The Commission counters that the announcement of its
October 8, 2004 vote satisfied the requirement that it “deny the
petition” by the statutory deadline, and that therefore the petition
may not be “deemed granted.” The deadline, the Commission
insists, applies only to the denial and not to the separate
requirement of a written explanation: “The two sentences in
section 160(c) impose separate and independent obligations on
the Commission.” FCC Br. 18. In any event, the Commission
continues, an FCC regulation permits the Commission to
“‘designate,’” as it did here, “‘an effective date that is . . . earlier

unaddressed provisions of the ISP Remand Order are “deemed
granted.” 47 U.S.C. § 160(c). The only provisions of the ISP Remand
Order against which Core mounted arguments under § 160(a) --
indeed, the only provisions that Core specifically mentioned at all --
were the four interim provisions. See Core’s Petition for Forbearance
(J.A. 22-35).
 15

. . . in time’” than the date upon which an order is released. Id.
(quoting 47 C.F.R. § 1.103(a)).

Under Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984), this court would ordinarily
accord deference to the Commission’s interpretation of a
statutory provision like § 160(c). Core contends that no such
deference is due here. This contention is based, in part, on the
fact that the FCC’s interpretation of § 160(c) is contained only
in the litigation briefs of FCC counsel, and not in a Commission
order. See generally United States v. Mead Corp., 533 U.S. 218,
228 (2001).

But there is good reason why the FCC did not address the
meaning of the statute in an order: Core never raised the issue
before the Commission. That fact does not merely create a
problem regarding the extent of deference we owe the FCC’s
statutory interpretation; it creates a problem regarding our
authority to review the issue at all. Under 47 U.S.C. § 405(a),
the “filing of a petition for reconsideration” is a “condition
precedent to judicial review” of any FCC order “where the party
seeking such review . . . relies on questions of fact or law upon
which the Commission . . . has been afforded no opportunity to
pass.” 47 U.S.C. § 405(a). This circuit has strictly construed
that section, holding that we “generally lack jurisdiction to
review arguments that have not first been presented to the
Commission.” BDPCS, Inc. v. FCC, 351 F.3d 1177, 1182 (D.C.
Cir. 2003); see, e.g., American Family Ass’n, Inc. v. FCC, 365
F.3d 1156, 1166 (D.C. Cir. 2004); New England Pub. Commc’ns
Council, Inc. v. FCC, 334 F.3d 69, 79 (D.C. Cir. 2003); Sioux
Valley Rural Television, Inc. v. FCC, 349 F.3d 667, 676 (D.C.
Cir. 2003).

Time Warner Entertainment Co. v. FCC, 144 F.3d 75 (D.C.
Cir. 1998), cited by Core, is not to the contrary. That case held
 16

that, where “the formulation of the issue presented to us was not
precisely as presented to the Commission,” we will nonetheless
review it if “a reasonable Commission necessarily would have
seen the question raised before us as part of the case presented
to it.” 144 F.3d at 81 (emphasis in original); see AT&T Corp. v.
FCC, 317 F.3d 227, 235 (D.C. Cir. 2003). Core’s problem,
however, is not that it failed to present the issue to us
“precisely” as it presented the issue to the Commission. The
problem is that it failed to present the issue to the Commission
in any form whatsoever.

Of course, Core, too, had good reason not to address, in its
forbearance petition, whether a timely denial of that petition
would require a written decision or only the announcement of
the Commission’s vote: Core could not have known, when it
filed the petition, that the FCC would wait to issue its written
denial until after the October 11 deadline had passed. Adhering
to the language of § 405(a), however, we have held that, even
when a petitioner has no reason to raise an argument until the
FCC issues an order that makes the issue relevant, the petitioner
must file “a petition for reconsideration” with the Commission
before it may seek judicial review. 47 U.S.C. § 405(a); see
AT&T Corp. v. FCC, 86 F.3d 242, 246 (D.C. Cir. 1996). Core
did not file such a petition in this case.

None of the foregoing should be understood to place this
court’s imprimatur on the FCC’s actions. Waiting until the
eleventh hour to vote on a forbearance petition, and then waiting
until the thirteenth hour to issue the explanatory order, is hardly
an ideal procedure for notifying a party of the disposition of a
petition. And relying on an informal press release and a back-
dating regulation to satisfy a statutory deadline could
unnecessarily place Commission policies at risk of judicial
invalidation. Nonetheless, because Core did not give the
 17

Commission an opportunity to address the question, we cannot
be the first authority to construe the meaning of § 160(c).

B

We review the Commission’s order denying in part Core’s
petition for forbearance under the familiar “arbitrary and
capricious” standard. See 5 U.S.C. § 706(2)(A); Cellular
Telecomms. & Internet Ass’n v. FCC, 330 F.3d 502, 507 (D.C.
Cir. 2003); AT&T Corp. v. FCC, 236 F.3d 729, 734 (D.C. Cir.
2001). Under that standard, our scope of review “is narrow and
a court is not to substitute its judgment for that of the agency.”
Cellular Telecomms., 330 F.3d at 507. The agency must,
however, “examine the relevant data and articulate a satisfactory
explanation for its action including a rational connection
between the facts found and the choice made.” Motor Vehicle
Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43
(1983) (internal quotation marks omitted).

Section 160(a) requires the FCC to “forbear from applying
any regulation or provision [of the Act] . . . to a
telecommunications carrier or telecommunications service” if it
determines that

(1) enforcement of such regulation or provision is not
necessary to ensure that the charges, practices,
classifications, or regulations by, for, or in connection
with that telecommunications carrier or
telecommunications service are just and reasonable and
are not unjustly or unreasonably discriminatory;

(2) enforcement of such regulation or provision is not
necessary for the protection of consumers; and
 18

(3) forbearance from applying such provision or
regulation is consistent with the public interest.

47 U.S.C. § 160(a) (emphasis added). These three prongs of the
forbearance test “are conjunctive,” meaning that “[t]he
Commission could properly deny a petition for forbearance if it
finds that any one of the three prongs is unsatisfied.” Cellular
Telecomms., 330 F.3d at 509. In this case, the Commission
found that “none of the three prongs is satisfied with respect to
the rate caps and mirroring rule.” Forbearance Order, 19 FCC
Rcd at 20184, ¶ 15. We now proceed to examine the
reasonableness of the FCC’s determination.

1. Core does not contend that there has been any change in
circumstances since the ISP Remand Order rendering
enforcement of the rate caps no longer “necessary to ensure that
the charges [and] practices” of CLECs serving ISPs “are just and
reasonable and are not unjustly or unreasonably discriminatory.”
47 U.S.C. § 160(a)(1). Instead, Core challenges the ISP Remand
Order itself, contending that its imposition of rate caps on ISP-
bound traffic was unreasonably discriminatory. It argues that,
while “the cost of terminating ISP-bound traffic is the same as
any other type of traffic,” the FCC has permitted “substantially
higher termination rates for other types of traffic, notably long
distance traffic.” Core Br. 37. “This means,” Core explains,
“that certain carriers earn more revenue for terminating certain
types of traffic while other carriers earn less, even though all
traffic cost[s] the same.” Id.

In rejecting this argument, the FCC reasonably concluded
that the potential for discrimination against ISP-serving CLECs
is limited because, as a consequence of the mirroring rule, “the
caps apply to ISP-bound traffic only if an incumbent LEC offers
to exchange all section 251(b)(5) traffic at the same rate.”
Forbearance Order, 19 FCC Rcd at 20187, ¶ 23. That is, the
 19

mirroring rule “prevent[s] disparate treatment of the two types
of traffic.” Id. Moreover, the different characteristics of the two
kinds of service -- particularly the fact that “traffic to ISPs flows
one way, [as] does money in a reciprocal compensation regime,”
ISP Remand Order at 9162, ¶ 21 -- precludes describing any
residual difference in treatment as unreasonably discriminatory.
And the FCC further explained that the rate caps are necessary
to prevent discrimination between dial-up Internet access
customers and basic telephone service customers. The rate caps,
the FCC stated, “were implemented to prevent the subsidization
of dial-up Internet access customers at the expense of consumers
of basic telephone service.” Id. at 20188, ¶ 25.

2. Core makes largely the same argument with respect to
the second prong of § 160(a). Enforcement of the rate caps “is
not necessary for the protection of consumers,” § 160(a)(2),
Core argues, because the cost of terminating dial-up Internet
traffic and voice traffic is the same. Thus, it contends, “the only
way to treat consumers on a nondiscriminatory basis is by
enabling all carriers to recover the same termination costs with
the same termination rate, such that no consumer has to bear a
disproportionate share of network costs.” Core Br. 38.

But this argument does not render unreasonable the FCC’s
view that the rate caps are necessary to prevent the subsidization
of dial-up Internet access consumers by consumers of basic
telephone service. See Forbearance Order, 19 FCC Rcd at
20188, ¶ 25. The FCC does not contend that subsidization arises
because the costs of dial-up and voice traffic are different, but
rather because “the large one-way flows of cash” in a reciprocal
compensation regime “ma[k]e it possible for LECs serving ISPs
to afford to pay [the ISPs] to use their services, potentially
driving ISP rates to consumers to uneconomical levels.” ISP
Remand Order, 16 FCC Rcd at 9162, ¶ 21; see id. at 9182-84, ¶¶
68-71. Moreover, “because the originating LEC typically
 20

charges its customers averaged rates, . . . the costs associated
with the intercarrier payments are recovered through rates
averaged across all of the originating carrier’s end-users,”
including particularly consumers of regular voice telephone
service. Id. at 9182, ¶ 68. The FCC concluded that “[t]here is
no public policy rationale to support a subsidy running from all
users of basic telephone service to those end users who employ
dial-up Internet access,” id. at 9192, ¶ 87, and that the caps were
thus necessary to protect consumers of basic telephone service,
see Forbearance Order, 19 FCC Rcd at 20188, ¶ 25. Core’s
argument does not undercut the reasonableness of this
conclusion.

3. With minor differences, Core reprises the same argument
with respect to the third prong of § 160(a), the requirement that
“forbearance from applying” the rate caps must be “consistent
with the public interest.” 47 U.S.C. § 160(a)(3). The caps are
inconsistent with that interest, Core insists, because they
unreasonably “discriminat[e]” against ISPs, and because they
“deter[] investment in competitive networks” by capping the
ability of CLECs to “recover costs at a level materially below
the [ILECs’] cost-based rate for providing the same termination
function.” Core Br. 38. Core derides the FCC’s determination
that the caps are necessary to prevent “regulatory arbitrage” and
“distorted economic incentives” as “nothing more than
imprecise, never-defined, FCC econo-babble.” Id. at 39.

With respect to Core’s contention that the rate caps deter
investment in competitive telecommunications networks, the
FCC found that “Core provide[d] no evidence to support the[]
claim[].” Forbearance Order, 19 FCC Rcd at 20185, ¶ 18.
Indeed, examination of Core’s Petition for Forbearance reveals
that the FCC is correct: Core offered no evidence on that issue
nor on its broader contention that “the ISP Remand Order has
forced CLECs from the market.” Core’s Petition for
 21

Forbearance 10 (J.A. 33). Core, moreover, cites no such
evidence on this appeal.

The derision that Core levels at the FCC’s terminology is
similarly unwarranted. The FCC’s economic analysis is neither
imprecise nor undefined. We have quoted it at length in Part I.A
to make that clear. In a nutshell, the FCC determined in the ISP
Remand Order that, because ISP-related traffic flows
overwhelmingly in one direction, a reciprocal compensation
regime creates an opportunity for CLECs “to sign up ISPs as
customers and collect [compensation from], rather than pay []
compensation” to, other carriers. ISP Remand Order, 16 FCC
Rcd at 9162, ¶ 21. In the FCC’s view, “this led to classic
regulatory arbitrage” that had two negative effects: “(1) it
created incentives for inefficient entry of LECs intent on serving
ISPs exclusively and not offering viable local telephone
competition, as Congress had intended to facilitate with the 1996
Act; (2) the large one-way flows of cash made it possible for
LECs serving ISPs to afford to pay their own customers to use
their services, potentially driving ISP rates to consumers to
uneconomical levels.” Id. at 9162, ¶ 21.

The question before us is not whether the FCC’s economic
conclusions are correct or are the ones that we would reach on
our own, but only whether they are reasonable. See Teledesic
LLC v. FCC, 275 F.3d 75, 84 (D.C. Cir. 2001). As we have
previously stated, we will not “second-guess” an agency’s
economic analysis, but will uphold regulations based on such an
analysis if the agency “has established in the record a reasonable
basis for its decision.” National Wildlife Fed’n v. EPA, 286
F.3d 554, 566 (D.C. Cir. 2002) (internal quotation marks
omitted). Core offers no ground for concluding that the FCC’s
analysis is unreasonable.

*****
 22

Although Core’s petition for review challenged the FCC’s
denial of forbearance as to both the rate caps and the mirroring
rule, Core clarified at oral argument that, if it lost its challenge
to the former, it would withdraw its challenge to the latter. See
Oral Arg. Tr. at 25. That is a logical strategy, since the
mirroring rule does no harm to Core and may do it some good:
If the rate caps remain in place, the mirroring rule imposes
equivalent caps on the rates that an ILEC may charge Core.
Having ruled against Core’s challenge to the rate caps, we
therefore do not address its challenge to the mirroring rule.

III

Taking the opposite tack from Core, the ILECs contend that
the FCC acted impermissibly in granting Core’s forbearance
petition regarding the growth caps and new markets rule. The
FCC found that “all three prongs” of the forbearance standard
were met with respect to those provisions. Forbearance Order,
19 FCC Rcd at 20184, ¶ 15. Once again, we review the FCC’s
decision under the arbitrary and capricious standard. See
Cellular Telecomms., 330 F.3d at 507.

A

As discussed in Part I.A, the growth caps placed a limit on
the total ISP-bound minutes for which a CLEC could receive
intercarrier compensation, equal to the total ISP-bound traffic
for which the CLEC was previously entitled to compensation,
plus a 10% growth factor for each of the first two years of the
transition. In the ISP Remand Order, the FCC explained that it
adopted the measure “to ensure that growth in dial-up Internet
access [did] not undermine [FCC] efforts to limit intercarrier
compensation for this traffic and to begin, subject to the
conclusion of the NPRM proceedings, a smooth transition
toward a bill and keep regime.” ISP Remand Order, 16 FCC
 23

Rcd at 9191, ¶ 86. “A ten percent growth cap, for the first two
years,” the FCC stated, “seem[ed] reasonable in light of CLEC
projections that the growth of dial-up Internet minutes will fall
in the range of seven to ten percent per year.” Id.

The FCC’s new markets rule precluded intercarrier
compensation for ISP-bound traffic where the carrier was “not
exchanging traffic pursuant to [an] interconnection agreement[]
prior to adoption” of the ISP Remand Order. Id. at 9188, ¶ 81.
It applied, for example, “when a new carrier enter[ed] a market
or an existing carrier expand[ed] into a market it previously had
not served.” Forbearance Order, 19 FCC Rcd at 20182, ¶ 9.
And its purpose, similar to that of the growth caps, was to
prevent “expansion of the old compensation regime” during the
transitional period. ISP Remand Order, 16 FCC Rcd at 9189, ¶
81.

The basis for the FCC’s decision to grant forbearance from
application of the growth caps and new markets rule was the
Commission’s determination that “[m]arket developments since
2001 have eased the concerns about growth of dial-up ISP traffic
that led the Commission to adopt these rules.” Forbearance
Order, 19 FCC Rcd at 20186, ¶ 20; see id. at 20186, ¶ 21.
“Recent industry statistics indicate . . . declining usage of dial-
up ISP services,” the Commission noted. Id. at 20186, ¶ 20. In
particular, the FCC cited an industry report indicating “that the
number of end users using conventional dial-up to connect to
ISPs is declining as the number of end users using broadband
services to access ISPs grows.” Id. The report showed a decline
in the number of dial-up subscribers and forecasted a decline in
the percentage of on-line subscribers using dial-up from 76% in
2002 to 25% in 2008. See Bernstein Research Call, DSL
Economics I at 1 (Oct. 15, 2003) (J.A. 112). The Commission
also cited FCC records showing a ten-fold increase in high-
speed access lines between 1999 and 2003. See FCC Releases
 24

Data on High-Speed Services for Internet Access at Tbl. 1 (June
8, 2004). With reduced concerns regarding “continued
expansion of the arbitrage opportunity presented by ISP-bound
traffic,” Forbearance Order, 19 FCC Rcd at 20186, ¶ 20, the
Commission concluded that “these concerns are now
outweighed by the public interest in creating a uniform
compensation regime,” id. at 20186, ¶ 21, and that the public
interest prong of § 160(a) was therefore satisfied, see id. at
20186-87, ¶¶ 20-21.

The same considerations led the Commission to conclude
that the growth caps and new markets rule “are no longer
necessary to ensure that charges and practices are just and
reasonable, and not unjustly or unreasonably discriminatory.”
Id. at 20188, ¶ 24 (citing 47 U.S.C. § 160(a)(1)). As the FCC
explained, “[b]oth the growth caps and new markets rule require
carriers to exchange ISP-bound traffic on a bill-and-keep basis”
where the provisions apply, while exchanging traffic under the
reciprocal compensation regime (subject to the rate caps) where
they do not. Id. at 20187-88, ¶ 24. Since the record “failed to
demonstrate different costs in delivering traffic that would
justify disparate treatment,” “similar rates should apply to both
local voice traffic and ISP-bound traffic, absent compelling
policy reasons to the contrary.” Id. at 20188, ¶ 24. And because
the FCC found that “the policy rationale for those rules no
longer outweighs policies favoring a unified compensation
regime” in light of the “market developments” just discussed,
the Commission “conclude[d] that forbearance is warranted.”
Id. The Commission reached the same conclusion with respect
to the “protection of consumers” prong of § 160(a). Id. at
20189, ¶ 26.
 25

B

The root of BellSouth’s challenge to the FCC’s grant of
forbearance is an attack on the Commission’s determination that
market developments have eased the concerns about growth in
dial-up usage that initially spurred promulgation of the growth
caps and new markets rule.

BellSouth’s first claim is that “the record was replete with
evidence contradicting” that determination. BellSouth Br. 17.
The principal evidence BellSouth cites is one of its own
submissions. That submission does not dispute that there has
been (and will be) a decline in the number of dial-up
subscribers; to the contrary, it acknowledges that “the total
subscriber base has gradually declined each year since” 2002
and “predicts a loss of 10 million subscribers” in “the next five
years.” Dial-Up Minutes of Use Chart (Sept. 2004) (J.A. 68).
Instead, BellSouth focuses on the submission’s projected
increase in ISP-bound dial-up minutes, a projected increase of
3.5% from 2003 to 2006. See BellSouth Br. 17 (citing Dial-Up
Minutes of Use Chart (J.A. 68)). That increase, however, still
falls well short of the 7-10% projection that initially prompted
the FCC to impose the growth caps, and also well below the
10% per year of growth (for each of the first two years)
permitted under the caps themselves. See ISP Remand Order,
16 FCC Rcd 9191, ¶ 86. Moreover, the same BellSouth
submission that projects a 3.5% increase from 2003 to 2006,
predicts a more-than-offsetting decrease of 15.9% from 2006 to
2008 (the last year on the chart). See Dial-Up Minutes of Use
Chart (J.A. 68).5

5
BellSouth also cites a submission by Qwest Communications
declaring that Quest had experienced a 39% cumulative increase in
dial-up minutes in its region from 2001 to 2004, see Qwest Letter to
FCC at 3 (Oct. 5, 2004) (J.A. 124), and one on behalf of the
 26

Shifting from the evidentiary to the theoretical, BellSouth
attacks the FCC’s prediction that there will be “‘declining usage
of dial-up ISP services’” based on evidence that shows only a
decline in “‘the number of end users.’” BellSouth Br. 19
(quoting Forbearance Order, 19 FCC Rcd at 20186, ¶ 20
(emphasis added by BellSouth)). This charge is, of course,
hobbled from the start by BellSouth’s own record submission,
which projects a substantial decline in dial-up minutes (i.e.,
usage) by 2008. See Dial-Up Minutes of Use Chart (J.A. 68).
In any event, “[u]nder the arbitrary and capricious standard of
review, ‘an agency’s predictive judgments about areas that are
within the agency’s field of discretion and expertise’ are entitled
to ‘particularly deferential’ review, as long as they are
reasonable.” Milk Industry Found. v. Glickman, 132 F.3d 1467,
1478 (D.C. Cir. 1998) (quoting International Ladies’ Garment
Workers’ Union v. Donovan, 722 F.2d 795, 821-22 (D.C.
Cir.1983)).

There is nothing unreasonable about the FCC’s reliance on
a declining subscriber base to predict a decline in overall usage
of dial-up service. Although BellSouth speculates that increased
Internet usage per dial-up subscriber should be expected because
such subscribers must remain online longer than broadband
users to receive the same content, see BellSouth Br. 19,

Independent Telephone & Telecommunications Alliance (ITTA)
stating that “dial-up still is the predominant method of ISP access in
rural markets,” ITTA Letter to FCC at 2 n.2 (Oct. 7, 2004) (J.A. 132).
The FCC accurately characterizes these submissions as “anecdotal,”
“unsupported,” and “logically . . . subsumed within the . . . industry-
wide results that BellSouth proffered -- results that show essentially
a plateau in dial-up minutes from 2004 through 2006, with an
accelerating decline thereafter.” FCC Br. 39. As such, these
submissions are insufficient to call into question the reasonableness of
the FCC’s determination.
 27

BellSouth cites nothing in the record to support that speculation.
BellSouth also contends that forbearance from enforcing the
growth caps and new markets rule will indirectly lead to
increased payments from CLECs to ISPs, enabling the ISPs to
make dial-up service more attractive by lowering their prices to
subscribers. But, as the FCC responds, the record in the
forbearance proceeding suggested that (inter alia) the increasing
bandwidth requirements of popular website content will
continue to erode dial-up usage notwithstanding a substantial
price differential between dial-up and broadband service. See
Bernstein Research Call, DSL Economics I at 2 (Oct. 15, 2003)
(J.A. 113). Moreover, although the FCC has forborne from
enforcing the growth caps and new markets rule, the rate caps
remain in effect to cabin the intercarrier compensation that
makes such subsidization possible.

Finally, BellSouth attacks the FCC for failing to provide a
reasoned explanation for its forbearance decision. BellSouth
insists that the regime adopted in the ISP Remand Order “was
designed not merely to reduce the amount paid to competitors
for ISP-bound calls[,] . . . but also to induce competitors to move
away from ISP-only business models.” BellSouth Br. 22-23.
And it contends that the Forbearance Order failed to explain
why this objective, which the FCC had regarded as important to
the maintenance of viable local telephone competition,6 was no
longer applicable. See id. at 23-24.

We disagree. As noted above, the purpose of the growth
caps and new markets rule was not to eliminate all market
distortions attendant to a reciprocal compensation regime, but

6
Section 160(b) provides that, “[i]n making the determination
under subsection (a)(3)” that forbearance is consistent with the public
interest, “the Commission shall consider whether forbearance . . . will
promote competitive market conditions.” 47 U.S.C. § 160(b).
 28

rather “to ensure that growth in dial-up Internet access” and
“expansion of the old compensation regime” would not
undermine the FCC’s efforts during the transition period. ISP
Remand Order, 16 FCC Rcd at 9191, ¶ 86 (emphasis added); id.
at 9189, ¶ 81 (emphasis added). Once the Commission
determined that “[m]arket developments since 2001” had
assuaged its concerns over such growth and expansion, it was
reasonable for it to conclude that “the policies favoring a unified
compensation regime outweigh any remaining concerns about
the growth of dial-up Internet traffic.” Forbearance Order, 19
FCC Rcd at 20186, ¶ 20. It is not for this court to second-guess
the conclusion reached by the agency that Congress has
entrusted with balancing those policies. See Global Crossing
Telecomms., Inc. v. FCC, 259 F.3d 740, 746 (D.C. Cir. 2001);
Melcher v. FCC, 134 F.3d 1143, 1152 (D.C. Cir. 1998).

IV

For the foregoing reasons, both the petition for review filed
by Core and the petition for review filed by BellSouth are

denied.7

7
Prior to filing its petition for review, Core filed a document --
styled as a “complaint for declaratory relief” -- claiming that Core’s
petition for forbearance was granted by operation of law once the
statutory deadline passed. Core’s effort to invoke this court’s
equitable jurisdiction by arguing that its complaint fits within the rule
of Telecommunications Research & Action Center v. FCC, 750 F.2d
70 (D.C. Cir. 1984), is misplaced. We are fully capable of reviewing
any future Commission decision to enforce any provision of the ISP
Remand Order or Forbearance Order against Core, and there is no
need “to issue [a] writ[] of mandamus . . . to protect [our] prospective
jurisdiction.” Id. at 76. We therefore dismiss Core’s complaint.