On May 23, the Tenth District Court of Appeals in Denver gave the FCC its biggest victory in years as it affirmed the Commission’s November 2011 Order which:

• Created the Connect America Fund (CAF) to replace the analog-centric high-cost Universal Service Fund (USF) to bring broadband Internet access service to rural Americans, and; 
• Reformed the Inter-Carrier Compensation (ICC) system to regulate all traffic including interstate and intrastate access under section 251(b)(5) of the 1996 Telecommunications Act. Previously, this section applied only to reciprocal compensation for the completion of local calls;
• Mandated that terminating interstate and intrastate switched access charge rates would move to zero and the costs of “transporting and terminating” such long-distance traffic would be recovered by each carrier from its end user customers through a system known as “bill-and-keep.”

The Court divided its review of the FCC’s Order into two separate Opinions, one for the Connect America Fund and one for Inter-carrier Compensation reform. In both Opinions the Court rejected almost all the arguments made by the 31 petitioners. The arguments that were not rejected were found to be not yet “ripe” for judicial review.

The Court used the following standards to evaluate thearguments made by petitioners:

The Chevron standard, which applies to all of the issues in which petitioners assert that the FCC acted contrary to the statutory authority granted to it by Congress. If the FCC actions are in clear disagreement with the unambiguous intent of Congress, then its actions must be rejected.

However, if the intent of Congress is ambiguous, the Court then must give deference to the Commission as long as its actions are rational and not “arbitrary and capricious;”

Finally, the Court also reviews whether specific Commission orders violate the constitutional rights of petitioners, called the “de novo” review.

Next time, we will discuss the Court’s CAF Opinion, for now, here the important conclusions reached by the Court regarding Inter-Carrier Compensation reform.

The FCC Can Regulate Access Charges under Section 251(b)(5) – The Court finds that the term “reciprocal compensation” is ambiguous and therefore concludes that the FCC acted reasonably in concluding that section 251(b)(5) also applies to the traffic between IXCs and LECs (access).

The FCC Can Preempt State Authority over Intrastate Access Charges – Section 251 provided the FCC with the authority to preempt state regulations in implementing the 1996 Act. Therefore, section 251(b)(5) applies to both interstate and intrastate access charges and the Commission’s authority over intrastate access rates is not constrained by any other section of the Act.   

The Scope of the FCC’s Authority over Originating Access Rates is not Ripe for Judicial Review – Because the Commission has not yet decided whether to move originating access charges to bill-and-keep, petitioner arguments regarding the scope of its authority over originating access charges are premature.

Bill –and-Keep is Reasonable - The FCC’s interpretation of its authority allows it to adopt rules and regulations to implement section 251(b)(5). In implementing this section, it considers bill-and-keep to be “just and reasonable” as the default standard for all traffic subject to § 251(b)(5), including interstate and intrastate access and reciprocal compensation. Bill-and-Keep is reasonable because it allows carriers to satisfactorily recover their costs of transport and termination of traffic from their end users.

Bill-and Keep does not Unlawfully Preempt State Pricing Authority - Section 252(d)(2) of the 1996 Act provided state commissions with the authority to arbitrate  the terms and conditions of reciprocal compensation in interconnection agreements. A Bill-and-Keep requirement does not usurp this authority because states have the authority to arbitrate the “edge” of each carrier’s network. According to the Court, this authority can be significant because the “edge” of a carrier’s network consists of the points “at which a carrier must deliver terminating traffic to avail itself of bill-and-keep.” The location of the “edge” of a carrier’s network determines the transport and termination costs for the carrier.Thus, the precise amount each carrier pays for the transport and termination of traffic remains under state control.

The implications of the Court’s ICC decision are as follows:

The current ICC transition to Bill-and-Keep as ordered by the Commission in 2011 will continue over at least the next couple of years.

However, one or more of the 30+ petitioners will almost certainly appeal the decision to the US Supreme Court. The National Association of Regulatory Utility Commissioners (NARUC) has already expressed its displeasure with the Opinion and indicated that it is ready to participate in any Supreme Court appeal.

It is the opinion here that in a couple of instances the Court gave to much deference to the FCC.  Specifically, the Court’s view that determining the network’s edge where carriers exchange traffic, lawfully preserves state authority over reciprocal compensation pricing, I just don’t buy. Moreover, a Supreme Court with a majority of conservatives is likely to be less cavalier than the Tenth Circuit over the usurping of state rights. 

In addition, there are many arguments against making access part of section 251(b)(5), including all the previous arguments made by the FCC which argued that this section applied to reciprocal compensation only.

Thus, while I anticipated that the Court would validate the FCC’s Order because of its relative lack of experience in dealing with these technical and arcane telecommunications rules compared to the DC Circuit, I am surprised at the weak  explanations the Court used at times to defend its deference to the Commission. Thus, I believe that there is a greater than 50 percent chance that the Supreme Court will overturn this Opinion.

By Andrew Regitsky, President, Regitsky & Associates