No. 11-9900 IN THE United States Court of Appeals FOR THE TENTH CIRCUIT IN RE: FCC 11-161 On Petition for Review of an Order of the Federal Communications Commission UNCITED WINDSTREAM PRINCIPAL BRIEF Jeffrey A. Lamken Counsel of Record Lucas M. Walker MOLOLAMKEN LLP The Watergate, Suite 660 600 New Hampshire Avenue, N.W. Washington, D.C. 20037 (202) 556-2000 Counsel for Windstream Corporation and Windstream Communications, Inc. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 1 CORPORATE DISCLOSURE STATEMENT Pursuant to Federal Rule of Appellate Procedure 26.1, petitioners Wind- stream Corporation and Windstream Communications, Inc. state as follows: Windstream Corporation is a publicly he ld corporation. No publicly held corporation has a 10% or greater ownershi p interest in Windstream Corporation. As relevant to this litigation, Windstream Corporation wholly owns numerous local exchange carrier subsidiaries that opera te throughout the United States, including in rural areas. Windstream Communications, Inc. is a wholly owned subsidiary of Windstream Corporation; no other publicly held company has a 10% or greater ownership interest in Windstream Communications, Inc. As relevant to this litigation, Windstream Communications, Inc. is a local exchange carrier that offers broadband and voice service. December 10, 2012 /s/ Jeffrey A. Lamken Jeffrey A. Lamken MOLOLAMKEN LLP The Watergate, Suite 660 600 New Hampshire Ave., N.W. Washington, D.C. 20037 (202) 556-2000 Counsel for Windstream Corporation and Windstream Communications, Inc. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 2 ii TABLE OF CONTENTS Page JURISDICTIONAL STATEMENT ..........................................................................1 ISSUE PRESEN TED.................................................................................................2 STATEMENT OF THE CASE AND FACTS ..........................................................3 I. Regulatory Framework....................................................................................3 A. Originating and Terminating Access ....................................................3 B. Interstate and Intrastate Access Charges............................................... 4 C. VoIP Tr affic ..........................................................................................5 II. Proceedings Below ..........................................................................................6 A. The Notice of Proposed Rulemaking ....................................................6 B. The ABC Plan .......................................................................................7 C. The USF/ICC Tran sformation Order .................................................... 9 D. Proceedings on Reconsideration .........................................................13 1. Windstream’s Petition for Reconsideration or Clarification ..............................................................................13 2. The Second Reconsideration Order ..........................................14 SUMMARY OF ARGUME NT...............................................................................17 Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 3 iii ARGUME NT...........................................................................................................19 THE FCC’ S DECISION TO FLASH-CUT ORIGINATING ACCESS CHARGES FOR INTRASTATE V OIP TRAFFIC WITHOUT PROVIDING ANY REVENUE RECOVERY MECHANISM WAS ARBITRARY , CAPRICIOUS , AND CONTRARY TO REASONED DECISIONMAKING .....................................................................................................19 A. The FCC Failed To Justify Its Decision To Reduce Originating Access Rates for Intrastate VoIP ........................................................20 B. The FCC’s Failure To Provide a Revenue Recovery Mechanism Was Arbitrary, Capricious, and Inconsistent with Reasoned Decisionmaking...................................................................................24 CONCLUSIO N........................................................................................................31 Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 4 iv TABLE OF AUTHORITIES Page(s) CASES Am. Radio Relay Lea gue, Inc. v. FCC , 524 F.3d 227 (D.C. Cir. 2008) ......19, 26, 27 Camp v. Pitts, 411 U.S. 138 (1973) .........................................................................26 FCC v. Fox Television Stations, Inc. , 556 U.S. 502 (2009) ....................................19 Indep. Petroleum Ass’n of Am. v. Babbitt , 92 F.3d 1248 (D.C. Cir. 1996) .............19 Judulang v. Holder , 132 S. Ct. 476 (2011 )..................................................19, 22, 28 Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co. , 463 U.S. 29 (1983) ..................................................................................21, 26, 29 Nat’l Ass’n of Broadcasters v. FCC , 740 F.2d 1190 (D.C . Cir. 1984)....................29 NorAm Gas Transmission Co. v. FERC , 148 F.3d 1158 (D.C. Cir. 1998)........19, 27 Prometheus Radio Project v. FCC , 373 F.3d 372 (3d Cir. 2004) ...............24, 27, 30 Q west Corp. v. FCC , 258 F.3d 1191 (10t h Cir. 2001) ..............................................4 Sinclair Broad. Grp., Inc. v. FCC , 284 F.3d 148 (D.C. Cir. 2002).........................28 Sorenson Commc’ns, Inc. v. FCC , 567 F.3d 1215 (10th Cir. 2009) .......................19 STATUTES 5 U.S.C. § 706( 2)(A) ................................................................................................19 28 U.S.C. § 2342(1)....................................................................................................1 47 U.S.C. § 251 (c)(2) .................................................................................................3 47 U.S.C. § 251(g)......................................................................................................3 47 U.S.C. § 402(a) ......................................................................................................1 Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 5 v REGULATORY MATERIALS 47 C.F.R. § 1 .4(b) .......................................................................................................1 47 C.F.R. § 1 .429(d) ...................................................................................................1 47 C.F.R. § 51. 913(a)(1) ..........................................................................................16 76 Fed. Reg. 73,830 (Nov. 29, 2011) ........................................................................1 77 Fed. Reg. 31,520 (May 29, 2012) .........................................................................1 Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 6 vi STATEMENT OF RELATED CASES There are no prior appeals, and all related cases known to counsel have been consolidated into this omnibus case except Accipiter Communica- tions, Inc. v. FCC (D.C. Cir. No. 12-1258). Th at case, which challenged the Third Reconsideration Order in the administrative proceedings below (an order not at issue in Windstream’s case or any of the other cases consoli- dated before this Court), was dismi ssed by the D.C. Circuit on December 6, 2012. Additionally, as listed in Petitioners’ Joint Prel iminary Brief at xxii, a previous order arising from one of the administrative proceedings below is before the Ninth Circuit in Ronan Telephone Co. et al. v. FCC (9th Cir. No. 05-71995). Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 7 vii GLOSSARY ABC Plan America’s Broadband Connectivity Plan APA Administrative Procedure Act ARC Access Recovery Charge CAF Connect America Fund FCC or Commission Federal Communications Commission FNPRM Further Notice of Proposed Rulemaking ICC Intercarrier Compensation ILEC Incumbent Local Exchange Carrier IP Internet Protocol IXC Interexchange Carrier LEC Local Exchange Carrier NPRM Notice of Proposed Rulemaking Order USF/ICC Transformation Order, FCC Order No. 11-161, 26 FCC Rcd. 17663 (2011) PSTN Public Switched Telephone Network Second Reconsideration Second Order on Reconsideration, Order FCC Order No. 12-47, 27 FCC Rcd. 4648 (2012) TDM Time-Division Multiplexing USF Universal Service Fund VoIP Voice over Internet Protocol (also called VoIP-PSTN) Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 8 JURISDICTIONAL STATEMENT Windstream1 seeks review of the FCC’s S econd Order on Reconsideration in its Connect America Fund proceeding, FCC Order No. 12-47, 27 FCC Rcd. 4648 (2012) (“Second Reconsideration Order” ) (JA__-__), which is not addressed by any of the other petitions in this consolidated case, as well as the underlying USF/ICC Transformation Order, FCC Order No. 11-161, 26 FCC Rcd. 17663 (2011) (“Order” or “USF/ICC Tr ansformation Order”) (JA__-__). Windstream adopts the jurisdictional st atement in Petitioners’ Joint Prelimi- nary Brief, but adds the following: The USF/ICC Transformation Order was published in the Federal Regis ter on November 29, 2011. 76 Fed. Reg. 73,830. Windstream timely sought reconsideration on December 29, 2011. JA__; see 47 C.F.R. § § 1.4(b), 1.429(d). The FCC’s Second Reconsideration Order, which finally disposed of Windstream’s pe tition, was published on May 29, 2012. 77 Fed. Reg. 31,520. Windstream timely petitioned for review on July 27, 2012. The D.C. Circuit transferred the case to this Court, which consolidated it with petitions for review of the USF/ICC Transformation Order. Th is Court has jurisdiction under 47 U.S.C. § 402(a) and 28 U.S.C. § 2342(1). Windstream participated below and is directly 1 Petitioners are Windstream Corporation, Windstream Communications, Inc., and Windstream Corporation’s wholly owned regulated subsidiaries. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 9 2 and adversely affected by the FCC’s reducti ons to intercarrier compensation in the Orders under review. ISSUE PRESENTED Long-distance telephone companies use the networks of Local Exchange Carriers (“LECs”) to connect their calls. They pay “originating access” charges to the LEC on whose network a long-distance call begins and “terminating” access to the LEC on whose network the call ends. In the USF/ICC Transformation Order, the FCC reduced the default rates for terminating access, but provided a recovery mechanism for LECs to make up some of the resulting lost revenue. The FCC declined to reduce originating access charges, deferring that issue to a further rule- making where, among other things, the FCC could consider an appropriate recovery mechanism. In the Second Reconsideration Order, however, the FCC announced that it had reduced originating access rates for intrastate Voice over Internet Protocol (“VoIP”) calls. Unlike with terminating access charges, however, it refused—without explanation—to provi de an accompanying revenue recovery mechanism. The issue presented is: Whether the FCC’s decision to cut originating access rates for intrastate VoIP traffic, without establishing a mech anism for recovering lost revenues or explaining why a recovery mechanism wa s unnecessary, was arbitrary, capricious, and/or inconsistent with reasoned decisionmaking. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 10 3 STATEMENT OF THE CASE AND FACTS I. Regulatory Framework A. Originati n g and Terminat i n g Access The facilities of long-distance carriers (also called Interexc hange Carriers or “IXCs”) typically do not reach all the way to their customers’ premises. Accord- ingly, to allow their customers to complete long-distance calls, IXCs use the local telephone networks of Local Exchange Carriers (“LECs”) on both ends of the call. NPRM ¶ 494 (JA__). When a customer ma kes (“originates”) a long-distance call, the LEC’s network is used to connect the customer to the IXC’s facilities. Likewise, IXCs typically use a LEC’s netw ork to reach the customer being called (the “terminating” end of the call). LECs are required to term inate calls delivered to them by IXCs. 47 U.S.C. § 251(c)(2) . And incumbent LECs (“ILECs”) like Windstream are obligated to provide “equal access” to their networks for originating calls, making them available to IXCs on the terms the ILEC affords its own affiliates. See 47 U.S.C. § 251(g). To compensate LECs for the use of their networks, IXCs pay “access” charges, also called intercarrier compensation (“ICC”). “Originating” access charges are paid to the LEC on whose network a long-distance call originates— i.e., where the caller is located. The caller generally is the LEC’ s customer for local telephone service but the IXC’s customer for long distance. Thus, for long- distance calls, the IXC—not the LEC—has a billing relationship with the caller. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 11 4 Pet’rs Preliminary Br. 16. As a result, compensation from IXCs is often the only way LECs can recover the cost of originating long-distance calls. On the other end of the call, the IXC pays “terminating” access charges to the LEC on whose network the call terminates— i.e., where the called party is. As the FCC recognized, “the most acute inter carrier compensation problems, such as arbitrage” and billing disputes, historically have arisen in connection with termi- nating rather than originating access. Order ¶ 800(JA__). B. Intersta t e and Intrast a t e Access Charges LECs are permitted to charge for originating and terminating access at default or “tariff ” rates set by regulators. The FCC sets default access charges for interstate calls, while state commissions historically have set rates for intrastate calls. NPRM ¶ 494 n.697(JA__). Intrastate access rates, set by state regulators, generally are significantly higher than interstate rates. NPRM ¶ 494 (JA__). States use the higher intrastate rates—which ma y be 13.5 cents per minute or more, compared to interstate rates that can be less than one cent per minute—to subsidize local telephone service, offsetting the be low-market, regulated rates LECs must charge some customers. See id. ; Qwest Corp. v. FCC , 258 F.3d 1191, 1196 (10th Cir. 2001). Intrastate ICC revenues thus help offset the losses ILECs incur providing service to high-cost rural customers (e.g. , where the LEC might need miles of Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 12 5 poles and wires for a single customer). As “carriers of last resort,” ILECs are required to serve those customers, but statutory and regulatory constraints limit their ability to adjust rates to reflect the higher costs. See Order ¶ 862(JA__). ICC has provided critical support, allowing ILECs to serve high-cost areas where there is otherwise “no business case” to o ffer service at regulated rates. Id. ¶ ¶ 862, 948 & n.1916(JA__, __). C. VoIP Traffic Traditionally, telephone traffic has traveled on the Public Switched Telephone Network (“PSTN”) in Time-Div ision Multiplexing (“TDM”) format. Pet’rs Preliminary Br. 6. More recently , some providers have begun to transmit traffic in Internet Protocol (“IP”) form at. A single call can be transmitted in different formats as it traverses telephone networks: It may originate in TDM format on one carrier’s network but be c onverted into IP by the time it terminates on another (“TDM-IP” calls). Conversely, a call may be gin in IP and end in TDM format (“IP-TDM” calls). In these proceed ings, the FCC classified both kinds of calls as Voice over Internet Protocol (“Vo IP”) traffic. Order ¶ 940(JA__); Second Reconsideration Order ¶ 28 & n.69(JA__). This traffic is sometimes called “VoIP- PSTN” traffic. Order ¶ 940(JA__). From a cost-recovery standpoint, it makes no difference to an originating LEC that a TDM call is later converted into IP on another carrier’s network. The Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 13 6 cost of originating the call is the same. Indeed, the LEC has no reliable way of knowing that a call is converted into IP after it leaves the LEC’s hands. Rather, to determine what portion of the traffic it originates is VoIP traffic, the LEC must rely on IXCs to report those figures. See Order ¶ 948 n.1917(JA__) (citing LEC comments). IXCs have traditionally paid intrastate originating access rates for intrastate VoIP calls. Very few (if any) disputes ha ve arisen, especially with respect to TDM-originating calls. Second Reconsideration Order ¶ 33(JA__). Like terminat- ing access generally, however, VoIP terminating access has been the subject of significantly more “disputes and instan ces of non-payment or under-payment.” Id. II. Proceedin gs Below A. The Notice of Proposed Rulema ki n g On February 9, 2011, the FCC issued its Notice of Proposed Rulemaking (“NPRM”), proposing to reduce or elimin ate per-minute ICC in the long term. NPRM ¶ 40(JA__). The FCC emphasized, however, that it would “avoid sudden changes or ‘flash cuts’ in [its] policies, acknowledging the benefits of measured transitions that enable stakeholders to adapt to changing circumstances and minimize disruption.” Id. ¶ 12(JA__); see id. ¶ 17(JA__) (“We do not propose any ‘flash cuts,’ but rather suggest transitions and glide paths that . . . facilitate adapta- tion . . . .”); id. ¶ 533(JA__) (“[I]t is important for any transition to be gradual Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 14 7 enough to enable the private sector to react and plan appropriately.”). To that end, the NPRM “propose[d] to adopt a mechan ism for recovery” of lost revenues to mitigate the impact of reducing ICC. Id. ¶ 43(JA__); see id. ¶ 34 fig.3(JA__) (transitional step of “[a]dopt[ing] framewo rk for long-term ICC reform, including glide path and recovery mechanisms”). The NPRM expressed the FCC’s inte nt to encompass VoIP traffic in particular in its rulemaking. NPRM ¶ 608(JA__). Because the FCC had previous- ly declined to address VoIP ICC, “dispu tes increasingly have arisen among carriers and VoIP providers regarding intercarri er compensation for VoIP traffic.” Id. ¶ 610(JA__). According to the NPRM, di fferent carriers took diametrically op- posed positions on VoIP access charges, with so me contending that VoIP “traffic is subject to the same intercarrier compensa tion obligations as any other voice traf- fic,” while “other carriers conte nd no compensation is required.” Id. B. The ABC Plan In response to the NPRM, a group of carriers proposed a negotiated compro- mise plan for reform, called America’ s Broadband Connectivity Plan or “ABC Plan.” Letter from Robert W. Quinn, Jr. et al., Attachment I, Framework of the Proposal (July 29, 2011) (JA__) (“ABC Plan Framework”) . The ABC Plan pro- posed gradually reducing terminating ICC rates along a “glide path.” ABC Plan Framework 9(JA__). Intrastate terminati ng rates would be reduced to interstate Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 15 8 levels over about two years, then trans itioned to a uniform rate of $0.0007 per minute over the following three years. Id. at 11(JA__). Those proposed reductions were “i nextricably linked” to accompanying revenue recovery mechanisms: Carriers would be “able to reduce their reliance on implicit support from intercarrier compensation” by turning to “support from new explicit mechanisms.” ABC Plan Framewo rk 9(JA__). Those included an “access replacement mechanism” allowing carriers to recover part of their lost ICC revenue from the universal service fund (“USF”). Id. The “access repl acement mechanism is necessary to ensure that the intercarrier compensation reforms do not jeopardize the operations of broadband providers th at rely on intercarrier compensation revenues for implicit support of networks in high-cost areas.” Id. at 12(JA__). The ABC Plan proposed not reducing originating access charges immediate- ly, instead providing that they be capped at current levels. As the Plan’s propo- nents explained, originati ng access did not present the same pressing problems as terminating access because “most existing ar bitrage schemes . . . take advantage of widely disparate terminating rates in different jurisdic tions.” Joint Comments of AT&T et al. 22 (Aug. 24, 2011) (JA__) (empha sis added). If the FCC were to reduce originating access rates, it would “need to addre ss rate rebalancing through potential end-user rate increases and additional recovery from the transitional access replacement mechanism.” Id. at 26(JA__). Those demands might “make it Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 16 9 more difficult to keep the access replacement fund at a manageable size” and “threaten the USF budget.” Id. at 22, 27(JA__, __). “The need to address such recovery,” the Plan’s proponents conclu ded, “is an important reason why the Commission should not reform originating access charges at this time.” Id. at 27(JA__). C. The USF/ICC Transformation Order 1. The USF/ICC Transformation Orde r targeted “bill-and-keep”—where each carrier bills its own customers a nd keeps the full amount without paying compensation to other carriers—as the ev entual “default met hodology” for ICC, which would eliminate ICC altogether. Order ¶ 736(JA__); see Pet’rs Preliminary Br. 34. But the Order provided for a staged transition, “limiting reductions at this time to terminating access rates,” because that is “whe re the most acute intercarrier compensation problems, such as arbitrage, currently arise.” Id. ¶ 800(JA__) (emphasis added). The Order largely “a dopt[ed] the transition proposed in the ABC Plan.” Id. ¶ 801 n.1497(JA__). Terminating charges thus will be reduced from intrastate to interstate levels in two steps, followed by a multi-year transition to a flat rate of $0.0007/minute, and eventually to bill-and-keep ( i.e., zero). Id. ¶ ¶ 739, 800-804 & fig.9 (JA__, __-__). 2 That gradual transition was necessary “to 2 The Order adopted slightly different transitions and recovery mechanisms for price-cap LECs and rate-of-return LECs. We focus on price-cap LECs like Wind- stream, although the distinctions are largely irrelevant here. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 17 10 avoid flash cuts and enabl[e] carriers su fficient time to adjust to marketplace changes and technological advancements.” Id. ¶ 802(JA__). The Order established a concomitan t two-pronged mechanism to allow ILECs to recoup a portion of lost terminating ICC revenues (called the “Eligible Recovery”). Order ¶ ¶ 847-932(JA__). Fi rst, ILECs may add an Access Recovery Charge (“ARC”) to end users’ monthly bills, subject to prescribed caps. Id. ¶ 852(JA__). Second, ILECs may receive explicit support from the Connect Amer- ica Fund (“CAF”) to the extent their E ligible Recovery exceeds the permissible ARC. Id. ¶ ¶ 853, 917-920(JA__, __-__). 3 The FCC opened the recovery mecha- nism to all ILECs, recognizing that “regul atory constraints on their pricing and ser- vice requirements otherwise limit their ability to recover their costs.” Id. ¶ 862(JA__). As carriers of last resort, ILECs “have limited control over the areas or customers that they serve, having been required to deploy their network in areas where there was no business case to do so ab sent subsidies, including the implicit subsidies from interca rrier compensation.” Id. Denying recovery, the FCC de- clared, “would represent a flash- cut for price-cap LECs, which is inconsistent with our commitment to a gradual transition and could threaten their ability to invest in extending broadband networks.” Id. ¶ 890(JA__). 3 The CAF was established by the USF por tion of the Order to promote broadband deployment. See Order ¶ ¶ 115-120(JA__-__); Pet ’rs Preliminary Br. 26-27. Price-cap ILECs accepting ICC recovery from the CAF must use that support to build and operate broadband ne tworks. Order ¶ 918 (JA__). Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 18 11 Consistent with the ABC Plan, the Orde r stated repeatedly that it was not reducing originating access charges, explaining that terminating access was “the principal source of arbitrage problems to day” and that the FCC’s “concerns . . . with respect to network inefficiencies, arbitrage, and costly litigation are less pressing with respect to originating access.” Order ¶ ¶ 35, 777(JA__, __); see also id. ¶ ¶ 653, 739, 764, 778, 800, 818, 922, 928, 1296-1298, 1301(JA__, __, __, __, __, __, __, __, __-__, __). Deferring orig inating access reductions also helped “manage the size of the acce ss replacement mechanism.” Id. ¶ 800(JA__). The FCC also found that the comments be fore it did “not provide a sufficient basis . . . to proceed at this time” with a recovery mechanism for originating access. Order ¶ 1301(JA__). The FCC issued a Further Notice of Proposed Rulemaking (“FNPRM”) “seek[ing] comment on th[e] final transition for all originating access charges.” Id. ¶ 1298 (JA__); see id. ¶ ¶ 1297-1305(JA__-__) (relevant section of FNPRM). For the time being, the FCC cappe d interstate and intrastate originating access rates for price-cap LECs at existing levels. Id. ¶ 800 n.1494 (JA__). 2. Focusing on VoIP traffic in particul ar, the FCC opined that there were “significant billing disputes and litigati on,” with many providers paying less-than- full ICC rates or even nothing at all. Order ¶ 937-938(JA__-__). In response, the FCC immediately set the default access rates for toll VoIP traffic, wh ether inter- or Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 19 12 intrastate, “equal to [the] interstate acce ss rates applicable to non-VoIP traffic.” Id. ¶ 943-944 (JA__-__). The FCC did not retreat from its repeated statements that it was addressing terminating access only, leaving originating access for another rulemaking. Nor did it suggest that its rationales for deferring originating access reductions, see p. 11, supra, did not apply to VoIP originating access. To the contrary, when addressing VoIP access charges, th e Order consistently referred to terminating access: Every example of VoIP ICC arb itrage, litigation, and confusion involved terminating access.4 So did the FCC’s examples of how VoIP ICC would work under the Order.5 The Order’s only mention of originating access specific to VoIP came in one sentence stating that, under the new rules, “toll VoIP-PSTN traffic will be subject to charges not more than originating[FN] and terminating interstate access rates.” Order ¶ 961(JA__). The appended footnote clarified that “originating access charges” would apply “in this context, subject to the phase-down and elimination 4 See Order ¶ 938(JA__) (Some “terminating ca rriers state that they receive no in- tercarrier compensation payments at all for [VoIP] traffic,” while “some providers cite asymmetries in payments where . . . some VoIP providers’ wholesale carriers charge full access charges while refusing to pay them to the terminating LEC.”) 5 See Order ¶ 942(JA__) (“We . . . adopt a symmetrical framework for VoIP-PSTN traffic, under which providers that benefit from lower VoIP-PSTN rates when their end-user customers’ traffic is terminated ” on others’ networks “also are restricted to charging the lower VoIP-PSTN rates when other providers’ traffic is terminated” on their networks.). Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 20 13 of those charges pursuant to a transition to be specified in response to the FNPRM .” Id. ¶ 961 n.1976(JA__) (emphasis added). D. Proceeding s on Reconsider a t ion 1. Windstream ’ s Petition for Reco nsidera t ion or Clarific a t ion After the Order’s release, some carrier s insisted that the Order reduced both terminating and originating access rates for intrastate VoIP traffic, despite the FCC’s repeated statements that it wa s “limiting reform to terminating access charges” and “need[ed] to further evaluate the timing, transition, and possible need for a recovery mechanism” for origin ating access. Order ¶ 739(JA__). Windstream (and others) petitioned the FCC to clarify “that the Order does not apply to, and is not intended to displace, intrastate originating access rates for PSTN-originated calls that are terminated over VoIP facilities” (or to reconsider that position). Petition for Reconsideration and/or Clarification 21 (Dec. 29, 2011) (“Windstream Petition”) (JA__). Windstrea m explained that nearly all disputes over VoIP ICC involved terminating access, not originating access. Id. at 24(JA__). Thus, as with non-VoIP traffi c, it was appropriate to address only terminating access rates now and defer originating access issues. Moreover, the FCC had conceded it lacked a sufficient record regarding how to structure changes to originating access and any accompanying recovery mechanism. Id. at 22- 23(JA__-__). There was no reason to carve out intrastate VoIP calls from the Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 21 14 Order’s repeated and unqualif ied statements that it was not reducing originating access rates. Id. at 24(JA__). The petition argued that “flash-cutting on e category of intrastate originating access rates to interstate levels” would “conflict with the Commission’s goal of ‘a measured, predictable transition’ and ‘transitional recovery’ for lost access revenues.” Windstream Petition 27(JA__) (quoting Order ¶ 917). “[A]t the very least,” the petition urged, the FCC “would need to permit LECs” a “mechanism to recover lost originating access revenues.” Id. at 28(JA__). Even carriers that opposed Windstream’s petition recognized the need to avoid a disruptive flash-cut. AT&T urged that all VoIP traffic should be subject to interstate originating access rates, but “ag ree[d] with Windstream . . . that LECs should be permitted to use th e recovery mechanism to recover access revenues that are lost as a result of ” that change. AT&T Comments 38-39 (Feb. 9, 2012) (JA__- __). Verizon similarly acknowledged Wi ndstream’s “legitimate concern” over revenue cuts “not accounted for in the USF-ICC Transformation Order ’s access revenue recovery mechanisms.” Verizon Ex Parte 1 (Mar. 16, 2012) (JA__). 2. The Second Reconsideration Order The FCC denied Windstream’s petiti on. Second Reconsideration Order ¶ ¶ 27-42(JA__-__). The FCC acknowledged that, in discussing VoIP ICC, the Order gave examples only of terminating charges. Id. ¶ 31(JA__). But it stated Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 22 15 that the Order’s one “reference to both ‘o riginating and terminating’ interstate access rates” “provide[d] clarity” that the new VoIP ICC framework applied to originating as well as terminating access. Id. ¶ 31 n.86(JA__) (citing Order ¶ 961); see pp. 12-13, supra. The FCC denied that the Order’s “general intent to address reductions to originating access” at a late r date (and repeated statements to that effect) applied to VoIP traf fic. The FCC asserted that it adopted a “distinct” framework for VoIP “based on its findings specific to that traffic.” Id. ¶ 31(JA__). The FCC noted Windstream’s argument th at “setting default rates equal to intrastate originating access [is] necessary to avoid ‘flash cuts’ or ‘reductions’ ” in ICC. Second Reconsideration Order ¶ 32(JA __). But it asserted that the argument “assume[d] that LECs were receiving intrasta te originating access for intrastate toll VoIP traffic under the status quo ” —an “assumption . . . not reflected in the U S F /ICC Transformation Order itself,” which was premised on the contrary belief that all VoIP ICC “was widely subject to dispute and varied outcomes.” Id. The FCC nonetheless conceded that the premise it attributed to the prior Order was erroneous, and that Windstream was factually correct: “[M]arketplace evidence in the record on reconsideration demonstrate[ d] the accuracy of that position in many cases,” and numerous commenters had shown they would “experience annual reductions in originating access revenues” if intrastate VoIP originating access were cut to interstate levels. Second Reconsideration Order Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 23 16 ¶ ¶ 32-33(JA__-__). There were also “f ewer disputes and instances of non- payment or under-payment of origination charges billed at intrastate originating ac- cess rates . . . , particularly for calls that originated in TDM format.” Id. The wide- spread dispute noted in the prior Order was limited to terminating access. See id. Despite admitting that the Order’s premise regarding the status quo for VoIP access charges was erroneous, the FCC declined to change course. Instead, it amended its rules to state that intrastate VoIP calls are subject to interstate originating access rates. Second Reconsideration Order App. A(JA__) (amending 47 C.F.R. § 51.913(a)(1)). At the same time, the FCC temporarily suspended the rate reduction, allowing LECs to resume charging intrastate originating access rates until July 2014—at which point thos e rates would again be flash-cut to interstate levels. Id. ¶ 35(JA__). That suspension was prospective only, leaving unredressed the six months—from the original Order’s effective date until the suspension took effect—during which in trastate VoIP origin ating access rates had already been flash-cut to interstate rates. See id. ¶ 52(JA__). The FCC also refused Windstream’s reques t that the agency at least provide a mechanism for LECs to make up lost Vo IP originating access revenues, as it had done when cutting terminating access rates. It offered no explanation other than to state, in one sentence of a 23-line footnote, that it did “not adopt the Frontier- Windstream Petition’s proposal that, ‘the Commission, at the very least, would Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 24 17 need to permit LECs to use the recovery mechanism to recover lost originating access revenues.’ ” Second Reconsideration Order ¶ 35 n.97(JA__). Immediately afterward, the FCC added that “[r]elated issues, such as advocacy regarding the elimination of equal access obligations du e to reduced originating access revenues are more appropriate for consideration in the context of a rulemaking proceeding or a forbearance petition.” Id. The FCC did not dispute that the Order and Second Reconsideration Order were themselves part of a rulemaking proceeding. SUMMARY OF ARGUMENT Throughout these proceedings, the FCC emphasized the need for gradual transitions, avoiding flash-cuts, and providing mechanisms for ILECs to recover losses that result when access charges are cut to interstate rates—particularly given ICC’s role in supporting service for high-cost ( e.g. , rural) customers. For termi- nating access, the FCC adhered to those principles, pairing gradual reductions in terminating rates with a revenue recovery mechanism. For originating access generally, the FCC applied those principles, declining to cut intrastate originating access until it could develop, in another proceeding, sufficient information to assess a recovery mechanism. A. But the FCC abandoned those principles with respect to originating access for intrastate VoIP calls, subjecting them to an unexplained flash-cut. The FCC’s original Order did not justify that result. In fact, the Order did not even Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 25 18 appear to address VoIP originating access, much less make findings specific to it. The FCC eventually conceded that its rationale for immediate reform of terminating access (that it was rife with disputes) was absent for VoIP originating access. And the FCC nowhere justifie d immediately reducing VoIP originating access rates, rather than addressing them later with originating access generally. A more obvious failure to provide the reasoned decisionmaking required by the Administrative Procedure Act (“APA” ) is hard to imagine. B. The FCC’s refusal to provide a revenue recovery mechanism to compensate for reductions to originating access rates for VoIP fa res no better. The FCC recognized the critical role of ICC in supporting high-cost customers. It then slashed ICC revenues for VoIP originating access. But, unlike with terminating access, the FCC provided no mechanism to allow ILECs to mitigate the revenue losses that resulted. And it offered no reason for that omission. The FCC’s sole explanation was that it was “not adopt[i ng]” a recovery mechanism. Under the APA, however, an agency cannot simply announce its decision; it must offer a reasoned rationale for its chosen result. The FCC failed to do so here. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 26 19 ARGUMENT THE FCC’ S DECISION TO FLASH-CUT ORIGINATING ACCESS CHARGES FOR INTRASTATE V OIP TRAFFIC WITHOUT PROVIDING ANY REVENUE RECOVERY MECHANISM WAS ARBITRARY , CAPRICIOUS, AND CONTRARY TO REASONED DECISIONMAKING Under the Administrative Procedure Act (“APA”), courts must “hold unlaw- ful and set aside agency action” that is “arbitrary, capricious, an abuse of discre- tion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). APA review may be “narrow in scope, but [it] is still a probing, in-depth review.” Sorenson Commc’ns, Inc. v. FCC , 567 F.3d 1215, 1221 (10th Cir. 2009). The Court must ensure that, “[w]hen an administrative ag ency sets policy, it . . . provide[s] a rea- soned explanation for its action.” Judulang v. Holder , 132 S. Ct. 476, 479 (2011). An agency must “ ‘examine the releva nt data and articulate a satisfactory explanation for its action.’ ” FCC v. Fox Television Stations, Inc. , 556 U.S. 502, 513 (2009). It “must treat si milar cases in a similar manner unless it can provide a legitimate reason for failing to do so.” Indep. Petroleum Ass’n of Am. v. Babbitt , 92 F.3d 1248, 1258 (D.C. Cir. 1996). It must “consider re sponsible alternatives to its chosen policy and . . . give a reasoned explanation for its rejection of such alternatives.” Am. Radio Relay League, Inc. v. FCC , 524 F.3d 227, 242 (D.C. Cir. 2008). And it must “engage the arguments raised before it.” NorAm Gas Trans- mission Co. v. FERC , 148 F.3d 1158, 1165 (D.C. Cir. 1998). Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 27 20 The FCC failed here on all counts. It gave no explanation in its original Order for flash-cutting intrastate VoIP originating access rates to much-lower interstate rates. Indeed, the Order and accompanying rules—which the FCC felt compelled to amend in the Second Reconsideration Order—did not make clear that the FCC even had taken such a step. Nor did the FCC explain why it was flash- cutting VoIP originating access with no m eans of offsetting lost revenue, even though it subjected terminating access to a gradual transition with a recovery mechanism that cushions revenue losses. The FCC compounded its error on reconsideration. While clarifying that it intended to cut VoIP originating access rates, the FCC again failed to explain wh y LECs should be denied the same transi- tional glide path—with accompanying opport unity to recover lost revenue—that the FCC considered to be essential when reducing terminating access charges. A. The FCC Failed To Justif y Its D ecision To Reduce Originating Access Rates for Intrasta t e VoIP The heart of the “reasoned decisionmak ing” required by the APA is the agency’s explanation of what it did a nd why. Here, the FCC provided no such explanation for reduc ing intrastate VoIP originating access rates to interstate levels. 1. For terminating access, the FCC found that widespread arbitrage problems and billing disputes justified its deci sion to fix rates at interstate levels, using a multi-stage phase-down that included a mechanism for recovering lost Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 28 21 revenues. Order ¶ 739(JA__). For originating access, the FCC found no such grounds and found it lacked sufficient information to create a recovery mechanism; it therefore declined to reduce intrastate originating access rates. Id. ¶ ¶ 35, 777(JA__, __). But the FCC, with no rationale, imposed a flash-cut reduction on one type of originating access—VoIP orig inating access—reducing those rates to interstate levels with no recovery mechanism. That unexplained trajectory cannot be sustained under the APA. Indeed, it was far from clear that the Order had reduced VoIP originating access. The Orde r’s substantive discussion of VoIP access charges revolved entirely around terminating access. See pp. 12-13, nn. 4- 5, supra. Originating access was mentioned just once—and there the FCC de- clared that VoIP originating access char ges would be “phase[d]-down” in the future “pursuant to a transition to be speci fied” in another rulemaking. Order ¶ 961 & n.1976(JA__); see pp. 12-13, supra. It is hard to read that as saying the FCC was consciously choosing to flash-cut VoIP originating rates. The FCC has claimed that the Order’s language discussing VoIP generally (and accompanying rule) was broad enough to encompa ss VoIP originating access charges. See Second Reconsideration Order ¶ 31 nn.86-87(JA__ ); pp. 14-15, supra. But APA review is not an exercise in linguistic possib ilities. The “agency must cogently explain w h y it has exercised its discretion in a given manner,” Motor Vehicle Mfrs. Ass’n of U.S. v. St ate Farm Mut. Auto. Ins. Co. , 463 U.S. 29, 48 Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 29 22 (1983) (emphasis added), by “provid[ing] a reasoned e xplanation for its action,” Judulang , 132 S. Ct. at 479. The Order’s failure even to state clearly that the FCC was reducing VoIP originatin g access rates forecloses any conclusion that the Order adequately spelled out why the FCC was doing so. Nor does the Order reconcile its (putative) decision to reduce VoIP origi- nating access with the FCC’s repeated st atements that any action on originating access was being deferred to a further rulemaking proceeding. It was necessary to postpone originating access reform, the Order stated, because the submitted comments did “not provide a sufficient basi s . . . to proceed at this time”; the FCC thus requested additional comments on the appropriateness of a revenue recovery mechanism for originating access as well as “how such recovery should be imple- mented.” Order ¶ 1301(JA__); see p. 11, supra. The Order nowhere explains how the record was nonetheless sufficient to reduce VoIP originating access rates. 2. The FCC’s attempted explanation in the Second Reconsideration Order exacerbated the error. The FCC a sserted that the initial Order’s general statements about deferring originating acce ss reform did not apply to VoIP because the Order’s VoIP discussion was based on “f indings specific to that traffic.” Second Reconsideration Order ¶ 31(JA__). But the Order did not contain any findings specific to VoIP originating access. The Second Reconsideration Order therefore construed the FCC’s prior Order as finding that VoIP ICC generally was Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 30 23 subject to dispute, adding that the FCC “d id not reach a different conclusion in the case of originating access.” Id. ¶ 32(JA__). But that does not constitute a determination that originating VoIP (and not just terminating) was in fact the subject of dispute. Neither Order iden tifies any determination to that effect. And the proceedings on reconsideration made clear that any such determina- tion would have been incorrect. Commenter s on both sides agreed that, as with non-VoIP or traditional telephony, VoIP originating access did not present the same problems as terminating access (especially for calls originated on a TDM network). Windstream explained that “the vast majority” of VoIP ICC disputes concerned “the termination of VoIP-PSTN calls.” Windstream Petition 24(JA__). And Verizon (which opposed Windstream’s petition) concurred that “[b]efore the Order , intercarrier compensation disputes were rare— or even non-existent —with respect to intrastate originating access charges for TDM-IP calls.” Verizon Ex Parte, White Paper 7 (Mar. 23, 2012) (JA__) (emphasis added). The FCC therefore found on reconsideration that “there were fewer disputes and instances of non-payment or under-payment of . . . intrastate originating access rates for intrastate toll VoIP traffic than was the case for terminating charges for such traffic.” Second Reconsideration Orde r ¶ 33(JA__). That is precisely the same conclusion the FCC reached for non-VoIP traffic—that terminating access was the “principal source” of ICC problems, while “concerns . . . are less pressing Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 31 24 with respect to originating access.” Or der ¶ ¶ 35, 777(JA__, __). For that very reason, the FCC deferred any change to non-VoIP originating access. Id. ¶ 777 (JA__). But it failed to “proffer[ ] an explanation for why [VoIP originating access] should be treated differently.” Prometheus Radio Project v. FCC , 373 F.3d 372, 411 n.41 (3d Cir. 2004), cert. denied, 545 U.S. 1123 (2005). Instead, confronted with the patent error in its prior assumption that VoIP originating access—like terminating access and unlike originating access generally—was rife with dispute, the FCC retreated to vague platitudes about the n eed to “mov[e] away from reliance on ICC revenues.” Second Reconsideration Order ¶ 35(JA__). But the desire to move away from ICC revenues applies equally to non-VoIP traffic. See Order ¶ 736(JA__). It provides no ba sis for singling out VoIP originating access for a flash-cut reduction before the rulemaking process on originating access has run its course. B. The FCC’s Failure To Provide a Revenue Recovery Mechanism Was Arbitrar y , Capricious, a nd Inconsiste n t with Reasoned Decisionma king 1. In the NPRM and the USF/I CC Transformation Order, the FCC repeatedly emphasized its “commitment to a gradual transition” toward bill-and- keep and corresponding opposition to any “flash-cut” that might “threaten [LECs’] ability to invest in extending broadband networks.” Order ¶ 890(JA__); NPRM ¶12 (“we intend to avoid sudden change s or ‘flash cuts’ ”), ¶ 17 (“We do not Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 32 25 propose any ‘flash cuts,’ but rather suggest transitions and glide paths . . . .”) (JA__, __). 6 Correspondingly, when the FCC reduced terminating access charges, it emphasized the need for a recovery m echanism to offset the resulting revenue loss. Order ¶858 (JA__) (“Predictable r ecovery during the intercarrier compen- sation reform transition is particularly important to ensure that carriers ‘can maintain/enhance their networks while still offering service to end-users at reason- able rates.’ ”). That recovery mechanis m is critical, the Order recognized, because statutory and regulatory constraints prevent ILECs from raising end-user rates to compensate for decreased ICC revenues. Id. ¶ 862-863(JA__-__); p. 10, supra.7 The FCC thus paired reductions in terminating access rates with a contemporane- ous recovery mechanism. Consistent with those principles, Windstream urged the FCC that, if it cut VoIP originating access rates, it should pr ovide a transitional mechanism allowing 6 See also Order ¶ 802 (“transition periods strike the right balanc e between our commitment to avoid flash cuts and enab ling carriers sufficient time to adjust”), ¶ 809 (“a flash cut would entail significant market disruption”), ¶ 870 (“commit- ment to a gradual transition with no flash cuts”), ¶ 875 (“we are committed to a gradual transition with sufficient predictability to enable con tinued investment”), ¶ 935 (“we are mindful of the need for a measured transition for carriers that receive substantial revenues from interca rrier compensation”) (JA__, __, __, __, __). 7 That concern is acute for originating access: Because the IXC, not the originating LEC, has a billing relationship with the ca ller for long-distance traffic, the LEC often has no way to recover offsetting revenues from the customer initiating the call. See pp. 3-4, supra. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 33 26 LECs to recover lost revenue. Windstream Petition 28(JA__). The FCC’s answer was “No,” unaccompanied by any reason for that decision. Instead, the FCC simply announced, in a single sentence, that it “d[id] not adopt the . . . proposal.” Second Reconsideration Order ¶ 35 n.97(JA__); pp. 16-17, supra. That non-explanation was legally deficien t. “[A]n agency’s action must be upheld, if at all, on the basis ar ticulated by the agency itself.” State Farm , 463 U.S. at 50. But here “the agency submitte d no reasons at all” for its decision to deny a recovery mechanism. Id. The FCC’s single sentence that it “d[id] not adopt” such a mechanism provides no insight into “the determinative reason for the final action taken.” Camp v. Pitts , 411 U.S. 138, 143 (1973). “[S]o conclusory a statement cannot substitute for a reasoned explanation.” Am. Radio , 524 F.3d at 241; see State Farm , 463 U.S. at 48 (agency action arbitrary where analysis of significant alternatives “was nonexistent”). 2. The absence of any explanation fo r refusing a recovery mechanism for VoIP originating access is particularly stark given the FCC’s rationale for declining to reduce originating access charges generally: Recognizing the need to provide a gradual transition with offsetting revenue, the FCC declined to cut non- VoIP originating access because (a) it lack ed sufficient information to properly consider and develop an originating access recovery mechanism and (b) budgetary constraints might make it difficult to fund an adequate mechanism at this time. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 34 27 Order ¶ ¶ 739, 1301(JA__, __); p. 11, supra. Rather than reduce originating rates now without a recovery mechanism, the FCC deferred both questions until it could resolve them together. But “the same rationale also app lies” to VoIP originating access. Promethe- us, 373 F.3d at 405. The FCC recognized that LECs currently receive intrastate originating access charges for VoIP traffic and that, as a result, a flash-cut to interstate levels will impose significant revenue losses. See pp. 15-16, supra. Those losses threaten to impair LECs’ ab ility not only to invest in broadband net- works, but also to maintain existing voice service in some high-cost areas. Even carriers opposing Windstream’s petition for reconsideration recognized that poten- tial impact, with AT&T “agree[ing] . . . th at LECs should be permitted to use the recovery mechanism to recover access revenues that are lost as a result of assessing only interstate originating access charges.” AT&T Comments 39(JA__). The FCC could have allowed ILECs to participate in a recovery mechanism (as the FCC provided for terminating access). Or it could have deferred any reduction in VoIP originatin g rates until a proper recovery mechanism could be developed (as the FCC did for originating access). At the very least, the FCC was required to “engage the argum ents raised before it,” NorAm , 148 F.3d at 1165, “consider [those] responsible alternatives to its chosen policy and . . . give a reasoned explanation for its rej ection of such alternatives,” Am. Radio , 524 F.3d at Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 35 28 242 (quotation marks omitted). But “the Commission never explain[ed] why” its policy of avoiding disruptive flash-cuts and pairing rate reductions with recovery decisions “should not also be reflected” in its approach to intrastate originating access for VoIP calls. Sinclair Broad. Grp., Inc. v. FCC , 284 F.3d 148, 164 (D.C. Cir. 2002). That failure is particularly perplexing given that, from the originating LEC’s perspective, TDM-IP VoIP calls are indistinguishable from TDM calls: On the LEC’s network they are TDM calls; they are converted to IP after they leave the LEC’s network, an event the LEC cannot even detect. See pp. 5-6, supra. The absence of reasoned decisionmaking on this issue is unmistakable. The FCC’s failure to justify its decisi on, however, is not inexplicable. In fact, the agency never contemplated that its original Order would cut VoIP origi- nating rates. The Order certainly did not attempt to justif y that action. Only on re- consideration did the FCC declare that the Order had done so—a pronouncement that prompted the FCC to revise its rules to reflect the change. See p. 16, supra. By that point, the FCC may have be lieved expanding the Order’s recovery mechanism to cover VoIP originating access too expensive. But “cheapness alone cannot save an arbitrary agency policy.” Judulang , 132 S. Ct. at 490. If the FCC could not provide an adequa te recovery mechanism, that militated in favor of deferring reductions to VoIP originating access rates until the FCC could devise one, as the FCC did for non-VoIP originati ng access. The Second Reconsideration Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 36 29 Order’s failure even to consider that a lternative is the paradigm of unreasoned decisionmaking. See State Farm , 463 U.S. at 48. 3. It is no answer that the FCC, on reconsideration, permitted LECs to resume charging intrastate rates on a temporary basis. See Second Reconsideration Order ¶ 35(JA__); p. 16, supra. That left in place the FCC’s arbitrarily imposed flash-cut to originating access for the six months between the original Order and the suspension’s effective date. The FCC’ s temporary stay, moreover, did nothing more than kick the flash-cut further down the road. Come July 2014, Windstream and other LECs will again be subject to an abrupt reduction in ICC charges. The FCC provided no justification for that bizarre flash-cut/flash-back/flash-cut approach. Nor can the FCC argue that Windstream’s objections are premature because the FCC may consider a recovery mechanism as part of the FNPRM. The rate cut ordered here “must rise or fall [bas ed] upon the FCC’s articulated policies at the time of the order .” Nat’l Ass’n of Broadcasters v. FCC , 740 F.2d 1190, 1201 (D.C. Cir. 1984) (emphasis adde d). It cannot be salvaged based on speculation that the FCC might later reverse course and adopt a recovery policy that, had it been adopted in the first place, might have rendered the decision defensible. Even dividing VoIP originating access rate reductions and revenue recovery into separate proceedings would be ar bitrary and unreasoned. For terminating Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 37 30 access, the Order paired gradual rate reductions with an explicit recovery mecha- nism. For non-VoIP originating access, the Order deferred rate reductions to permit consideration of reductions and recovery at the same time. See pp. 9-11, supra. But for VoIP originating access, th e FCC inexplicably separated the two, ordering a flash-cut in one proceeding while implying recovery might be addressed in another. “The Commission’s failure to provide any explanation for this glaring inconsistency is without doubt arbitrary a nd capricious,” and reinforces the need to set aside the flash-cut here. Prometheus , 373 F.3d at 411. That “wait-and-see” approach to recove ry would also defy the FCC’s recur- ring emphasis on the need for predictability in future ICC revenue streams. For terminating access, the FCC provided that ILECs could recoup revenues up to the “Eligible Recovery” limit. See p. 10, supra. The FCC emphasized that its recovery mechanism allowed price-cap LECs “to determine at the outset exactly how much their Eligible Recovery will be each year,” so as to “provide[ ] the necessary predictability” for carriers to i nvest in their networks. Order ¶ 879 & n.1697(JA__) (emphasis added). 8 Here, the FCC never offered any explanation for abandoning that approach with respect to VoIP originating access and subjecting carriers to ICC revenue losses with at best an uncertain possibility of future relief. 8 The recovery mechanism sets an Eligible Recovery baseline using 2011 revenues and provides for a 10% reduction of that amount each year, rather than requiring annual “true-up” adjustments to reflect varia tions in the actual volume of traffic. Order ¶ 879 (JA__). Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 38 31 Indeed, the FCC did not even commit to consider a recovery mechanism in some further rulemaking. After rejecting a recovery mechanism, the FCC asserted in the next sentence that “ [r]elated issues , such as . . . the elimination of equal access obligations,” are “mor e appropriate for consideration in the context of a rulemaking proceeding.” Second Reconsider ation Order ¶ 35 n. 97(JA__) (empha- sis added). But that statement refers onl y to “related issues” and does not promise implementation of the requested and denied recovery mechanism. The statement is also nonsensical; it fails to appreciate that the FCC was already engaged in “a rulemaking proceeding”—and a comprehensive one at that. Simply put, the FCC cannot—consistent with reasoned decisionmaking— repeatedly emphasize the necessity of gr adual transitions, revenue recovery, and certainty; implement those measures for one type of access; but then refuse to adhere to the same principles for another without explaining that departure. CONCLUSION This Court should vacate the FCC’s rule reducing intrastate VoIP originating access and remand with directions to pair any reduction with a recovery mecha- nism or, at the very least, to provide a reasoned explanation for its chosen course. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 39 December 10, 2012 Respectfully submitted, /s/ Jeffrey A. Lamken Jeffrey A. Lamken Counsel of Record Lucas M. Walker MOLOLAMKEN LLP The Watergate, Suite 660 600 New Hampshire Ave., N.W. Washington, D.C. 20037 (202) 556-2000 Counsel for Windstream Corporation and Windstream Communications, Inc. Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 40 CERTIFICATE OF COMPLIANCE 1. This brief complies with the type-vol ume limitations of Fed. R. App. P. 32(a)(7)(B)(ii) and this C ourt’s October 1, 2012 Order establishing a briefing schedule in Windstream’s case because th is brief contains 6,993 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii). 2. This brief complies with the typef ace requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in a proportiona lly spaced typeface using Microsoft Word 2003 in Times New Roman 14-point font. December 10, 2012 /s/ Jeffrey A. Lamken Jeffrey A. Lamken Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 41 CERTIFICATE OF SERVICE I hereby certify that, on December 10, 2012, per this Court’s order of October 17, 2012, I caused the foregoing doc ument to be electronically filed with the Court via e-mail. This document will be served on all parties in this case by the Notice of Docket Activity upon the Court’s docketing of the brief in the CM/ECF system. December 10, 2012 /s/ Jeffrey A. Lamken Jeffrey A. Lamken Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 42 ECF CERTIFICATION I hereby certify that with respect to the foregoing: 1. All required privacy redac tions have been made. 2. Hard copies of this Uncited Brief are not required to be submitted to the Clerk’s office. 3. This ECF submission was scanned fo r viruses with the most recent version of Windows Intune Endpoint Protection (version 1.141.1505.0, updated December 10, 2012) and, according to the program, is free of viruses. December 10, 2012 /s/ Jeffrey A. Lamken Jeffrey A. Lamken Appellate Case: 11-9900 Document: 01018964883 Date Filed: 12/10/2012 Page: 43