FEDERAL RESPONDENTS’ UNCITED RESPONSE TO THE BRIEF OF THE NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES 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: 01019020709 Date Filed: 03/18/2013 Page: 1 i TABLE OF CONTENTS Table of Authorities.......................................................................................... ii  Glossary ........................................................................................................... iv  Issue Presented .................................................................................................. 1  Introduction and Summary of Argument .......................................................... 1  Argument ........................................................................................................... 4  I.  The FCC Justified The ARC Under Specific Grants Of Statutory Authority. ................................................................................... 4  II.  The ARC Lawfully Recovers Both Interstate And Intrastate Revenues That Are Reduced By ICC Reforms. ........................................ 6  III.  The Order Lawfully Permits Eligible Recovery To Be Allocated To ARCs On A Holding-Company Basis. ................................ 8  Conclusion ....................................................................................................... 13  Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 2 ii TABLE OF AUTHORITIES CASES  AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999) ........................................................................................................3, 6 Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984) ...................................................................................... 7 Connecticut Office of Consumer Counsel v. FCC, 915 F.2d 75 (2d Cir. 1990) .......................................................................... 12 Nat’l Ass’n of Reg. Util. Comm’rs v. FCC, 737 F.2d 1095 (D.C. Cir. 1984) ............................................................................. 4, 10 Nat’l Ass’n of State Util. Consumer Advocates v. FCC, 372 F.3d 454 (D.C. Cir. 2004) ............................................................. 8 Reservation Tel. Coop. v. FCC, 826 F.2d 1129 (D.C. Cir. 1987) ........................................................................................... 11 Rural Cellular Ass’n v. FCC, 588 F.3d 1095 (D.C. Cir. 2009) ..................................................................................................... 12 Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215 (10th Cir. 2009) ............................................................................................. 5 Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035 (10th Cir. 2011) .................................................................................. 3, 5, 10 Sw. Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998) .............................................................................................................. 8 Texas Office of Pub. Util. Counsel v. FCC, 265 F.3d 313 (5th Cir. 2001) ........................................................................................ 8 STATUTES  47 U.S.C. §201(b)..................................................................................... 3, 5, 6 47 U.S.C. §202(a) ............................................................................................ 10 47 U.S.C. §251(b)(5) ................................................................................ 3, 5, 6 47 U.S.C. §405(a) ................................................................................... 3, 5, 10 Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 3 iii ADMINISTRATIVE DECISIONS  Access Charge Reform, 12 FCC Rcd 15982 (1997), aff’d Sw. Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998) ....................................................................................................... 8 Access Charge Reform, 15 FCC Rcd 12962 (2000), aff’d in pertinent part, Texas Office of Pub. Util. Counsel v. FCC, 265 F.3d 313 (5th Cir. 2001) ............................................. 8 Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 4 iv GLOSSARY ARC Access Recovery Charge Br. Petitioner’s Brief CAF Connect America Fund FCC Federal Communications Commission ICC Intercarrier Compensation ILEC Incumbent Local Exchange Carrier JA Joint Appendix LEC Local Exchange Carrier NASUCA National Association of State Utility Consumer Advocates SLC Subscriber Line Charge Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 5 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 BRIEF OF THE NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES ISSUE PRESENTED Whether the Federal Communications Commission (“FCC”) lawfully established a transitional Access Recovery Charge (“ARC”) that incumbent local exchange carriers (“incumbent LECs” or “ILECs”) may charge their end-user customers to recover some of the revenues that are reduced pursuant to the agency’s intercarrier compensation (“ICC”) reforms. INTRODUCTION AND SUMMARY OF ARGUMENT In the Order on review,1 the FCC started a comprehensive reform of the way local exchange carriers are compensated when they exchange telecommunications with other telecommunications providers. The revised regime “phase[s] out regulated per-minute intercarrier … charges,” Order 1 Connect America Fund, 26 FCC Rcd 17663 (2011) (“Order”) (JA__). Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 6 2 ¶736 (JA__), and replaces them over time with “a uniform national bill-and- keep framework as the ultimate end state for all telecommunications traffic exchanged with a LEC,” id. ¶34 (JA__). The FCC determined that a bill-and- keep framework – under which the LEC looks to its own subscribers (and, if necessary, explicit universal service subsidies) to recover its network costs (id. ¶737 (JA__)) – would “eliminat[e] the existing opaque implicit subsidy system under which consumers pay” billions of dollars to support other carriers’ networks, and would help ensure that “consumers pay only for services that they choose and receive.” Id. ¶738 (JA__); see also id. ¶¶748- 751 (JA__-__). The FCC also determined that a bill-and-keep framework was well within its authority to replace implicit subsidies with explicit ones and to adopt a regulatory framework for telecommunications traffic that LECs exchange with other providers. See Order ¶¶747, 760-781 (JA__-__); see also FCC Preliminary Brief 32-37. To implement its bill-and-keep methodology, the FCC established a transitional federally-tariffed ARC that incumbent LECs may bill to their end users. Id. ¶¶906-916 (JA__-__). The ARC is part of a recovery mechanism (which also includes direct subsidies from the Connect America Fund (“CAF”)) that the FCC established to enable incumbent LECs to recover some of the intercarrier compensation revenues that the Order reduces over Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 7 3 time. Id. ¶905 (JA__); see generally Argument II of the FCC’s Principal ICC Brief (describing the operation of the recovery mechanism). Petitioner National Association of State Utility Consumer Advocates (“NASUCA”) challenges the lawfulness of the ARC in three respects. I. NASUCA contends (Br. 5-8) that the FCC failed to identify its legal authority to adopt the ARC in the Order, and therefore cannot do so before this Court. This claim is barred by 47 U.S.C. §405(a) because no party presented it to the agency in the administrative proceedings below. Sorenson Commc’ns, Inc. v. FCC, 659 F.3d 1035, 1044 (10th Cir. 2011) (“Sorenson II”). The claim is baseless, in any event, because the FCC’s Order fully explained the statutory basis for the ARC: 47 U.S.C. §§201(b) & 251(b)(5). Order ¶¶760-781 (JA__-__). II. The FCC lawfully designed the ARC to recover intrastate, as well as interstate, ICC revenues reduced under the reforms adopted in the Order. Compare Br. 8-11. As the Supreme Court held in AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 (1999) (“AT&T”), the FCC has authority to implement section 251(b)(5), which requires LECs to “establish reciprocal compensation arrangements for the transport and termination of telecommunications.” That provision plainly covers intrastate telecommunications. See Order ¶761 Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 8 4 (JA__). Accordingly, under established Supreme Court precedent, the FCC acted lawfully in establishing the ARC to recover intrastate revenues. III. The Court also should reject NASUCA’s assertion (Br. 11-13) that it was arbitrary, and unlawfully discriminatory, for the FCC to permit ILECs to determine “at the holding company level” how eligible recovery will be allocated among subsidiary ILECs’ ARCs. NASUCA’s discrimination claim is barred by section 405(a) because it was not presented to the agency. Its claim fails on the merits, in any event, because the FCC provided a “neutral, rational basis” for the holding-company rule. Nat’l Ass’n of Reg. Util. Comm’rs v. FCC, 737 F.2d 1095, 1133 (D.C. Cir. 1984) (“NARUC”). As the FCC explained, that rule spreads out ARC recovery over a broader class of customers and helps reduce burdens on the CAF at the same time it maintains consumer protections to ensure that end-user rates remain reasonable. Order ¶910 (JA__). Although NASUCA may disagree with the FCC’s policy judgment, the agency’s balancing of factors is entitled to significant deference and should be affirmed. ARGUMENT I. THE FCC JUSTIFIED THE ARC UNDER SPECIFIC GRANTS OF STATUTORY AUTHORITY. The Court should dismiss NASUCA’s claim (Br. 5-8) that the FCC failed to cite any authority for the ARC. No one presented this argument Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 9 5 before the FCC. It thus is barred by section 405(a) of the Communications Act, which prevents review of “questions of fact or law upon which the [FCC] … has been afforded no opportunity to pass.” 47 U.S.C. §405(a); accord Sorenson II, 659 F.3d at 1044; Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215, 1227-28 (10th Cir. 2009) (“Sorenson I”). The claim is meritless, in any event, because the agency set out in detail its statutory authority to adopt the ICC reforms of which the ARC is a part. Order ¶¶760-781 (JA__-__). The FCC determined that 47 U.S.C. §§201(b) & 251(b)(5), among other provisions, empowered it to adopt rules establishing how LECs are compensated when they exchange traffic that originates or terminates on their networks. Order ¶760 (JA__). Acting under those provisions, the FCC adopted bill-and-keep as the end point of its ICC reforms, while allowing a gradual transition from the existing regime. Order ¶¶736-739 (JA__-__). Because the ARC provides a portion of the compensation ILECs may receive during that transition, id ¶¶906-916 (JA__- __), and forms an integral part of the overarching mechanism for transitioning to bill-and-keep, it falls squarely within the Order’s detailed Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 10 6 explanation of the agency’s statutory authority to adopt a bill-and-keep framework, id. ¶¶760-81 (JA__-__).2 II. THE ARC LAWFULLY RECOVERS BOTH INTERSTATE AND INTRASTATE REVENUES THAT ARE REDUCED BY ICC REFORMS. NASUCA argues (Br. 8-11) that the FCC lacks authority to regulate intrastate access traffic and that the ARC therefore must be unlawful, because it is designed to offset reductions in intrastate (as well as interstate) access charges. This claim is baseless. The FCC reasonably found authority to adopt rules governing all telecommunications – intrastate, as well as interstate – exchanged with a LEC. See Order ¶¶760-762 (JA__-__). The FCC explained that the Supreme Court had confirmed its authority under 47 U.S.C. §201(b) to adopt rules implementing the Communications Act, including section 251(b)(5). Id. ¶760 (JA__) (citing AT&T, 525 U.S. at 378). The agency further determined that section 251(b)(5), by its terms, covers intrastate “telecommunications” exchanged with a LEC. Order ¶761 (JA__). Because the ARC recovers some of the intrastate access revenues reduced by the Order pursuant to that federal authority, the ARC falls well within the FCC’s statutory powers. The 2 NASUCA’s argument (Br. 6-8) that the FCC lacks ancillary authority to adopt the ARC is irrelevant because the FCC never invoked such authority for the ARC. Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 11 7 FCC’s reasonable construction of the statute is entitled to deference under Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984). See FCC Principal ICC Brief, Argument I (explaining in detail the FCC’s statutory authority to adopt comprehensive ICC reform). In light of this statutory authority for establishing the ARC, NASUCA misses the point in emphasizing (Br. 8-11) that the FCC’s earlier precedents involving interstate access charges do not themselves establish the agency’s authority for the ARC. The FCC merely mentioned those precedents as examples of analogous reforms the agency had previously undertaken. Order ¶852 (JA__); see also id. ¶¶906-916 (JA__-__). In those prior decisions, which were upheld on judicial review, the FCC had moved incrementally to phase out certain per-minute interstate charges that LECs had imposed on long-distance carriers, in favor of flat monthly end-user charges (called “subscriber line charges” or “SLCs”) that did not vary with subscribers’ usage. The FCC determined that switching from intercarrier charges to end-user charges would better reflect cost- causation principles and reduce implicit subsidies that had been embedded Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 12 8 within the intercarrier charges. 3 These decisions fully support the reasonableness of the ICC reforms adopted in the Order. III. THE ORDER LAWFULLY PERMITS ELIGIBLE RECOVERY TO BE ALLOCATED TO ARCS ON A HOLDING-COMPANY BASIS. In designing the ARC, the FCC adopted numerous safeguards to ensure that consumers will see only small increases in their monthly bills. It capped at $0.50 per year any increases in the monthly ARC charged to residential and single-line business customers. Order ¶909 (JA___). It capped at $1.00 (per line) per year any increases in the monthly ARC for multi-line business customers, and it required “potential revenue from such increases to be imputed to carriers” – whether or not they actually imposed those charges – thereby reducing the revenues eligible for recovery through ARCs charged to residential consumers. Id. Price cap LECs may adopt annual increases in the ARC for only five years, and rate-of-return LECs for only six years. Id. ¶908 (JA__). Additionally, the FCC adopted a $30.00 per month residential rate 3 See, e.g., Access Charge Reform, 12 FCC Rcd 15982, 16007-09 ¶¶69-71 (1997), aff’d Sw. Bell Tel. Co. v. FCC, 153 F.3d 523, 557-59 (8th Cir. 1998); Access Charge Reform, 15 FCC Rcd 12962, 12975-76 ¶¶30-33 (2000), aff’d in pertinent part, Texas Office of Pub. Util. Counsel v. FCC, 265 F.3d 313, 321-23 (5th Cir. 2001). See also Nat’l Ass’n of State Util. Consumer Advocates v. FCC, 372 F.3d 454, 456-60 (D.C. Cir. 2004) (describing migration from intercarrier charges to end-user charges and rejecting NASUCA’s challenge to that process). Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 13 9 ceiling for both price cap and rate-of-return LECs, id. ¶913 (JA__), so that a LEC may not charge residential consumers an ARC if it would drive above $30.00 the consumer’s aggregate monthly bill for the federal SLC, the ARC, and assorted local service charges, id. ¶¶913-914 (JA__-__). Subject to these consumer protections, the FCC also allowed parent ILEC holding companies to pool the amounts their subsidiary ILECs are eligible to recover under the Order, and then reallocate those amounts among the ILEC subsidiaries for purposes of calculating the ARCs that each may charge. Id. ¶910 (JA__). This does not alter the total revenues that the related ILECs collectively may recover, but it does potentially affect the amount and source of each subsidiary ILEC’s recovery. 4 Assume, for example, that Holding Company X has two ILEC subsidiaries – ILEC A and ILEC B. Assume, further, that a $0.25 ARC increase (below the $0.50 annual cap on ARC increases) will recover all of ILEC A’s eligible recovery 4 The Order’s methodology for calculating eligible recovery allows each ILEC to recover a portion of its annual reduction in ICC revenues resulting from reform. For any given carrier, the size of the required annual reduction depends on the level of its existing charges for the rate elements subject to reform. See Order ¶801 & Figure 9 (JA__-__) (showing timetable and size of intercarrier rate reductions); id ¶¶867-920 (JA__-__) (describing recovery mechanism). Because each carrier’s existing ICC rate levels are likely to differ (depending on prior state regulatory policies), the calculation of any two ILECs’ eligible recoveries under the FCC’s reforms is likely to yield different results. Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 14 10 in Oklahoma, without resort to CAF subsidies. And assume that a full $0.50 ARC increase by ILEC B in Colorado is insufficient to recover all of that company’s eligible recovery without turning to explicit subsidies from the CAF. The holding-company rule permits the carriers to reallocate some of ILEC B’s eligible recovery to ILEC A, thus permitting ILEC A to recover more of the companies’ combined eligible revenues through the ARC, while requiring ILEC B to make offsetting reductions in its subsidy demands on the CAF. NASUCA argues that the holding-company rule requires “consumers in states that have previously reduced their intrastate access charges as well as jurisdictions that have no such charges” to “pick up the burden from states that have not done so” – an outcome it characterizes as arbitrary and contrary to the statutory prohibition against “‘unjust or unreasonable discrimination in charges.’” Br. 12, 13 (quoting 47 U.S.C. §202(a)). The Court should not consider NASUCA’s unreasonable discrimination claim because it was not presented to the FCC. See 47 U.S.C. §405(a); Sorenson II, 659 F.3d at 1044. NASUCA’s challenge is unsound in any event. By its terms, section 202(a) prohibits only “unjust or unreasonable discrimination in charges.” 47 U.S.C. §202(a) (emphasis added); see also NARUC, 737 F.2d at 1133 Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 15 11 (section 202(a) addresses “unjustifiably different rates for the same service”) (emphasis added). That provision does not bar rates that have “a neutral, rational basis.” NARUC, 737 F.2d at 1133; accord Reservation Tel. Coop. v. FCC, 826 F.2d 1129, 1136 (D.C. Cir. 1987). The ARC rates that the Order permits pursuant to the holding-company rule have such a neutral and rational basis. First, allowing eligible revenue recovery to be reallocated among subsidiary ILECs enables carriers to “spread the recovery” through the ARC “among a broader set of customers,” thereby potentially “minimizing the increase experienced by any one customer.” Order ¶910 (JA__). Second, by enabling a holding company’s subsidiary ILECs (as a group) to receive a higher proportion of their overall eligible recovery through the ARC, the holding-company rule “limit[s] the potential impact on the CAF,” which provides carriers with direct subsidies if the ARC is insufficient to generate all of the revenues to which carriers are entitled. Id.; see also id. ¶¶917-919 Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 16 12 (JA__-__) (describing the role of the CAF under the recovery mechanism). 5 Third, while the holding-company rule provides these benefits, “[t]he ARC’s modest and capped size, its interim nature, … [its revenue imputation feature], … [and] the $30 Residential Rate Ceiling” all combine to “ensure that overall rates remain affordable and set at reasonable levels.” Order n.1791 (JA__). The FCC “enjoys broad discretion” when conducting such balancing, particularly in the universal service context. RCA, 588 F.3d at 1103. Finally, Connecticut Office of Consumer Counsel v. FCC, 915 F.2d 75 (2d Cir. 1990), undermines rather than supports NASUCA’s discrimination claim. See Br. 13. Although the court in that case upheld an FCC decision to permit AT&T to pass through to its Connecticut customers, alone, the costs of that state’s gross receipts tax, it did not hold that state-specific costs always must be recovered from in-state consumers to avoid unlawful discrimination. Indeed, the court acknowledged the lawfulness of the underlying interstate regulatory regime at the time, which, in general, called 5 Although NASUCA complains that the holding-company rule may require consumers to pay higher ARCs in some states to cover revenue losses in other states, a similar result would occur if the absence of the rule led to increased demands on the CAF. That is so because CAF funds are recovered through contributions from telecommunications providers nationwide and are “almost always pass[ed on] … to their customers.” Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1099 (D.C. Cir. 2009) (“RCA”). Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 17 13 for ratemaking on the basis of a nationwide pooling of fixed costs across state lines. Id. at 76-77, 79. Like the holding-company rule here, that nationwide system of pooling lawfully permitted carriers to recover some costs incurred in one state through charges imposed on customers in other states. CONCLUSION The petition 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/ Laurence N. Bourne LAURENCE N. BOURNE JAMES M. CARR MAUREEN K. FLOOD COUNSEL FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 (202) 418-1740 March 18, 2013 Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 18 CERTIFICATE OF COMPLIANCE Certifica t e of Complianc e With Ty pe-Volume Limitati o n s , Typeface Requirem e n t s , Type Style Requirem e n t s , Privacy Redactio n Requirem e n t s , 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 Brief of The National Association of State Utility Consumer Advocates was certified to be 2,429 words in length. Therefore, the FCC may file a response brief up to 2,793 words in length. This brief contains 2,570 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 17, 2013, and according to the program is free of viruses. /s/ Laurence N. Bourne Laurence N. Bourne Counsel March 18, 2013 Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 19 CERTIFICATE OF SERVICE I hereby certify that on March 18, 2013, I caused the foregoing Federal Respondents’ Uncited Response to the Brief of The National Association of State Utility Consumer Advocates 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/ Laurence N. Bourne Laurence N. Bourne Counsel March 18, 2013  Appellate Case: 11-9900 Document: 01019020709 Date Filed: 03/18/2013 Page: 20