US Supreme Court Briefs

Nos. 99-1072, 99-1244 and 99-1249


In the Supreme Court of the United States


CELPAGE, INC., ET AL., PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.


GTE SERVICE CORPORATION, ET AL., PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.


AT&T CORPORATION, ET AL., PETITIONERS

v.

CINCINNATI BELL TELEPHONE COMPANY, ET AL.


ON PETITIONS FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT


BRIEF FOR THE
FEDERAL COMMUNICATIONS COMMISSION
IN OPPOSITION


SETH P. WAXMAN
Solicitor General
Counsel of Record
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217


CHRISTOPHER J. WRIGHT
General Counsel
JONATHAN E. NUECHTERLEIN
Deputy General Counsel
JOHN E. INGLE
Deputy Associate General
Counsel
LISA S. GELB
Counsel
Federal Communications
Commission
Washington, D.C. 20554



QUESTIONS PRESENTED

1. Whether the universal-service provisions of 47 U.S.C. 254 (Supp. III1997) violate the Taxing Clause or the Origination Clause or are void forvagueness.

2. Whether the Federal Communications Commission (FCC) reasonably determinedthat, under 47 U.S.C. 254(f) and 332(c)(3)(A) (Supp. III 1997), providersof commercial mobile radio services must contribute to state universal-servicesubsidies.

3. Whether the FCC may, consistent with the Takings Clause, adopt a forward-lookingcost methodology to determine the proper level of federal universal-servicesubsidies.

4. Whether the FCC has statutory jurisdiction to consider a telecommunicationscarrier's intrastate revenues, as well as its interstate revenues, to determinethe carrier's contribution to the federal universal-service program forschools, libraries, and rural health-care facilities.




In the Supreme Court of the United States


No. 99-1072

CELPAGE, INC., ET AL., PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.


No. 99-1244

GTE SERVICE CORPORATION, ET AL., PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.


No. 99-1249

AT&T CORPORATION, ET AL., PETITIONERS

v.

CINCINNATI BELL TELEPHONE COMPANY, ET AL.


ON PETITIONS FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT


BRIEF FOR THE
FEDERAL COMMUNICATIONS COMMISSION
IN OPPOSITION


OPINIONS BELOW

The decision of the court of appeals (AT&T Pet. App. 1a-115a; CelpagePet. App. 1-110; GTE Pet. App. 1a-98a) is reported at 183 F.3d 393. TheOrder of the Federal Communications Commission (excerpted in AT&T App. 119a-249a; GTE App. 99a-150a) is reported at 12 F.C.C.R. 8776.

JURISDICTION

The judgment of the court of appeals was entered on July 30, 1999. Petitionsfor rehearing were denied on September 28, 1999 (AT&T Pet. App. 116a-118a).Celpage filed a petition for a writ of certiorari on December 23, 1999.AT&T and GTE filed petitions for a writ of certiorari on January 26,2000. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

1. a. Under the Communications Act of 1934 (1934 Act), 47 U.S.C. 151 etseq., as originally enacted, individual States generally regulated the ratesand terms of local telephone service and the Federal Communications Commission(FCC) generally regulated the rates and terms of interstate long-distanceservice. 47 U.S.C. 152, 201; see Louisiana Pub. Serv. Comm'n v. FCC, 476U.S. 355, 360 (1986). Initially, most of the rates set by the States andthe FCC entitled local telephone companies, known as "local exchangecarriers" or "LECs," to a reasonable rate of return basedon prudently incurred historical costs.

Many components of the telephone network are used to provide both localand long-distance service. The costs associated with each component havetraditionally been allocated between the interstate domain and the intrastatedomain and recovered through rates set by the appropriate regulatory authority.Smith v. Illinois Bell Tel. Co., 282 U.S. 133 (1930); 47 U.S.C. 221(c).That allocation is known as the "separations" process. Costs allocatedto the interstate domain are generally recovered by local exchange carriersthrough access charges imposed on long-distance carriers for the use ofthe local network. Costs allocated to the intrastate domain are generallyrecovered through the rates that consumers pay for local service.

b. The 1934 Act required the FCC to regulate interstate communications "soas to make available, so far as possible, to all the people of the UnitedStates * * * a rapid, efficient, Nation-wide, and world-wide wire and radiocommunications service with adequate facilities at reasonable charges."47 U.S.C. 151 (1994 & Supp. III 1997). Without some type of direct orindirect financial assistance, some Americans could not afford telephoneservice. For people living in rural or isolated areas, for example, thecost of telephone service could be prohibitively high, because of the greaterexpense of installing telephone lines and the reduced economies of scale.Moreover, people with low incomes, regardless of where they live, mightnot be able to afford telephone service.

The FCC and the States established a variety of subsidy mechanisms to ensureaffordable telephone service for all Americans, i.e., "universal service."For example, the FCC modified the separations process for the smallest localexchange carriers (those with fewer than 50,000 lines) by allocating a greater-than-usualportion of traffic-sensitive switching costs to the interstate domain. Thatmodification, by shifting more of those shared costs from local customersto long-distance customers, subsidized local rates. Other federal universal-servicesubsidies include the "Link-Up" and "Lifeline" programs,which reduce initial connection charges and monthly basic local servicefees for low-income customers. See FCC C.A. Br. 9-13.

Many States, in turn, have required local exchange carriers to charge thesame rate for service throughout their service areas, even though some partsof each area may be more costly to serve than other parts. Such "geographicaveraging" creates a subsidy from customers in low-cost areas to customersin high-cost areas. In addition, many States have set business rates athigher levels than residential rates, even though the cost of providingservice to business and residential customers may be the same. Some Statesalso have explicit subsidy programs to achieve universal service. See FCCC.A. Br. 11-12 & n.8.

The patchwork of implicit and explicit federal and state subsidies workedwell, in the era of monopoly local telephone service, to ensure that affordabletelephone service was available to virtually everyone. But that era wasto come to an end.

2. The Telecommunications Act of 1996 (1996 Act), Pub. L. No. 104-104, 110Stat. 56, fundamentally changed the regulation of telecommunications. Inthe core "local competition" provisions of the 1996 Act, Congressestablished requirements and procedures designed to open local telephonemarkets to full competition. 47 U.S.C. 251, 252.1 In particular, incumbentlocal exchange carriers were required to interconnect their networks withthose of competing providers and to lease their network elements to thosecompeting providers at nondiscriminatory cost-based rates. See 47 U.S.C.251(c)(2) and (3), 252(d)(1).

Congress anticipated that such competition would cause the retail ratesfor local telephone service to move toward the carriers' forward-lookingcosts. Congress also anticipated that such a process would erode the implicitsubsidies supporting universal service. For example, competition for customerswho can be served at low cost-e.g., customers in high-density areas- couldbe expected to reduce those customers' rates to close to cost. As a consequence,the implicit subsidies from those customers to customers in high-cost areascould be expected to diminish.

Congress addressed such concerns in 47 U.S.C. 254, titled "Universalservice," which was designed to preserve and advance universal servicein a competitive environment. Section 254 codified the FCC's policy of providingfederal universal-service support for low-income consumers and consumersin high-cost areas. 47 U.S.C. 254(b)(3), (e) and (j). Section 254 also createda new program to provide discounted telecommunications and information servicesto schools, libraries, and rural health-care facilities. 47 U.S.C. 254(b)(6)and (h).

Congress directed that a Federal-State Joint Board be established, pursuantto 47 U.S.C. 410(c), to recommend changes to the FCC in federal universal-servicepolicies. 47 U.S.C. 254(a)(1). The FCC, in turn, was directed to promulgateuniversal-service rules, "includ[ing] a definition of the servicesthat are supported by Federal universal service support mechanisms and aspecific timetable for implementation," by May 1997. 47 U.S.C. 254(a)(2).

Congress set forth several "principles" to guide the FCC and theJoint Board in that process. First, Congress stated that "[q]ualityservices should be available at just, reasonable, and affordable rates."47 U.S.C. 254(b)(1). Second, Congress stated that "[a]ccess to advancedtelecommunications and information services should be provided in all regionsof the nation." 47 U.S.C. 254(b)(2). Third, Congress stated that "[c]onsumersin all regions of the Nation, including low-income consumers and those inrural, insular, and high cost areas," should have access to telecommunicationsand information services that are "reasonably comparable to those servicesprovided in urban areas" and "at rates that are reasonably comparable"to those in urban areas. 47 U.S.C. 254(b)(3). Fourth, Congress stated that"[a]ll providers of telecommunications services should make an equitableand nondiscriminatory contribution to the preservation and advancement ofuniversal service." 47 U.S.C. 254(b)(4). Fifth, Congress stated that"[t]here should be specific, predictable and sufficient Federal andState mechanisms to preserve and advance universal service." 47 U.S.C.254(b)(5). And, finally, Congress stated that schools, libraries, and ruralhealth-care facilities "should have access to advanced telecommunicationsservices." 47 U.S.C. 254(b)(6).

3. In August 1996, the FCC adopted rules implementing the local-competitionprovisions of the 1996 Act. In re Implementation of Local Competition Provisionsin the Telecomms. Act of 1996, 11 F.C.C.R. 15,499 (1996). Among other things,the FCC established a pricing methodology, based on forward-looking economiccosts, that state public utility commissions are to use in determining theprices that an incumbent local exchange carrier may charge competitors tolease the incumbent's network elements or to interconnect with the incumbent'snetwork. The prices set under that methodology reflect the incumbent's long-runeconomic cost of providing network elements, assuming that the incumbentacts rationally to provide service in an efficient manner; those pricesalso reflect a reasonable share of the incumbent's joint and common costs,an economic rate of depreciation that reflects the true changes in economicvalue of an asset, and a reasonable return on investment that reflects therisks incurred by investors, including the risks of increased competition.See id. at 15,848-15,849, 15,851-15,854, 15,856. The FCC explained thata pricing methodology based on forward-looking costs, which approximatesprices in a competitive market, would encourage efficient competitive entryinto traditionally monopolistic markets. Id. at 15,844.

The Eighth Circuit invalidated the FCC's pricing rules (along with certainother rules) on the ground that the 1996 Act gives state public utilitycommissions, not the FCC, general jurisdiction to interpret the pricingprovisions of Sections 251 and 252. Iowa Utils. Bd. v. FCC, 120 F.3d 753,794-800 (8th Cir. 1997). This Court, however, reversed the Eighth Circuit'sjurisdictional ruling, holding that the FCC has statutory authority to establishpricing standards. AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 376-385(1999). The Court remanded the case to the Eighth Circuit to address (amongother things) the substantive validity of the FCC's pricing methodologybased on forward-looking costs. Id. at 397. Those remand proceedings arepending.

4. In May 1997, the FCC released its initial order concerning implementationof the universal-service provisions of Section 254. See In re Federal-StateJoint Bd. on Universal Service, 12 F.C.C.R. 8776 (1997) (Universal ServiceOrder). The rules adopted in the Universal Service Order, which generallyreflect the recommendations of the Federal-State Joint Board, address federaluniversal-service programs for low-income customers, for customers in high-costareas (e.g., rural or isolated areas), and for schools, libraries, and ruralhealth-care facilities.

a. The FCC adopted rules regarding who must contribute to universal service,who may receive universal-service support, and which services are eligiblefor support. The FCC required all telecommunications carriers (as well ascertain other providers of telecommunications services) to contribute touniversal-service support in proportion to their share of end-user telecommunicationsrevenues. Universal Service Order, 12 F.C.C.R. at 8797-8798 (AT&T Pet.App. 158a). The FCC rejected arguments that certain carriers, such as pagingproviders, should be exempted from the contribution requirement or permittedto make reduced contributions. Id. at 9188-9189. The FCC also rejected argumentsthat the federal preemption provisions of 47 U.S.C. 332(c)(3)(A) precludeStates from requiring universal-service contributions from providers ofcommercial mobile radio services. 12 F.C.C.R. at 9181.

The FCC determined that federal universal-service subsidies would be availablefor telecommunications services, internal connections, and Internet accessprovided to eligible schools, libraries, and rural health-care facilities.Universal Service Order, 12 F.C.C.R. at 8794 (AT&T Pet. App. 152a).The FCC concluded that only telecommunications carriers could receive federalsubsidies for providing telecommunications services to such entities. TheFCC also concluded, however, that the 1996 Act did not prohibit, and publicpolicy interests favored, permitting any provider, including a non-telecommunicationscarrier, to receive federal subsidies for providing internal connectionsor Internet access to such entities. Id. at 9086-9089.

b. The FCC determined that it had jurisdiction to calculate a carrier'sfederal universal-service contributions based on both its interstate (includinginternational) revenues and its intrastate revenues. Universal Service Order,12 F.C.C.R. at 9192- 9197 (AT&T Pet. App. 210a-221a). The FCC then decidedthat carriers' contributions to the universal-service program for schools,libraries, and rural health-care providers should be assessed based on theirintrastate as well as interstate revenues. The FCC reasoned that, becausethe States did not have programs to subsidize service to those entities,carriers could be required to contribute to the federal program based ontheir total revenues. Id. at 9203 (AT&T Pet. App. 231a-232a). In contrast,the FCC decided to determine carriers' contributions to the universal-serviceprograms for low-income consumers and consumers in high-cost areas basedsolely on interstate revenues. Id. at 9200 (AT&T Pet. App. 226a).

The FCC separately decided, however, that carriers could recover their universal-servicecontributions for schools, libraries, and rural health-care providers onlythrough their rates for interstate services. Universal Service Order, 12F.C.C.R. at 9199 (AT&T Pet. App. 224a). The FCC explained that otherwise"carriers would recover the portion of their intrastate contributionsattributable to intrastate services through increases in rates for basicresidential dialtone service." Id. at 9203 (AT&T Pet. App. 232a).

c. The FCC determined that the amount of federal universal-service supportfor carriers providing service to high-cost areas should be based, in part,on the forward-looking economic costs of providing such service. UniversalService Order, 12 F.C.C.R. at 8899. The FCC explained that a methodologybased on forward-looking costs would "send the correct signals forentry, investment, and innovation" and would thereby encourage efficientcompetitive market entry. Ibid. The FCC stated that forward-looking costscould be determined, at the State's election, based either on "state-conductedforward-looking economic cost studies approved by the Commission" oron "cost models developed by the Commission, in consultation with theJoint Board." Ibid.

The FCC stated that rural carriers serving high-cost areas would continueto receive federal universal-service support under the existing mechanismsuntil the FCC, working with the Joint Board, had an opportunity to developa model that could reliably reflect such carriers' forward-looking costs.Universal Service Order, 12 F.C.C.R. at 8792-8793 (AT&T Pet. App. 148a-149a),8935. The FCC noted that the various models that had been submitted forits consideration were not yet capable of doing so. Id. at 8909- 8910.

After the issuance of the Universal Service Order, the FCC implemented amulti-phase process to develop a model based on forward-looking costs todetermine the amount of federal universal-service support for non-ruralcarriers serving high-cost areas. See In re Federal-State Joint Bd. on UniversalService, 12 F.C.C.R. 18,514 (1997) (Further Notice of Proposed Rulemaking).That process was completed in November 1999. See In re Federal-State JointBd. on Universal Service, CC Docket No. 96-45, FCC 99-306 (adopted Oct.21, 1999) (Ninth Report and Order), appeal pending sub nom. U.S. West v.FCC, No. 99-9546 (10th Cir. filed Dec. 10, 1999); In re Federal-State JointBd. on Universal Service, CC Docket No. 96-45, FCC 99-304 (adopted Oct.21, 1999) (Tenth Report and Order), appeal pending sub nom. U.S West v.FCC, No. 99-9547 (10th Cir. filed Dec. 10, 1999).

4. A number of parties challenged the Universal Service Order. Those challengeswere consolidated in the Fifth Circuit, which affirmed in part and reversedin part. GTE Pet. App. 1a-98a.2 We discuss only those portions of the court'sopinion that are challenged in the petitions for certiorari.

a. The court of appeals rejected Celpage's claim that Section 254, as appliedto paging providers, violates the Origination Clause, U.S. Const. Art. I,§ 7, Cl. 1, which requires that "[a]ll Bills for raising Revenueshall originate in the House of Representatives." GTE Pet. App. 50a-52a.The court concluded that Section 254 is not a "Bill[] for raising Revenue,"under the standard articulated in United States v. Munoz-Flores, 495 U.S.385, 398 (1990). The court explained that "universal service contributionsare part of a particular program supporting the expansion of, and increasedaccess to, the public institutional telecommunications network"- aprogram from which "[e]ach paging carrier directly benefits" throughthe creation of "a larger and larger network." GTE Pet. App. 51a.The court reasoned that the design of the universal-service program, which"exact[s] payments from those companies benefiting from the provisionof universal service," prevents those payments from being classifiedas "revenue" within the meaning of the Origination Clause. Ibid.

The court of appeals observed that Celpage had not raised a Taxing Clauseclaim in its initial brief. "Therefore," said the court, "wewill not consider it." GTE Pet. App. 49a-50a.

The court of appeals also rejected Celpage's contention that the States'authority to assess universal-service contributions from providers of commercialmobile radio services (CMRS) is preempted by 47 U.S.C. 332(c)(3)(A), whichstates, in pertinent part, that "no State or local government shallhave any authority to regulate the entry of or the rates charged by anycommercial mobile service * * * except that this paragraph shall not prohibita State from regulating the other terms and conditions of commercial mobileservices." GTE Pet. App. 57a-62a. The court held that Section 332(c)(3)(A)bars States only from regulating the rates and entry of CMRS providers,not from requiring CMRS providers to contribute to state universal-serviceprograms. GTE Pet. App. 60a-61a. The court explained that such a constructionof Section 332(c)(3)(A) gives full effect to Section 254(f), which authorizesStates to require universal-service contributions from "[e]very telecommunicationscarrier that provides intrastate telecommunications services." GTEPet. App. 61a.

b. The court of appeals generally affirmed the FCC's determinations regardingfederal universal-service support for carriers serving high-cost areas.The court, applying the methodology of Chevron U.S.A. Inc. v. Natural ResourcesDefense Council, Inc., 467 U.S. 837, 842-845 (1984), determined that Section254 is ambiguous as to whether the FCC may calculate such support basedon carriers' forward-looking costs. The court concluded that the FCC's decisionto use such a methodology was reasonable and, consequently, was permissibleunder Chevron. GTE Pet. App. 15a-17a. The court noted that this Court hasconsistently refused to foreclose ratemaking alternatives that could benefitconsumers and investors, id. at 15a n.12 (quoting Duquesne Light Co. v.Barasch, 488 U.S. 299, 316 (1989))-and, indeed, that the Court has upheldthe use of similar cost models that were not based on historical costs,ibid. (citing Mobil Oil Exploration & Producing S.E., Inc. v. UnitedDistrib. Cos., 498 U.S. 211, 224-225 n.5 (1991)).

The court of appeals rejected GTE's contention that the FCC's decision touse a methodology based on forward-looking costs violated the Takings Clause.The court explained that, under Duquesne Light, a party cannot successfullyattack a cost methodology without showing that the methodology will producean unreasonable rate. The court found that GTE had failed to make such ashowing. GTE Pet. App. 19a n.14. Distinguishing Brooks-Scanlon Co. v. RailroadComm'n, 251 U.S. 396 (1920), the court observed that the FCC is not "requiringthe [incumbent local exchange carriers] to remain open or to charge lowrates." GTE Pet. App. 19a n.14.

c. Finally, the court of appeals held that the FCC lacked statutory jurisdictionto calculate carriers' universal-service contributions based on their intrastaterevenues as well as their interstate revenues. GTE Pet. App. 92a-94a. Thecourt stated that the FCC's exercise of such jurisdiction violated the "broadlanguage" of Section 2(b) of the 1934 Act, 47 U.S.C. 152(b), whichprovides that, with certain exceptions, "nothing in this [Act] shallbe construed to apply or to give the Commission jurisdiction with respectto * * * charges, classifications, practices, services, facilities, or regulationsfor or in connection with intrastate communication service." GTE Pet.App. 92a-93a. The court concluded that "the inclusion of intrastaterevenues in the calculation of universal service contributions easily constitutesa 'charge . . . in connection with intrastate communication service'"within the meaning of that statute. Id. at 93a. The court further concludedthat Section 254 was not a sufficiently unambiguous grant of authority tothe FCC to regulate intrastate matters to overcome Section 152(b). Ibid.

ARGUMENT

The claims raised by petitioners Celpage (in No. 99-1072) and GTE (in No.99-1244) are without merit. We agree with petitioner AT&T (in No. 99-1249)that the court of appeals erred in prohibiting the FCC from including carriers'intrastate revenues in the assessment base for the federal universal-serviceprograms for schools, libraries, and rural health-care facilities. But wedid not ourselves seek certiorari because, on balance, we concluded thatthe court's decision on that issue is not so significant as to warrant thisCourt's review. We adhere to that judgment now. We therefore urge that allthree petitions be denied.

1. a. Celpage principally contends (Pet. 12-21) that 47 U.S.C. 254, theuniversal-service provision of the 1996 Act, and the FCC's Universal ServiceOrder violate the Taxing Clause, U.S. Const. Art I, § 8, because theuniversal-service assessments are a "tax" that may be imposedonly by Congress, and not by the FCC. The court of appeals declined to reachthat claim, however, because Celpage did not raise the claim in a timelymanner. See GTE Pet. App. 49a-50a ("Celpage * * * does not raise aTaxing Clause claim until its reply brief. Therefore, we will not considerit."). The claim is therefore unsuited for the Court's consideration.See Pennsylvania Dep't of Corrections v. Yeskey, 524 U.S. 206, 212-213 (1998);Delta Air Lines, Inc. v. August, 450 U.S. 346, 362 (1981); Adickes v. S.H.Kress & Co., 398 U.S. 144, 147 n.2 (1970).3

In any event, Celpage's Taxing Clause claim, even if properly presented,would not warrant review for two reasons. First, the universal-service assessmentsare not a tax, but a fee paid by members of the telecommunications industryto assure the availability of "[q]uality services" at "just,reasonable, and affordable rates" in "all regions of the Nation."47 U.S.C. 254(b)(1) and (2). See United States v. Munoz-Flores, 495 U.S.385, 399 (1990) (distinguishing, for Origination Clause purposes, betweena tax provision and a "special assessment provision [that] was passedas part of a particular program to provide money for that program").The Taxing Clause thus is not implicated here.

Second, even if the universal-service assessments could be categorized asa "tax," this Court has recognized that Congress may "delegatediscretionary authority under its taxing power" to federal agencies.Skinner v. Mid-America Pipeline Co., 490 U.S. 212, 221 (1989). Such delegationsare "subject to no constitutional scrutiny greater than that * * *applied to other nondelegation challenges." Id. at 223. Section 254does not contravene ordinary non-delegation principles, because Congressdid not leave the FCC without any "intelligible guidelines for [theuniversal-service] assessments." Id. at 224. In Section 254(b), Congressestablished a set of "universal service principles" to be appliedby the FCC and the Joint Board. And, in Section 254(d), Congress made clearthat "[e]very telecommunications carrier that provides interstate telecommunicationsservices shall contribute, on an equitable and non-discriminatory basis,to the specific, predictable, and sufficient mechanisms established by theCommission to preserve and advance universal service." See generallyMistretta v. United States, 488 U.S. 361, 373 (1989) (noting that this Courthas upheld "without deviation" since 1935 "Congress' abilityto delegate power under broad standards").

b. Celpage also contends (Pet. 19, 21) that Section 254 violates the OriginationClause, U.S. Const. Art. I, § 7, Cl. 1, because the 1996 Act originatedin the Senate, not the House of Representatives. As this Court has explained,however, "a statute that creates a particular governmental programand that raises revenue to support that program, as opposed to a statutethat raises revenue to support Government generally, is not a 'Bil[l] forraising Revenue' within the meaning of the Origination Clause." Munoz-Flores,495 U.S. at 398. That is so even where the "assessments are not collectedfor the benefit of the payors" because "the beneficiaries of thebill are not relevant." Id. at 400.

Celpage nonetheless insists that an assessment must be considered the productof a "revenue bill" if no close relationship exists between thepayors and beneficiaries. The court of appeals, which accepted Celpage'sargument on that point (see GTE Pet. App. 52a n.56), found that such a relationshipexists here. As the court explained, "Congress designed the universalservice scheme to exact payments from those companies benefiting from theprovision of universal service." Id. at 51a. Celpage and other pagingcarriers, as entities engaged in the business of providing telecommunicationsservices, "directly benefit[] from [the] larger and larger network"that is created, in part, as a result of the universal-service program.Ibid.4

Contrary to Celpage's suggestion, the mere fact that universal-service contributionsare reflected in the federal budget does not mean that the contributionsderive from a "Bill[] for raising Revenue." As the court of appealsobserved, the relevant issue is not the nature of the government's "accountingdesignations," but "whether the funds are 'part of a particularprogram to provide money for that program.'" GTE Pet. App. 50a-51a(quoting Munoz-Flores, 495 U.S. at 399); see also Edye v. Robertson (HeadMoney Cases), 112 U.S. 580, 596 (1884). The universal-service contributionsare part of such a program and, consequently, do not implicate the OriginationClause.5

c. Celpage contends (Pet. 22, 26) that, because Section 254 "providesno guidance as to who must pay these universal service assessments, or theamount owed," "the entire statutory program is unconstitutionallyvague." See Pet. iii (questions presented) (directing the vaguenesschallenge to "the Universal Service statute"). Celpage's vaguenessclaim, like its Taxing Clause claim, is inappropriate for the Court's review.Celpage raised no vagueness challenge to Section 254 below. The court ofappeals consequently did not address any such challenge.6

Section 254 is not, moreover, unconstitutionally vague. As noted above,Congress articulated a set of "universal service principles,"47 U.S.C. 254(b), and directed the FCC to design a universal-service programconsistent with those principles, 47 U.S.C. 254(a). In addition, Congressspecifically provided that "[e]very telecommunications carrier thatprovides interstate telecommunications services shall contribute, on anequitable and nondiscriminatory basis, to the specific, predictable, andsufficient mechanisms established by the Commission to preserve and advanceuniversal service." 47 U.S.C. 254(d). The statute leaves no ambiguityas to whether Celpage, which indisputably provides "interstate telecommunicationsservice," is required to make such contributions. That Congress leftit to the FCC to fill in certain details-for example, the precise servicesto receive universal-service support and the precise levels of support tobe provided-does not render Section 254 unconstitutionally vague. It iswell settled that Congress may leave statutory "gap[s] for the agencyto fill." Chevron U.S.A. Inc. v. Natural Resources Defense Council,Inc., 467 U.S. 837, 843 (1984). Such gaps do not make a statute unconstitutional.

2. Celpage renews its claim (Pet. 26-30) that 47 U.S.C. 332(c)(3)(A) precludesStates from requiring commercial mobile radio service (CMRS) providers tocontribute to state universal-service programs.7 That claim lacks merit.Such claims have been rejected by the D.C. Circuit and the Tenth Circuitas well as by the Fifth Circuit in this case. See Cellular Telecomms. Indus.Ass'n v. FCC, 168 F.3d 1332 (D.C. Cir. 1999); Sprint Spectrum v. State Corp.Comm'n, 149 F.3d 1058 (10th Cir. 1998).

As the court of appeals explained (GTE Pet. App. 61a), the plain languageof Section 332(c)(3)(A) precludes the States only from "regulat[ing]the entry of or the rates charged by" CMRS providers. It explicitlyexempts from preemption other types of state regulation-i.e., regulationof "the other terms and conditions of commercial mobile services,"47 U.S.C. 332(c)(3)(A)-including regulation requiring CMRS providers tocontribute to state universal-service programs. Such a construction of Section332(c)(3)(A) is, as the court of appeals recognized (GTE Pet. App. 61a),consistent with the unqualified mandate of Section 254(f) that "[e]verytelecommunications carrier that provides intrastate telecommunications servicesshall contribute" to state universal-service programs. See CellularTelecomms. Indus. Ass'n, 168 F.3d at 1336 (Section 254(f) "is strongsupport for the proposition" that States may require CMRS providersto contribute to universal service).

That construction does not, as Celpage contends (Pet. 29), render superfluousthe second sentence of Section 332(c)(3)(A), which allows more extensivestate regulation where commercial mobile services "are a substitutefor land line telephone exchange service for a substantial portion of thecommunications within [a] State." 47 U.S.C. 332(c)(3)(A). As the courtof appeals recognized (GTE Pet. App. 60a), that sentence simply "clarifiesthe ability of states to regulate rates and entry in the name of universalservice" in certain circumstances; in contrast, "the 'other termsand conditions clause' [of the first sentence of Section 332(c)(3)(A)] opensthe door to all other universal service regulation," whether or notthe condition stated in the second sentence is satisfied.

3. GTE contends (Pet. 15-30) that the Takings Clause precludes the FCC'schoice of a forward-looking cost methodology in determining the amount offederal universal-service support for carriers serving high-cost areas.GTE does not claim to have suffered any actual taking. Instead, concernedthat such carriers may not be as well compensated under a methodology basedon forward-looking costs as under a methodology based on historical costs,GTE argues (Pet. 17, 19) that "the principle of constitutional avoidance"requires a "narrowing construction of the Act" that would preventany consideration of forward-looking costs. The court of appeals correctlyrejected that argument.8

GTE would be entitled to invoke the "principle of constitutional avoidance"in this context only if, among other things, the FCC's choice of a methodologybased on forward-looking costs would necessarily subject incumbent localexchange carriers to regulatory takings in the future. See United Statesv. Riverside Bayview Homes, Inc., 474 U.S. 121, 128 n.5 (1985) (decliningto apply the principle of constitutional avoidance in the absence of any"identifiable set of instances in which [the regulatory action] willnecessarily or even probably constitute a taking"). As this Court hasexplained, "[i]t is not theory, but the impact of the rate order whichcounts," because "[t]he Constitution protects the utility fromthe net effect of the rate order on its property." Duquesne Light Co.v. Barasch, 488 U.S. 299, 314 (1989) (emphasis added) (quoting FPC v. HopeNatural Gas Co., 320 U.S. 591, 602 (1944)); accord id. at 317 (Scalia, J.,concurring). Accordingly, "[i]f the total effect of the rate ordercannot be said to be unreasonable, judicial inquiry . . . is at an end."Id. at 310. "The fact that the method employed to reach that resultmay contain infirmities is not then important." Ibid.

There is no reason to assume that the FCC's forward-looking cost methodologywill produce confiscatory results in any context. A local exchange carrier'scosts, rates, and ultimate profits are not determined by the FCC alone.It is the State, and not the FCC, that requires a carrier to serve customersin high-cost areas. It is likewise the State, not the FCC, that determinesthe rates that the carrier may charge its customers. See Universal ServiceOrder, 12 F.C.C.R. at 8785 ("The Commission * * * does not have controlover the local rate-setting process."); 47 U.S.C. 152(b). And the Stateshave traditionally borne a large share of the responsibility for universal-servicesupport for carriers serving high-cost areas. The dispute presented hereconcerns only the FCC's choice of methodology for determining the federalshare of such support. GTE fails to explain how the FCC's choice of onemethodology over another would trigger a chain of events that would necessarilycause the States to take measures that would have confiscatory results forlocal exchange carriers.9

Moreover, even if, contrary to Duquesne, a regulator's general methodologyfor setting rates could be a proper subject of a Takings Clause challenge,GTE's challenge still would fail. As this Court has noted, "[a]t onetime, it was thought that the Constitution required rates to be set accordingto the actual present value of the assets employed in the public service,"an approach that "mimics the operation of the competitive market."Duquesne, 488 U.S. at 308 (emphasis added) (citing Smyth v. Ames, 169 U.S.466 (1898)). That approach is similar to the FCC's approach here. Althoughthis Court ultimately determined that such a "fair value" approachis not constitutionally required, that approach has always been a permissibleform of ratemaking, which has the salutary effect of "giv[ing] utilitiesstrong incentive to manage their affairs well and to provide efficient serviceto the public." Id. at 309. The courts have routinely upheld ratemakingorders that denied a utility full recovery of its historical costs. See,e.g., id. at 312-314 (denying a utility the recovery of prudently incurredhistorical expenditures); Mobil Oil Exploration & Producing S.E., Inc.v. United Distrib. Cos., 498 U.S. 211, 224- 225 & n.5 (1991); MarketSt. Ry. v. Railroad Comm'n, 324 U.S. 548, 553-554, 564-568 (1945).10

GTE erroneously contends that the court of appeals' approval of the FCC'smethodology is inconsistent with Brooks-Scanlon Co. v. Railroad Comm'n,251 U.S. 396 (1920), which GTE invokes for the proposition that courts mustconstitutionally scrutinize the rates for each aspect of a utility's operations.That proposition is inconsistent with the rule-adopted in Hope Natural Gasand reaffirmed in Duquesne-that the appropriate constitutional inquiry beginsand ends with "the total effect of the rate order." Duquesne,488 U.S. at 310; Hope Natural Gas, 320 U.S. at 602; see In re ValuationProceedings Under §§ 303(c) and 306 of the Regional Rail ReorganizationAct, 439 F. Supp. 1351, 1357 n.12 (Spec. Court 1977) (Friendly, J.) (observingthat Brooks-Scanlon's statement that "a carrier cannot be compelledto carry on even a branch of business at a loss," 251 U.S. at 399,"is not the law").11 GTE's reliance on Brooks-Scanlon also isunavailing for the additional reasons identified by the court of appeals.See GTE Pet. App. 19a n.14 ("Unlike the situation in Brooks-Scanlon,the circumstance here is that the regulatory entity setting the rules, theFCC, is not requiring the [incumbent local exchange carriers] to remainopen or to charge low rates, thereby forcing them to operate at a permanentloss.").

Finally, GTE asserts (Pet. 25-26) that the decision of the Fifth Circuit,in deferring to the FCC's implementation of Section 254, conflicts withdecisions of other circuits that have declined to defer to agency actionthat raised grave constitutional concerns. This case is readily distinguishablebecause, as the Fifth Circuit recognized, the Universal Service Order presentsno such concerns. As this Court observed in Hope Natural Gas, an agency's"order does not become suspect by reason of the fact that it is challenged."320 U.S. at 602. Indeed, the order, as "the product of expert judgment,""carries a presumption of validity." Ibid.

In sum, the court of appeals' disposition of GTE's Takings Clause claimis correct and does not conflict with any decision of this Court or anyother court of appeals. The petition therefore raises no issue that warrantsthe Court's review. GTE requests that, at a minimum, its petition be heldpending the Eighth Circuit's decision on remand in Iowa Utilities Board.In that case, GTE and other incumbent local exchange carriers have challenged,on Takings Clause and other grounds, the FCC's adoption of a methodologybased on forward-looking costs to determine carrier-to-carrier rates underSections 251 and 252 for interconnection and unbundled access to an incumbent'snetwork elements. If the Eighth Circuit were to rule in GTE's favor, thatcase would warrant this Court's review, because invalidation of the FCC'spricing rules implementing Sections 251 and 252 would cause disarray inthe telecommunications industry.12 If the Eighth Circuit were to rule forGTE on the takings issue before the date on which this Court would otherwiseact on the petitions in this case, GTE's petition in this case might appropriatelybe held pending this Court's review of the Eighth Circuit's decision. Butthere is no reason to suppose that the Eighth Circuit will rule in GTE'sfavor, much less that the Eighth Circuit will do so based on the TakingsClause. The mere possibility of a future circuit conflict is insufficientto justify holding a petition in a case that does not warrant plenary review.For that reason, we submit that the Court should deny GTE's petition outrightif, by the time this Court considers the petition, the Eighth Circuit hasnot ruled in GTE's favor on its takings claim.

4. AT&T challenges (Pet. 13-23) the court of appeals' holding that theFCC lacks jurisdiction to include a carrier's intrastate revenues (togetherwith its interstate revenues) in the assessment base used to determine itscontribution to the universal-service program for schools, libraries, andrural health-care facilities. We agree that the holding is incorrect, essentiallyfor the reasons stated in AT&T's petition. In Iowa Utilities Board,this Court held that, under 47 U.S.C. 201(b), the FCC's regulatory jurisdictionembraces the substantive scope of the Communications Act, including theprovisions added in 1996, even where the Act expressly grants concurrentjurisdiction to the States. See 525 U.S. at 377-380. Here, in includingintrastate revenues in the assessment base, the FCC was implementing Section254, which authorizes the FCC, after consultation with the Federal-StateJoint Board, to define the scope of universal service, see 47 U.S.C. 254(c),and requires contributions to universal service to be made by all telecommunicationsproviders, both interstate and intrastate, see 47 U.S.C. 254(b)(5), (d)and (f). Universal service has always focused on ensuring affordable localtelephone service for customers who have low incomes or who live in high-costareas. There is thus no meaningful respect in which Section 254 could besaid not to "apply" to intrastate matters. Under Iowa UtilitiesBoard, the FCC has jurisdiction to implement Section 254 by establishingan effective universal-service program, without regard to the formal "interstate"or "intrastate" character of the matters being regulated.

Nonetheless, we concluded that the Fifth Circuit's jurisdictional errordoes not present a question of national significance that warrants thisCourt's intervention. Strictly construed, the court's jurisdictional holdingis confined to a determination that the FCC may not include intrastate revenuesin its assessment base for the universal-service programs for schools, libraries,and rural health-care facilities. The court did not consider whether theFCC had jurisdiction to do so with respect to the other universal-serviceprograms- i.e., the programs for low-income consumers and high-cost consumers-becausethe FCC had determined not to include intrastate revenues in the assessmentbases for those programs. See AT&T Pet. App. 226a. The court's holdingdisadvantages carriers, such as AT&T, that provide predominantly interstateservices. But the court's decision does not clearly purport to divide universalservice into discrete interstate and intrastate spheres and to precludethe FCC from exercising any jurisdiction in the latter.

Indeed, as AT&T observes (Pet. 19), any such categorical division wouldbe untenable, because Congress did not intend to strip the FCC of its longstandingauthority to assist in subsidizing universal service, which, as noted, hastraditionally focused on the provision of affordable local telephone service.Unlike AT&T (see Pet. 21), we do not read the decision below to holdotherwise. Despite isolated language suggesting that the FCC may lack theauthority "to fund intrastate universal services" (GTE Pet. App.94a), the court of appeals separately affirmed that the FCC may use federaluniversal-service contributions to subsidize intrastate services, even wherethe FCC is not required to do so, and that the FCC may attach conditionsto such contributions (GTE Pet. App. 87a). To be sure, in other portionsof the opinion not directly challenged here, the court compounded its errorby invalidating additional FCC rules on jurisdictional grounds. See, e.g.,GTE Pet. App. 36a-44a (no-disconnect rule).13 In our view, however, thecourt's jurisdictional analysis is sufficiently unclear that it is unlikelyto have appreciable persuasive force beyond this case. So limited, the court'sdecision does not threaten the basic integrity of the federal government'suniversal-service programs. If the decision is given broader significance,however, this Court's intervention may become necessary.

CONCLUSION

The petitions for a writ of certiorari should be denied.

Respectfully submitted.


SETH P. WAXMAN
Solicitor General

CHRISTOPHER J. WRIGHT
General Counsel
JONATHAN E. NUECHTERLEIN
Deputy General Counsel
JOHN E. INGLE
Deputy Associate General
Counsel
LISA S. GELB
Counsel
Federal Communications
Commission



MARCH 2000

1 Citations in this brief of provisions of the 1996 Act are to SupplementIII 1997.

2 All citations of the Fifth Circuit's opinion will be to GTE's Appendix.

3 The court of appeals did not, as Celpage suggests (Pet. 12 n.15), excuseCelpage's failure to raise a timely Taxing Clause claim. The court merelyobserved in a footnote that, "[e]ven if Celpage's Taxing Clause argumentwere properly before us," the argument would lack merit. GTE Pet. App.49a-50a n.52.

4 The court of appeals' rejection of the Origination Clause claim is not,as Celpage asserts (Pet. 18-19, 21), inconsistent with any decision of thisCourt. In National Cable Television Ass'n v. United States, 415 U.S. 336(1974), a statute expressly required the FCC to determine fees based, inpart, on "the value to the recipient." Id. at 340. Section 254,in contrast, does not require the FCC to base a carrier's contributionsto the universal-service program on the value of the benefits that the carrierreceives from the program. Cf. Skinner, 490 U.S. at 224 (rejecting a broaderconstitutional reading of National Cable Television). In Dane v. Jackson,256 U.S. 589 (1921), the Court did not distinguish between user fees andtaxes, but instead considered whether a State's method of distributing income-taxcollections violated the Takings Clause, which Celpage has not invoked.In United States v. United States Shoe Corp., 523 U.S. 360 (1998), the Courtconfined its holding to the special considerations raised by the ExportClause. The Court distinguished, and left undisturbed, decisions arisingunder other constitutional provisions. See id. at 367-369. Nor is the courtof appeals' decision in tension with Thomas v. Network Solutions, Inc.,176 F.3d 500 (D.C. Cir. 1999). In that case, the D.C. Circuit assumed, withoutdeciding, that a particular assessment was a tax rather than a fee (id.at 506), and then concluded that Congress had, in any event, authorizedthe agency to make the assessment (id. at 506-507).

5 The Congressional Budget Office report cited by Celpage confirms thatuniversal-service contributions are used only to support the universal-serviceprogram. The contributions are not treated as general revenues of the federalgovernment. Celpage Pet. App. 142-143.

6 The only vagueness challenge that the court of appeals identified wasdirected at the FCC's administrative procedures for assessing contributions.GTE Pet. App. 56a. The court did not identify or address any claim thatSection 254 itself is unconstitutionally vague.

7 Section 332(c)(3)(A) provides. in relevant part:

[N]o State or local government shall have any authority to regulate theentry of or the rates charged by any commercial mobile service or any privatemobile service, except that this paragraph shall not prohibit a State fromregulating the other terms and conditions of commercial mobile services.Nothing in this subparagraph shall exempt providers of commercial mobileservices (where such services are a substitute for land line telephone exchangeservice for a substantial portion of the communications within such State)from requirements imposed by a State commission on all providers of telecommunicationsservices necessary to ensure the universal availability of telecommunicationsservices at affordable rates.

8 GTE claims (Pet. 12) that the FCC's approach "assume[s] * * * a hypothetical,ideally efficient network." That is not entirely accurate. The FCChas explained that an appropriate model for determining forward-lookingcosts must take into account the location of an incumbent local exchangecarrier's existing wire centers, see Universal Service Order, 12 F.C.C.R.at 8913, even though a "hypothetical, ideally efficient" carriermight have arranged those wire centers differently. As the court of appealsrecognized (GTE Pet. App. 18a), the FCC "departed from its general'most efficient' methodology" in ways that benefit GTE and other incumbentlocal exchange carriers.

9 Even considered in isolation, the FCC's choice of a methodology basedon forward-looking costs may not, in application, necessarily disadvantagelocal exchange carriers at all, much less threaten to constitute a taking.GTE does not attempt to demonstrate that the FCC's new methodology, whichwas finalized after the Universal Service Order at issue here, will causeGTE's affiliates to receive a smaller amount of explicit federal universal-servicesupport than they received under the prior methodology based on historicalcosts.

10 GTE argues (Pet. 16) that Duquesne holds that "when methodologiesare changed, the end result of the new system must still * * * provide anadequate rate of return on the full investment as measured under the oldsystem." No such issue was presented in Duquesne. Instead, the Court,after observing that "[a]t all relevant times, Pennsylvania's ratesystem has been predominantly but not entirely based on historical cost,"found that "it has not been shown that the rate orders as modified* * * fail to give a reasonable rate of return on equity given the risksunder such a regime." 488 U.S. at 315 (emphases added). The Court alsoemphasized that "[t]he adoption of a single theory of valuation asa constitutional requirement would be inconsistent" with longstandingprecedent. Id. at 316.

GTE also invokes (Pet. 15-16) the Court's observation in Duquesne that "aState's decision to arbitrarily switch back and forth between methodologiesin a way which required investors to bear the risk of bad investments atsome times while denying them the benefit of good investments at otherswould raise serious constitutional questions." 488 U.S. at 315. Butthe FCC has not "switch[ed] back and forth between methodologies."Nor did the FCC act "arbitrarily" in adopting a methodology basedon forward-looking costs, which the FCC concluded was necessary given Congress'sdecision in the 1996 Act to open local telecommunications markets to competition.Moreover, although the new methodology requires incumbent local exchangecarriers to bear "the risk of bad investments" (just as they didunder a historical cost methodology, which typically excludes costs thatwere not prudently incurred, see, e.g., NEPCO Mun. Rate Comm. v. FERC, 668F.2d 1327, 1332-1333 (D.C. Cir. 1981)), the new methodology does not denysuch carriers "the benefit of good investments." It merely givescarriers an incentive to operate efficiently to ensure a reasonable profit.See Universal Service Order, 12 F.C.C.R. at 8899-8901, 8913-8914.

11 In any event, GTE's argument proves too much. Historically, state regulatorsallowed local exchange carriers to charge some customers for intrastateservice at rates far above cost so that the carriers could charge othercustomers at rates below cost. The implication of GTE's argument is thatthe traditional system, which is only now being phased out, is pervasivelyunconstitutional. Although GTE argues (Pet. 22-23) that competition is alteringthe constitutional analysis by eroding the protected status of incumbentlocal exchange carriers as regulated monopolies, such arguments are properlypresented to the States, which decide which intrastate carriers must servewhich customers and at which rates.

12 Before this Court issued its decision in Iowa Utilities Board, the EighthCircuit stayed the FCC's pricing rules for interconnection and unbundledaccess. While the stay was in effect, the vast majority of state commissionsindependently implemented the pricing provisions of Sections 251 and 252by adopting a forward-looking cost methodology in that context. The federalcourts have consistently upheld that choice of methodology, rejecting claimsthat the methodology violates the Takings Clause. See, e.g., GTE South Inc.v. Morrison, 6 F. Supp. 2d 517, 526-530 (E.D. Va. 1998), aff'd on othergrounds, 199 F.3d 733 (4th Cir. 1999); Southwestern Bell Tel. Co. v. AT&TCommunications, No. A97-CA-13255, 1998 WL 657717, at *10-*13 (W.D. Tex.Aug. 31, 1998).

13 Although AT&T blames "the Fifth Circuit's sweeping 'jurisdictional'rulings" (Pet. 20) for the invalidation of FCC rules governing a carrier'seligibility for universal-service support, the Fifth Circuit purported notto "reach the states' jurisdictional challenges" on that point(GTE Pet. App. 29a), ostensibly basing its decision on the text of 47 U.S.C.214(e)(2). But see GTE Pet. App. 30a n.32 (citing 47 U.S.C. 152(b)).

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