FEDERAL RESPONDENTS UNCITED RESPONSE TO THE JOINT UNIVERSAL SERVICE FUND PRINCIPAL BRIEF OF PETITIONERS IN THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT NO. 11-9900 IN RE: FCC 11-161 ON PETITIONS FOR REVIEW OF AN ORDER OF THE FEDERAL COMMUNICATIONS COMMISSION WILLIAM J. BAER ASSISTANT ATTORNEY GENERAL ROBERT B. NICHOLSON ROBERT J. WIGGERS ATTORNEYS UNITED STATES DEPARTMENT OF JUSTICE WASHINGTON, D.C. 20530 SEAN A. LEV GENERAL COUNSEL PETER KARANJIA DEPUTY GENERAL COUNSEL RICHARD K. WELCH DEPUTY ASSOCIATE GENERAL COUNSEL LAURENCE N. BOURNE JAMES M. CARR MAUREEN K. FLOOD COUNSEL FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 (202) 418-1740 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 1 i TABLE OF CONTENTS TABLE OF AUTHORITIES .......................................................................... iv  GLOSSARY .................................................................................................... ix  ISSUE PRESENTED ........................................................................................ 1  INTRODUCTION AND SUMMARY OF ARGUMENT ............................... 1  ARGUMENT .................................................................................................. 12  I.  THE FCC REASONABLY DETERMINED THAT THE STATUTE AUTHORIZES THE UNIVERSAL SERVICE REFORMS IN THE ORDER. ................................................................. 12  A.  The FCC Reasonably Concluded That It Has Authority Under Section 254 Of The Act To Condition Receipt Of Federal Universal Service Subsidies On Deployment Of Broadband-Capable Networks. ........................................................... 12  B.  The FCC Reasonably Concluded That It May Condition Federal Universal Service Subsidies On A Recipient’s Compliance With Clearly Defined Public Interest Obligations. ......................................................................................... 18  1.  The Order Does Not Fund Information Services Under Section 254 Of The Act. .................................................................. 19  2.  The Broadband Public Interest Obligation Is A Lawful Condition On Federal Universal Service Support. ......................... 20  3.  The Broadband Public Interest Obligation Does Not Constitute Title II Common Carrier Regulation. ............................ 22  C.  Petitioners’ Claim That The Order Violates Sections 254(e) And 214(e) Of The Act Is Not Ripe And Lacks Merit. ................................................................................................... 24  D.  The FCC Reasonably Ruled That It Also Has Authority Under Section 706 Of The 1996 Act To Require Recipients Of Federal Universal Service Support To Deploy Broadband Networks And Services. ...................................... 27  Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 2 ii II.  THE FCC REASONABLY ADOPTED A $4.5 BILLION ANNUAL FUNDING TARGET. ............................................................ 31  A.  The FCC’s Reasonable Predictive Judgment That The Order Will Provide Sufficient Support Is Entitled To Substantial Deference. ......................................................................... 33  B.  Petitioners’ Takings Claim Is Not Ripe And Lacks Merit. ................. 38  III.  THE FCC REASONABLY REFORMED SUPPORT MECHANISMS FOR RATE-OF-RETURN CARRIERS TO ELIMINATE WASTE AND INEFFICIENCY IN THE PRIOR SYSTEM. .................................................................................... 39  A.  The “Benchmarking Rule” Is Consistent With Section 254(b)(5) Of The Act And The FCC’s Other Rules. .......................... 40  B.  The FCC Did Not Engage In Impermissible Retroactive Rulemaking. ........................................................................................ 46  IV.  PETITIONERS’ CHALLENGES TO THE FCC’S NEW SUPPORT MECHANISMS FOR AREAS SERVED BY PRICE CAP CARRIERS ARE NOT RIPE AND LACK MERIT. .................................................................................................... 51  V.  PETITIONERS’ VARIOUS CHALLENGES TO THE OTHER REFORMS IN THE ORDER ARE WAIVED, NOT RIPE, AND LACK MERIT. ........................................................... 54  A.  The Order Lawfully And Reasonably Reduced Federal Universal Service Subsidies In Areas With Artificially Low End-User Rates. .......................................................................... 54  B.  The Order Reasonably Eliminated Federal Universal Service Support In Areas Served By An Unsubsidized Competitor. .......................................................................................... 58  C.  The New Competitive Bidding Mechanism For Distributing One-Time Support To Wireless Carriers Is Consistent With the Act. ..................................................................... 61  D.  The Order Did Not Eliminate Federal Universal Service Support For Remote Areas. ................................................................. 62  Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 3 iii VI.  THE FCC GAVE ADEQUATE NOTICE AND OPPORTUNITY TO COMMENT ON THE RULE CHANGES IN THE ORDER. .................................................................. 63  VII. THE FCC REASONABLY DECIDED TO ADDRESS UNIVERSAL SERVICE CONTRIBUTIONS IN A SEPARATE PROCEEDING. .................................................................. 66  CONCLUSION ............................................................................................... 69  Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 4 iv TABLE OF AUTHORITIES CASES  Abbott Labs. v. Gardner, 387 U.S. 136 (1967) ............................................... 54 Ad Hoc Telecomms. User Comm. v. FCC, 572 F.3d 903 (D.C. Cir. 2009) .................................................................................... 28 Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608 (5th Cir. 2000) .......................................... 8, 33, 35, 38, 39, 45, 47, 49, 50, 55, 59 Alto Eldorado P’ship v. County of Santa Fe, 634 F.3d 1170 (10th Cir. 2011) .......................................................................... 39 Ark Initiative v. U.S. Forest Serv., 660 F.3d 1256 (10th Cir. 2011) ........................................................................................... 57 AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999) .......................................................................................................... 31 Bechtel v. FCC, 957 F.2d 873 (D.C. Cir. 1992) .............................................. 50 Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988) (Scalia, J., concurring) ..................................................................... 48 Bowoto v. Chevron Corp., 621 F.3d 1116 (9th Cir. 2010) ............................................................................................................ 15 Cable & Wireless PLC v. FCC, 166 F.3d 1224 (D.C. Cir. 1999) .................................................................................... 10, 55 Cellco P’ship v. FCC, 700 F.3d 534 (D.C. Cir. 2012) ..................................................................................................... 24, 27 Cellnet Commc’ns, Inc. v. FCC, 149 F.3d 429 (6th Cir. 1998) ..................................................................................................... 64 Cellular Telecomms. Indus. Ass’n v. FCC, 168 F.3d 1332 (D.C. Cir. 1999) .................................................................................. 55 Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010) ............................................................................................................ 29 DirecTV, Inc. v. FCC, 110 F.3d 816 (D.C. Cir. 1997) ............................................................................................................ 48 Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989) .......................................................................................................... 39 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 5 v FCC v. Nat’l Citizens Comm. for Broad., 436 U.S. 775 (1978) ................................................................................................... 37 FCC v. Pottsville Broad. Co., 309 U.S. 134 (1940) ........................................ 67 FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944) ..................................... 39 FPC v. Texaco, 417 U.S. 380 (1974) .............................................................. 35 Franklin Savings Ass’n v. Dir., Office of Thrift Supervision, 934 F.2d 1127 (10th Cir. 1991) .............................................. 37 Globalstar, Inc. v. FCC, 564 F.3d 476 (D.C. Cir. 2009) ............................................................................................................ 64 Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C. Cir. 1977) ..................................................................................................... 35 Ill. Bell Tel. Co. v. FCC, 988 F.2d 1254 (D.C. Cir. 1993) ............................................................................................................ 39 In re Dawes, 652 F.3d 1236 (10th Cir. 2011) ................................................. 15 Landgraf v. USI Film Prods., Inc., 511 U.S. 244 (1994) .......................................................................................................... 47 Los Alamos Study Grp. v. U.S. Dept. of Energy, 692 F.3d 1057 (10th Cir. 2012) ............................................................. 25, 46, 63 Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d 1228 (10th Cir. 2004) .................................................................................. 31 Melcher v. FCC, 134 F.3d 1143 (D.C. Cir. 1998) .......................................... 60 NAB v. FCC, 740 F.2d 1190 (D.C. Cir. 1984) ................................................ 67 Nat’l Ass’n of Home Health Agencies v. Schweiker, 690 F.2d 932 (D.C. Cir. 1982) .................................................................... 30 Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005) .................................................... 31, 67 Nutraceutical Corp. v. Von Eschenbach, 459 F.3d 1033 (10th Cir. 2006) .................................................................................. 15 Nuvio Corp. v. FCC, 473 F.3d 302 (D.C. Cir. 2006) ......................... 26, 59, 64 Qwest Commc’ns Int’l, Inc. v. FCC, 240 F.3d 886 (10th Cir. 2001) ........................................................................ 25, 46, 54, 63 Qwest Commc’ns Int’l., Inc. v. FCC, 398 F.3d 1222 (10th Cir. 2005) ............................................................ 10, 16, 21, 31, 37, 56 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 6 vi Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2001) ..................................................................................... 2, 10, 13, 18, 56 Qwest Corp. v. FCC, 482 F.3d 471 (D.C. Cir. 2007) ..................................... 43 Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012) ............................................................................................................ 37 Rural Cellular Ass’n v. FCC, 588 F.3d 1099 (D.C. Cir. 2009) ................................................ 7, 31, 33, 35, 37, 47, 50, 58, 59, 66 Rural Cellular Ass’n v. FCC, 685 F.3d 1083 (D.C. Cir. 2012) .............................................................................................. 33, 35 Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215 (10th Cir. 2009) .............................................................................. 22, 43, 67 Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035 (10th Cir. 2011) .................................................................. 19, 42, 43, 46, 58 Sw. Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998) ............................................................................................................ 46 Tex. Office of Pub. Util. Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999) ......................................................................... 21, 33, 39 United States v. Am. Libraries Ass’n, Inc., 539 U.S. 194 (2003) ................................................................................................... 21 Vt. Pub. Serv. Bd. v. FCC, 661 F.3d 54 (D.C. Cir. 2011) ............................................................................................... 35, 52, 57 Williamson County Reg’l Planning Comm’n v. Hamilton Bank, 473 U.S. 172 (1985) ..................................................... 7, 39 WWC Holding Co. v. Sopkin, 488 F.3d 1262 (10th Cir. 2007) ........................................................................................ 22, 23, 25 STATUTES  5 U.S.C. §553(b) .............................................................................................. 63 5 U.S.C. §553(b)(3) ......................................................................................... 63 47 U.S.C. §152(b)....................................................................................... 9, 55 47 U.S.C. §154(j) ............................................................................................ 67 47 U.S.C. §155(c)(1) ................................................................................ 43, 44 47 U.S.C. §201 et seq. ....................................................................................... 5 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 7 vii 47 U.S.C. §214(e) ......................................................................... 10, 15, 24, 61 47 U.S.C. §214(e)(1) ....................................................................................... 24 47 U.S.C. §214(e)(1)(A) .......................................................................... 26, 27 47 U.S.C. §214(e)(2) ............................................................................ 5, 25, 61 47 U.S.C. §214(e)(3) ....................................................................................... 60 47 U.S.C. §214(e)(6) .................................................................................. 5, 25 47 U.S.C. §254 .................................................................................................. 2 47 U.S.C. §254(b)............................................................... 3, 13, 15, 16, 20, 69 47 U.S.C. §254(b)(1) ................................................................................ 66, 68 47 U.S.C. §254(b)(1)-(3) ................................................................................. 22 47 U.S.C. §254(b)(2) .............................................................. 3, 4, 6, 13, 16, 30 47 U.S.C. §254(b)(2)-(3) ................................................................................. 20 47 U.S.C. §254(b)(3) ............................................................................ 3, 13, 37 47 U.S.C. §254(b)(4) ................................................................................ 66, 68 47 U.S.C. §254(c)(1) .......................................... 3, 4, 14, 15, 16, 18, 19, 20, 26 47 U.S.C. §254(d)............................................................................................ 69 47 U.S.C. §254(e) ................................................................. 3, 7, 20, 24, 33, 37 47 U.S.C. §332(c)(3) ....................................................................................... 56 47 U.S.C. §405(a) ............................................................... 7, 19, 42, 46, 58, 64 47 U.S.C. §1302 ................................................................................................ 6 47 U.S.C. §1302(b)............................................................................... 6, 27, 28 REGULATIONS  47 C.F.R. §0.291 ............................................................................................. 44 47 C.F.R. §0.291(e) .................................................................................. 43, 44 47 C.F.R. §54.313(a)-(b) ................................................................................. 21 47 C.F.R. §54.314(a)-(b) ................................................................................. 21 Connect America Fund; High Cost Universal Service Support, 77 Fed. Reg. 30,411-01 (May 23, 2012) ...................................................................................................... 46 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 8 viii Universal Service-Intercarrier Compensation Transformation, 76 Fed. Reg. 49,401-01 (Aug. 10, 2011) ...................................................................................................... 65 ADMINISTRATIVE DECISIONS  Accipiter Communications, Inc., 28 FCC Rcd 391 (WCB 2013) ................................................................................................ 35 Allband Communications, 27 FCC Rcd 8310 (WCB 2012) ............................................................................................................ 35 Connect America Fund, 26 FCC Rcd 4554 (2011) ......................................... 21 Connect America Fund, 27 FCC Rcd 4235 (WCB 2012), aff’d in part and modified in part, Connect America Fund, 2013 WL 749737 (Feb. 26, 2013) ...................................... 42 Federal-State Joint Board on Universal Service, 16 FCC Rcd 11244 (2001) ............................................................................... 12 Federal-State Joint Board on Universal Service, 20 FCC Rcd 6371 (2005) ................................................................................. 25 High-Cost Universal Service Support, 23 FCC Rcd 8834 (2008), aff’d, Rural Cellular Ass'n v. FCC, 588 F.3d 1095 (D.C. Cir. 2009) .................................................................. 62 IP-Enabled Services, 20 FCC Rcd 10245 (2005), aff’d sub nom. Nuvio Corp. v. FCC, 473 F.3d 302 (D.C. Cir. 2006) ........................................................................................... 26 Preserving the Open Internet, 25 FCC Rcd 17905 (2010), pet. for review pending, Verizon v. FCC, D.C. Cir. No. 11-1355 ................................................................................. 30 Universal Service Contribution Methodology; A National Broadband Plan for Our Future, 27 FCC Rcd 5357 (2012) ................................................................................. 67 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 9 ix GLOSSARY 1996 Act The Telecommunications Act of 1996 Act The Communications Act of 1934 APA The Administrative Procedure Act ARC Access Recovery Charge COLR Carrier of Last Resort ETC Eligible Telecommunications Carrier FCC Federal Communications Commission FNPRM Further Notice of Proposed Rulemaking HCLS High-Cost Loop Support LEC Local Exchange Carrier NPRM Notice of Proposed Rulemaking SNA Safety Net Additive USF Universal Service Fund VoIP Voice over Internet Protocol WCB Wireline Competition Bureau Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 10 IN THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT NO. 11-9900 IN RE: FCC 11-161 ON PETITIONS FOR REVIEW OF AN ORDER OF THE FEDERAL COMMUNICATIONS COMMISSION FEDERAL RESPONDENTS UNCITED RESPONSE TO THE JOINT UNIVERSAL SERVICE FUND PRINCIPAL BRIEF OF PETITIONERS ISSUE PRESENTED Whether the Federal Communications Commission (“FCC”) lawfully reformed its universal service rules to efficiently enhance access to broadband in rural America. INTRODUCTION AND SUMMARY OF ARGUMENT The FCC, in the Order on review, took the necessary steps to modernize its universal service program. Finding that “[n]etworks that provide only voice service … are no longer adequate for the country’s communication needs,” Order ¶2 (JA__), the FCC reoriented the federal high-cost universal service program to support dual-use networks capable of Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 11 2 providing voice as well as broadband service to all Americans. See FCC Preliminary Br. 21-22. Seeking to preserve the status quo, petitioners raise at least twelve issues. Br. 1-3. They claim that the FCC lacked authority to reform its universal service rules, violated various provisions of the Communications Act of 1934 (“Act”), engaged in unreasoned decision-making in violation of the Administrative Procedure Act (“APA”), and failed to follow proper procedures. As explained below, these claims are baseless, and many are not properly presented. I. Petitioners broadly assert that the FCC lacked statutory authority to enact universal service reform. Petitioners’ various challenges rest on the assertion that Congress fenced off “information services” (see FCC Preliminary Br. 8 n.6). – notably, broadband Internet access – from the universal service program. Petitioners are wrong. A. The FCC reasonably determined that section 254 of the Act, 47 U.S.C. §254, authorized the agency to provide federal universal service support for broadband-capable networks. The FCC has a “mandatory duty” to “base its universal [service] policies on the principles listed in §254(b)” of the Act. Qwest Corp. v. FCC, 258 F.3d 1191, 1200 (10th Cir. 2001) (“Qwest I”). Among those principles Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 12 3 are that “[a]ccess to advanced telecommunications and information services should be provided in all regions of the Nation,” and that “[c]onsumers in all regions of the Nation … should have access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas” and at reasonably comparable rates. 47 U.S.C. §254(b)(2), (3). After evaluating the record evidence, the FCC found that the achievement of the section 254(b) principles requires carriers to deploy networks capable of providing consumers with access to both voice and broadband services. The FCC concluded that it was authorized to advance those principles by 47 U.S.C. §254(e), which requires recipients of support from the federal universal service fund (“USF”) to “use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended.” Because “facilities” and “services” are distinct terms, the FCC reasoned that, through section 254, Congress granted the agency authority to support the “telecommunications services” designated under 47 U.S.C. §254(c)(1) and the facilities necessary to achieve the principles in section 254(b). In fact, in the decade prior to the Order, the FCC permitted (but did not require) the recipients of high-cost universal service support to invest in “dual-use” facilities that provide voice as well as Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 13 4 broadband services. Consistent with that long-standing policy, the FCC in the Order conditioned a carrier’s receipt of federal universal service support under section 254 on the deployment of a broadband-capable network. To ensure that USF recipients use support for that purpose, the FCC further required them to offer broadband service that meets certain basic performance requirements. 1. Petitioners claim that the FCC lacks authority to fund broadband facilities because, in their view, section 254(e)’s use of the phrase “for which the support is intended” must be construed as referring to the “telecommunications services” deemed eligible for support under section 254(c)(1). But the FCC reasonably interpreted that clause to refer to the universal service principles in section 254(b) of the Act. This reading gives full effect to section 254. Indeed, under petitioners’ reading, the FCC could not achieve the mandatory principles in sections 254(b)(2) and (3) – which include “[a]ccess to advanced telecommunications and information services … in all regions of the Nation.” 47 U.S.C. §254(b)(2) (emphasis added). The FCC was not required to adopt an interpretation of the statute that disabled the agency from achieving the purposes Congress assigned to it. Such a reading is not reasonable, much less mandated. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 14 5 2. To ensure that universal service support is being used to deploy broadband facilities, the FCC further required USF recipients to provide broadband Internet access service – a public interest obligation that was a valid and necessary exercise of the agency’s judicially affirmed authority to impose conditions on federal subsidies. Further, because the public interest obligation is conditional (i.e., carriers need only provide broadband if they voluntarily seek federal universal service support), it does not amount to common carrier “regulation” under Title II of the Act, 47 U.S.C. §201 et seq., as petitioners allege. 3. While petitioners assert that the Order distributes universal service support to entities that are not “telecommunications carriers” and provide no “telecommunications services,” that claim will not be ripe for judicial review unless and until a state commission (or the FCC) designates such an entity an “eligible telecommunications carrier” (“ETC”). See 47 U.S.C. §214(e)(2), (6). But even under petitioners’ theory, a provider of Voice over Internet Protocol (“VoIP”), an “unclassified” service, could be eligible for such support if it voluntarily offers VoIP as a “telecommunications service” – a practice that the FCC has sanctioned in prior orders and that occurs in the marketplace today. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 15 6 B. The FCC concluded that it has independent authority under section 706 of the Telecommunications Act of 1996 (“1996 Act”), 47 U.S.C. §1302, to support broadband networks and services. That provision empowers the FCC to “take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” 47 U.S.C. §1302(b). Evidence in the record showed that support for broadband helps achieve both those statutory objectives. The FCC separately found that its exercise of authority under section 706 helps fulfill the objectives in section 254(b), notably the principle that “[a]ccess to advanced telecommunications and information services should be provided in all regions of the Nation.” 47 U.S.C. §254(b)(2). II. The FCC, for the first time, established an annual funding target for the high-cost component of the USF. Relying on its predictive judgment, the FCC found that setting the target at $4.5 billion annually would provide sufficient support to ensure affordable and reasonably comparable voice and broadband service. Contrary to petitioners’ claims, the FCC carefully calibrated the impact of universal service reform on incumbent local exchange carriers (“LECs”) subject to rate-of-return regulation. It maintained high-cost support for those Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 16 7 carriers at existing levels (about $2 billion annually), and required them to extend facilities to customers only upon a reasonable request for service. The FCC estimated that almost one-half of all rate-of-return carriers would see no change or an increase in federal support, and of those expected to experience a reduction, the majority would see reductions of fewer than 10 percent of their annual subsidies. The FCC also provided a waiver process under which carriers may receive exemptions from these reductions if they are able to demonstrate that support reductions would imperil their financial viability and threaten service to consumers. The availability of that waiver process undercuts petitioners’ arguments that the Order (1) provides insufficient support for purposes of sections 254(b)(5) and (e) of the Act, see Rural Cellular Ass’n v. FCC, 588 F.3d 1099, 1104 (D.C. Cir. 2009) (“RCA I”); and (2) effects an unconstitutional taking of property, see Williamson County Reg’l Planning Comm’n v. Hamilton Bank, 473 U.S. 172, 194 (1985). III. To eliminate waste and inefficiency in universal service support to rate-of-return carriers, the FCC limited those carriers’ recovery of certain capital and operating expenses. Petitioners have waived their various challenges to this rule because they never presented them to the FCC. See 47 U.S.C. §405(a). The challenges lack merit in any event. Petitioners’ primary complaint is that the new rule will produce unpredictable funding amounts, Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 17 8 allegedly in violation of 47 U.S.C. §254(b)(5). But that provision of the Act only requires predictable rules, not outcomes. See Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608, 622 (5th Cir. 2000). Moreover, it has always been the case that carriers will not know how much support they will receive in future periods, so the new rule adds no uncertainty to USF disbursements. Separately, petitioners argue that the FCC engaged in impermissible retroactive rulemaking. Not so. There is no “primary retroactivity” because the Order only reduces universal service support prospectively. Even if the Order were retroactive in effect (which it is not), there is no “secondary retroactivity” because the FCC’s decision to amend its rules was reasonable and thus lawful. IV. The FCC also overhauled the support mechanisms for incumbent LECs subject to price cap regulation. To spur broadband deployment, over and above what price cap carriers had already planned, the FCC offered additional high-cost support, on a one-time basis, to areas currently lacking broadband service. Having adequately explained its decision to jump-start broadband deployment in previously unserved areas rather than subsidize service upgrades in areas that already have access to broadband, the FCC was not required to separately respond to petitioners’ objections to that limitation. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 18 9 Nor was the FCC required to address petitioners’ arguments that using an auction mechanism to eventually distribute subsidies to price cap carriers will degrade service and disadvantage small telecommunications carriers. The Order merely stated the FCC’s intention to use an auction mechanism. In an attached Further Notice of Proposed Rulemaking (“FNPRM”), the FCC sought comment on how best to design and implement it – including comment on the issues of concern to petitioners. Until the FCC acts on the FNPRM, petitioners’ claims that the mechanism will degrade service or harm small carriers are not ripe. V. Petitioners launch a scattershot attack on various other reforms designed to more efficiently and cost-effectively support voice and broadband with federal universal service funding. Many of these perfunctory and often underdeveloped claims are waived or unripe; they all lack merit. A. In response to record evidence showing that a number of USF recipients charge artificially low rates, the FCC adopted a rule that reduces federal subsidies to carriers with rates below a specified floor so as not to burden consumers who ultimately make universal service contributions. While petitioners complain that the new rule has the de facto effect of setting local rates in violation of 47 U.S.C. §152(b), courts have made clear that an incidental effect on rates does not mean that the FCC is “regulating” rates. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 19 10 See Cable & Wireless PLC v. FCC, 166 F.3d 1224, 1230 (D.C. Cir. 1999). Moreover, FCC adoption of measures that encourage states to adjust local rates is not only permissible, it is sometimes required to ensure that states assist in implementing the universal service goals in section 254 of the Act. See Qwest I, 258 F.3d at 1203-04; Qwest Commc’ns Int’l., Inc. v. FCC, 398 F.3d 1222, 1238 (10th Cir. 2005) (“Qwest II”). B. The FCC also eliminated support in areas served by an unsubsidized competitor. Petitioners predict that this will threaten customers, because an unsubsidized competitor (unlike the incumbent LEC) has no legal obligation to provide voice and broadband service. But the FCC reasonably predicted that unsubsidized competitors would have business incentives to maintain service in areas they serve today, and thus declined to fund duplicative networks where market forces are already sufficient to ensure consumer access to voice and broadband services. That sensible determination is entitled to substantial deference. C. To spur the deployment of mobile wireless services, the FCC decided to use competitive bidding to distribute $300 million in one-time high-cost support to wireless carriers in certain designated areas. Petitioners argue that this mechanism usurps state commission authority under 47 U.S.C. §214(e), but they conflate eligibility for subsidies with the right to receive Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 20 11 subsidies. Nothing in the Order limited the states’ authority under section 214(e) to determine who is eligible for support, and where they are eligible for support. Such state eligibility determinations are still a precondition to receiving support, but no carrier is entitled to receive federal universal service support simply by virtue of these state determinations. D. The FCC decided to transition support for the most remote areas of the nation to a newly created fund. The Order set aside $100 million annually for that effort but sought comment on how to distribute support in the attached FNPRM. Contrary to petitioners’ suggestion, until those distribution rules are in place, extremely high-cost areas will continue to receive support under existing mechanisms for price cap and rate-of-return carriers. When the FCC creates the new Remote Areas Fund, petitioners may, if they are aggrieved, challenge that new mechanism. Until then, their claim is not ripe and, in any event, meritless. VI. Petitioners complain that certain key provisions of the Order did not comply with the notice-and-comment requirements of the APA. That argument is not properly before the Court, because it was not first presented to the FCC through a petition for reconsideration. It also lacks merit, because the FCC sought comment on all of the challenged provisions. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 21 12 VII. Finally, the FCC reasonably decided to address in a separate proceeding the issue of universal service contributions. This action was well within the agency’s discretion to define the scope of its own proceedings and to proceed incrementally. ARGUMENT I. THE FCC REASONABLY DETERMINED THAT THE STATUTE AUTHORIZES THE UNIVERSAL SERVICE REFORMS IN THE ORDER. A. The FCC Reasonably Concluded That It Has Authority Under Section 254 Of The Act To Condition Receipt Of Federal Universal Service Subsidies On Deployment Of Broadband-Capable Networks. “‘The public switched telephone network is not a single-use network.’” Order n.70 (JA__) (quoting Federal-State Joint Board on Universal Service, 16 FCC Rcd 11244, 11322 (¶200) (2001) (“Rural Task Force Order”)). Rather, “‘[m]odern network infrastructure can provide access not only to voice services, but also to data, graphics, video, and other services.’” Id. Thus, in the Rural Task Force Order, the FCC established the “no barriers” policy. Order ¶¶64, 308 (JA__, __). For more than a decade, this policy permitted (but did not require) recipients of federal high-cost universal service support to invest in “dual-use” facilities that provide voice as well as broadband Internet access services. Id. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 22 13 The FCC, in the Order, found that section 254(e) of the Act allowed it to “go beyond the ‘no barriers’ policy” to “require carriers receiving federal universal service support to invest in modern broadband-capable networks.” Id. ¶65 (JA__); see also ¶308 (JA__). Petitioners now contend that the FCC lacked authority to make that once-permissive policy mandatory. Br. 21-22. The FCC properly rejected petitioners’ view in the Order, explaining that “nothing in section 254 … requires [the agency] simply to provide federal funds to carriers and hope that they will use such support to deploy broadband facilities” as occurred under the “no barriers” policy. Order ¶65 (JA__). “To the contrary, [the FCC] ha[s] a ‘mandatory duty’ to adopt universal service policies that advance the principles … in section 254(b), and … the authority to ‘create some inducement’ to ensure that those principles are achieved.” Id. (quoting Qwest I, 258 F.3d at 1200, 1204). Two of those principles identify access to information services as an integral component of universal service. See 47 U.S.C. §254(b)(2), (3). By conditioning support on the deployment of a broadband-capable network, the Order lawfully sought to “induce” the recipients of federal universal service subsidies to “advance” the principles in section 254(b). In this regard, petitioners’ argument that the section 254(b) principles are merely “aspirational language” (Br. 16) is squarely foreclosed by Qwest I, 258 F.3d at 1200 (explaining that “[t]he plain Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 23 14 text of the statute mandates that the FCC ‘shall’ base its universal policies on the principles listed in § 254(b),” which “indicates a mandatory duty on the FCC”); see also FCC Response to Wireless Carrier USF Principal Br. __. Despite the FCC’s precedent authorizing support for broadband facilities, petitioners contend that because the phrase “facilities and services” in section 254(e) is modified by the clause “for which the support is intended,” the FCC may only require USF recipients to deploy facilities that are used to provide the “telecommunications services” deemed eligible for support pursuant to section 254(c)(1). Br. 22-23. According to petitioners, this prohibits the FCC from conditioning federal universal service support on the deployment of broadband-capable networks. As the FCC explained, however, “[b]y referring to ‘facilities’ and ‘services’ as distinct items for which federal universal service funds may be used, … Congress granted [the FCC] the flexibility not only to designate the types of telecommunications services for which support would be provided, but also to encourage the deployment of the types of facilities that will best achieve the principles set forth in section 254(b).” Order ¶64 (JA__); see id. ¶308 (JA__). Limiting support to the facilities used to provide the section 254(c)(1) services, as petitioners argue the FCC must, would conflate “services” with “facilities,” rendering the latter term “superfluous.” See Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 24 15 Nutraceutical Corp. v. Von Eschenbach, 459 F.3d 1033, 1040 (10th Cir. 2006) (holding that because “[t]he rule against surplusage encourages courts to give meaning to every word used in a statute to realize congressional intent,” the district court erred by conflating “significant risk” with “unreasonable risk” – “a distinct term”); see also Bowoto v. Chevron Corp., 621 F.3d 1116, 1127 (9th Cir. 2010) (when a statute uses distinct terms, a court “must … presume those terms have different meanings”).1 The FCC thus reasonably interpreted the phrase “for which the support is intended” in section 254(e) to reference the universal service principles in section 254(b). Order ¶¶64, 308 (JA__). This reading properly gives full effect to both section 254(b) and section 254(c)(1) of the Act. See In re Dawes, 652 F.3d 1236, 1242 (10th Cir. 2011) (statutes should be construed so that no part will be inoperative or superfluous). Petitioners’ narrow and exclusive focus on “telecommunications services” ignores the FCC’s obligation to achieve the section 254(b)(2) and (3) principles, which include 1 Petitioners incorrectly read the Order to define the “facilities” supported by section 254(e) as limited to those used to provide only the “telecommunications services” designated under section 254(c)(1). See Br. 22-23 (citing Order n.69 (JA__)). As the FCC explained, “Section 254(e) … contemplates that carriers may receive federal support to enable the deployment of broadband facilities used to provide supported telecommunications services as well as other services.” Order ¶64 (JA__) (emphasis added). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 25 16 “[a]ccess to advanced telecommunications and information services … in all regions of the Nation.” 47 U.S.C. §254(b)(2) (emphasis added). The agency cannot satisfy that obligation if section 254(c)(1) prohibits the FCC from conditioning a recipient’s use of federal subsidies on the deployment of a single network capable of supporting both telecommunications services and information services. Indeed, the prior, permissive “no barriers” policy failed to sufficiently achieve those objectives. See FCC Preliminary Br. 15. It follows that petitioners’ interpretation of the statute is not reasonable – much less mandated – because it would disable the FCC from achieving the explicit statutory goals regarding information services. Petitioners’ interpretation also ignores the FCC’s duty to “advance” universal service. See 47 U.S.C. §254(b); Qwest II, 398 F.3d at 1236. Their proposal to “limit[] federal support based on the regulatory classification of the services offered … would exclude from the universal service program providers who would otherwise be able to deploy broadband infrastructure to consumers.” Order ¶72 (JA__). That infrastructure is used to provide new services, such as VoIP, which are “viewed by consumers as substitutes for traditional voice telephone services.” Id. ¶63 (JA__). Thus, requiring USF recipients to deploy networks capable of providing voice and broadband services “advances” universal service, whereas merely requiring recipients to Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 26 17 deploy networks capable of providing traditional circuit-switched voice services would only “preserve” the status quo. If, as petitioners claim (Br. 22-23), the FCC may support facilities only to the extent that they are used to provide telecommunications services, then allowing ETCs to expend universal service subsidies to deploy facilities used to provide broadband Internet access, even on a permissive basis, would have violated the Act. Hence, under petitioners’ reading, the long-standing, permissive “no barriers” policy, which petitioners themselves supported in proceedings before the agency, would be unlawful.2 In conflict with their legal position here, however, it is clear that petitioners do not oppose federal universal service support that may be used for broadband deployment; rather, they oppose federal support conditioned on broadband deployment. In other 2 See, e.g., Comments of the National Exchange Carrier Association, Inc.; National Telecommunications Cooperative Association; Organization for the Promotion and Advancement of Small Telecommunications Companies; and Western Telecommunications Alliance, WC Docket 10-90 et al. at 64-65 (filed Apr. 18, 2011) (JA__-__) (encouraging the FCC to “recognize that the current high-cost support mechanisms have enabled great success in broadband deployment and adoption in R[ural] LEC study areas” and specifically that “the ‘no barriers to advanced services’ policy … has allowed R[ural] LECs to use USF support in a forward-looking manner to construct multi-use networks that support both quality voice and broadband offerings”); see also id. n.35 (JA__) (explaining that “there is no question that support can be distributed for mixed-use plant that supports both Title I broadband Internet access and Title II regulated telecommunications services”). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 27 18 words, petitioners want subsidies without the obligation. But this Court has already held that the FCC is not required to provide petitioners’ hoped for “blank check.” See Qwest I, 258 F.3d at 1204.3 B. The FCC Reasonably Concluded That It May Condition Federal Universal Service Subsidies On A Recipient’s Compliance With Clearly Defined Public Interest Obligations. Section 254(c)(1) of the Act defines “[u]niversal service” as “an evolving level of telecommunications services that the Commission shall establish periodically under this section, taking into account advances in telecommunications and information technologies and services.” Petitioners argue that “the Commission [wa]s not … empowered to include” VoIP and broadband Internet access “on the list of supported services” designated under section 254(c)(1) because they are not “telecommunications services.” Br. 14. Petitioners, however, mischaracterize the Order, which provides universal service support for (1) “voice telephony service” and (2) broadband-capable networks. To ensure that support is being used for the latter, the FCC further required USF recipients to provide broadband Internet access service – a public interest obligation that was a valid and necessary 3 We address in section I.C., below, petitioners’ separate claim that the FCC lacks authority to fund broadband-capable networks on the ground that the Order does not require USF recipients to provide telecommunications services. Br. 21-22. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 28 19 exercise of the agency’s judicially affirmed authority to impose funding conditions. 1. The Order Does Not Fund Information Services Under Section 254 Of The Act. Pursuant to the Order, “voice telephony service” is the only supported service for purposes of section 254(c)(1).4 Order ¶¶62, 80, 309 (JA__, __, __). “To the extent [ETCs] offer traditional voice telephony services as telecommunications services over traditional circuit-switched networks, [the FCC’s] authority to provide support for such services is well-established.” Id. ¶62 (JA__); see also 47 U.S.C. §254(c)(1). Petitioners attack the Order’s inclusion of VoIP – an “unclassified service” (i.e., a service that the FCC has not classified either as a “telecommunications service” or an “information service”) – in the definition of “voice telephony service.” Br. 13-15. As the FCC explained, however, “[i]f interconnected VoIP services are telecommunications services,” the agency can designate them as eligible for support pursuant to section 4 Petitioners claim that “the Order fails to discuss how its new ‘voice telephony service’ definition takes … into account” any of the four factors listed in section 254(c)(1). Br. 56. This claim is barred because petitioners failed to raise it in the proceeding below or in a subsequent petition for reconsideration of the Order. See Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1044 (10th Cir. 2011) (“Sorenson II”); 47 U.S.C. §405(a). In any event, the Order did discuss these factors at length. See Order ¶¶61-65, 68- 69, 71-72, 76-81 (JA__-__, __-__, __-__, __-__). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 29 20 254(c)(1). Order ¶63 n.67 (JA__). Alternatively, if “interconnected VoIP services are information services, [the FCC] ha[s] authority to support the deployment of broadband networks used to provide such services” under sections 254(b)(2)-(3) and (e). Id. In the latter circumstance, VoIP is not a “telecommunications service” supported by section 254(c)(1); it is one of the “other services” offered across “broadband facilities used to provide supported telecommunications services.” Id. ¶64 (JA__). 2. The Broadband Public Interest Obligation Is A Lawful Condition On Federal Universal Service Support. Petitioners likewise fail to show that the FCC, acting under section 254, authorized federal universal service support for broadband Internet access service itself. Br. 11-16. Indeed, the FCC expressly declined to “add broadband to the list of supported services” under section 254(c)(1). Order ¶¶65, 309 & n.514 (JA__, __). Instead, it merely conditioned the receipt of support on a carrier’s deployment of a broadband-capable network pursuant to sections 254(b) and (e). Id. ¶65 (JA__). Petitioners counter that the Order (at ¶86 (JA__)) had that effect when, “[a]s a condition of receiving federal high-cost universal service support,” it required funding recipients “to offer broadband service … that meets certain basic performance requirements and to report regularly on associated performance measures.” Br. 23-24. Petitioners’ argument ignores the fact Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 30 21 that “[n]othing in section 254 prohibits the Commission from conditioning the receipt of [universal service] support, and the Commission has imposed conditions in the past.” Connect America Fund, 26 FCC Rcd 4554, 4581 (¶71 & n.103) (2011) (emphasis added) (JA__,__) (citing 47 C.F.R. §§54.313(a)-(b), 54.314(a)-(b) (“NPRM”)); see also United States v. Am. Libraries Ass’n, Inc., 539 U.S. 194, 211 (2003). As the FCC explained, “[u]niversal service support is a public-private partnership,” and carriers “that benefit from public investment in their networks must be subject to clearly defined obligations associated with the use of such funding.” Order ¶74 (JA__). Courts have recognized this proposition in denying similar challenges to conditions on federal subsidies. See Am. Libraries Ass’n, 539 U.S. at 211-13 (upholding the requirement that public libraries use Internet filters as a condition on receipt of federal universal service subsidies); Qwest II, 398 F.3d at 1238 (affirming the FCC’s authority to condition universal service support on state commission certification that local telephone rates are “reasonably comparable”); Tex. Office of Pub. Util. Counsel v. FCC, 183 F.3d 393, 444 (5th Cir. 1999) (“TOPUC”) (affirming the FCC’s authority to condition federal universal service support on state-established discount rates for intrastate services provided to schools, libraries, and rural health care providers). Absent the Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 31 22 performance metrics and rate comparisons set forth in paragraphs 90-114 of the Order (JA__-__), the FCC would have no means to ensure that federal universal service subsidies are being used, as required by sections 254(b)(1)- (3) of the Act, to deploy “in all regions of the Nation” networks capable of providing affordable voice and broadband services that are reasonably comparable – in terms of quality and rates – to voice and broadband services in urban areas, see Order ¶¶87, 91, 106, 113 (JA__, __, __, __).5 3. The Broadband Public Interest Obligation Does Not Constitute Title II Common Carrier Regulation. Petitioners separately argue that the broadband public interest obligation “essentially forc[es]” USF recipients “to offer … information service[s] as a common carrier service.” Br. 23. That claim is contrary to this Court’s precedent in WWC Holding Co. v. Sopkin, 488 F.3d 1262, 1268, 1274 (10th Cir. 2007), which held that a state commission could condition a wireless carrier’s ETC designation on compliance with some of the 5 Petitioners contend that the agency cannot confirm that the Order will produce “reasonably comparable” broadband Internet access service because the agency has never compared broadband rates and service quality between urban and rural areas. Br. 33-34. The FCC directed its staff to gather the data needed to make this determination. See Order ¶¶113, 1018 (JA__, __). Because agencies may proceed incrementally, the FCC was not required to complete this effort before adopting the Order. See, e.g., Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215, 1222 (10th Cir. 2009) (“Sorenson I”). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 32 23 “consumer protection and operational standards” imposed on incumbent LECs. As the Court explained, funding conditions commensurate with the requirements imposed on common carriers do not amount to common carrier “regulation,” because providers voluntarily assume the conditions in the first instance and “retain[] the ability to opt out of [them] entirely by declining … federal universal service subsidies.” Id. at 1274. Because the broadband public interest obligation is conditional (i.e., carriers only have to provide broadband service to a customer if they request federal subsidies), it does not amount to “regulation” of any sort. Moreover, the Order does “not extend[] the gamut of telephone regulations” under Title II of the Act to broadband Internet access service; it simply requires providers that “approach[] the [FCC] to receive federal universal service subsidies” (id.) “to offer broadband service … that meets certain basic performance requirements and to report regularly on associated performance measures,” Order ¶86 (JA__). Petitioners have failed to demonstrate that those modest requirements correspond to any, let alone all, of the requirements that Title II imposes on common carriers. Br. 23. They do not. But even if that were not the case, “common carriage is not all or nothing – there is a gray area in which although a given regulation might be Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 33 24 applied to common carriers, the obligations imposed are not common carriage per se.” Cellco P’ship v. FCC, 700 F.3d 534, 547 (D.C. Cir. 2012). Accordingly, “the Commission’s determination” that the broadband public interest obligation “does not confer common carrier status warrants deference” from the Court. Id. C. Petitioners’ Claim That The Order Violates Sections 254(e) And 214(e) Of The Act Is Not Ripe And Lacks Merit. Petitioners further argue that the Order violates sections 254(e) and 214(e) of the Act because “it distributes USF support to entities that are not telecommunications carriers and provide no telecommunications services.” Br. 5, 17-18, 22. Petitioners’ claim should be dismissed because it is not ripe. In any event, it is wrong. 1. Pursuant to section 254(e), only “eligible telecommunications carriers,” i.e., those entities designated under section 214(e), “shall be eligible to receive specific Federal universal service support.” 47 U.S.C. §254(e). Section 214(e)(1), in turn, provides that “a common carrier designated as an eligible telecommunications carrier … shall be eligible to receive universal service support in accordance with section 254.” Id. §214(e)(1). “[T]he states designate common carriers over which they have jurisdiction as ETCs, and th[e] [FCC] designates common carriers as ETCs in those instances Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 34 25 where the state lacks jurisdiction.” Order ¶570 (JA__); see 47 U.S.C. §214(e)(2), (6). The FCC, in the Order, reformed the larger framework for distributing federal universal service subsidies; it did not find that any particular service provider, or category of providers, would be eligible for support under this new framework. Br. 18. ETC designation under sections 214(e)(2) and (6), which is a pre-requisite for the receipt of federal subsidies, is an “inherently local and fact-specific” process. WWC Holding Co., 488 F.3d at 1278; Federal-State Joint Board on Universal Service, 20 FCC Rcd 6371, 6397 (¶61) (2005). For a “non-telecommunications carrier to use USF support for unregulated information services” (Br. 18), a state commission (or, in limited circumstances, the FCC) would first have to decide that the provider satisfies the requirements of section 214(e)(1). Consequently, petitioners’ claim is not ripe for judicial review, because it is contingent upon such future, fact- specific decisions. See Los Alamos Study Grp. v. U.S. Dept. of Energy, 692 F.3d 1057, 1065 (10th Cir. 2012) (a claim is ripe where “the issues involved are purely legal, … the agency’s action is final,” and the “action has or will have an immediate impact on the petitioner” (internal quotation marks and citation omitted)); see also Qwest Commc’ns Int’l, Inc. v. FCC, 240 F.3d 886, 894 (10th Cir. 2001). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 35 26 2. Petitioners’ claim also lacks merit. Petitioners mistakenly assert that the Order “does not limit support to telecommunications carriers or require that USF [support] be used for telecommunications services.” Br. 17. Only “eligible telecommunications carriers” are eligible for subsidies under section 254, however, and an ETC, by definition, is a “common carrier” that “offer[s] the services that are supported by the Federal universal service support mechanisms under section 254(c).” 47 U.S.C. §214(e)(1)(A). Nowhere does the Order hold that an entity not designated as an ETC could receive federal universal service support. Further, the only service that the FCC has designated under section 254(c)(1) is “voice telephony service.” See, e.g., Order ¶¶62-63, 79 (JA__- __, __). Petitioners assert that providing “voice telephony service” as VoIP would violate the Act, because unlike circuit-switched voice service, VoIP has not yet been designated a “telecommunications service.” Br. 17-18. While VoIP service is unclassified, the FCC has acknowledged that a VoIP provider can obtain the rights available to “telecommunications carriers” under Title II of the Act if it voluntarily “holds itself out as a telecommunications carrier and complies with appropriate federal and state requirements.” IP-Enabled Services, 20 FCC Rcd 10245, 10268 (¶38 n.128) (2005), aff’d sub nom. Nuvio Corp. v. FCC, 473 F.3d 302 (D.C. Cir. 2006). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 36 27 And in this proceeding, “some providers of facilities-based retail VoIP services state[d] that they are providing those services on a common carrier basis.” Order ¶1389 & n.2537 (JA__). Thus, at a minimum, a provider could be eligible for ETC status under section 214(e)(1)(A) and universal service support under section 254(e) if it voluntarily offered VoIP as a “telecommunications service.” Consequently, a “set of circumstances exists in which [the Order] can be lawfully applied,” so petitioners’ facial challenge fails. Cellco P’ship, 700 F.3d at 549 (internal quotation marks and citations omitted).6 D. The FCC Reasonably Ruled That It Also Has Authority Under Section 706 Of The 1996 Act To Require Recipients Of Federal Universal Service Support To Deploy Broadband Networks And Services. In section 706(b) of the 1996 Act, 47 U.S.C. §1302(b), Congress instructed the FCC to “determine whether advanced telecommunications 6 The Order “rel[ied] on section 706(b) as an alternative basis to section 254 to the extent necessary to ensure that the federal universal service program covers services and networks that could be used to offer information services as well as telecommunications services.” Order ¶73 (JA__). While the FCC noted that section 706 would also permit the agency to provide universal service support to VoIP providers irrespective of the regulatory classification of that service, id. ¶71 (JA__), the Order further provides that “[c]arriers seeking federal support” under section 706(b) “must still comply with the same universal service rules and obligations set forth in section 254 and 214.” Id. ¶73 (JA__). Hence, any funding recipient must still be an ETC. In any event, because the FCC has not authorized support for VoIP service under section 706, that issue is not presented here. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 37 28 capability is being deployed to all Americans in a reasonable and timely fashion,” and if the agency concludes that it is not, to “take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” Having found that broadband deployment lagged, Order ¶70 (JA__), the FCC reasonably concluded that section 706(b) empowered it to support broadband-capable networks, see id. ¶¶67-70 (JA__- __). Petitioners argue that the FCC lacked authority under section 706(b) because “[t]here is no mention of expanding the USF to include support for broadband information services” in that provision. Br. 26. While Congress could have created an exhaustive and highly specific list of the authorities the FCC could exercise to further the statutory goal set forth in section 706(b), it instead delegated to the FCC broad authority to “take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” 47 U.S.C. §1302(b); see also Ad Hoc Telecomms. User Comm. v. FCC, 572 F.3d 903, 906-07 (D.C. Cir. 2009) (explaining that “[t]he general and generous phrasing of §706 means that the Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 38 29 FCC possesses significant, albeit not unfettered, authority and discretion to settle on the best regulatory or deregulatory approach to broadband”). The FCC, in the Order (at ¶67 (JA__)), reasonably found that “[p]roviding support for broadband networks helps achieve section 706(b)’s objectives.” Support for broadband “promot[es] competition in the telecommunications market” where “interconnected VoIP service is increasingly used to replace [traditional] voice service.” Id. ¶68 (JA__) (internal quotation marks omitted). Support for broadband also “eliminate[s] a significant barrier to infrastructure investment.” Id. ¶67 (JA__). This is because “one of the most significant barriers to investment in broadband infrastructure is the lack of a business case for operating a broadband network in high-cost areas in the absence of programs that provide additional support.” Id. (internal quotation marks omitted). Those findings by the expert agency as to a matter within its competence satisfy the requirements of section 706(b). Petitioners find no support in Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010). See Br. 24. The D.C. Circuit in that decision found that a prior FCC order stating that section 706(a) did not “constitute an independent grant of authority” was “still binding” at that time because the agency “never questioned [it], let alone overruled [it].” Comcast, 600 F.3d at 658-59. In a Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 39 30 subsequent order, however, the FCC did just that. It held that if the prior order could be interpreted as having declined to read section 706(a) as a grant of authority, the FCC “reject[ed] that reading of the statute.” See Preserving the Open Internet, 25 FCC Rcd 17905, 17969 n.370 (2010), pet. for review pending, Verizon v. FCC, D.C. Cir. No. 11-1355. Petitioners also attempt to manufacture a conflict between sections 254 and 706. Br. 27. As the FCC explained, “section 254(b)(2)’s principle that ‘[a]ccess to advanced telecommunications and information services should be provided in all regions of the Nation’ dovetails comfortably with section 706(b)’s policy that ‘advanced telecommunications capability [be] deployed to all Americans in a reasonable and timely fashion.’” Order ¶72 (JA__) (quoting 47 U.S.C. §254(b)(2)). It follows that the FCC’s “decision to exercise authority under Section 706 does not undermine section 254’s universal service principles”; rather, it “ensures their fulfillment.” Id. For the same reason, petitioners’ argument that the “specific” section 254 controls the more “general” section 706(b) is unpersuasive. Br. 27. There is no point in “quibbl[ing] over which section is more specific,” where, as here, the agency’s “interpretation … is reasonable” and “gives effect to both provisions.” Nat’l Ass’n of Home Health Agencies v. Schweiker, 690 F.2d 932, 943 n.70 (D.C. Cir. 1982). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 40 31 * * * As this Court has recognized, “the 1996 Act is not a model of clarity.” Qwest II, 398 F.3d at 1235 (quoting AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 397 (1999)). Section 254, in particular, is ambiguous, RCA I, 588 F.3d at 1101-02, and the FCC reasonably construed it to authorize the agency to modernize universal service support so that it enhances the broadband access that is critical to rural America. But “even if the agency’s reading differs from what the court believes is the best statutory interpretation,” it is clearly not precluded by the statute’s language or structure and therefore must be affirmed under well-established principles of deference to agencies that interpret the statutes they are entrusted to administer. Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005); see Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d 1228, 1250 (10th Cir. 2004). II. THE FCC REASONABLY ADOPTED A $4.5 BILLION ANNUAL FUNDING TARGET. The FCC “[f]or the first time … establish[ed] a defined budget for the high-cost component of the universal service fund.” Order ¶123 (JA__). It did so to “ensure[] that individual consumers will not pay more in [universal service] contributions due to the reforms” in the Order. Id. ¶124 (JA__). If those reforms were “to significantly raise the end-user cost of services,” they Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 41 32 “could undermine” the agency’s larger efforts “to promote broadband and mobile deployment and adoption.” Id. The FCC set the annual funding target at $4.5 billion – the estimated amount of funding collected for the high-cost program in Fiscal Year 2011. Order ¶125 (JA__). By “setting the budget at this year’s support levels,” the FCC hoped to “minimize disruption and provide the greatest certainty and predictability to all stakeholders.” Id. Of the $4.5 billion, the FCC allocated $500 million for the Mobility Fund, $1.8 billion for areas served by price cap carriers, and $2 billion for rate-of-return carriers. Id. ¶126 (JA__). Although the FCC established a fixed budget, it adopted “a number of safeguards … to ensure that carriers that warrant additional funding have the opportunity to petition for such relief.” Order ¶126 (JA__); see also id. ¶¶539-44 (JA__-__) (establishing express waiver procedures). The FCC also committed to “closely monitor” the budget going forward to “ensur[e] [it] remains at appropriate levels to satisfy [the FCC’s] statutory mandates.” Id. ¶126 (JA__). “[A] broad cross-section of interested stakeholders, including consumer groups, state regulators, current recipients of funding, and those that do not currently receive funding” supported the $4.5 billion annual budget. Order ¶122 & n.192. (JA__, __). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 42 33 A. The FCC’s Reasonable Predictive Judgment That The Order Will Provide Sufficient Support Is Entitled To Substantial Deference. Sections 254(b)(5) and (e) of the Act require “sufficient” universal service support. See 47 U.S.C. § 254(b)(5) and (e). “[W]hat constitutes ‘sufficient’ support” is inherently “ambiguous.” TOPUC, 183 F.3d at 425. So long as “the FCC … offer[s] reasonable explanations of why it thinks the funds will still be ‘sufficient’ to support high-cost areas,” the Court should “defer to the agency’s judgment of what is ‘sufficient.’” Id.; see also id. at 426, 436-37; Alenco, 201 F.3d at 620-21; RCA I, 588 F.3d at 1103-04; Rural Cellular Ass’n v. FCC, 685 F.3d 1083, 1094 (D.C. Cir. 2012) (“RCA II”). Petitioners nevertheless contend that the FCC erred when it found that “maintaining total funding for rate-of-return companies at approximately $2 billion per year” would ensure that support is “sufficient” to “sustain service to consumers” and expand broadband. Order ¶195 (JA__). Petitioners’ overarching complaint is that the FCC “improperly limited its analysis to whether, without reform, USF support would be excessive” without “also consider[ing] whether too little support is being provided.” Br. 31. Contrary to petitioners’ assertion, the Order expressly considered the possibility of too little support, and it found that subsidies would not be “insufficient” given its efforts to eliminate “long-standing inefficiencies and Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 43 34 wasteful spending” in the FCC’s legacy funding mechanisms. Order ¶125 (JA__). The FCC expected that those cost savings would offset any increased support to individual carriers to make additional investments to deploy broadband. See id. ¶¶125, 285-92 (JA__, __-__). Particularly relevant to petitioners’ objections, the FCC structured reform to mitigate the financial impact on rate-of-return carriers. Under the Order, “rate-of-return carriers will not necessarily be required to build out to and serve the most expensive locations within their service area.” Order ¶207 (JA__). Instead, they are only obligated to offer broadband upon “reasonable request.” Id. ¶¶206-07 (JA__-__). This “flexible approach” (id. ¶206 (JA__)) was specifically designed to protect rate-of-return carriers from extending facilities where high-cost support was insufficient to make deployment economically reasonable, see also id. ¶26 (JA__). The Order also “exempted the most remote areas” from the new broadband service obligations. Id. ¶533 (JA__). And the Order “provide[d] rate-of-return carriers … access to a new explicit recovery mechanism,” which guarantees “stable and certain revenues that the current intercarrier system can no longer provide.” Id. ¶291 (JA__). In light of these factors, the FCC reasonably predicted that its “incremental reforms will not endanger existing service to Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 44 35 consumers” and will “minimally affect[]” rate-of-return carriers “that invest and operate in a prudent manner.” Id. ¶289 (JA__). Further, as a backstop to ensure sufficient support in individual cases of hardship, the Order provides a waiver process for those carriers that can demonstrate that “reductions in current support levels would threaten their financial viability, imperiling service to consumers in the areas they serve.” Order ¶¶539-44 (JA__-__). The agency has already granted two such waivers. See Accipiter Communications, Inc., 28 FCC Rcd 391 (WCB 2013); Allband Communications, 27 FCC Rcd 8310 (WCB 2012). Courts have repeatedly held that it is reasonable for the agency to rely on a waiver process to address any unforeseen shortfalls that might arise in specific instances.7 7 See Vt. Pub. Serv. Bd. v. FCC, 661 F.3d 54, 65 (D.C. Cir. 2011) (finding a waiver process provided a reasonable means to update stale line count data used in a model for determining universal service support); RCA I, 588 F.3d at 1104 (discussing, with approval, a waiver process used to provide certain wireless carriers additional support should an interim cap render support insufficient); RCA II, 685 F.3d at 1095 (same); Alenco, 201 F.3d at 622 (finding a single carrier’s reduced rate of return under an operating expenses cap “at most … presents an anomaly that can be addressed by a request for a waiver”). Petitioners never mention these cases, and instead rely on FPC v. Texaco, 417 U.S. 380, 399 (1974) and Home Box Office, Inc. v. FCC, 567 F.2d 9, 50-51 (D.C. Cir. 1977) – neither of which concern the FCC’s universal service program – to argue that “a waiver” cannot “justify an otherwise unreasonable rule.” Br. 32-33. Those cases are easily distinguished on the ground that the FCC is not relying on the waiver process to save an otherwise irrational rule; to the contrary, the rule is rational and the waiver process addresses potential outlier cases. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 45 36 Petitioners nonetheless allege that the FCC “disregard[ed] the substantial additional costs” to satisfy the broadband service condition in the Order. Br. 32. Their only support for that claim is a 2010 study estimating that many rate-of-return carriers provided broadband service at slower speeds than those required by the Order. See id. Petitioners, however, make no attempt to quantify the cost to upgrade their networks. The FCC had little reason to think that the additional cost (if any) would be substantial given that the Order’s “flexible approach” to broadband deployment “does not require rate-of-return companies to extend service to customers absent … a [reasonable] request.” Order ¶26 (JA__). Moreover, the Order provides rate-of-return carriers, which serve “less than five percent of access lines in the U.S.,” id., annual funding that totals nearly one-half of annual high-cost support (i.e., approximately $2 billion of the $4.5 billion budget), id. ¶126 (JA__). Nor is it true that the Order “ma[de] no effort to quantify whether the resulting USF support can cover the [rate-of-return carriers’] ‘efficient’ cost of providing voice service plus the added cost of satisfying the broadband mandate.” Br. 32. The FCC’s analysis showed that 34 percent of rate-of- return carriers would see no change in federal universal service support receipts, and 12 percent would see an increase in support. Order ¶290 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 46 37 (JA__). Of those rate-of-return carriers expected to experience a reduction, most would see a reduction of fewer than 10 percent of their federal subsidies annually. Id. Qwest II, 398 F.3d 1222 (Br. 32), is not to the contrary. In that decision, the Court directed the FCC, on remand, to provide “empirical findings supporting [its] conclusion” that rates then in effect were “reasonably comparable” for purposes of section 254(b)(3). Id. at 1237. The FCC, in the Order at issue here, necessarily could not provide “empirical support” that funding is currently “sufficient” to satisfy sections 254(b)(5) and (e) because the reforms in the Order had not yet been implemented. Thus, the agency appropriately relied on evidence in the record to support a reasonable predictive judgment. See Order ¶123 (JA__). And “[w]here, as here, the FCC must make predictive judgments about the effects of increasing [or decreasing] subsidies, certainty is impossible.” RCA I, 588 F.3d at 1105; see also FCC v. Nat’l Citizens Comm. for Broad., 436 U.S. 775, 813-14 (1978); Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012); Franklin Savings Ass’n v. Dir., Office of Thrift Supervision, 934 F.2d 1127, 1146-47 (10th Cir. 1991). Finally, petitioners complain that funding “cuts fall indiscriminately on most high-cost carriers, untethered to evidence that any particular company’s Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 47 38 support level was actually due to inefficiency rather than the intrinsically high cost of serving particular areas.” Br. 32. That claim is demonstrably incorrect. The reforms in the Order are “targeted at eliminating inefficiencies and closing gaps in [the] system, not at making indiscriminate industry-wide reductions.” Order ¶287 (JA__). For example, limitations on reimbursable capital and operating costs (id. ¶¶215-20 (JA__-__)) and high-cost loop support (id. ¶¶234-47 (JA__-__)), which are designed to encourage rate-of- return carriers to operate more efficiently, are based on carrier-specific analyses of costs and rates. In any event, “the agency [i]s well within its discretion to impose” purely prophylactic cost controls “rather than to undertake the more costly alternative of intensive auditing.” Alenco, 201 F.3d at 621. B. Petitioners’ Takings Claim Is Not Ripe And Lacks Merit. Petitioners speculate that the Order is an unconstitutional taking of property. Br 42-45. At this point, however, petitioners’ unsubstantiated takings claim is not ripe. The agency has made clear that if “any rate-of- return carrier can effectively demonstrate that it needs additional support to avoid constitutionally confiscatory rates, the Commission will consider a waiver request for additional support.” Order ¶294 (JA__) (emphasis added); see id. ¶¶539-44 (JA__). No takings claim is ripe until a party has invoked Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 48 39 that process and been denied. See Williamson County, 473 U.S. at 194; Alto Eldorado P’ship v. County of Santa Fe, 634 F.3d 1170, 1175-77 (10th Cir. 2011); TOPUC, 183 F.3d at 428-29; Alenco, 201 F.3d at 624. A takings claim would fail, in any event. Carriers face a “heavy burden” in proving confiscation as a result of rate regulation. FPC v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944). To be confiscatory, government- regulated rates must be so low that they threaten a regulated entity’s “financial integrity,” Ill. Bell Tel. Co. v. FCC, 988 F.2d 1254, 1263 (D.C. Cir. 1993), or “destroy the value” of the company’s property, Duquesne Light Co. v. Barasch, 488 U.S. 299, 307 (1989). Petitioners made no such showing in the record below (see Order ¶294 (JA__)) or in their brief. Thus, “[t]he mere fact that, for many rural carriers, universal service support provides a large share of the carriers’ revenues … is not enough to establish that the [Order] constitute[s] a taking. The Fifth Amendment protects against takings; it does not confer a constitutional right to government-subsidized profits.” Alenco, 201 F.3d at 624 (internal quotation marks and citation omitted). III. THE FCC REASONABLY REFORMED SUPPORT MECHANISMS FOR RATE-OF-RETURN CARRIERS TO ELIMINATE WASTE AND INEFFICIENCY IN THE PRIOR SYSTEM. The FCC, in the Order, “implement[ed] a number of reforms to eliminate waste and inefficiency and improve incentives for rational Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 49 40 investment and operation by rate-of-return LECs.” Order ¶195 (JA__). These reforms were long overdue. As the FCC explained, “[b]y providing an opportunity for a stable 11.25 percent interstate return for rate-of-return companies, regardless of the necessity or prudence of any given investment, our current system imposes no practical limits on the type or extent of network upgrades or investment.” Id. ¶287 (JA__). The consequence was that the FCC “provide[d] universal service support to both a well-run company operating as efficiently as possible, and a company with high costs due to imprudent investment decisions, unwarranted corporate overhead, or an inefficient operating structure.” Id. The FCC predicted that the reforms in the Order “will help ensure rate-of-return carriers retain the incentive and ability to invest and operate modern networks capable of delivering broadband as well as voice services, while eliminating unnecessary spending.” Id. ¶288 (JA__); see id. ¶195 (JA__). A. The “Benchmarking Rule” Is Consistent With Section 254(b)(5) Of The Act And The FCC’s Other Rules. The Order adopted a new rule (the “benchmarking rule”) that uses regression analysis to establish “benchmarks,” or caps, to limit the reimbursable capital and operating expenses in the formula used to determine high-cost loop support (“HCLS”) for rate-of-return carriers. Order ¶¶214, Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 50 41 219 (JA__, __).8 The FCC’s prior rules did not provide rate-of-return carriers an incentive to restrain costs. Id. ¶¶211, 219 (JA__-__). The new rule addresses that problem by reducing subsidies to carriers with costs greater than similarly situated companies and redistributing that support to other carriers to promote broadband deployment. Id. ¶220 (JA__). The FCC also sought additional public comment on a methodology to implement this rule (the “benchmarking methodology”) in an attached FNPRM. See Order ¶¶¶216, 1081-89 (JA__, __-__), App. H (JA__-__). The FCC directed its staff (the Wireline Competition Bureau, or “WCB”) to finalize the benchmarking methodology after considering the record compiled in response to the FNPRM. Id. ¶217 (JA__). WCB completed that task in an April 25, 2012, Order. See Connect America Fund, 27 FCC Rcd 4235 (WCB 2012) (“Benchmarking Order”), aff’d in part and modified in part, Connect 8 A local loop is the wire between a telephone company’s switch (i.e., a device that routes telephone calls) and the subscriber’s home or office. HCLS “helps offset the non-usage based costs associated with the local loop in areas where the cost to provide voice service is relatively high compared to the national average cost per line.” Order ¶216 n.347 (JA__). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 51 42 America Fund, 2013 WL 749737 (Feb. 26, 2013) (“Sixth Order on Reconsideration”).9 Petitioners contend that the FCC (1) violated its own rules when it delegated implementation of the benchmarking rule to WCB; (2) provided WCB “unbounded discretion” to devise the benchmarking methodology, resulting in unpredictable support amounts in violation of section 254(b)(5) of the Act; and (3) authorized WCB “to revise [that methodology] without abiding by APA notice and comment procedures.” Br. 36-37. Petitioners did not raise these contentions before the agency in a petition for reconsideration, and so they are waived. See 47 U.S.C. §405(a). “The filing of a reconsideration petition” with the FCC “is ‘a condition precedent to judicial review … where the party seeking such review … relies on questions of fact or law upon which the Commission … has been afforded no opportunity to pass.’” Sorenson II, 659 F.3d at 1044 (quoting 47 U.S.C. §405(a)). “[E]ven when a petitioner has no reason to raise an argument until the FCC issues an order that makes the issue relevant, the petitioner must file a petition for reconsideration with the Commission before it may seek judicial 9 Petitioner NTCA asked this Court to stay implementation of the Benchmarking Order, or in the alternative to issue a writ of mandamus directing the FCC to rule on NTCA’s application for review of the Order. This Court denied that request on August 13, 2012. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 52 43 review.” Qwest Corp. v. FCC, 482 F.3d 471, 474 (D.C. Cir. 2007) (internal quotation marks and citation omitted). Petitioners did not do this. Consequently, section 405 of the Act bars judicial review of petitioners’ claims. See Sorenson II, 659 F.3d at 1044, 1048 n.8; Sorenson I, 567 F.3d at 1227-28. These arguments in any event lack merit because the delegation was proper. Petitioners contend that the Order (at ¶217 (JA__)) violated 47 C.F.R. §0.291(e), which prohibits rulemaking by WCB, when it “delegate[d] authority to [WCB] to adopt the initial [benchmarking] methodology, to update it as it gains more experience and additional information, and to update its regression analysis annually with new cost data.” Br. 37. But the FCC, pursuant to the relevant statutory provision may “delegate any of its functions” to staff by rule or order. See 47 U.S.C. §155(c)(1). The FCC lawfully exercised that statutory power by explicitly delegating rulemaking authority to WCB in this narrow context, notwithstanding any prior limitations imposed on WCB’s general authority under the pre-existing agency rules. The delegation was also fully consistent with Rule 0.291. Pursuant to that rule “[t]he Chief, Wireline Competition Bureau, is … delegated authority to perform all functions of the Bureau” subject to certain “exceptions and Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 53 44 limitations.” 47 C.F.R. §0.291. One of those limitations is that WCB generally “shall not have authority to issue notices of proposed rulemaking, notices of inquiry, or reports and orders arising from either of the foregoing.” Id. §0.291(e). Subsection (e), by its terms, only limits WCB’s general authority under the rule; it in no way limits the full Commission’s authority under the Act to “delegate any of its functions” to staff. 47 U.S.C. §155(c)(1). Nor does the delegation breach any statutory provisions. Specifically, petitioners have not demonstrated that the benchmarking rule violates section 254(b)(5), which requires “predictable” universal service support mechanisms. The Order imposed meaningful “substantive limitation[s]” on WCB’s authority to develop and revise the benchmarking methodology, undercutting petitioners’ claim that the “vague rule” will result in “unpredictable changes” in HCLS. Br. 38; see Order ¶¶217-18 (JA__-__) (directing WCB to use “statistical techniques,” setting forth a non-exhaustive list of variables for WCB to consider, and directing WCB to publish an updated list of “capped” values annually). Moreover, contrary to the premise of petitioners’ argument, the FCC is not required to guarantee carriers substantially the same universal service support amounts “from year to year.” Br. 38. Petitioners have made clear Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 54 45 (Br. 38, 46) that what they seek “is not merely predictable funding mechanisms, but predictable market outcomes” – something to which the Act does not entitle USF recipients, see Alenco, 201 F.3d at 622. Beyond that, petitioners’ argument, even on its own terms, fails to demonstrate that the rule adds uncertainty into HCLS disbursements. It has always been the case that carriers do not know how much support they will receive in future periods. As the Order (at ¶220 (JA__)) explained, “the fact that an individual company will not know how the benchmark affects its support levels until after investments are made is no different from the current operation of high-cost loop support, in which a carrier receives support based on where its own cost per loop falls relative to a national average that changes from year to year.” The only difference is that under the prior rules, “carriers that t[ook] prudent measures to cut costs” often “los[t] HCLS support to carriers that significantly increase[d] their costs in a given year” (id. ¶219) (JA__), whereas after the Order, rate-of-return carriers have an incentive to avoid over-spending by “manag[ing] their costs to be in alignment with their similarly situated peers.” Id. ¶221 (JA__). Petitioners further claim that the Order “exacerbates unpredictability” by allowing WCB “to change the [benchmarking] rule … without following the notice and comment procedures required for proposed rule changes under Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 55 46 the APA.” Br. 39. In fact, WCB followed the APA’s procedural requirements in implementing the benchmarking rule. See 77 Fed. Reg. 30,411-01 (May 23, 2012). To the extent that a later WCB order does not follow those rules, petitioners may challenge it then. Until then, their claim is not ripe. See Qwest, 240 F.3d at 894; Los Alamos Study Grp., 692 F.3d at 1064-65; Sw. Bell Tel. Co. v. FCC, 153 F.3d 523, 556 (8th Cir. 1998).10 B. The FCC Did Not Engage In Impermissible Retroactive Rulemaking. Petitioners argue that adoption of the benchmarking rule and elimination of the safety net additive (or “SNA”) rule, which reduce their federal universal service subsidies, constitute improper retroactive rulemaking. See Br. 45-48. Their argument lacks merit. The FCC’s actions are far removed from the classic (or “primary”) retroactivity that occurs when governmental conduct “would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.” Landgraf 10 Petitioners fleetingly claim that it was arbitrary and capricious for the FCC to rely on only cost data for voice services when it updated the formula used to limit the corporate operations expenses eligible for recovery through HCLS. Br. 33 (citing Order ¶230 (JA__)). This argument was never presented in the proceeding below or in a subsequent petition for reconsideration of the Order; thus, it has been waived. See 47 U.S.C. §405(a); Sorenson II, 659 F.3d at 1044, 1048 n.8. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 56 47 v. USI Film Prods., Inc., 511 U.S. 244, 280 (1994). This is because the Order is entirely prospective: that is, it does not mandate the return of USF disbursements already made but only reduces or eliminates federal subsidies going forward. Petitioners concede as much, but contend that the Order is retroactive insofar as it precludes them from recovering expenses they incurred based on the “reasonable expectation[]” that they would receive universal service support. Br. 46. But a new rule is not retroactive “merely because it … upsets expectations based in prior law.” Landgraf, 511 U.S. at 269. Moreover, any expectations petitioners had that they would receive any particular funding amounts in the future (or that prior methodologies would be used to determine future subsidy disbursements) were not reasonable. As the FCC explained, “Section 254 does not mandate the receipt of support by any particular carrier.” Order ¶221 (JA__); see also id. ¶293 (JA__). The courts agree. In rejecting a challenge to an earlier cap on HCLS, the Fifth Circuit explained that “[t]he Act does not guarantee all local telephone service providers a sufficient return on investment.” Alenco, 201 F.3d at 620. Instead, “[t]he Act only promises universal service, and that is a goal that requires sufficient funding of customers, not providers.” Id.; see RCA I, 588 F.3d at 1103. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 57 48 Petitioners alternatively contend that the Order is “arbitrary and capricious” because it “alter[s] future regulation in a manner that makes worthless substantial past investment incurred in reliance upon the prior rule[s].” Br. 47 (citing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 220 (1988) (Scalia, J., concurring)). As set forth above, petitioners have not demonstrated that the Order renders their past investments “worthless,” see pp. 38-39, and a waiver process in the Order exempts carriers from support reductions that would imperil their financial viability, see p. 35. Significantly, the FCC has only received a handful of waiver petitioners to date. Id. Even if petitioners had made that showing, however, there is no presumption against such “secondary” retroactive effects, and a rule “may nonetheless be sustained in spite of such retroactivity if it is reasonable.” Bowen, 488 U.S. at 220 (1988) (Scalia, J., concurring); see also DirecTV, Inc. v. FCC, 110 F.3d 816, 826 (D.C. Cir. 1997). The two rule changes petitioners attack are reasonable and easily satisfy this standard. In particular, the “benchmarking rule” (see pp. 40-46, above) limits the reimbursable capital and operating expenses in the formula used to determine HCLS for rate-of-return carriers. Petitioners contend that the rule is unreasonable given the Order’s alleged failure to explain why certain costs previously incurred by rate-of-return carriers are no longer compensable from Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 58 49 the USF. See Br. 47-48. But the Order made clear that the benchmarking rule was necessary to “discourage companies from over-spending relative to their peers.” Order ¶220; see id. ¶¶211, 219 (JA__, __). Under the FCC’s prior rules, rate-of-return carriers could have 100 percent of their loop costs above a certain threshold reimbursed from the federal USF; thus, carriers that took measures to control expenses could find themselves losing support to carriers that increased costs. Id. ¶¶211, 219 (JA__, __). To accomplish its cost-saving goal, the FCC reasonably declined to conduct costly and burdensome audits of the more than 800 rate-of-return carriers, as demanded by petitioners (see Br. 47-48), and instead adopted a general rule that identifies carriers with costs that are significantly greater than their peers, see Alenco, 201 F.3d 620-21. The FCC adopted the SNA rule in 2001 to provide support to rural incumbent LECs that made “additional significant investments” in their networks. Order ¶248 (JA__). According to petitioners, “the Order made no attempt to explain why a program intended to provide additional support for carriers making substantial network upgrades should be terminated.” Br. 48. But petitioners fail to mention that the Order “conclude[d] the safety net additive is not designed effectively to encourage additional significant investment in telecommunications plant.” Order ¶250 (JA__). Instead, Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 59 50 “[t]he majority of incumbent LECs that currently are receiving the safety net additive qualified in large part due to significant loss of lines, not because of significant increases in investment, which is contrary to the intent of the rule.” Id. ¶249 (JA__). Given that the rule had not worked as intended, the FCC reasonably eliminated it. See Bechtel v. FCC, 957 F.2d 873, 881 (D.C. Cir. 1992) (the FCC has a “duty to evaluate its policies over time to ascertain whether they work – that is, whether they actually produce the benefits the Commission originally predicted they would”). The Order likewise “rejected” petitioners’ claim (see Br. 46, 48) that carriers are entitled to SNA for investments made in 2010 and 2011 to satisfy commitments made to other federal agencies under broadband stimulus programs. Order ¶252 n.409 (JA__). As the Order noted, “since early 2010, the Commission has given carriers ample notice that [it] intended to undertake comprehensive universal service reform in the near term.” Id.; NPRM, 26 FCC Rcd at 4620-21 (¶184) (JA__) (proposing to eliminate SNA); Connect America Fund, 25 FCC Rcd 6657, 6677-78 (¶¶51-52) (2010) (JA__- __) (proposing to eliminate new eligibility for SNA). More fundamentally, carriers are never “entitled” to universal service support for future years and could not properly rely upon it. See Alenco, 201 F.3d at 620; RCA I, 588 F.3d at 1103. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 60 51 IV. PETITIONERS’ CHALLENGES TO THE FCC’S NEW SUPPORT MECHANISMS FOR AREAS SERVED BY PRICE CAP CARRIERS ARE NOT RIPE AND LACK MERIT. In addition to reforming funding for rate-of-return carriers, the Order overhauled the rules that distribute high-cost universal service support to price cap carriers. “[M]ore than 83 percent of the unserved locations in the nation are in price cap areas,” the FCC explained, “yet such areas currently receive approximately 25 percent of high-cost support.” Order ¶158 (JA__). “[T]o meet [its] universal service mandate to unserved consumers residing in these communities,” the FCC “conclude[d] that increased support to areas served by price cap carriers, coupled with rigorous, enforceable deployment obligations, [wa]s warranted.” Id. ¶159 (JA__). In Phase I of reform, which is still in effect, the FCC froze support for price cap carriers at existing levels. See Order ¶128 (JA__). “In addition, to spur the deployment of broadband in unserved areas,” the FCC “allocate[d] up to $300 million in additional support to such carriers.” Id. In Phase II, the FCC will almost double support to price cap carriers (from about $1 billion to $1.8 billion annually). See id. ¶158 (JA__). The FCC will offer each price cap carrier high-cost support in exchange for a commitment to offer (1) voice service throughout its service territory and (2) broadband service to specific areas within its service territory in a state. See id. ¶166 (JA__). A price cap Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 61 52 carrier’s “right to [that] support will terminate after five years,” at which time the FCC “expect[s] that support … will be awarded through a competitive bidding process in which all eligible providers will be given an equal opportunity to compete.” Id. ¶178 (JA__). Petitioners contend that the FCC “failed to consider” their argument that limiting Phase I incremental support to unserved areas is “arbitrary and discriminatory” because “carriers in states with extensive broadband development commitments … get nothing to upgrade what they have done.” Br. 57. In fact, the Order acknowledged that “[c]arriers have been steadily expanding their broadband footprints” and “expect[ed] such deployment will continue.” Order ¶137 (JA__). The FCC then reasonably concluded that, instead of subsidizing service upgrades in areas that already have access to broadband, it could most effectively promote broadband deployment by devoting Phase I funding to jump-starting broadband deployment in previously unserved areas. See id.; see also Connect America Fund, 27 FCC Rcd 4648, 4653 (¶15) (2012) (JA__). Petitioners may disagree with that policy judgment, but because the FCC “adequately explained its decision,” its action “was neither arbitrary nor capricious.” Vermont Public Service Board, 661 F.3d at 63. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 62 53 Petitioners also assert that the FCC “failed adequately to address arguments” that using an auction to distribute subsidies to price cap carriers in Phase II will result in inadequate service. Br. 49. This claim is not ripe for judicial review, because the FCC did not “adopt[] an auction mechanism” for price cap carriers in the Order. Br. 48. Rather, the agency merely sought comment on how best to design and implement such a mechanism in the attached FNPRM. See Order ¶¶1190-222 (JA__). The FCC addressed the “arguments” that it allegedly “ignored” by seeking comment on them in that FNPRM. Compare Br. 50 with Order ¶¶1203-07 (JA__-__) (seeking comment on service quality standards); Br. 51 with Order ¶1213 (JA__) (seeking comment on a bidding preference for small carriers). Indeed, while petitioners purport to attack the FCC’s discussion of the auction mechanism for price cap carriers, they rely (without acknowledgement) on the agency’s discussion of a different auction mechanism for wireless carriers. See Br. 48-51 (citing Order ¶¶311, 325-26 (JA__, __-__)). Unless the FCC adopts that specific mechanism for price cap carriers, its discussion of that mechanism is not relevant. Petitioners also seem to assume that the service quality standards applicable to price cap carriers today will be the same service quality standards that apply to price cap carriers under a competitive bidding mechanism. See Br. 50 (citing Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 63 54 Order ¶¶90, 94, 96, 98 (JA__, __, __, __)). The FCC has not yet made that determination. See Order ¶¶1203-07 (JA__-__). Until the FCC adopts an auction mechanism based on the record developed under the outstanding FNPRM, the Court will not be able to determine whether the FCC adequately responded to petitioners’ arguments that competitive bidding will degrade service and disadvantage small carriers. See Qwest, 240 F.3d at 894. Likewise, there will be no “‘direct and immediate impact’ upon [petitioners]” until the FCC issues an order adopting a competitive bidding mechanism. Id. (quoting Abbott Labs. v. Gardner, 387 U.S. 136, 152 (1967)). V. PETITIONERS’ VARIOUS CHALLENGES TO THE OTHER REFORMS IN THE ORDER ARE WAIVED, NOT RIPE, AND LACK MERIT. A. The Order Lawfully And Reasonably Reduced Federal Universal Service Subsidies In Areas With Artificially Low End-User Rates. To avoid “plac[ing] an undue burden on the [USF] and consumers that pay into it,” the Order “adopt[ed] a rule to limit high-cost support where end- user rates do not meet a specified local rate floor” initially set at $10 per month. Order ¶¶235; see ¶¶237, 239 (JA__; __, __). Evidence in the record showed that “there are a number of carriers with local rates that are significantly lower than rates that urban customers pay” – sometimes as low Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 64 55 as $5 per month. Id. ¶235 (JA__).11 While section 254(b)(3) of the Act requires “reasonably comparable” urban and rural rates, the FCC interpreted that principle to “ensure” only “that rates in rural areas not be significantly higher than in urban areas,” not to “subsidize[] artificially low local rates in rural areas.” Id. “The agency’s broad discretion to provide sufficient universal service funding includes the decision to impose cost controls to avoid excessive expenditures that will detract from universal service.” Alenco, 201 F.3d at 620-21. Petitioners argue that “the de facto effect” of this rule is to “set[] local rates,” in violation of 47 U.S.C. §152(b). Br. 41. Petitioners cite no judicial authority for this assertion. Nor could they, because as courts have recognized, the mere fact that an FCC rule might have an incidental effect on rates does not mean that the FCC is “regulating” rates. See, e.g., Cable & Wireless, 166 F.3d at 1230 (finding that even though “the practical effect of the Order will be to reduce settlement rates charged by foreign carriers … the Commission does not exceed its authority simply because a regulatory action has extraterritorial consequences”); Cellular Telecomms. Indus. Ass’n v. FCC, 168 F.3d 1332, 1336 (D.C. Cir. 1999) (upholding the FCC’s 11 By comparison, the national average local rate is $15.62 per month. Order ¶236 (JA__). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 65 56 determination that a state commission’s imposition of universal service contribution requirements on wireless carriers did not amount to “rate regulation” preempted by 47 U.S.C. §332(c)(3), even though such requirements “impact the rates charged to customers”). Accordingly, the FCC’s rate floor for federal universal service support does not constitute local rate-setting. Moreover, under this Court’s precedent, adopting measures that encourage states to adjust local rates is not only permissible; it is sometimes required. That is because the agency “remains obligated to create some inducement – a ‘carrot’ or a ‘stick,’ for example … – for the states to assist in implementing the goals of universal service,” here avoiding excessive universal service support caused by extraordinarily low local rates. Qwest I, 258 F.3d at 1204; see also Qwest II, 398 F.3d at 1238 (upholding the FCC’s authority to withhold all universal service support from states that fail to certify that rural rates within their boundaries are “reasonably comparable” to urban rates). It follows that the FCC did not unlawfully interfere with state regulation of local rates when it adopted the rate floor rule in the Order. Petitioners separately contend that the rate floor rule is arbitrary and capricious due to the FCC’s alleged “fail[ure] to give adequate consideration” to comments in the record. Br. 42. Petitioners rely on a single comment (out Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 66 57 of more than 650 formal comments and reply comments filed in this proceeding) arguing that low rates in certain rural areas might be attributed to small calling local areas. Under the theory sketched in this comment, urban and rural services are not comparable because rural customers living in the allegedly smaller calling local areas make fewer local calls but more long distance calls than their urban counterparts. See id. (citing Comments of the Missouri Small Company Telephone Group, WC Docket 10-90 at 10 (filed Apr. 18, 2010) (JA__)). This comment, however, is “unsupported by any data” showing that rural customers actually pay as much, or more, for telecommunications services than their urban counterparts by incurring greater long distance charges. Vermont Public Service Board, 661 F.3d at 63. Thus, it is not a significant comment that warranted a response from the agency. See Ark Initiative v. U.S. Forest Serv., 660 F.3d 1256, 1262 (10th Cir. 2011). Petitioners also contend that the FCC neglected to consider “the fact that rate[s] may have been kept low by state funds.” Br. 42. This claim has been waived because it was never presented to the FCC. See 47 U.S.C. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 67 58 §405(a); Sorenson II, 659 F.3d at 1044, 1048 n.8.12 Moreover, the argument is unavailing: if state universal service funding keeps certain rural rates artificially low, there is no reason to continue providing carriers federal universal service funding to ensure that those rates are “reasonab[ly] comparab[le]” to urban rates. Order ¶237 (JA__); see also RCA I, 588 F.3d at 1102 (the FCC’s universal service policies must consider “not just affordability for those benefitted, but fairness for those burdened”). B. The Order Reasonably Eliminated Federal Universal Service Support In Areas Served By An Unsubsidized Competitor. The FCC, in the Order, found that “[p]roviding universal service support in areas of the country where another voice and broadband provider is offering high-quality service without government assistance is an inefficient use of limited universal service funds.” Order ¶281 (JA__). As the FCC explained, “USF support should be directed to areas where providers would not deploy and maintain network facilities absent a USF subsidy, and not in areas where unsubsidized facilities-based providers already are competing for customers.” Id. (internal quotation marks omitted). The FCC thus “adopt[ed] 12 The comment cited by petitioners (Br. 42) raised a very different claim, arguing that the rate floor “would penalize [the commenter] for complying with [a] state law” prohibiting local rate increases. Comments of Consolidated Communications Holdings, Inc., WC Docket No. 10-90 at 14 (filed Aug. 24, 2011) (JA__). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 68 59 a rule to eliminate universal service support where an unsubsidized competitor – or a combination of unsubsidized competitors – offers voice and broadband service throughout an incumbent carrier’s study area.” Id.; see id. ¶170 (JA__). The rule “reflects a reasonable balance between the Commission’s mandate to ensure sufficient support for universal service and the need to combat wasteful spending.” Alenco, 201 F.3d at 620; see RCA I, 588 F.3d at 1102. Petitioners assert that “[t]he Order disregards evidence that the moment the rural carrier loses its USF support … consumers are at risk,” because an unsubsidized competitor (unlike the incumbent LEC) has only market incentives, rather than an ongoing legal obligation, to continue providing voice and broadband service in these areas. Br. 55; see id. at 54. The FCC, however, made a very different predictive judgment: that an “unsubsidized competitor” – which, by definition, is a facilities-based provider that is not eligible for support yet serves the incumbent LEC’s entire geographic service area (Order ¶¶281-83 (JA__-__)) – would have an incentive to recover its investment by continuing to serve every possible customer. This was entirely reasonable. See Nuvio Corp., 473 F.3d at 309 (“[p]redictions regarding the actions of regulated entities are precisely the type of policy judgments that courts routinely and quite correctly leave to administrative agencies”) Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 69 60 (internal quotation marks and citation omitted); Melcher v. FCC, 134 F.3d 1143, 1152 (D.C. Cir. 1998) (deferring to the FCC’s predictive “judgments about future market behavior”).13 Moreover, under 47 U.S.C. §214(e)(3), the FCC and the state commissions may compel a carrier to provide the supported universal services “to an unserved community or any portion thereof,” subject to the statutory obligations imposed on ETCs. Given its ability to address petitioners’ speculative parade of horribles (should they ever arise), the FCC is under no obligation to continue to distribute universal service support inefficiently. Finally, petitioners claim that it is unfair to retain carrier-of-last-resort (“COLR”) obligations14 for incumbent LECs after they no longer receive federal universal service support. See Br. 55. COLR requirements, however, are imposed under state law and not by the FCC. See Order ¶¶15, 75 (JA__, 13 As we explain in our Response to the Additional USF Issues Principal Brief of Petitioners at __, the FCC reasonably found that if an area is served by a provider without federal subsidies, there is no need to provide high-cost universal service support to any provider. 14 “[I]ncumbent LECs in many states are designated as the carriers of last resort and thus have a preexisting obligation to ensure service to consumers who request it.” Order ¶177 n.290 (JA__). Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 70 61 __). Ultimately, it is the states’ responsibility to determine whether COLR requirements are still warranted. C. The New Competitive Bidding Mechanism For Distributing One-Time Support To Wireless Carriers Is Consistent With the Act. Petitioners also contend (at Br. 39-40) that the Order violates section 214(e)(2) of the Act, which provides that a “State commission may, in the case of an area served by a rural telephone company, and shall, in the case of all other areas, designate more than one common carrier as an eligible telecommunications carrier for a service area designated by the State commission.” 47 U.S.C. §214(e)(2). According to petitioners, the Order “usurps the role expressly reserved to the states” by “adopt[ing] various competitive bidding mechanisms to distribute USF support” and “defin[ing] the geographic service areas to be auctioned off.” Br. 39-40. Petitioners’ argument fails because it conflates eligibility for subsidies with the right to receive subsidies. While state commissions under section 214(e) of Act determine which carriers are eligible for support, and where those carriers are eligible for support, a carrier is not entitled to receive support merely by virtue of its ETC designation. See Order ¶¶73 & n.104, 389, 390 & n.662, 392 (JA__, __, __, __). As the FCC explained, “nothing in the statute compels that every party eligible for support actually receive it.” Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 71 62 Order ¶318 (JA__); see High-Cost Universal Service Support, 23 FCC Rcd 8834, 8847 (¶29) (2008), aff’d, RCA I, 588 F.3d 1095; FCC Response to Wireless Carrier USF Principal Br. __. Because the Order only reformed the distribution of high-cost universal service support, and left intact the state commissions’ authority to designate ETCs and their service areas, there is no section 214(e) violation. Petitioners also mistakenly claim the Order created a “new conditional [ETC] designation.” Br. 40 (citing Order ¶439 (JA__)). Rather, the Order simply held that carriers that receive an ETC designation conditioned upon receiving Mobility Fund support may participate in the Mobility Fund Phase I auction. Order ¶¶391 n.665, 439 (JA__, __). Nothing in the Order compels the state commission to grant such a conditional designation (though a state commission is free to make such a grant). D. The Order Did Not Eliminate Federal Universal Service Support For Remote Areas. The FCC recognized that the cost of deploying terrestrial networks can be extremely high in remote areas of the nation, and so it concluded that it should eventually support such areas through a new fund. See Order ¶¶533- 38 (JA__-__). This remote areas fund is intended to help consumers “obtain affordable broadband through alternative technology platforms such as satellite and unlicensed wireless.” Id. ¶533 (JA__). The Order budgeted Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 72 63 $100 million annually for the fund but sought comment “on the details of distributing support” in an accompanying FNPRM. Id. ¶¶534, 1223-90 (JA__, __-__). Petitioners seem to think the FCC eliminated universal service support to remote areas pending enactment of those rules. See Br. 52-53. It did not. Until the distribution rules are in place (see Order ¶167 (JA__)), extremely high-cost areas will continue to receive support under existing mechanisms for price cap and rate-of-return carriers, see id. ¶¶133 (JA__) (freezing support for price-cap carriers), 195 (JA__) (maintaining support for rate-of- return carriers). It follows that petitioners’ claim that the Order “denied” support to extremely high-cost areas is incorrect and not ripe. See Qwest, 240 F.3d at 894-95; Los Alamos Study Group, 692 F.3d at 1064-65. VI. THE FCC GAVE ADEQUATE NOTICE AND OPPORTUNITY TO COMMENT ON THE RULE CHANGES IN THE ORDER. Petitioners complain that the FCC violated the notice-and-comment requirements of the APA, 5 U.S.C. §553(b). See Br. 57-59. That provision requires notice of “either the terms or substance of the proposed rule or a description of the subjects and issues involved.” 5 U.S.C. §553(b)(3). “Since the public is generally entitled to submit their views and relevant data on any proposals, the notice must be sufficient to fairly apprise interested parties of Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 73 64 the issues involved, but it need not specify every precise proposal which [the agency] may ultimately adopt as a rule.” Nuvio Corp., 473 F.3d at 309-10 (internal quotation marks and citations omitted). Petitioners claim that “[k]ey provisions in the Order were not part of the proposed rule.” Br. 57. This argument is not properly before the Court, because it was not presented to the FCC either before the FCC issued the Order or on reconsideration once the agency allegedly acted without notice. See 47 U.S.C. §405(a); Globalstar, Inc. v. FCC, 564 F.3d 476, 483-85 (D.C. Cir. 2009) (explaining that 47 U.S.C. §405(a) applies to claims of lack of APA notice and thus requires the filing of a reconsideration petition as a precondition to obtaining judicial review); Cellnet Commc’ns, Inc. v. FCC, 149 F.3d 429, 442-43 (6th Cir. 1998) (same). In any event, petitioners’ claims are baseless. Petitioners broadly assert that the FCC failed to provide notice of the new rules implementing the Access Recovery Charge (“ARC”) mechanism. Br. 58. Not so. The FCC sought comment on those rules twice. In the NPRM released on February 9, 2011, the FCC “s[ought] comment … on possible recovery of reduced intercarrier compensation through a variety of mechanisms, including through end-user charges such as modifications to the interstate SLC cap.” NPRM ¶545 (JA__). Subsequently, in an August 3, 2011 Public Notice published in the Federal Register, the FCC sought Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 74 65 comment on “the appropriate recovery mechanism for ICC reform, including the ABC Plan’s … recovery proposals.” See Further Inquiry Into Certain Issues in the Universal Service-Intercarrier Compensation Transformation Proceeding, 26 FCC Rcd 11112, 11124 (2011) (“August 3, 2011, Public Notice”) (JA__); 76 Fed. Reg. 49,401-01 (Aug. 10, 2011). The ARC, as adopted in the Order, is largely modeled on the ABC Plan. Compare Order ¶¶850-53 (JA__-__) with Letter from Robert W. Quinn, AT&T, et al., WC Docket 10-90 et al. at 11-13 (filed July 29, 2011) (“ABC Plan”) (JA__-__). Likewise, the FCC twice proposed to adopt “a dual process for ICC revenue recovery.” Br. 58-59; see NPRM ¶451 (JA__) (seeking “comment on an incentive regulation framework for any intercarrier compensation replacement funding that would be distributed through the CAF to carriers that currently set their access charges based on a rate-of-return framework”); August 3, 2011, Public Notice, 26 FCC Rcd at 11125-26 (JA__) (seeking comment on separate recovery mechanisms for price cap and rate-of-return carriers). Petitioners further allege that the FCC, without notice, amended its price cap rules to eliminate exogenous adjustments. Br. 58. The agency did give notice, however. In the NPRM, it expressly “s[ought] comment regarding whether there is any basis under the Commission’s price cap rules Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 75 66 for concluding that an exogenous adjustment should not be permitted due to the transitional reduction in [Interstate Access Support].” NPRM ¶235 (JA__). Finally, the FCC sought comment on “an exclusive right of first refusal” for price cap carriers in the August 3, 2011, Public Notice, 26 FCC Rcd at 11114-15 (JA__-__). See Br. 59. VII. THE FCC REASONABLY DECIDED TO ADDRESS UNIVERSAL SERVICE CONTRIBUTIONS IN A SEPARATE PROCEEDING. The USF is financed through “assessments paid by interstate telecommunications service providers.” RCA I, 588 F.3d at 1099. Fund assessments paid by contributors are determined by applying a quarterly “contribution factor” to the contributors’ interstate revenues. Id. Contributors “almost always pass their contribution assessments through to their customers.” Id. Petitioners allege that the FCC erred by only addressing universal service distributions and not also contributions in the Order. See Br. 34-36. According to petitioners, the FCC’s failure to “widen[] the … base” against which universal service contributions are assessed will render voice and broadband services less affordable, and contributions inequitable, in violation of 47 U.S.C. §254(b)(1) and (4), respectively. Id. at 34. Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 76 67 As petitioners acknowledge, the FCC in a separate rulemaking docket has “s[ought] comment on proposals to reform and modernize how Universal Service Fund … contributions are assessed and recovered.” Br. 35; see Universal Service Contribution Methodology; A National Broadband Plan for Our Future, 27 FCC Rcd 5357, 5358 (2012); see also id. at 5389-92 (¶¶65-72) (requesting comment on extending USF assessments to broadband Internet access service). Given the FCC’s well-established discretion under 47 U.S.C. §154(j) to define the scope of its own proceedings, the agency acted properly in addressing universal service contributions elsewhere. See FCC v. Pottsville Broad. Co., 309 U.S. 134, 138 (1940) (providing that “subordinate questions of procedure,” including the “scope of the inquiry,” are “explicitly and by implication left to the Commission’s own devising, so long … as it observes the basic requirements designed for the protection of private as well as public interest”). The FCC’s decision to address contributions later is also entirely consistent with precedent upholding the agency’s authority to act incrementally. As this Court has found, “the FCC is not required to address all problems ‘in one fell swoop,’ and may focus on problems depending on their acuteness.” Sorenson I, 567 F.3d at 1222 (citing NAB v. FCC, 740 F.2d 1190, 1207 (D.C. Cir. 1984)); see also Brand X, 545 U.S. at 1002 (affirming Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 77 68 the FCC’s decision to incrementally address the regulatory framework for different categories of facilities-based information service providers). In any event, petitioners’ arguments lack merit. Noting that “telecommunications voice revenues are declining,” petitioners assert that universal service contributions levied on consumers will increase and render service less affordable, in violation of section 254(b)(1), “unless the contribution base is widened.” Br. 34-35. But, if anything, the Order promotes affordability by “[f]or the first time … establish[ing] a defined budget for the high-cost component of the universal service fund.” Order ¶123 (JA__). Had the FCC not established a budget, (id. ¶125 (JA__)), ever- growing demand for subsidies would have resulted in greater increases in the USF contributions paid by consumers, over and above any increase resulting from a decline in telecommunications revenues. There is likewise no merit to petitioners’ argument that it is “inequitable” under section 254(b)(4) to provide universal service support for broadband, but not also assess USF contributions against broadband service revenues. Br. 35. Nothing in section 254(b)(4) requires the recipients of universal service support to also contribute to the USF. Indeed, distributions and contributions are distinct: the former concerns which providers should receive support (and how much) to preserve and advance universal service, Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 78 69 see 47 U.S.C. §254(b), whereas the latter concerns which providers should be required to help fund that effort, see id. §254(d). Thus, “there is always likely to be a disparity between the contributions parties make to the USF and the amounts that they receive from the USF.” Order ¶312 (JA__). CONCLUSION The petitions for review should be dismissed in part and otherwise denied. Respectfully submitted, WILLIAM J. BAER ASSISTANT ATTORNEY GENERAL ROBERT B. NICHOLSON ROBERT J. WIGGERS ATTORNEYS UNITED STATES DEPARTMENT OF JUSTICE WASHINGTON, D.C. 20530 SEAN A. LEV GENERAL COUNSEL PETER KARANJIA DEPUTY GENERAL COUNSEL RICHARD K. WELCH DEPUTY ASSOCIATE GENERAL COUNSEL /s/ Maureen K. Flood LAURENCE N. BOURNE JAMES M. CARR MAUREEN K. FLOOD COUNSEL FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 (202) 418-1740 March 6, 2013 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 79 CERTIFICATE OF COMPLIANCE Certificate of Compliance With Type-Volume Limitations, Typeface Requirements, Type Style Requirements, Privacy Redaction Requirements, and Virus Scan 1. This brief complies with the type-volume limitation of the Second Briefing Order. It does not exceed 15% of the size of the brief to which it is responding. The Uncited Joint Universal Service Fund Principal Brief for Petitioners was certified to be 13,190 words in length. Therefore, the FCC may file a response brief up to 15,168 words in length. This brief contains 14,726 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii). 2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and 10th Cir. R. 32(a) and the type style requirements of Fed. R. App. P. 32(a)(6) because this filing has been prepared in a proportionally spaced typeface using Microsoft Word 2010 in 14-point Times New Roman font. 3. All required privacy redactions have been made. 4. This brief was scanned for viruses with Symantec Endpoint Protection, version 11.0.7200.1147, updated on March 6, 2013, and according to the program is free of viruses. /s/ Maureen K. Flood Maureen K. Flood Counsel March 6, 2013 Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 80 CERTIFICATE OF SERVICE I hereby certify that on March 6, 2013, I caused the foregoing Federal Respondents’ Uncited Response to the Joint Universal Service Fund Principal Brief of Petitioners to be filed by delivering a copy to the Court via e-mail at FCC_briefs_only@ca10.uscourts .gov. I further certify that the foregoing document will be furnished by the Court through (ECF) electronic service to all parties in this case through a registered CM/ECF user. This document will be available for viewing and downloading on the CM/ECF system. /s/ Maureen K. Flood Maureen K. Flood Counsel March 6, 2013  Appellate Case: 11-9900 Document: 01019014108 Date Filed: 03/06/2013 Page: 81