FCC USF, Intercarrier Compensation Order Beats Back All Challenges in 10th Cir. Appeal

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By Bryce Baschuk  

May 23 — In a wide-ranging victory for the Federal Communications Commission, the U.S. Court of Appeals for the Tenth Circuit has upheld the agency's 2011 overhaul of the Universal Service Fund and intercarrier compensation systems.

The court denied all petitions across multiple U.S. jurisdictions seeking to review the FCC's reforms of both USF and intercarrier compensation regimes.

The decision affirms the FCC's legal authority to transform the nation's $4.5 billion annual USF “high-cost” fund into the “Connect America Fund” aimed at subsidizing broadband deployment to unserved or underserved areas. The order also required a gradual reduction of intercarrier compensation rates to zero in order to spur phone companies to upgrade their infrastructure to internet protocol-based networks.

Petitioners' Arguments ‘Unpersuasive.'

Over the last two years, dozens of U.S. wireline companies and state regulatory commissions have fought back against a multitude of issues stemming from FCC's nearly 800-page order. Among the entities that filed challenges were AT&T Inc., C Spire Wireless (formerly Cell South), Centurylink, Inc., the National Telecommunications Cooperative Association (NTCA), the National Association of Regulatory Utility Commissioners (NARUC), Pennsylvania Public Utility Commission, the Vermont Public Service Board, and the Ohio Public Utilities Commission.

The court denied all the petitioners' complaints, including broad claims that the commission failed to undergo “reasoned decision-making” and that its ultimate decision was “arbitrary and capricious.”

Tenth Circuit Chief Judge Mary Beck Briscoe said the petitioners' claims were “either unpersuasive or barred from judicial review,” in the court's opinion. Circuit Judge Jerome Holmes concurred, while Judge Robert Bacharach in a separate opinion concurred with “virtually all” of Briscoe's opinion but dissented in part.

FCC Authority Affirmed

The court determined that the FCC had authority under Section 254 of the Communications Act of 1934, as amended by the Telecommunications Act of 1996, to require USF recipients to provide broadband services in order to qualify for telecommunications subsidies. Briscoe wrote that “nothing in the statute [47 USC 254] limits the FCC's authority to place conditions, such as the broadband requirement, on the use of USF funds.”

“The FCC's interpretation of § 254(e) is not ‘arbitrary, capricious, or manifestly contrary to the statute,'” the ruling said. “It is reasonable to conclude that Congress left a gap to be filled by the FCC, i.e., for the FCC to determine and specify precisely how USF funds may or must be used.”

The court also agreed with the FCC's argument that Section 706(b) of the Telecommunications Act qualified as an independent grant of authority for the agency to implement its broadband requirements. Section 706(b) permits the FCC “ ‘to take steps necessary to fulfill Congress's broadband deployment objectives,' and ‘it is hard to see what additional work section 706(b) does if it is not an independent source of authority,' ” Briscoe's opinion said.

Support for Net Neutrality Order

The decision further dents Republican claims that Section 706 was not intended to permit the FCC to regulate the nation's broadband networks. In January, the U.S. Court of Appeals for the District of Columbia Circuit ruled that Congress provided the FCC with authority to implement open Internet rules under Section 706, which requires the FCC to encourage “the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans” (Verizon Commc'ns Inc. v. FCC, D.C. Cir., No. 11-1355, 1/14/14).

Partial Dissent

Judge Bacharach, in his separate opinion, said the FCC violated the Administrative Procedure Act by failing to supply a “reasonable basis” for determining that an annual budget of $4.5 billion would be enough to satisfy the order's new broadband requirements.

‘Across-the-Board' Win

FCC officials, in separate statements, told Bloomberg BNA they were pleased with the court's decision.

“Congress has directed the commission to ensure that all Americans receive the benefit of 21st Century communications. With today's across-the-board affirmance of our landmark 2011 reforms, the commission has tools in hand to accomplish that critical goal,” said FCC Press Secretary Kim Hart in an e-mail. “We are particularly pleased that the Tenth Circuit affirmed the commission's authority to condition receipt of universal-service funds on a carrier's agreement to provide broadband services to rural Americans.”

“After years of good faith efforts faltered, voting to approve the comprehensive reform of universal service and intercarrier compensation continues to be one of my proudest moments at the FCC,” said FCC Commissioner Mignon Clyburn in a news release. “The reforms are changing the lives of millions of Americans who will receive broadband for the first time.”

Supreme Court Appeal?

NARUC President Colette Honorable said the decision “appears to conflict with decisions from other federal court circuits, misapplies controlling Supreme Court precedent, and provides the FCC's decision with deference—when no deference was warranted because the cited statutory text is not ambiguous,” according to a news release. “It seems more than likely that one or more of the other 30 petitioners will seek Supreme Court review of this decision. We will determine shortly whether and how we could participate in any Supreme Court review.”

Other petitioners in the case said they were generally disappointed but commended the FCC for working with stakeholders to correct some of the more widespread objections to the order like the recent elimination of the order's quantile regression analysis caps.

NTCA Cites Missed Opportunities

NTCA Chief Executive Officer Shirley Bloomfield said the court decision was unfortunate in that it “could have helped to address several still lingering concerns with respect to intercarrier compensation changes and the establishment of more proper and sufficient universal service budgets,” according to a separate news release. “Those are matters we will now look to address through further engagement and potential course corrections in ongoing conversations with the FCC and Congress,” she said.

“The FCC's win in the 10th Circuit is a win for all Americans,” said AT&T spokeswoman Margaret Boles in an e-mail statement. The court has “vindicated the FCC's decision to eliminate implicit subsidies in intercarrier compensation and transform universal service into a program focused on broadband,” she said.

US Telecom spokeswoman, Anne Veigle, said the group hopes the decision “provides impetus for the commission to rapidly finish implementing universal service and Connect America Fund reforms.” US Telecom was not a plaintiff in the case.

To contact the reporter on this story: Bryce Baschuk in Washington at bbaschuk@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com

For more information read the court decision here: https://www.ca10.uscourts.gov/opinions/11/11-9900.pdf

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