On Petition for Review of an Order of the Federal Communications Commission
Before: Ginsburg, Chief Judge, and Edwards and Rogers,
The opinion of the court was delivered by: Ginsburg, Chief Judge
The National Association of State Utility Consumer Advocates (NASUCA) petitions for review of an order of the Federal Communications Commission adjusting the manner in which Local Exchange Carriers (LECs) may recover the fixed costs they incur in providing service to residential and single-line business customers. NASUCA claims the approach adopted by the Commission violates the "universal service" provisions of the Telecommunications Act of 1996, results in rates that are unjust and unreasonable, and is arbitrary and capricious, in violation of the Administrative Procedure Act. We hold the Commission acted reasonably and in conformity with the 1996 Act and, accordingly, we deny NASUCA's petition for review.
This case challenges the Commission's latest attempt to phase out certain "implicit subsidies" resulting from the access fee the LECs charge interexchange carriers (IXCs) in order to recover the expenses the LECs incur to build and operate local loops -- the part of the telecommunications network that runs from the LEC's switch to the customer's premises (a/k/a "the last mile"). These implicit subsidies are the means by which the Commission assures the provision of universal service, for without the subsidies many customers in sparsely populated areas would be unwilling to pay the high rates necessary to cover the LECs' cost of serving them. As detailed more fully below, and in accordance with the policy of the 1996 Act, the Commission has been attempting to make the subsidies transparent by replacing implicit subsidies with explicit subsidies. See 47 U.S.C. § 254. The order here under review is intended to be a step in that direction.
When AT&T was broken up in 1984, the Commission first issued rules governing the access charges IXCs were to pay LECs for originating and terminating long-distance calls. See generally Nat'l Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095 (D.C. Cir. 1984). Those charges did not, however, cover the cost of the local loop, which the LECs instead recovered directly from end users through a flat fee per line called the Subscriber Line Charge (SLC); it is flat because the LEC's cost of providing the local loop is not traffic-sensitive. See In the Matter of Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure and Pricing End User Common Line Charges ( Access Charge Reform Order ) ¶ 24, 12 FCC Rcd 15,982, 15,998-99 (1997). Recovering the cost of the loop from end users, however, raised the prospect that customers in outlying regions, where the cost per line could be quite high, would drop their telephone service and thus compromise the objective of universal service. The Commission therefore decreed that some of the cost of the local loop would be recovered through a per-minute-use charge, known as the Carrier Common Line (CCL) charge, that IXCs would pay LECs for handling their traffic. Access Charge Reform Order ¶¶ 37, 38, at 15,998-16,000.
The Commission initially capped the SLC at $3.50 per line. Because that was significantly below the average fixed cost of the local loop, a substantial portion of the cost had to be recovered through the CCL charge, which worked a large, albeit implicit, subsidy from high- to low-volume long-distance callers.
The implicit subsidies inherent in the Commission's rate structure helped to assure access to affordable telecommunication service in rural areas, but they were incompatible with another goal of the 1996 Act, namely, opening local telecommunication markets to competition. Implementation of the Local Competition Provisions of the Telecommunications Act of 1996 ¶ 5, 11 FCC Rcd 15,499, 15,506-07 (1996). To that end the Act required incumbent LECs to share their networks with rival telecommunications providers. Id. ¶ 4, at 15,506. A rival telecommunications carrier that leases elements of the incumbent LEC's network has a significant advantage in competing for customers the incumbent must charge above cost in order to subsidize others. Id. ¶ 5, at 15,506-07. Indeed, this pattern of subsidization could not persist if incumbent LECs were to compete against new entrants.
In 1997 the Commission took a step toward "[r]ationalizing" its rate structure by "eliminat[ing] significant implicit subsidies in the access charge system." Access Charge Reform Order ¶ 36, at 15,998. This it did by allowing greater recovery of fixed costs through flat (as opposed to traffic-sensitive) fees. The Commission did not, however, allow further recovery through the SLC, which remained capped at $3.50 per line, because it was concerned that a higher price for the basic dial tone could cause rural customers to discontinue service -- "contrary to [the Commission's] mandate to ensure universal service." Id. ¶ 38, at 15,999. Rather than impose an additional charge upon the end user, therefore, the Commission settled upon a "flat, per-line charge assessed on the IXC to whom [sic] the access line is presubscribed," id., known as the presubscribed interexchange carrier charge (PICC).
Not long after introducing the PICC, the Commission realized it was not a complete solution: "Because IXCs have recovered the residential PICCs on a per-account basis, residential customers with only one line pay the same as those with two or more lines, and so pay more than the costs IXCs have incurred for providing them service." In the Matter of Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Low-Volume Long Distance Users; Federal-State Joint Board On Universal Service ( CALLS I ) ¶ 19, 15 FCC Rcd 12,962, 12,970 (2000). In order to offset that newly-introduced cross-subsidy, the Commission scheduled incremental increases in the cap on the SLC that LECs charge end users -- from $3.50 per line to $4.35 in 2000, to $5.00 in 2001, to $6.00 in 2002, and to $6.50 in 2003.*fn1 Id. ¶ 70, at 12,988-89. Well, not necessarily. Recovery via the SLC was not to exceed the "average ... common line, marketing[,] and transport interconnection charge revenue" ("CMT Revenue") in any unbundled network element (UNE) zone. Id. In other words, the maximum allowable recovery via the SLC, CCL charge, and PICC combined is equal to the amount the LEC would be allowed to recover under price cap regulation, which is based upon the LEC's historical cost of providing the local loop. Accordingly, if the SLC cap exceeds that amount, the LEC may recover up to, but no more than, its CMT Revenue via those three rate elements.
Because a LEC recovers its local loop costs in a "cascading fashion" -- first through the SLC, then the PICC, and finally the CCL charge -- an increase in the SLC cap reduces by the same amount what the LEC may recover through the CCL charge and the PICC -- the Commission's goal being to minimize and then to eliminate those charges. See In the Matter of Cost Review Proceeding for Residential and Single-Line Business Subscriber Line Charge (SLC) Caps; Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers ( CALLS II ) ¶ 15, 17 FCC Rcd 10,868, at 10,875-76. When they are eliminated, the LEC is permitted to "deaverage" the SLC in up to four UNE zones, CALLS I ¶ 73, at 12,989-90, that is, to calculate the average cost for each zone rather than for all zones combined. Calculating average costs in this manner "enhances the efficiency of the local telephone market by allowing prices to be tailored more easily and more accurately to reflect cost." Id. ¶ 113, at 13,007.
In CALLS I the Commission also established the Universal Service Fund, an "explicit interstate universal service support mechanism," in order to help offset the reduction in the implicit subsidies; it is to be funded with $650 million raised through a new element in the rate that LECs charge subscribers. Id. ¶¶ 195, 218, at 13,043, 13,057; see also 47 U.S.C. §§ 214(e), 254. The Fund was set up as "a five-year transitional plan designed to provide explicit subsidies to poor and rural end-users." Tex. Office of Pub. Util. Counsel ( TOPUC v. FCC, 265 F.3d 313, 327 (5th Cir. 2001).
Finally, in CALLS I the Commission undertook to "review any increases to residential and single-line business SLC caps above $5.00 to verify that any such increases are appropriate and reflect higher costs where they are to be applied." ¶ 83, at 12,994. In doing that review, the Commission said it ...