Vonage Holdings Corp. v. Federal Communications Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 9, 2007 Decided June 1, 2007

No. 06-1276

VONAGE HOLDINGS CORPORATION,
PETITIONER

v.

FEDERAL COMMUNICATIONS COMMISSION AND
UNITED STATES OF AMERICA,
RESPONDENTS

VERIZON COMMUNICATIONS INC., ET AL.,
INTERVENORS

Consolidated with
06-1317

On Petitions for Review of an Order of the
Federal Communications Commission

Glenn B. Manishin argued the cause for petitioner
Computer and Communications Industry Association. With
him on the briefs were Jonathan E. Canis and Stephanie A.
Joyce.
 2

Christopher J. Wright argued the cause for petitioner
Vonage Holdings Corporation. With him on the briefs were
Scott Blake Harris, Brita D. Strandberg, and Stephanie
Weiner.

Ross A. Buntrock and Michael B. Hazzard were on the
briefs for intervenor Voice on the Net Coalition, Inc. in
support of petitioner.

James M. Carr, Counsel, Federal Communications
Commission, argued the cause for respondents. With him on
the brief were Thomas O. Barnett, Assistant Attorney
General, U.S. Department of Justice, Robert B. Nicholson and
Robert J. Wiggers, Attorneys, Samuel L. Feder, General
Counsel, Federal Communications Commission, Eric D.
Miller, Deputy General Counsel, Richard K. Welch, Associate
General Counsel, and John E. Ingle, Deputy Associate
General Counsel.

David C. Bergmann was on the brief for intervenor
National Association of State Utility Consumer Advocates.

Michael E. Glover, Edward Shakin, Christopher M.
Miller, Helgi C. Walker, Joshua S. Turner, and Megan L.
Brown were on the brief for intervenor Verizon
Communications Inc.

Before: TATEL and GARLAND, Circuit Judges, and
EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: Petitioners, providers of voice
over internet protocol services (VoIP), challenge a Federal
Communications Commission order requiring them to
 3

contribute to the Universal Service Fund (USF). Specifically,
they claim that, in requiring such contributions, the
Commission exceeded its authority under the
Telecommunications Act of 1996 and acted arbitrarily and
capriciously by (1) analogizing VoIP to wireline toll service
for the purposes of setting the presumptive percentage of
VoIP revenues generated interstate or internationally, (2)
requiring pre-approval for traffic studies submitted by VoIP
providers but not for those submitted by wireless providers,
and (3) suspending the “carrier’s carrier rule” with respect to
VoIP. We conclude that the Commission has statutory
authority to require VoIP providers to make USF
contributions and that it acted reasonably in analogizing VoIP
to wireline toll service for purposes of setting the presumptive
percentage of VoIP revenues generated interstate and
internationally. But finding the Commission’s explanation
wanting as to the pre-approval of traffic studies and the
suspension of the carrier’s carrier rule, we vacate those
portions of the Order.

I.

In March 2004, the Federal Communications
Commission issued a notice of proposed rulemaking calling
for comments on how best to regulate a range of internet
protocol-enabled services, including voice over internet
protocol, an internet-based service offering “multidirectional
voice functionality, including, but not limited to, services that
mimic traditional telephony.” In re IP-Enabled Services, 19
F.C.C.R. 4863, 4866 n.7 (2004); see also Minn. Pub. Utils.
Comm’n v. FCC, Nos. 05-1069, 05-1122, 05-3114, 05-3118,
2007 WL 838938, at *1 (8th Cir. Mar. 21, 2007) (describing
the difference between packet-switched and circuit-switched
communications). Perhaps most significantly for VoIP’s
future, the Commission asked whether it should classify VoIP
 4

as a “telecommunications service” or an “information
service.” If classified as a telecommunications service, VoIP
would be subject to mandatory Title II common carrier
regulations, 47 U.S.C. § 153(44), but as an information
service it would not. See Nat’l Cable & Telecomms. Ass’n v.
Brand X Internet Servs., 545 U.S. 967, 975–77 (2005). The
Commission also requested comment on a range of narrower
questions, including—most relevant to this case—whether
VoIP providers should be required to contribute to the
Universal Service Fund (USF). See IP-Enabled Services, 19
F.C.C.R. at 4905 ¶ 63 (calling for comment on whether VoIP
providers should contribute to the USF but stating that the
question would be addressed in the separately docketed
Universal Service Contribution Methodology proceeding).

The USF is a funding stream the Commission uses to
subsidize telecommunications and information services in
rural and high-cost areas, as well as for schools, libraries, and
low-income households. 47 U.S.C. § 254(b)(3), (h)(1)(B).
The USF receives its funding from businesses in the
telecommunications sector; some businesses are required by
statute to contribute while others must contribute only when
the Commission has, in its discretion, required them to do so.
Specifically, the Act mandates contributions from “[e]very
telecommunications carrier that provides interstate
telecommunications services.” Id. § 254(d). Moreover, under
its permissive contribution authority, the Commission may
demand USF contributions from “[a]ny other provider of
interstate telecommunications . . . if the public interest so
requires.” Id.

Two years later and following public comment, the
Commission issued an order requiring providers of
“interconnected” VoIP services to contribute to the USF. In
re Universal Service Contribution Methodology, 21 F.C.C.R.
 5

7518 (2006) (hereinafter “Order”). Interconnected VoIP
services “(1) enable real-time, two-way voice
communications; (2) require a broadband connection from the
user’s location; (3) require IP-compatible customer premises
equipment; and (4) permit users to receive calls from and
terminate calls to the PSTN [public switched telephone
network].” Id. at 7526 ¶ 15; see also 47 C.F.R. § 9.3.

Deferring a decision on whether to classify VoIP as a
telecommunications service or an information service, the
Commission grounded its order in its permissive contribution
authority and, alternatively, its Title I ancillary jurisdiction.
See Am. Library Ass’n v. FCC, 406 F.3d 689, 692–93 (D.C.
Cir. 2005) (holding that the Commission may regulate under
its ancillary jurisdiction when “the subject of the regulation
[is both] . . . covered by the Commission’s general grant of
jurisdiction under Title I of the Communications Act . . . .
[and] ‘reasonably ancillary to the effective performance of the
Commission’s various responsibilities.’” (citation omitted)).
The Commission gave three reasons for taking this
discretionary step. First, USF contributions have declined in
recent years, while interconnected VoIP services have
“experienced dramatic growth.” Order at 7528 ¶ 19. Thus,
requiring contributions from interconnected VoIP providers
would “preserve and advance universal service.” Id. at 7527
¶ 17. Second, interconnected VoIP providers ought to
contribute to the USF because “much of the appeal of their
services to consumers derives from the ability to place calls to
and receive calls from the PSTN, which is supported by
universal service mechanisms.” Id. at 7540 ¶ 43. Third,
competitive neutrality—a principle that requires advantaging
no one technology over another—favors making VoIP
providers contribute because they increasingly compete with
analog voice service providers, who contribute to the USF.
Id. at 7541 ¶ 44.
 6

Having decided to require VoIP providers to contribute,
the Commission turned to the issue of how to calculate the
level of such contributions. The Commission assesses USF
contributions only on revenues generated from interstate or
international calls. See Tex. Office of Pub. Util. Counsel v.
FCC, 183 F.3d 393, 446–48 (5th Cir. 1999). For companies
connecting landline customers, determining the percentage of
interstate or international calls is relatively simple. But for
wireless and VoIP providers—whose customers may use their
services from many locations and often have area codes that
do not correspond to their true location—determining the
percentage of interstate and international traffic is more
difficult. Given those difficulties, the Commission
established—as it has since 1998 for wireless—a “safe
harbor” that approximates the percentage of VoIP revenues
generated from interstate and international calls. The safe
harbor ensures that VoIP providers will not have to make USF
contributions on more than a certain percentage of their
revenues. As its name suggests, the safe harbor is only a
ceiling: VoIP providers may reduce their USF contributions
if, through traffic studies, they can show that their actual
percentage of interstate and international revenues falls below
the safe harbor percentage.

To set the safe harbor level, the Commission sought to
identify the “appropriate analogue” for VoIP service. Order
at 7545 ¶ 53. The Commission considered two possibilities:
wireline toll service (colloquially referred to as landline long
distance), which the Commission presumes to be 64.9%
interstate and international, and wireless service, presumed to
be 37.1% interstate and international. The Commission
selected wireline toll service as the better analogue, giving
two reasons for its decision. First, it cited two industry
reports, one estimating that 83.8% of VoIP traffic is interstate
 7

or international and a second putting the figure at
66.2%—both figures higher than the safe harbor level for
wireline toll service. Second, the Commission cited
advertisements demonstrating that VoIP providers frequently
market their service as a substitute for wireline toll service,
noting that many customers purchase such plans in order to
“place a high volume of interstate and international calls” and
consequently “benefit from the pricing plans the providers
offer for such services.” Id. at 7546 ¶ 55.

The Commission then ruled that interconnected VoIP
providers wishing to contribute less than the safe harbor level
may do so only after the Commission has approved their
traffic studies. This rule differs from the rule applicable to
wireless providers, who may contribute according to the
findings of their traffic studies even before Commission
approval. Having “identified concerns in the wireless context
with the use of traffic studies,” the Commission feared that
allowing VoIP providers to rely on traffic studies without pre-
approval would “risk extending the problems we have
identified with the use of traffic studies . . . to a new
technology.” Id. at 7547 ¶ 57. Addressing the inconsistent
treatment of wireless and VoIP providers, the Commission
explained that imposing a pre-approval requirement on both
groups “would be disruptive to wireless contributors who,
unlike interconnected VoIP providers, are already relying on
the current regime.” Id.

Finally, the Commission suspended the so-called
carrier’s carrier rule, which prevents duplicative USF
contributions at the wholesale and retail levels. The rule
accomplishes this by basing contributions only on “end-user
telecommunications revenues.” 47 C.F.R. § 54.706(b). The
Commission suspended the rule with respect to VoIP for two
quarters following issuance of the Order, explaining that “if
 8

carriers are permitted to invoke the carrier’s carrier rule
immediately to exclude revenues from interconnected VoIP
providers, the result could be a net decrease in the Fund in the
short term,” a result inconsistent with its obligation to
“preserve and advance universal service.” Order at 7548 ¶ 59.

The Computer and Communications Industry
Association (CCIA), a trade group with at least one
interconnected VoIP provider among its members, and
Vonage Holdings Corporation (Vonage), a provider of
interconnected VoIP, now petition for review. The CCIA
challenges the Commission’s assertion of authority—under
both section 254(d) and its Title I ancillary jurisdiction—to
require VoIP providers to contribute to the USF. Vonage
does not contest the Commission’s authority to require USF
contributions, challenging instead three other aspects of the
Order: the safe harbor level, the pre-approval requirement for
traffic studies, and the suspension of the carrier’s carrier rule.

II.

Section 254(d) of Title 47 states that:

Every telecommunications carrier that provides
interstate telecommunications services shall
contribute, on an equitable and nondiscriminatory
basis, to the specific, predictable, and sufficient
mechanisms established by the Commission to
preserve and advance universal service. . . . Any
other provider of interstate telecommunications
may be required to contribute to the preservation
and advancement of universal service if the public
interest so requires.
 9

47 U.S.C. § 254(d). According to the Commission, section
254(d)’s “permissive portion” (the final sentence) authorizes it
to require VoIP providers to contribute to the USF, regardless
of whether VoIP is ultimately classified as a
“telecommunications service” or an “information service.”
Understanding this position requires a brief detour through the
regulatory classification decision the Commission has yet to
make and the statutory text and case law governing it.

The Act defines both “telecommunications service” and
“information service” as “offerings.” See 47 U.S.C. § 153(46)
(defining “[t]elecommunications service” as “the offering of
telecommunications for a fee directly to the public”); id.
§ 153(20) (defining “[i]nformation service” as “the offering of
a capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing, or making available
information via telecommunications”). In an order issued
several years ago, the Commission advanced a narrow
definition of the verb “offer,” explaining that cable modem
service, even though it contains telecommunications as a
component, is not a “telecommunications service” because an
“offering” of telecommunications can only be something
perceived as telecommunications by the end user viewing the
integrated, finished product. In re Inquiry Concerning High-
Speed Access to the Internet Over Cable and Other Facilities,
17 F.C.C.R. 4798, 4822–23 ¶¶ 38–39 (2002) (hereinafter
“Cable Modem Order”). Because cable modem customers use
the service “to access the World Wide Web . . . rather than
‘transparently’ to transmit and receive ordinary-language
messages without computer processing” the Commission
concluded that “cable modem service is not a ‘stand-alone,’
transparent offering of telecommunications.” Brand X, 545
U.S. at 988 (citing Cable Modem Order at 4823–4825
¶¶ 41–43). In Brand X, the Supreme Court upheld the
 10

Commission’s interpretation of the word “offer” as reasonable,
explaining:

It is common usage to describe what a company
“offers” to a consumer as what the consumer
perceives to be the integrated finished product, even
to the exclusion of discrete components that
compose the product . . . . One might well say that
a car dealership “offers” cars, but does not “offer”
the integrated major inputs that make purchasing
the car valuable, such as the engine or the chassis.
It would, in fact, be odd to describe a car dealership
as “offering” consumers the car’s components in
addition to the car itself.

Brand X, 545 U.S. at 990.

Were the Commission to conclude that VoIP is an
“offering of telecommunications” and therefore to classify it
as a telecommunications service, VoIP providers would fall
under section 254(d)’s mandatory contribution language (the
first sentence). The scope of the Commission’s permissive
contribution authority, however, does not depend on whether
VoIP is considered an “offering” of either telecommunications
or information. Rather, the Commission’s permissive
contribution authority extends to “provider[s] of interstate
telecommunications.” 47 U.S.C. § 254(d) (emphasis added).
The verb “provide,” the Commission explained, “is a different
and more inclusive term than ‘offer.’” Order at 7538–39 ¶ 40.
Black’s Law Dictionary, upon which the Commission relied,
defines “‘provide’” as “‘[t]o make, procure or furnish for
future use, prepare. To supply; to afford; to contribute.’” Id.
(alteration in original) (quoting BLACK’S LAW DICTIONARY
1244 (6th ed. 1990)). Under this definition, the Commission
explained, the verb “provide” is broad enough to include the
 11

act of supplying a good or service as a component of a larger,
integrated product. For instance, under the Commission’s
interpretation, McDonald’s provides beef, as well as
hamburgers, and The Washington Post provides ink, as well as
newspapers.

After concluding that a “provider of telecommunications”
need only supply telecommunications as a component of its
finished product, the Commission explained that VoIP does in
fact include telecommunications as a component. The Act
defines “[t]elecommunications” as “the transmission, between
or among points specified by the user, of information of the
user’s choosing, without change in the form or content of the
information as sent and received.” 47 U.S.C. § 153(43). The
Commission explained that interconnected VoIP services
provide such transmission by virtue of their interconnection
with the PSTN:

[B]y definition, interconnected VoIP services are
those permitting users to receive calls from and
terminate calls to the PSTN. . . . [W]e find
interconnected VoIP providers to be “providing”
telecommunications regardless of whether they own
or operate their own transmission facilities or they
obtain transmission from third parties. In contrast
to services that merely use the PSTN to supply a
finished product to end users, interconnected VoIP
supplies PSTN transmission itself to end users.

Order at 7539–40 ¶ 41 (footnotes and internal quotation marks
omitted); see also id. at 7540 n.147 (distinguishing a contrary
result in In re Petition for Declaratory Ruling that
pulver.com’s Free World Dialup Is Neither
Telecommunications nor a Telecommunications Service, 19
F.C.C.R. 3307, 3312 ¶ 9 (2004), on the grounds that the non-
 12

interconnected VoIP provider in that order did not “supply
connectivity to any PSTN user.”).

With this background in mind, we turn to the issues
before us.

III.

Where, as here, Congress has delegated interpretive
authority to an agency, we review the agency’s interpretation
of a statute under the familiar two-part test set forth in
Chevron U.S.A. Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984). We first inquire whether “Congress
has directly spoken to the precise question at issue. . . . [and if]
the intent of Congress is clear, that is the end of the matter.”
Id. at 842–43. But if “the statute is silent or ambiguous with
respect to the specific issue, the question . . . is whether the
agency’s answer is based on a permissible construction of the
statute.” Id. at 843. In this case, the Commission does not
contend that the statute unambiguously places VoIP providers
within the phrase “providers of telecommunications.” Nor has
petitioner CCIA given us any reason to conclude that either
the phrase “providers of telecommunications” or the Act’s
definition of telecommunications unambiguously exempts
VoIP providers from the Commission’s permissive
contribution authority. Thus, we proceed to Chevron step two,
where “we need not determine that the [agency’s] reading . . .
is the best possible reading, only that it was reasonable.” Am.
Fed’n of Gov’t Employees, Local 446 v. Nicholson, 475 F.3d
341, 355 (D.C. Cir. 2007).

The Commission’s application of section 254(d) to
interconnected VoIP providers involved two discrete
decisions: (1) that, unlike the verb “offer,” the verb “provide”
may apply to the act of supplying a component of an
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integrated product, and (2) that VoIP providers supply
telecommunications as a component of their service.

Provide v. Offer

Recall that in Brand X the Supreme Court upheld the
narrow definition of “offer” advanced by the Commission.
Thus, we now face only two issues: has the Commission
reasonably interpreted the word “provide,” and was it
reasonable for the Commission to give the word “provide” a
different meaning than the word “offer”?

As to the first issue, we have little trouble concluding that
the word “provide” is sufficiently broad to encompass the
Commission’s interpretation. Returning to Brand X’s car
dealership hypothetical, we see nothing strange about the
statement that a dealership provides both cars and engines.
Indeed, one could reasonably interpret the statement that a
dealership “does not provide engines” to mean that it sells cars
without engines, not that it won’t sell disconnected engines.

We also see nothing that would prevent the Commission
from interpreting the word “offer” from the demand side (i.e.,
the consumer’s perception of what she receives) and the word
“provide” from the supply side (the seller’s perception of what
she supplies). True, the words have mutual synonyms and can
be used interchangeably in some contexts. See, e.g.,
WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1566,
1827 (1993) (listing “supply” in the definitions of both words).
Such similarities, however, provide an insufficient basis for
concluding that Congress unambiguously intended the two
words to have the same meaning—something it could have
accomplished quite simply by using the same word. Indeed,
we have repeatedly held that “‘[w]here different terms are
used in a single piece of legislation, the court must presume
 14

that Congress intended the terms to have different meanings.’”
Transbrasil S.A. Linhas Aereas v. Dep’t of Transp., 791 F.2d
202, 205 (D.C. Cir. 1986) (alteration in original) (quoting
Wilson v. Turnage, 750 F.2d 1086, 1091 (D.C. Cir. 1984)).
Thus, the Commission’s construction of the verb “provide” in
the phrase “providers of telecommunications” is reasonable
under Chevron step two.

Telecommunications as a Component of VoIP

CCIA presents three challenges to the Commission’s
finding that VoIP providers supply telecommunications as a
component of their service insofar as they “suppl[y] PSTN
transmission itself to end users.” Order at 7540 ¶ 41. All
three are unpersuasive.

First, CCIA argues that “[a]s only telecommunications,
and not ‘information services,’ may be subject to the USF
contribution obligations under the Act, the VoIP Order
exceeds the scope of the Commission’s authority.” CCIA Br.
22–23. Spoiling for tomorrow’s battle, CCIA insists that
“VoIP is an information service, whether or not it is
‘interconnected’ with the PSTN.” CCIA Br. 23–24. But,
although “information service” and “telecommunications
service” are mutually exclusive categories, CCIA points to no
authority supporting its argument that a provider of
“information services” cannot also be a “provider of
telecommunications” for the purposes of section 254(d).
Indeed, the Act clearly contemplates that
“telecommunications” may be a component of an “information
service,” defining the latter as “the offering of a capability for
generating, acquiring, storing, transforming, processing,
retrieving, utilizing, or making available information via
telecommunications.” 47 U.S.C. § 153(20).
 15

Second, CCIA argues that “[u]nder Brand X, the
Commission is not permitted to isolate the ‘transmission
element’ of VoIP and consider that component in isolation for
purposes of Title II classification.” CCIA Br. 29. But in
Brand X the Court merely held that the meaning of the word
“offering” in the statute’s definition of “telecommunications
service” was ambiguous and that the Commission’s narrow
interpretation was reasonable. The Court had no occasion to
consider the meaning of the phrase “providers of
telecommunications,” much less to determine that the phrase
unambiguously demands the same construction the
Commission applies to an “offering of telecommunications.”

Finally, CCIA argues that “since interconnected VoIP
always involves change in the ‘form or content’ of
information, it cannot by definition be ‘telecommunications.’”
CCIA Reply Br. 6. But we have found no indication that
anyone made this argument before the Commission, which
may explain why the Commission never addressed it. Asked
about this at oral argument, CCIA’s counsel pointed to two
portions of the record where he assured us we would find the
argument. See Oral Arg. Tr. 8 (citing CCIA Reply Br. 5 n.5).
Like much of CCIA’s brief, however, the cited comments
argue only that VoIP is an information service, not that
interconnected VoIP providers provide no
“telecommunications” as a component of their service.
Accordingly, we may not address this argument here. See 47
U.S.C. § 405(a) (foreclosing judicial review of “questions of
fact or law upon which the Commission . . . has been afforded
no opportunity to pass”).

Finding that the Commission has section 254(d) authority
to require interconnected VoIP providers to make USF
contributions, we have no need to decide whether the
 16

Commission could have also done so under its Title I ancillary
jurisdiction.

IV.

Next we turn to Vonage’s challenges to the safe harbor
level, the pre-approval requirement for VoIP traffic studies,
and the suspension of the carrier’s carrier rule. We review
these decisions under the arbitrary and capricious standard,
affirming if the Commission “considered the relevant factors
and articulate[d] a rational connection between the facts found
and the choice made.” BellSouth Telecomms., Inc. v. FCC,
469 F.3d 1052, 1056 (D.C. Cir. 2006) (alteration in original)
(citation and internal quotation marks omitted). Mindful of
Congress’s insistence that USF contributions be made “on an
equitable and nondiscriminatory basis,” we devote particular
attention to the Commission’s reasons for treating VoIP
differently from other technologies. 47 U.S.C. § 254(d); see
also 47 U.S.C. § 254(b)(4) (“All providers of
telecommunications services should make an equitable and
nondiscriminatory contribution to the preservation and
advancement of universal service.”).

Safe Harbor Level

The Commission set the safe harbor level by analogizing
VoIP to wireline toll service. Because VoIP’s functionality
and customer profile differ from those of other technologies,
reasoning by analogy in this way invites some inevitable
imprecision. Vonage, however, does not challenge this aspect
of the Commission’s method, nor do we think it could, given
our cases demanding far less than perfect precision in agency
line drawing. In WJG Telephone Co. v. FCC, we wrote:
 17

It is true that an agency may not pluck a number out
of thin air when it promulgates rules in which
percentage terms play a critical role. When a line
has to be drawn, however, the Commission is
authorized to make a “rational legislative-type
judgment.” If the figure selected by the agency
reflects its informed discretion, and is neither
patently unreasonable nor “a dictate of unbridled
whim,” then the agency’s decision adequately
satisfies the standard of review.

675 F.2d 386, 388–89 (D.C. Cir. 1982) (citations omitted); see
also WorldCom, Inc. v. FCC, 238 F.3d 449, 461–62 (D.C. Cir.
2001) (“The relevant question is whether the agency’s
numbers are within a zone of reasonableness, not whether its
numbers are precisely right.” (internal quotation marks
omitted)).

Vonage argues that the Commission acted arbitrarily and
capriciously in choosing wireline toll service instead of
wireless service as the analogue for VoIP. The Commission
analogized VoIP to wireline toll service principally because
VoIP providers market their service as a substitute for wireline
toll service and offer pricing plans—typically flat fees for
unlimited local and long distance calls—that make the service
attractive to customers who place high volumes of interstate
and international calls. Questioning this analogy, Vonage
argues that, unlike wireline toll service, VoIP functions as an
“all-distance service” that enables local as well as long
distance and international calls. Vonage also points out that
the Commission recognized VoIP’s all-distance functionality
in two previous decisions, one requiring VoIP providers to
ensure 911 service, In re IP-Enabled Services, E911
Requirements for IP-Enabled Service Providers, 20 F.C.C.R.
10,245, 10,246 ¶ 1 (2005), and the other requiring them to
 18

provide intercept capability for law enforcement, In re
Communications Assistance for Law Enforcement Act and
Broadband Access and Services, 20 F.C.C.R. 14,989,
15,009–10 ¶ 42 (2005).

We agree with Vonage that this difference in capabilities
renders the VoIP/wireline toll service analogy imperfect.
Perfection, however, is not what the law requires. To prevail,
Vonage must show that wireless is so much the better
analogue for VoIP that the Commission acted arbitrarily and
capriciously by failing to select it. This Vonage has not done.
The mere fact that both VoIP and wireless are “all-distance”
services hardly compels the conclusion that usage patterns for
VoIP are closer to those for wireless than to those for wireline
toll service. Vonage’s “all-distance” argument also does
nothing to disturb the Commission’s conclusion that VoIP and
wireless are likely to attract different types of
customers—with VoIP customers predisposed, on average, to
making more long distance and international calls. Indeed,
Vonage concedes that VoIP is unlikely to attract customers
who make relatively few long distance calls, but nowhere
argues that the same is true for wireless. That omission is
significant: if VoIP only attracts customers who make high
volumes of long distance and international calls but wireless
attracts all kinds of customers—perhaps because its mobility
appeals even to people who make few long distance
calls—then VoIP will carry a greater proportion of long
distance and international calls than wireless.

Because Vonage has neither shown why usage patterns
for VoIP are more like those for wireless than for wireline toll
service nor unsettled the Commission’s reasoning regarding
the type of customer attracted to VoIP, we have little trouble
rejecting its challenge to the safe harbor level. Our confidence
in this conclusion is unshaken by Vonage’s criticism of the
 19

two industry reports cited in the Order. One of those reports
estimates that 83.8% of VoIP traffic is long distance or
international and the other puts the figure at 66.2%. Vonage
insists that these reports, both of whose estimates exceed the
64.9% level selected by the Commission, shed no light on the
issue because they estimate world-wide rather than just U.S.
VoIP traffic and because nothing suggests that the reports
cover only interconnected VoIP. For these reasons, we agree
with Vonage that the two reports, by themselves, would
provide weak support for the Commission’s decision. But the
Commission did not hang its hat solely on these reports.
Indeed, had the Commission done so, we expect that, given the
reports’ estimates, it would have chosen an even higher safe
harbor level. The Commission, moreover, did not overstate
the reports’ precision, citing them only for the general
proposition that “VoIP traffic is predominantly long distance
or international.” Order at 7545 ¶ 53. Finally, because neither
Vonage nor any other commenter submitted studies of its own,
the two industry reports appear to be the only record evidence
estimating actual VoIP traffic. Given this, we are reluctant to
fault the Commission for considering the only available data,
however imperfect. See Am. Pub. Commc’ns Council v. FCC,
215 F.3d 51, 56 (D.C. Cir. 2000) (“Where existing
methodology or research in a new area of regulation is
deficient, the agency necessarily enjoys broad discretion to
attempt to formulate a solution to the best of its ability on the
basis of available information.” (internal quotation marks
omitted)).

Pre-Approval of Traffic Studies

The Commission chose to require pre-approval for VoIP
traffic studies because of “problems [it had] identified with the
use of traffic studies by wireless carriers.” Order at 7547 ¶ 57.
In other words, the Commission decided that the consequences
 20

of unreliable traffic studies submitted by wireless providers
should be borne not by the wireless providers themselves, but
by VoIP providers alone. Though recognizing the inequity in
this decision, the Commission devoted but one sentence to
justifying it: “While there would be a benefit to parity of
requirements between wireless and interconnected VoIP
providers, a pre-approval requirement for wireless traffic
studies would be disruptive to wireless contributors who,
unlike interconnected VoIP providers, are already relying on
the current regime.” Id.

This explanation hardly justifies treating VoIP and
wireless differently. Imposing a new pre-approval
requirement on wireless carriers would no doubt have been
disruptive to them. The Commission, however, has failed to
explain how it is any less disruptive to impose such an
obligation on interconnected VoIP providers who have gone
overnight from making no direct USF contributions to
contributing at nearly twice the level of wireless providers.
We understand that regulations can be more costly when
unforeseen. We also understand that the Commission may
have assumed, given the IP-Enabled Services notice, that
interconnected VoIP providers would have foreseen new USF
regulations. But even so, the Commission has given us no
reason to believe that interconnected VoIP providers foresaw
that they would be subject to a pre-approval requirement.
After all, the Commission had declined to impose such a
requirement on wireless providers despite the fact that their
own studies suffered from reliability problems. The
Commission’s explanation thus gives us no confidence that it
has apportioned USF obligations on “an equitable and
nondiscriminatory basis.” 47 U.S.C. § 254(d).
 21

Suspension of the Carrier’s Carrier Rule

We come finally to the Commission’s suspension of the
carrier’s carrier rule—a rule that prevents double payment at
the wholesale and retail level by basing USF contributions
only on “end-user telecommunications revenues.” 47 C.F.R.
§ 54.706(b). As the Commission acknowledged, this decision
effectively required VoIP providers to make duplicative USF
contributions for two quarters: once directly on their own
interstate and international revenues and a second time
indirectly in the form of higher costs passed along from
carriers who sell them telecommunications inputs. The
Commission’s sole justification for imposing this unique
obligation on VoIP providers was this: “if carriers are
permitted to invoke the carrier’s carrier rule immediately to
exclude revenues from interconnected VoIP providers, the
result could be a net decrease in the Fund in the short term.”
Order at 7548 ¶ 59.

This explanation suffers from a fundamental flaw: the
Commission never explained how there could be a net
decrease in fund revenues by making VoIP providers
contribute while keeping the carrier’s carrier rule in force.
Indeed, increasing USF revenues was the very reason the
Commission gave for requiring interconnected VoIP providers
to contribute to the Fund. And, as Vonage points out, the only
reason to expect a decrease in fund revenues would be if the
indirect payments interconnected VoIP providers made before
the Order were somehow larger than the direct payments they
would make after the Order. For that to occur, however,
interconnected VoIP providers would have to sell their
services for less than they pay for a single wholesale
input—an unlikely business model that, without some
explanation from the Commission, we are unwilling to assume
VoIP providers pursue.
 22

In its brief, the Commission offered several new
explanations for a potential short-run decrease in the fund.
We, however, may not consider counsel’s post-hoc
rationalizations. See SEC v. Chenery Corp., 318 U.S. 80,
89–90 (1943).

V.

We grant the petitions for review and vacate the Order
with respect to the pre-approval requirement for
interconnected VoIP traffic studies and the suspension of the
carrier’s carrier rule. We deny the petitions with respect to the
Commission’s construction of section 254(d), the setting of
the safe harbor level, and all remaining claims, which we have
considered and found to be without merit.

So ordered.