IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT AT&T INC. S OPPOSITION TO FCC S MOTION TO HOLD CASE IN ABEYANCE

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1 USCA Case # Document # Filed: 07/15/2015 Page 1 of 18 IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT AT&T INC., v. Petitioner, FEDERAL COMMUNICATIONS COMMISSION and UNITED STATES OF AMERICA, Respondents. No AT&T INC. S OPPOSITION TO FCC S MOTION TO HOLD CASE IN ABEYANCE This is a straightforward case in which AT&T seeks judicial review of final agency action namely an order that concluded a Further Notice of Proposed Rulemaking and in which the FCC promulgated a rule that it codified in the Code of Federal Regulations. That rule relieved price cap carriers 1 of some service obligations, while leaving in place certain others that AT&T had argued violate the Communications Act and are arbitrary and capricious. In petitioning for judicial review, AT&T argues that the Final Rule did not go far enough, National Ass n of Clean Air Agencies v. EPA, 489 F.3d 1221, 1224 (D.C. Cir. 2007), in part because it was based upon an erroneous interpretation of the relevant law, 1 A price cap carrier is a local telephone company subject to the FCC s price cap regime for setting its federally tariffed rates. See WorldCom, Inc. v. FCC, 238 F.3d 449, (D.C. Cir. 2011).

2 USCA Case # Document # Filed: 07/15/2015 Page 2 of 18 Federal Express Corp. v. Mineta, 373 F.3d 112, 116 (D.C. Cir. 2004). Those challenges are now properly before the Court. There is no reason for delay. BACKGROUND This case concerns two programs funded by the FCC s Universal Service Fund (the Fund ): the high-cost program, which supports the provision of affordable service in sparsely populated, rural areas that are costly to serve, and the Lifeline program, which subsidizes telephone service for low-income consumers. The Telecommunications Act of 1996 ( 1996 Act ) provides the statutory framework that governs the FCC s authority to establish those programs, how they are funded, and which service providers may participate in each program. See Pub. L. No , 102 (codified as amended at 47 U.S.C. 254, 214(e)) In order for a carrier to receive high-cost disbursements from the Fund, the carrier must be designated an Eligible Telecommunications Carrier ( ETC ). 47 U.S.C. 254(e). Under 254(e), all ETCs shall be eligible to receive specific Federal universal service support and [a]ny such support should be explicit and sufficient to achieve the purposes of this section. Id. Once designated, an ETC 2 As explained in AT&T s opening brief (at 4-5) and the FCC s motion (at 3), the 1996 Act s universal-service provisions replaced a system of universalservice funding based upon implicit subsidization. Before competition entered the markets for local telephone service, regulated local telephone companies were able to provide affordable service in high-cost areas by charging above-cost rates for less expensive service elsewhere. The advent of competition drove down the price of inexpensive services, rendering infeasible the system of implicit subsidization. See AT&T Br. 5. 2

3 USCA Case # Document # Filed: 07/15/2015 Page 3 of 18 shall, throughout the service area for which the designation is received[,] offer the services that are supported by Federal universal service. Id. 214(e)(1). As relevant here, ETC designations and the assignment of a corresponding service area are the purview of state public utility commissions, which are authorized by the Act to designate a common carrier that meets the requirements of [ 214(e)](1) as an [ETC] for a service area designated by the State commission. Id. 214(e)(2). The Act defines a service area as a geographic area established... for the purpose of determining universal service obligations and support mechanisms. Id. 214(e)(5). The States authority to designate ETCs and assign service areas, however, is subject to and limited by FCC regulations that implement those provisions. See 47 U.S.C. 201(b); AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378, 385 (1999) (holding that the FCC s rulemaking authority applies even where the 1996 Act delegates certain policy decisions to the States). And the FCC has warned the States that service areas should not be unreasonably large, given the purpose of the service-area designation. Report and Order, Federal-State Joint Board on Universal Service, 12 FCC Rcd 8776, 184 (1997). In practice, however, States have designated a price cap carrier s entire service territory within their borders as a price cap carrier s ETC service area. 3

4 USCA Case # Document # Filed: 07/15/2015 Page 4 of The Lifeline program subsidizes telephone service for qualifying low-income consumers by requiring the consumer s chosen carrier to provide a monthly discount on telephone service. See Report and Order, Lifeline and Link Up Reform and Modernization, 27 FCC Rcd 6656, 12 (2012). In turn, the carrier receives reimbursement from the Universal Service Fund for the provision of such discounts. Id. 14. Lifeline is primarily a creature of regulation, not statute. In the 1996 Act, Congress exempted the Lifeline program from the statutory requirement that limits Fund disbursements to carriers designated as ETCs. See 47 U.S.C. 254(j) ( Nothing in this section shall affect the collection, distribution, or administration of the Lifeline Assistance Program provided for by the Commission. ). Nevertheless, the FCC adopted in 1997, based on conclusions drawn from market data obtained at the time, rules under which only ETCs may offer Lifelinediscounted service and receive reimbursement, and all ETCs must offer Lifeline service to eligible subscribers throughout their service areas. See 47 C.F.R (b), In November 2011, the FCC issued an order in which it comprehensively reform[ed] and modernize[d] the universal service system. Report and Order and Further Notice of Proposed Rulemaking, Connect America Fund, 26 FCC Rcd 17663, 1 (2011) ( Transformation Order ), petitions for 4

5 USCA Case # Document # Filed: 07/15/2015 Page 5 of 18 review denied, In re FCC , 753 F.3d 1015, (10th Cir. 2014), cert. denied, United States Cellular Corp. v. FCC, 135 S. Ct (2015). The FCC s goals were to limit the growth of the Fund and to target the funding more effectively, including by better identifying high-cost areas, limiting support to one ETC per area, and eliminating funding in areas already served by a provider that was not receiving high-cost support. The centerpiece of this reform is the FCC s new methodology for calculating and distributing high-cost support from the Fund to providers operating in price cap carriers service territories. Prior to the Transformation Order s reforms, price cap carriers high-cost disbursements were calculated on a statewide basis, rather than by reference to the specific areas within a state that were costly to serve. See Qwest Corp. v. FCC, 258 F.3d 1191, (10th Cir. 2001). Calculated this way, however, the support mechanism frequently fail[ed] to direct money to all parts of rural America where it is needed. Transformation Order 7. The Transformation Order attempts to address this issue by targeting high-cost support much more narrowly, census-block-by-census-block, and by using a reverse bidding mechanism to provide the most efficient level of support. Thus, the Fund now will only provide support in those areas where a federal subsidy is necessary. Id

6 USCA Case # Document # Filed: 07/15/2015 Page 6 of 18 Although funding recipients must be ETCs by statute, the FCC has decided to allow non-etcs to bid on high-cost support on the understanding that they will apply for ETC status if (and, likely, only if) they win at auction, and only for the areas in which they win at auction and receive support. See Report and Order and Further Notice of Proposed Rulemaking, Connect America Fund, 29 FCC Rcd 7051, 43 (2014) ( Order and FNPRM ). In adopting this rule, the FCC reasoned that potential bidders may have concerns about triggering obligations as an ETC... for areas for which they are not ultimately awarded support. Id. The FCC did not apply this reasoning to price cap carriers, such as AT&T s affiliated local telephone companies, that had obtained ETC designations under the legacy regime. While their funding is now narrowly tailored, their service obligations remain tied to legacy statewide service areas. 4. In a Further Notice of Proposed Rulemaking included in the Transformation Order, the FCC recognized that carriers then designated as ETCs may receive reduced support in their existing service areas and ultimately may no longer receive any support and sought comment on whether those potential support reductions should be accompanied by relaxation of those carriers section 214(e)(1) voice service obligations. Transformation Order 1095; accord Mot. for Abeyance 8 ( Mot. ). It also sought comment on whether such a relaxation is required by 47 U.S.C See Transformation Order 1099; accord Mot. 8. 6

7 USCA Case # Document # Filed: 07/15/2015 Page 7 of 18 The FCC sought further comment on these issues in an April 2014 Order and FNPRM. See Order and FNPRM ; Mot. 8. In October 2014, USTelecom filed a petition for forbearance from a variety of obligations imposed on incumbent local telephone companies, including some related to universal service and price cap carrier ETC obligations. See Petition for Forbearance of the U.S. Telecom Ass n, WC Dkt. No (filed Oct. 6, 2014). The FCC also sought comment on that petition, including its request that the FCC eliminate [a]ll remaining 47 U.S.C. 214(e) obligations where a price cap carrier does not receive High Cost Universal Service Support. Public Notice, Pleading Cycle Established for Comments on United States Telecom Association Petition for Forbearance from Certain Incumbent LEC Regulatory Obligations, 29 FCC Rcd 13535, (2014). In response to these requests for comment, AT&T and others urged that allowing price cap carrier ETCs statewide designations and obligations to persist under the new funding mechanism violates 47 U.S.C See, e.g., Comments of AT&T at 18, WC Dkt. No (Aug. 8, 2014). And AT&T explained that the FCC had ample authority (and indeed was obliged) to adopt rules that interpret and implement section 214(e)(1) by limiting ETC designations in areas served by price cap carriers only to those areas in which an ETC receives high-cost support. 7

8 USCA Case # Document # Filed: 07/15/2015 Page 8 of 18 Id. at 22. AT&T further argued that the FCC should relieve ETCs of their extrastatutory obligation to provide Lifeline service. See id. at In December 2014, the FCC released the Order under review. See Report and Order, Connect America Fund, 29 FCC Rcd (2014) ( Order ). The Order adopted a rule, codified at 47 C.F.R (d)(3), that exempts pricecap ETCs from their federal voice service obligations in three specific cases: (i) in low-cost census blocks, (ii) in census blocks served by a provider of voice and broadband service that is not receiving money from the Fund, and (iii) in census blocks where a provider other than the price cap carrier ETC won the auction and is receiving high-cost funding under the Transformation Order. 47 C.F.R (d)(3); see Order 166 & App. A at The rule did not, however, relieve price cap carrier ETCs of their legacy service obligations in every census block in which they do not receive support, or their legacy designations in any census block. In the Order, the FCC expressly stated that it would not reinterpret[] section 214(e)(1) to sunset all existing ETC designations and require states to re-designate ETCs so that their service areas include only high-cost funded areas. Order 67. The FCC attempted to justify its decision by reference to the important role that Congress has given the states in defining service areas and designating ETCs. Id. The Order further declined to alter the Lifeline obligations of price cap carrier ETCs. Id

9 USCA Case # Document # Filed: 07/15/2015 Page 9 of 18 Although the Order addresses the forbearance criteria in 47 U.S.C. 160, see id ; see also Mot. 13 (characterizing the Order as a partial grant of USTelecom s forbearance petition), the Order adopts a new rule. It does not forbear from applying an existing regulation. 47 U.S.C. 160(a). Indeed, it is undisputed that the Order adopted a new rule of general applicability. See Order 166; Mot On February 17, 2015, AT&T filed a timely petition for review of the Order, asserting that AT&T is aggrieved by the FCC s decision in the Order to maintain price cap carriers legacy ETC designations and obligations in areas where they do not receive high-cost support from the Fund, as well as their obligation, as ETCs, to participate in the Lifeline program. The FCC did not move to hold this case in abeyance by the March 26, 2015 deadline for procedural motions, although it did move for (and was granted) an additional 15 days in which to file its merits brief. Pursuant to the briefing schedule the Court established, AT&T filed its opening brief on June 15, The FCC brief would have been due on July 30, ARGUMENT I. THE ORDER IS FINAL AGENCY ACTION, REVIEWABLE NOW In response to the FCC s request for comments on whether and how legacy ETC obligations and designations should be changed following the Transformation 9

10 USCA Case # Document # Filed: 07/15/2015 Page 10 of 18 Order, AT&T (and others) urged the agency to take two steps relevant to this petition for review: (1) recognize that 214(e) precludes ETC obligations and designations in areas where a price cap carrier does not receive high-cost support from the Fund; and (2) extinguish the requirement that all ETCs participate in the Lifeline program. In the Order, the FCC promulgated a rule that amended the obligations governing price cap carrier ETCs, but that stopped far short of adopting either of AT&T s recommendations. The rule which the FCC does not deny constitutes a binding regulation that is directly aimed at and enforceable against AT&T, Croplife Am. v. EPA, 329 F.3d 876, 881 (D.C. Cir. 2003) is quintessential final agency action. See generally Center for Auto Safety v. National Highway Traffic Safety Admin., 452 F.3d 798, 806 (D.C. Cir. 2006) ( [T]he agency s adoption of a binding norm obviously would reflect final agency action. ). 3 The FCC suggests (at 13) that it will consider implementing AT&T s recommendations at a future date. That, however, does not mean the determination is not final as a matter of law. Fox Television Stations, Inc. v. FCC, 280 F.3d 1027, 1038 (D.C. Cir. 2002) ( Fox I ). Whatever the agency s future plans, the Order mark[ed] the consummation of the agency s decision 3 The FCC half-heartedly question[s] whether AT&T has challenged final agency action, Mot. 1; see also id. at 16, but its unwillingness actually to move to dismiss shows that it knows the answer to that question. 10

11 USCA Case # Document # Filed: 07/15/2015 Page 11 of 18 making process started with the Further NPRMs, and there is no question that the rule it promulgated is one from which legal consequences will flow. Bennett v. Spear, 520 U.S. 154, 178 (1997) (internal quotation marks omitted). Hence, AT&T now brings a petition for review of a standard sort: it argues that the rule did not go far enough. Appalachian Power Co. v. EPA, 249 F.3d 1032, 1040 (D.C. Cir. 2001); see also, e.g., New England Power Generators Ass n v. FERC, 757 F.3d 283, 291 (D.C. Cir. 2014) ( Petitioners... argue that FERC did not go far enough.... ). The fact that the FCC may one day revisit its conclusion always a possibility, see FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) does not mean the conclusions it reaches along the way are immune from judicial review. 4 The FCC attempts (at 13) to recharacterize the Order as merely a partial grant of a still-pending forbearance petition. Again, however, the FCC ignores (or regrets) the fact that it went beyond its authority to forbear from applying an existing regulation, 47 U.S.C. 160(a), and instead used its rulemaking authority under 47 U.S.C. 201(b) to promulgate a generally applicable legislative rule[] 4 Indeed, while the FCC cites (at 14) United States Cellular Corp. v. FCC, 254 F.3d 78 (D.C. Cir. 2001), for the proposition that agencies may act one step at a time, there was no suggestion in that case that each incremental step does not constitute final agency action. 11

12 USCA Case # Document # Filed: 07/15/2015 Page 12 of 18 with the force and effect of law, Perez v. Mortgage Bankers Ass n, 135 S. Ct. 1199, 1203 (2015) (internal quotation marks omitted). Likewise, the FCC s damning review of its own Order acknowledging (at 15) that it failed to address[] the corresponding amendment of its rules and apparently agreeing (at 16) that the FCC made no attempt to offer a reasoned explanation for rejecting AT&T s arguments goes only to the merits of the case. 5 The FCC may not promulgate a rule, fail to explain it, and then cite that failure as evidence that the agency left issues open to be decided another day particularly where, as here, the Order says nothing of the sort. Cf. FEC v. Wisconsin Right to Life, Inc., 551 U.S. 449, 471 (2007) ( This heads I win, tails you lose approach cannot be correct. ). Rather, the agency s adoption of a legislative rule obviously constitutes final agency action. Center for Auto Safety, 452 F.3d at The FCC is careful not to say that the statutory arguments AT&T has raised in this Court remain open, further confirming that the FCC took reviewable agency action that harmed AT&T. With respect to the statutory point, the FCC in the Order expressly declined to take the further steps suggested by some commenters [including AT&T] of reinterpreting section 214(e)(1), and based that decision (incorrectly) on the role that Congress has given the states in defining service areas and designating ETCs. Order 67; see AT&T Br In AT&T Corp. v. FCC, 349 F.3d 692 (D.C. Cir. 2003), the Court held that an FCC declaratory ruling was not ripe for review because the impact of the ruling was contingent on a pending district court litigation. See id. at And, in the portion of the opinion the FCC quotes (at 16), the Court concluded that the FCC properly deferred consideration of a question the agency never reached and thus 12

13 USCA Case # Document # Filed: 07/15/2015 Page 13 of 18 II. ABEYANCE IS NOT APPROPRIATE IN THIS CASE AT&T s foremost argument in this petition for review indeed Part I.A of its brief is that the FCC was obligated by statute to relieve price cap carrier ETCs of their legacy designations and service obligations in areas in which those carriers do not receive high-cost support. See AT&T Br AT&T argues that the Order left in place designations and service obligations that are unlawful, whatever the FCC s reasoning, now or later. If the Court agrees, AT&T s price cap carrier affiliates will necessarily be entitled to relief from their existing unfunded service obligations. The FCC ignores this statutory argument in suggesting (at 18) that abeyance would not deprive AT&T of any meaningful relief. As explained, a judicial interpretation of 214(e) would entail more than a mere remand for further explanation, Mot. 18; rather, it would require the FCC to implement the Court s controlling statutory interpretation and to adopt a rule that invalidates existing obligations affecting AT&T s price cap carrier affiliates. Conversely, delaying decision on this dispositive statutory issue would leave AT&T s price cap carrier affiliates continuously burdened by the costs of that there was no conclusion for the Court to review. Id. at 703. That is not the case here. The FCC solicited comments on whether and how to amend price cap carrier ETC obligations and designations and then promulgated a rule amending those obligations, in which it cited and rejected AT&T s arguments, see Order 67, 70, with no suggestion that it was merely deferring consideration of those arguments until a later point. 13

14 USCA Case # Document # Filed: 07/15/2015 Page 14 of 18 complying with those potentially unlawful obligations. Cellco P ship v. FCC, 357 F.3d 88, 100 (D.C. Cir. 2004). And those costs are significant: According to the Commission s cost model, it costs [AT&T s price cap carrier] affiliates approximately $1.8 billion/year to continue providing standalone legacy voice telephone service (or about $1 billion/year if one makes generous revenue assumptions). But these affiliates receive just a fraction of that amount $176 million/year in federal high-cost support. Moreover, this figure does not include the significant administrative expense associated with participating in the Lifeline program, which the Commission estimates is approximately $600 million/year for the industry. Comments of AT&T at 3-4, WC Dkt. No (Dec. 5, 2014) (footnote omitted); see AT&T Br. 29, The FCC argues (at 17) that, given the still pending forbearance petition, abeyance would promote judicial efficiency by consolidating this case with future challenges to the eventual forbearance decision. 7 But USTelecom s forbearance petition is more than 100 pages long, and only one of its seven parts relates to the issues now before the Court. The FCC offers no reason to believe that waiting to hear every possible challenge to its ruling on such a multifaceted forbearance petition will be more efficient than adjudicating discrete issues as they properly arise. Nor does it account for the inherent risk of delay and the added burden on petitioners if AT&T is forced to re-brief its challenges as one of many 7 The FCC also suggests (at 17) that the issues raised by AT&T remain under consideration in multiple other proceedings but, quite properly, does not ask that AT&T be forced to wait until each of those proceedings has concluded. 14

15 USCA Case # Document # Filed: 07/15/2015 Page 15 of 18 petitioners in a complex and consolidated litigation. Contra Mot. 17 (arguing that abeyance is unlikely to result in substantial delay ). The FCC also argues (at 17) that abeyance would be efficient because subsequent agency action may eliminate AT&T s desire to litigate i.e., that the agency may moot the case by granting price cap carriers additional relief in a future order. AT&T has heard this before. The FCC has been incrementally (Mot. 14) reforming high-cost support for price cap carriers since 1999, 8 and AT&T first asked the FCC for the relief sought through this petition for review more than four years ago. 9 In any event, it is always the case in a petition for review that the agency may turn around, do what the petitioner wants, and narrow the questions for review. Mot That does not justify delaying review of the decisions the agency actually makes, see Fox I, 280 F.3d at 1038 (agency s willingness to reconsider decision at later date does not render review of decision inappropriate), 8 See Vermont Pub. Serv. Bd. v. FCC, 661 F.3d 54, (D.C. Cir. 2011) (recounting the FCC s repeated attempts to reform high-cost support, resulting in two remands from the Tenth Circuit, in 2001 and 2005, and the FCC s subsequent decision to change course in favor of the comprehensive reform of the high-cost universal service mechanism now before the Court) (internal quotation marks omitted). 9 See, e.g., Comments of AT&T at 76-82, WC Dkt. No (Apr. 18, 2011). 10 And, as in any case, if a future FCC order were to grant AT&T the relief it seeks through its petition for review, AT&T will have reason to dismiss its appeal, preserving the resources of the Court and the parties. 15

16 USCA Case # Document # Filed: 07/15/2015 Page 16 of 18 particularly where, as here, the incremental decision was to promulgate a final rule that imposes real-world consequences on a proper petitioner with a justiciable case. * * * At bottom, the FCC promulgated a rule it knows it cannot defend. Yet rather than concede the obvious that the Order, at a minimum, violated the APA the FCC, having reviewed AT&T s brief, now seeks delay so that it can avoid having to defend the Order or to request a voluntary remand. AT&T s price cap carrier affiliates continue to comply with obligations they contend are unlawful, and AT&T has properly challenged those obligations in this Court. The fact that the FCC might, in a future order, grant AT&T relief from those obligations is no reason to hold this case in abeyance and to relieve the FCC of the obligation to respond to AT&T s arguments in the meantime. CONCLUSION The Court should deny the FCC s motion to hold this case in abeyance and proceed with briefing and argument. 16

17 USCA Case # Document # Filed: 07/15/2015 Page 17 of 18 Respectfully submitted, CATHY CARPINO GARY L. PHILLIPS DAVID L. LAWSON AT&T SERVICES, INC th Street, N.W. Washington, D.C (202) /s/ Scott H. Angstreich SCOTT H. ANGSTREICH BENJAMIN S. SOFTNESS KELLOGG, HUBER, HANSEN, TODD, EVANS & FIGEL, P.L.L.C M Street, N.W., Suite 400 Washington, D.C (202) Counsel for Petitioner AT&T Inc. July 15,

18 USCA Case # Document # Filed: 07/15/2015 Page 18 of 18 CERTIFICATE OF SERVICE I hereby certify that, on July 15, 2015, I electronically filed the foregoing with the Clerk of the Court for the United States Court of Appeals for the District of Columbia Circuit using the appellate CM/ECF system. Participants in the case who are registered CM/ECF users will be served by the appellate CM/ECF system. /s/ Scott H. Angstreich Scott H. Angstreich