Qwest Communications International Inc. v. Federal Communications Commission United States of America, Verizon Telephone Companies at & T Corp. Maine Public Utilities Commission Sbc Communications, Inc. (Sbc) Bellsouth Corporation Vermont Public Service Board Montana Consumer Counsel Montana Public Service Commission Wyoming Public Service Commission, Intervenors, and National Association of State Utility Consumer Advocates, Amicus Curiae. Sbc Communications, Inc. v. Federal Communications Commission United States of America, National Association of State Utility Consumer Advocates, Amicus Curiae. Vermont Public Service Board v. Federal Communications Commission United States of America, National Association of State Utility Consumer Advocates, Amicus Curiae

Citations: 398 F.3d 1222; 35 Communications Reg. (P&F) 310; 2005 U.S. App. LEXIS 3147Docket: 04-9518

Court: Court of Appeals for the Tenth Circuit; February 22, 2005; Federal Appellate Court

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Consolidated petitions from Qwest Communications International Inc. and SBC Communications Inc. challenge the Federal Communications Commission's (FCC) Order on Remand related to federal support for non-rural telecommunications carriers, as established under the 1996 Telecommunications Act. The U.S. Court of Appeals for the Tenth Circuit previously reversed and remanded the FCC's support mechanism in Qwest Corp. v. FCC, 258 F.3d 1191 (2001). In the current proceeding, the court finds that the FCC's interpretation of 47 U.S.C. 254 in defining statutory terms and creating the funding mechanism for non-rural, high-cost support was erroneous and incomplete. Consequently, this flawed construction undermines the validity of the cost support mechanism being contested. The court grants in part and denies in part the petitions for review.

The Order on Remand includes a mechanism to promote state action in achieving universal service goals. The context relates to the competitive telecommunications market established by the Telecommunications Act of 1996, which aimed to introduce competition into previously monopolized markets while maintaining a commitment to universal service. Universal service ensures that all consumers, regardless of location, have access to a range of telecommunications services, adapting to technological advancements. Before the Act, universal service was supported through direct payments and implicit subsidies, allowing higher urban rates to fund rural service, which is generally more expensive. Concerns arose that new market entrants would focus on low-cost urban areas, burdening former monopolies with unprofitable rural service obligations.

Congress outlined principles for universal service preservation, emphasizing that quality services must be available at affordable rates and that rural consumers should have access to comparable rates as those in urban areas. It also highlighted the need for predictable federal and state mechanisms to support universal service goals. Telecommunications carriers may qualify for federal assistance to serve high-cost areas, which must be explicit and adequate. The Ninth Order, previously reversed and remanded in Qwest I, established a funding mechanism for non-rural carriers in high-cost areas, using forward-looking costs per line to achieve rate comparability, distinguishing between rural and non-rural carriers.

The FCC determined that costs were a more accurate measure of comparability than rates, establishing a benchmark at 135% of the national average cost per line. Non-rural carriers in states where average costs exceeded this benchmark became eligible for support, contingent on state certification that federal funds would be used per statutory requirements. The Ninth Order was challenged due to the FCC's lack of clear definitions for key terms and insufficient justification for the 135% benchmark. It failed to consider the variance in costs between rural and urban areas and did not provide mechanisms to encourage states to develop their own universal service programs. Consequently, the Ninth Order was remanded with directives for the FCC to clarify statutory definitions, substantiate the level of support, create incentives for state participation, and outline a comprehensive plan for universal service support. In response, the FCC issued an Order on Remand, defining "sufficient" support as necessary for achieving reasonable comparability of rural and urban rates and setting "reasonably comparable" rates based on a national urban benchmark. The revised federal support mechanism mandates regular comparisons of rural rates against the national average urban rate.

States are required to certify annually to the FCC that their rural rates are reasonably comparable, with a benchmark serving as a safe harbor for compliance. States can submit additional information to demonstrate that other factors affect rate comparability in high-cost areas. Non-rural carriers' access to federal support hinges on effective state certification. The FCC evaluates the level of support by comparing statewide average costs per line to a national average, with support available only if the state’s average exceeds the national average by more than two standard deviations. The Order on Remand establishes two benchmarks: a national average urban rate for assessing reasonable comparability and a national cost benchmark for determining federal support eligibility. Despite complaints about previous funding levels, the Order increases federal support from $254 million to $278 million and expands qualifying states from eight to ten.

Three petitions for review against the Order have been consolidated. Qwest and SBC claim the FCC violated statutory mandates regarding support mechanisms and definitions of "reasonably comparable" and "sufficient." Vermont argues that the FCC's definitions lack precise standards and that its cost-based support mechanism is inadequately analyzed. Various state commissions and telecommunications companies have intervened both in support of and opposition to the Order. The court's jurisdiction to review FCC orders is based on 28 U.S.C. 2342(1), and it will only overturn agency actions if found arbitrary, capricious, or not legally compliant. The court's review, while narrow, requires a thorough examination of the agency's reasoning and the factors considered.

Deference is owed to an agency's interpretation of a statute it administers, as established in Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co. Courts should first determine if Congress has clearly addressed the issue; if so, both the agency and the court must adhere to that intent. If the statute is ambiguous, the agency's interpretation must be based on a permissible construction. Deference is warranted when the agency's interpretation is informed by its expertise, but not if it is arbitrary, capricious, or contrary to the statute.

In the context of Qwest I, the court highlighted the difficulty of evaluating federal support for universal service without a comprehensive overview of FCC support mechanisms. The FCC had not finalized its approach, particularly regarding rural carriers, who received only 13.7% of high-cost support in 2002. The FCC has been cautious with rural carriers, opting for a modified embedded cost mechanism instead of a forward-looking cost model and plans to develop a long-term universal service plan that differentiates between rural and non-rural carriers.

Qwest and SBC argue that 47 U.S.C. 254 mandates both federal and state governments to replace implicit subsidies with explicit ones and claim the FCC has unlawfully failed to ensure this transition, alleging arbitrary and capricious actions in ignoring its own directives for explicit support.

The FCC argues that its conclusion that the statute does not require states to transition from implicit to explicit subsidies is not a final action suitable for appellate review and that the issue is not ripe for consideration. However, the court rejects both arguments. 

To assess finality, the court examines whether the agency’s action has a direct and immediate impact, marks the end of its decision-making process, and settles the rights and obligations of the parties. The FCC has clearly stated that the 1996 Act does not mandate states to adopt explicit universal service support mechanisms, indicating a definitive legal determination. Despite the FCC's claim that its action is not final because it has not determined measures to encourage states to remove implicit subsidies, the court finds that this repeated interpretation establishes an appearance of finality. The action is seen as direct and immediate, effectively rejecting any obligation to enforce an alleged mandate.

Regarding ripeness, the court considers whether the issues are purely legal, if the agency's action is final, whether there will be an immediate impact on the petitioner, and whether resolving the issue will assist the agency's enforcement and administration. The court agrees with the FCC’s implicit acknowledgment that the issue is legal and confirms the finality of the action. The petitioners, Qwest and SBC, argue that they are experiencing direct harm from the erosion of implicit subsidies as competitors gain market share, supporting the claim of an immediate impact. Furthermore, the court believes that a judicial decision will clarify the Commission’s role and aid in future efforts to maintain universal service. Consequently, the issue is deemed ripe for review.

Under 47 U.S.C. § 254(b), the FCC is mandated to formulate universal service policies based on principles set by Congress, which include the need for predictable and sufficient federal and state mechanisms to support universal service. Specifically, § 254(e) emphasizes that federal support must be explicit and sufficient. The Act acknowledges a partnership between federal and state governments in this initiative. States have the authority to enact regulations that align with FCC rules, provided these regulations enhance universal service without relying on federal support mechanisms.

Qwest and SBC interpret this framework as imposing a statutory requirement for states to shift from implicit to explicit support mechanisms; however, this argument is rejected. The Act explicitly requires federal support to be clear but does not impose the same explicit requirement on states. This distinction follows the principle that when specific terms are included in one part of a statute but omitted in another, it is presumed that the omission is intentional.

The FCC's interpretation of the statute is upheld as consistent with congressional intent, as Congress clearly knew how to mandate explicit support if desired. The Petitioners' assertion that the Act's requirement for funding to be "specific, predictable, and sufficient" allows for federal influence over state mechanisms is dismissed, as there is no evidence supporting their claim that implicit subsidies are inherently inadequate.

Furthermore, the requirement for telecommunications carriers providing intrastate services to contribute equitably to universal service funds does not obligate states to eliminate implicit subsidies in favor of explicit mechanisms. Instead, it simply mandates carrier contributions without requiring parity in funding distribution among carriers, underscoring that the contribution framework is a state responsibility.

Congress established a dual regulatory framework under the Act, allowing states to maintain significant oversight without mandating a specific timeline for transitioning support systems. The Act does not require an immediate shift from implicit to explicit federal subsidies and does not eliminate the possibility of ongoing state implicit support mechanisms that effectively promote universal service. 

On remand from Qwest I, the FCC was instructed to clarify the terms "sufficient" and "reasonably comparable." However, the FCC's definition of "sufficient" as merely enabling states to achieve reasonable comparability of rural and urban rates is insufficient, as it neglects the other principles outlined in 47 U.S.C. 254(b), particularly the principle of affordability. The FCC's focus on reasonable comparability alone fails to justify why it overrides the other principles and does not adequately address how its definition aligns with the statutory requirements. The court finds the FCC's argument for a narrow interpretation unpersuasive, noting that the Act supports a broader consideration of all principles when defining "sufficient." Thus, the FCC's definition lacks statutory backing and is deemed inadequate.

Petitioners challenge the Commission's attempt to narrowly define "sufficient" by suggesting that federal support should be limited to what is "only as large as necessary" to achieve statutory goals, arguing that excessive subsidization could undermine the affordability of telecommunications services, contrary to 47 U.S.C. § 254(b)(1). The FCC is required to balance the principles outlined in the statute but has not adequately demonstrated that it considers the full spectrum of these principles. On remand, the FCC must provide a clear definition of "sufficient" that reflects all statutory directives.

Section 254(b)(3) mandates that consumers, including low-income and rural populations, have access to telecommunications services that are "reasonably comparable" to those in urban areas at comparable rates. The FCC previously ordered to clarify "reasonably comparable" rates between rural and urban areas. In its Order on Remand, the FCC defined "reasonably comparable" using a national urban rate benchmark, establishing rural rates as "reasonably comparable" if they fall within two standard deviations of the national average urban rate from the Wireline Competition Bureau's survey. The FCC justified its benchmark on the presumption that Congress understood local rate variances when enacting the 1996 Act, despite lacking rural rate data at the time. The Commission inferred that Congress viewed rural and urban rates as reasonably comparable in 1996 based on its interpretation of terms like "preserve" in the Act, suggesting that Congress was satisfied with pre-existing rate disparities. However, the Petitioners argue that the FCC's interpretation of "reasonably comparable" is flawed and lacks substantial support from the Act.

The FCC's interpretation of the statute lacks deference and is deemed "manifestly contrary to the statute." The terms "preserve" and "preservation," used alongside "advance" and "advancement," are not defined in the statute, necessitating traditional statutory construction methods to ascertain their meanings. "Preserve" primarily means to protect or maintain, while "advance" implies moving forward or promoting progression. The conjunction "and" in phrases like "preserve and advance universal service" indicates that the Commission must fulfill both duties concurrently, rather than separately interpreting "universal service" in relation to each term. 

The Commission's failure arises from its attempt to separately define "universal service" for each verb or noun, which is an unnatural reading of the statutory language. The term "universal service," when associated with "preserve," refers to existing rate variances from 1996, while its connection with "advance" pertains to evolving market rules. The Commission's reliance on ambiguous Congressional Record statements to support its construction is ineffective. 

"Universal service" is defined in the Act as an evolving set of telecommunications services essential to basic needs, accessible to consumers nationwide. The relationship between rates and universal service cannot be ignored, as excessive rates may render essential services unavailable. The Commission erred by focusing solely on 1996 rate disparities while neglecting its obligation to advance universal service, which could involve addressing the gap between urban and rural rates.

The FCC's decision to set a comparability benchmark at the national urban average plus two standard deviations allows for ongoing significant disparities between rural and urban rates. In 2002, urban rates ranged from $15.65 to $35.19 with an average of $23.38, resulting in a benchmark of $32.28, which is 138% of the average urban rate. Concerns were raised regarding a 70-80% discrepancy between rural and urban rates, suggesting this might violate rate comparability principles. Rates just below the benchmark could exceed the lowest urban rates by over 100%, questioning their reasonableness in comparison to urban rates. The FCC's choice of two standard deviations as a benchmark is criticized for lacking a solid statutory foundation and being arbitrary, similar to a previous 135% cost-support benchmark. On remand, the FCC must clarify "reasonably comparable" rates in line with its mission to maintain universal service.

The Order on Remand modified the non-rural high-cost support mechanism by establishing a cost benchmark at two standard deviations above the national average cost per line, making non-rural carriers in states with higher average costs eligible for support. This decision relied on GAO Report data comparing urban and rural rates, concluding current rates were reasonably comparable. However, since the new cost support mechanism is based on a definition of "reasonably comparable" rates that has been invalidated, it too is deemed invalid. The court had previously suggested a willingness to uphold the FCC’s cost-based funding mechanism if it produced reasonably comparable rates but found no empirical evidence linking rates to costs, undermining the FCC's conclusions.

On remand, the FCC is required to develop a support mechanism that aligns with Congressional intent and its duty to promote universal service. It must substantiate its final decision based on the existing record. In *Qwest I*, it was determined that the FCC should create incentives for states to aid in achieving universal service. The FCC has proposed a requirement for states to certify that rural rates are reasonably comparable; otherwise, they must present an action plan, with federal funds being withheld for non-compliance. The Petitioners argue that this certification process is insufficient, but it is deemed adequate as it includes annual reviews and the potential for withholding funds to motivate state action. The Commission is positioned to ascertain the necessary inducements for fulfilling the Act’s goals.

Qwest and SBC further contend that the FCC's lack of specific inducement mechanisms for transitioning states from implicit to explicit support is arbitrary, especially since implicit subsidies are considered unsuitable in competitive markets. However, the FCC has not indefinitely suspended regulations or neglected the need for replacing implicit subsidies, and thus, the argument is rejected due to the complexity of the regulatory environment.

Additionally, the FCC's invalidation of its definitions of "sufficient" and "reasonably comparable," along with the cost-support mechanism, prevents addressing the Petitioners' claims about federal support adequacy for non-rural carriers.

The Petitioners request the court to maintain jurisdiction and impose a 180-day deadline for the FCC to comply, citing unreasonable delays in implementing universal service support mechanisms following the court’s remand, under 5 U.S.C. § 706(1).

A court-imposed deadline for agency action is considered an extraordinary remedy, as established by the U.S. Court of Appeals for the D.C. Circuit, which outlines four key factors for determining the appropriateness of such relief: (1) the extent of the delay, (2) the reasonableness of the delay regarding the enabling legislation, (3) the consequences of the delay, and (4) administrative difficulties affecting the agency's ability to act. Additionally, the complexity of the tasks involved in a court's remand order should also be considered.

Despite the nearly nine-year duration since the Telecommunications Act's passage and over three years since the court's prior decision in Qwest I, the court declines to retain jurisdiction or impose a deadline. The Telecommunications Act entails a complex transition to a competitive communications market without statutory deadlines for its universal service mandate. Redefining statutory terms and developing a support mechanism requires comprehensive administrative development, empirical findings, and careful analysis.

The court expects the FCC to act expeditiously in compliance with its decision, acknowledging that the FCC has inadequately responded to the prior ruling in Qwest I. The petitions for review, in Nos. 03-9617, 04-9518, and 04-9519, are partially granted and partially denied, with the matter remanded to the FCC for further proceedings consistent with this opinion. The document also notes that certain comments and ongoing efforts by the FCC are not relevant to the current context, and the agency's previous positions indicate that further administrative processes would be futile.