Testimony, Comments & Press Releases

The undersigned counsel of record certifies that the following listed persons have an interest in the outcome of this case. These representations are made in order that the judges of this court may evaluate possible disqualification or recusal.

Ad Hoc Telecommunications Users Committee

Alliance for Public Technology

Allegiance Telecom, Inc.

American Association of Retired Persons

American Petroleum Institute

Association For Local Telecommunications Services

AT&T Corp.

Bell Atlantic Telephone Companies

BellSouth Corporation

Frank Bowe

Cable and Wireless USA, Inc.

California Public Utilities Commission

Cincinnati Telephone Company

Competition Policy Institute

Competitive Telecommunications Assoc.

Connecticut Office of Consumer Counsel

Consumer Federation of America

Consumer Union

Citizens Utility Company

Enterprise Networking Technologies Users Association

Excel Communications, Inc.

Florida Public Service Commission

Focal Communications Corporation

General Services Administration

Global Crossing North America, Inc.

GTE

State of Hawaii

Independent Telephone and Telecommunications Alliance

Intermedia Communications Inc.

Shonah P. Jefferson

League of United Latin American Citizens

Level 3 Communications, LLC

Massachusetts Department of Telecommunications and Energy

MCI WorldCom, Inc.

Michigan Public Service Commission

Maryland Office of People’s Counsel

Missouri Office of the Public Counsel

Missouri Public Service Commission

Montana Public Service Commission

National Association for the Advancement of Colored People

National Association of Development Organizations

National Association of Regulatory Utilities Commission

National Rural Telecom Association

National Telephone Cooperative Association

New Hampshire Office of Consumer Advocate

New Jersey Division of Ratepayer Advocate

New Mexico Attorney General

Oncor Communications, Inc.

One Call Communications, Inc.

Pathfinder Communications, Inc.

Pennsylvania Office of Consumer Advocate

Personal Communications Industry Association

Public Utilities Commission of Ohio

Public Utilities Commission of Texas

Rainbow/PUSH Coalition and Citizenship Education Fund

Qwest Communications Corp.

SBC Communications, Inc.

Service Commission of Wisconsin

The Small Company Committee of Wisconsin State Telecommunications Association

Smithville Telephone Company, Inc.

Sprint Corporation

Telecommunication Resellers Assoc.

Telefonica Larga Distancia de Puerto Rico, Inc.

Texas Office of Public Utilities Counsel

Time Warner Telecom

United States Hispanic Chamber of Congress

United States Telecom Association

The Utility Reform Network

Valor Telecommunications, Inc.

Vermont Department of Public Service

Washington D.C. Office of People’s Counsel

Washington Office of Attorney General

Washington Utilities and Transportation Commission

Western Wireless Corporation

_____________________________

Stephanie A. Joyce

Attorney for National Association of State Utility Consumer Advocates

 

Petitioner National Association of Regulatory Utility Consumer Advocates ("NASUCA"), pursuant to Fifth Circuit Rule 28.2.4, respectfully requests oral argument in these consolidated administrative cases. This proceeding involves an unprecedented agency action that impacts every telephone consumer in the nation and contains myriad complex issues related to telecommunications regulation. Petitioner believes that oral argument would provide assistance to the Court in properly resolving the numerous infirmities in the agency’s decision.

TABLE OF AUTHORITIES vi

JURISDICTIONAL STATEMENT 1

STATEMENT OF ISSUES 1

STATEMENT OF THE CASE 2

STATEMENT OF FACTS 4

SUMMARY OF ARGUMENT 24

ARGUMENT 24

II. THE CALLS ORDER VIOLATES THE 1996 ACT AND

ARBITRARILY REVERSES SETTLED FCC POLICIES ON

ACCESS CHARGES AND UNIVERSAL SERVICE 29

the 1996 Act and Is An Unexplained Reversal of the FCC’s

Access Charge Policy 30

2. The FCC has violated Congress’s Section 254 mandate to ensure the affordability of basic local phone rates 37

3. The CALLS Order is an unexplained reversal of the FCC’s policy not to impose all access costs on end users 41

B. The New Access Charge Structure Established in the CALLS Order

Still Continues to Flout Congress’s Mandate and Settled FCC Policy Requiring All Network Charges to Reflect the Actual Cost of

Providing Service 45

CALLS Order violate the 1996 Act requirement that all

charges reflect a competitive market 46

2. The CALLS Order arbitrarily reverses fundamental FCC

policy related to cost-based service rates 49

3. The CALLS Order arbitrarily endorses "market forces"

as the solution to above-cost access charge rates 51

4. The FCC arbitrarily created the new $650 Million Universal Service Fund on the basis of its hidden "compromise"

rather than on reasoned judgment 52

5. The FCC unlawfully manipulated the X-Factor in the

CALLS Order to derive its pre-determined result 55

CONCLUSION 66

CERTIFICATE OF SERVICE 67

CERTIFICATE OF COMPLIANCE 68 

Cases Page

Arlington Oil Mills v. Knebel, 543 F.2d 1092 (5^th Cir. 1976) 42, 55

Association of Oil Pipe Lines v. FERC, 83 F.3d 1424 (D. C. Cir. 1996) 54

City of New Orleans v. SEC, 969 F.2d 1163 (D.C. Cir. 1992) 54

Consumer Product Safety Comm’n v. GTE Sylvania, 447 U.S. 102 (1980) 37

Iowa Utilities Bd. v. FCC, 525 U.S. 366 (1999) 39, 40

Iowa Utilities Bd. v. FCC, 219 F.3d 744 (8^th Cir. 2000) 45 n.16

MCI Telecommunications Corp. v. FCC, 675 F.2d 408 (D.C. Cir. 1982) 11

Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Automobile Ins.,

463 U.S. 29 (1983) 29, 42, 49, 50, 51, 54, 55

NARUC v. FCC, 737 F.2d 1095 (D.C. Cir. 1984). 4, 37 n.12

National Resources Defense Council v. EPA, 859 F.2d 156 (D.C. Cir. 1988) 54

Smith v. Illinois, 282 U.S. 133, 151 (1930) 31

Southwestern Bell Telephone Co. v. FCC, 153 F.3d 523 (8^th Cir. 1998) passim

Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393

(5^th Cir. 1999) passim

United States Telephone Association v. FCC, 199 F.3d 521

(D.C. Cir. 1999) 16, 20, 56

United States v. Garner, 767 F.2d 104 (5^th Cir. 1985) 27, 29, 42, 49, 55

United States Steel Corp. v. EPA, 595 F.2d 207 (5^th Cir. 1979) 27, 29

United States v. Nova Scotia Food Products Corp., 568, F.2d 240

(2d Cir. 1976) 29

USA Group Loan Svcs. v. Riley, 82 F.3d 708 (7^th Cir. 1996) 54

Statutes

Administrative Procedure Act, 5 U.S.C. § 551 et seq. (West 1994) 1

Communications Act of 1934, as amended, 47 U.S.C. § 151 et seq. (West 1994) 1

Negotiated Rulemaking Act of 1990, 5 U.S.C. § 561 et seq. (West 1994) 1

Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified

at 47 U.S.C. §§ 151 et seq. (West Supp. 1997), 6

5 U.S.C. § 553 (b) 29

5 U.S.C. § 553 (c) 29

5 U.S.C. § 563 24

5. U.S.C. § 564 26

5 U.S.C. § 706 2, 54

28 U.S.C. § 2342(1) 27

47 U.S.C. § 2(b) 46 n.17

47 U.S.C. § 205(a) 44

47 U.S.C. § 251(c) 6, 30, 47

47 U.S.C. § 252(d)(1) 30, 45, 46

47 U.S.C. § 254 7

47 U.S. C. § 254(a) 12

47 U.S.C. § 254(b)(1) passim

47 U.S.C. § 254(e) 53

47 U.S.C. § 254(i) 30, 37, 38, 39, 40 N.15, 41

47 U.S.C. § 254(k) 31, 32, 33, 34

47 U.S.C. § 402(a) 27

Legislative Materials

H.R. Rep. No. 104-204, 104^th Cong., 2d Sess. at 1 (1996) 46

Administrative Orders

Access Charge Reform, CC Docket Nos. 96-262, et al., First Report and Order,

12 FCC Rcd. 15,982 (1997) passim

Access Charge Reform, CC Docket Nos. 96-262 et al., Notice of Proposed Rulemaking, FCC 99-235 (rel. Sept. 15, 1999) 2, 17

Access Charge Reform, CC Docket Nos. 96-262 et al., Sixth Report and Order,

FCC 00-193 (rel. May 31, 2000) passim

Access Charge Reform, CC Docket Nos. 96-262, Order, FCC 00-249

(rel. July 14, 2000) 3, 49

Coalition for Affordable Local and Long Distance Service Modified Proposal,

Public Notice, DA 00-533 (rel. Mar. 8, 2000) 18

Report and Order, 12 FCC Rcd. 8766 (1997) passim

Implementation of Section 254 of the Communications Act of 1934, as amended,

12 FCC Rcd. 6415 (1997) 32-33

Jurisdictional Separations Reform and Referral to the Federal-State Joint Board,

CC Docket No. 80-286, Notice of Proposed Rulemaking

(rel. Nov. 10, 1997) 32, 33

Local Competition Provisions in the Telecommunications Act of 1996, CC Docket

No. 96-98, First Report and Order, 11 FCC Rcd. 15,499 (1996) 33, 47

MTS and WATS Market Structure, CC Docket Nos. 78-72 et al.,

Report and Order, 2 FCC Rcd. 2324 (1987) 32

Price Cap Performance Review for Local Exchange Carriers, CC Docket

No. 94-1, Fourth Report and Order, 12 FCC Rcd. 16,642 (1997) 15, 16, 17

Price Cap Performance Review For Local Exchange Carriers, CC Docket

No. 94-1, Further Notice of Proposed Rulemaking,

14 FCC Rcd. 19,717 (1999) 2, 16, 17

65 Fed. Reg. 38, 638 (2000) 1

Administrative Rules

47 C.F.R. § 1.1200 27

47 C.F.R. § 36.154 33

47 C.F.R. § 54.202(b) 31, 36

47 C.F.R. § 54.703 13

These petitions for review arise from an Order of the Federal Communications Commission ("FCC") that addresses the fees local exchange telephone carriers charge for access to their local networks. Access Charge Reform, Sixth Report and Order, CC Docket Nos. 96-262 et al. (rel. May 31, 2000) ("CALLS Order"). A summary of the Order was published in the Federal Register on June 21, 2000. 65 Fed. Reg. 38,683 (2000). Timely petitions for review were filed in the Court of Appeals for the D.C. Circuit and this Court; all petitions were consolidated in this Court on July 17, 2000. This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 2342(1) and 47 U.S.C. § 402(a).

2. Whether the CALLS Order and accompanying rule amendments violate the universal service provisions of Section 254 of the Communications Act of 1934, as amended, 47 U.S.C. § 254.

3. Whether the CALLS Order and accompanying rule amendments are arbitrary, capricious, an abuse of discretion, or otherwise in violation of Section 706 of the APA, 5 U.S.C. § 706.

These consolidated petitions for review challenge the FCC’s May 31, 2000 decision by reversing its settled policies, affirmed by this and other courts of appeals, in order to prescribe new rules for the "access charges" paid to local telephone companies. The CALLS Order was issued pursuant to a Commission rulemaking initiated by two events. First, in September 1999, a group of large local and long-distance providers — the Coalition for Affordable Local and Long Distance Service, or so-called "CALLS Coalition" (from which the Order takes its name) — unveiled a proposal for "reform" of access charges. Second, in November 1999, the Commission released a Further Notice of Proposed Rulemaking in a related docket concerning alternative means of regulating the rates charged by monopoly local exchange carriers ("LECs"). These proceedings produced a number of comments and critiques of the CALLS proposal, in response to which the CALLS Coalition in March 2000 submitted a modified access charge proposal (the "Modified Proposal"). Parties again were invited to submit comments on this Modified Proposal, with initial comments due April 3, 2000, and reply comments due April 17, 2000.

Approximately seven weeks later, the FCC released the CALLS Order. The CALLS Order adopts nearly every recommendation in the Modified Proposal, including several rules altering the FCC’s historical regime governing the assessment of access charges. Of these rule changes, the most significant is that the CALLS Order ends the FCC’s 17-year policy of requiring contribution from long distance telephone service providers for recovery of the costs imposed on the local network by long distance traffic.

US West, a petitioner in this case, filed a Petition for Partial Stay of the Order that was denied by the FCC on July 14, 2000. Access Charge Reform, Order, CC Docket Nos. 96-262 (rel. July 14, 2000). In addition, several parties timely filed Petitions for Reconsideration of the CALLS Order with the FCC pursuant to Commission Rules on July 21, 2000. These Petitions for Reconsideration remain pending.

This proceeding was consolidated in this Court on July 21, 2000 from several petitions for review timely filed in this circuit and in the D.C. Circuit.

Petitioner NASUCA is an association of 42 consumer advocates in 39 states and the District of Columbia. NASUCA’s members are designated by the laws of their respective states to represent the interests of utility consumers before state and federal regulators and in the courts.

Access Charge Regulation

The CALLS Order is the FCC’s latest attempt to rationalize the system whereby local exchange carriers ("LECs") impose and collect access charges from long distance, or interexchange, carriers ("IXCs"). Access charges are fees designed to recover the costs borne by the local network in the provision of local and long distance services to end users. These costs include the LEC’s provisioning of the end user’s telephone line, or "loop," the switch that routes long-distance calls into and through the local network, and the transport facilities that carry telephone call traffic between an IXC switch and the LEC local switch. The Commission established its regime for assessing and collecting access charges in 1983, following the divestiture by AT&T of its local service to the seven Regional Bell Operating Companies ("RBOCs"). See NARUC v. FCC, 737 F.2d 1095 (D.C. Cir. 1984).

The access charge regime was, and remains, closely interrelated to the FCC’s price regulation of the RBOCs, which were then the monopoly phone providers in their respective regions. From 1983 until 1990, FCC price regulation occurred under the so-called "rate-of-return" method, which prescribed the amount of profit that the RBOCs could derive from the use of their local networks. The amount of access charge revenue received by the RBOCs from the IXCs was required to conform to rate-of-return methodology, thus limiting the RBOCs’ earnings from providing access services to IXCs.

Beginning in 1991, the FCC replaced rate-of-return regulation with a system known as "price caps." Price cap regulation sets the maximum service rate that an RBOC may impose, including a maximum rate for access charges assessed on IXCs. This new system was developed in an effort to create incentives for the RBOCs to achieve greater efficiency, and thus reduce their costs, in order to derive the greatest profit from each price-capped service.

Access charges at that time were recovered through a combination of fixed, or "flat," fees, and variable, or "traffic-sensitive," fees. Flat fees were assessed for network components like local loops, for which costs remain constant regardless of the volume of usage. Traffic-sensitive fees applied to components such as switching, for which costs continue to accrue as call volume increases. Flat-rated loop costs were paid by all end users of basic local service in the form of the Subscriber Line Charge ("SLC"), capped at $3.50 per residence, that appeared as a monthly charge on the end user’s bill. Variable costs for switching and other traffic-sensitive elements were assessed as Common Carrier Line ("CCL") charges on the IXC providing the long distance service, which generally were passed through to the end user by the IXC. For the most part, these rates were developed to conform with prevailing price cap regulation rather than as a reflection of network cost.

With the passage of the Telecommunications Act of 1996 ("1996 Act"), Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. §§ 151 et seq. (West Supp. 1997), Congress declared that the local telephone market be opened to competitors. In order to provide competitors a means of entry into the local market, Congress mandated that the RBOCs and other monopoly local carriers, called incumbent local exchange carriers ("ILECs"), provide competitors with finished local services that may be resold to local end users. 47 U.S.C. § 251(c)(4). In addition, Congress required that ILECs lease the component parts of their local networks to competitors, called "unbundled network elements" or "UNEs," in order that the competitor may itself provide finished services to end users. Id. § 251(c)(3). Under each means of entry, Congress mandated that the rates that ILECs charge to competitors reflect the actual cost incurred by the ILEC in providing the service or UNE, rather than the price cap level allotted to the ILEC by the FCC. The 1996 Act also requires that the FCC address and restructure the system for support of "universal" telephone service, which historically had relied on implicit financial support built into LEC rates, including access charges. 47 U.S.C. § 254. Thus, the 1996 Act necessarily implicated the FCC’s 1983-era access charge regime.

Access Charge Reform

Congress’s statutory mandate for cost-based rates and universal service compelled reform of all areas of FCC price regulation, including the access charge system. The FCC therefore issued its First Report and Order in the Access Charge Reform docket on May 16, 1997. Access Charge Reform, CC Docket Nos. 96-262 et al., 12 FCC Rcd. 15,982 (1997) ("Access Charge First Report and Order"). In the Access Charge First Report and Order, the Commission concluded that it must "eliminate the rules that have helped to sustain de facto or de jure monopolies in access markets and instead create the conditions for competitive entry on a sustainable, long-term basis." 12 FCC Rcd. at 15,989. Thus, the FCC sought to "ensure that [access] charges more accurately reflect the manner in which the costs are incurred, thereby facilitating the movement to a competitive market." Id.

The FCC first addressed this issue by determining that access charges should occur as a flat rate in order not to discourage long distance entry and competition. The Commission found that most network elements are not traffic-sensitive, making variable traffic-sensitive rates a potential windfall for ILECs. 12 FCC Rcd. at 16,008. Further, because the CCL was generally passed through to the customers in long distance bills, the variable CCL rate structure penalized high-volume customers despite the fact that they had not actually caused greater costs than low-volume customers. Id. In addition, flat rates would permit IXCs to compete for customers through innovative high-volume calling plans without fear of limitless variable CCL charges.

For these reasons, the Commission abolished the CCL charge in favor of the Presubscribed Interexchange Carrier Charge ("PICC"). As was the CCL, this charge is "assessed, not on the end user, but on the end user’s presubscribed interexchange carrier." Access Charge First Report and Order, 12 FCC Rcd. at 16,004. The PICC was assessed on primary and second residential lines, as well as multi-line business lines. Id., 12 FCC Rcd. at 16,005. The Commission specifically determined to continue to recover some access charges from IXCs in order to avoid threatening the universal service mandate of Section 254 of the Act by increasing local telephone rates for end users.

With regard to the SLC, the charge paid directly by end users, the FCC held that it could not increase the SLC for primary residential and single-business lines. The Commission reasoned that "it would be inappropriate" to raise the SLC for these customers because such action would tend to make local phone service too expensive for local customers. Access Charge Reform First Report and Order, 12 FCC Rcd. at 16,011. Rather, the FCC held that multi-line business customers should bear any increase in the SLC, because "cost of service is unlikely to be a factor that would cause multi-line users not to subscribe to telephone service." Id.

The initial steps in access charge reform adopted in the Access Charge First Report and Order were intended by the Commission as an interim measure in the process of transforming access charges into a cost-based and equitable system. Id., 12 FCC Rcd. at 15,988-989. Noting the extreme complexity inherent in reforming access charges on the eve of local competition, the FCC stated that "we find that the [1996] Act does not require, nor did Congress intend, that we immediately institute a vast set of wide-ranging pricing rules[.]" Access Charge First Report and Order, 12 FCC Rcd. at 15,988. The FCC therefore determined to await the results of competition for further study of the costs of the local network and the necessity of additional amendments of, and reductions to, access charges.

The Eighth Circuit’s Review of the Access Charge First Report and Order

The Court of Appeals for the Eighth Circuit in large part upheld the Access Charge First Report and Order from challenges by several IXCs and ILECs that claimed the FCC had violated the 1996 Act and had acted arbitrarily and capriciously. In Southwestern Bell Telephone Co. v. FCC, 153 F.3d 523 (8^th Cir. 1998) ("SWBT v. FCC"), ILEC petitioners challenged, inter alia, the FCC’s failure to immediately remove all implicit subsidies from access charges. More specifically, they maintained that the FCC’s decision not to raise the SLC on primary residential lines while raising the SLC on multi-business lines in effect created new implicit subsidies in violation of the 1996 Act. Id. In addition, the ILECs contended that by maintaining the cap on the primary residential SLC, the FCC was preventing ILECs from fully recovering the costs directly attributable to providing access service to those customers. 153 F.3d at 537.

Several IXC petitioners attacked the Order on the ground that the FCC had not developed and relied upon cost information in support of its change in access charge policy. Further, the IXCs argued that the Commission’s decision to forbear from more comprehensive cost analysis in favor of a permissive market-based approach was arbitrary and capricious. 153 F.3d at 540. Finally, the IXCs argued that, in failing to adopt cost-based access charges immediately, the FCC was providing the LECs with a windfall in the form of inflated rates. 153 F.3d at 548.

The Eighth Circuit rejected these challenges. In addressing the LECs’ arguments, the court held that the FCC did not violate the 1996 Act by refusing to raise the primary residential SLC. In fact, the court found, the FCC was constrained from doing so by the Section 254’s universal service mandate that basic local residential service remain affordable. SWBT v. FCC, 153 F.3d at 538 (FCC "justifiably determined that an increase in the SLC ceiling for primary residential lines would threaten universal service"). Further, the court noted that the Order represented a "temporary, transitional arrangement" by the FCC to "mov[e] toward cost-based rates." Id.

In response to the IXCs’ arguments, the Eighth Circuit held that "at this time" the Commission had lawfully used its "predictive judgment" that competition would place downward pressure on access charges and bring them toward actual cost. SWBT v. FCC, 153 F.3d at 547. Should its judgment not prove correct, the Eighth Circuit held, the FCC could revisit the issue on the basis of the development and effects of competition. Id. In addition, the court held that the FCC’s continued reliance on historical rate-of-return methodology for setting access charges was within its authority under the Communications Act of 1934, and that its refusal immediately to established truly cost-based rates would effect no harm on IXCs at this juncture and that, if harm is subsequently discovered, the FCC could act at that time to lower access charges further. 153 F.3d at 548.

Therefore, the court of appeals held, the Commission’s rules adopted in the Access Charge First Report and Order were a "‘reasonable selection from among the available alternatives’" and were not unlawful, arbitrary and capricious. Id. at 560-561 (quoting MCI Telecommunications Corp. v. FCC, 675 F.2d 408, 413 (D.C. Cir. 1982)).

Universal Service Regulation and Reform

The FCC has long required that all Americans, regardless of their income or geographic location, have access to basic local phone service. Programs such as "Long Term Support" and "Lifeline" were created to ensure access to local service for low-income, rural and high-cost consumers. These programs established a means for ILECs to recover their cost of providing service to these consumers through a system of implicit support drawn largely from urban local and long distance revenues. Access charge revenue was a major component of these implicit universal service support mechanisms.

In Section 254 of the 1996 Act, Congress sought to abolish this system of hidden subsidies while maintaining ubiquitous, low-cost local service for all consumers. Section 254 requires the Commission, together with a Federal-State Joint Board as an advisor, to develop rules to create predictable, explicit means of funding universal service that would be equitably supported by and among all telecommunications carriers. 47 U.S.C. § 254(a). In addition, Section 254 requires that basic local telephone service rates remain affordable and relatively uniform among all areas of the nation. Id. § 254(b).

The Commission began to devise this explicit universal service support system in its First Report and Order in the Universal Service docket. Federal-State Joint Board on Universal Service, CC Docket 96-45, First Report and Order, 12 FCC Rcd. 8776 (1997) ("Universal Service First Report and Order"). In this Order, the Commission held that "interstate implicit support for universal service will be identified and removed from interstate access charges[.]" 12 FCC Rcd. at 8786. In place of access charges and other implicit support, the FCC created an explicit support mechanism that requires all telecommunications carriers to contribute a fixed percentage of their revenue to a federal Universal Service Fund. Id., 12 FCC Rcd. at 9171-9172; 47 C.F.R. § 54.703.

In the Universal Service First Report and Order, the FCC emphasized its conclusion that end users must not bear any increase in local rates as a means of funding universal service for other consumers. Recognizing that "[t]he 1996 Act requires that the Commission and the states ensure that universal services are affordable," 12 FCC Rcd. at 8837, the Commission stated that "we wish to avoid action that directly or indirectly raises the price of the basic residential telephone service that guarantees access to the local telephone network." 12 FCC Rcd. at 8786. On the strong recommendation of the advisory Joint Board, therefore, the FCC expressly declined to raise the SLC for primary residential lines. 12 FCC Rcd. at 9167.

The Fifth Circuit Review of the Universal Service First Report and Order

In Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5^th Cir. 1999) ("TOPUC"), the Court of Appeals for the Fifth Circuit affirmed key portions of the Universal Service First Report and Order related to the removal of access charge revenues from universal service support. Upholding the Commission’s decision to require LECs to reduce access charges by an amount commensurate with moneys received as universal service support, the Fifth Circuit held that "the FCC has offered good reason to believe that its new explicit support through direct subsidies will replace the amounts lost through the reduction of access charges." TOPUC, 183 F.3d at 425. Finding that the FCC "has offered reasonable explanations of why it thinks the funds will still be ‘sufficient,’" the Court "defer[red] to the agency’s judgment." Id. The Fifth Circuit reversed, however, the Commission’s decision to require LECs to recover their contributions to the Universal Service Fund through their assessment of access charges on IXCs rather than on direct pass-through of these costs to the end user. 183 F.3d at 426. For this and several other reasons, which were not related to access charges, this Court remanded the Universal Service First Report and Order to the FCC for further consideration in accordance with its opinion. 183 F.3d at 448.

Price Cap Regulation and the X-Factor

The FCC’s price cap regime, in place since 1991, includes a mechanism for the annual reduction of ILEC service prices based on productivity. Because the theory of price cap regulation is to create incentives for the incumbent LECs to become more efficient and thus incur lower costs, reducing ILEC service rates based on their productivity in effect relieves end users from paying costs that the LEC has eliminated through higher productivity. The mechanism for lowering rates, called the "X-Factor," is derived as a function of ILEC increases in productivity, counterbalanced by the rate of inflation. The X-Factor figure is thus the sum of the relative percentage of ILEC productivity growth minus the rate of inflation. For example, in 1990 the X-Factor was determined to be 4.3%.

Application of the X-Factor also included a "sharing" component. Sharing was an option afforded to ILECs whereby they could employ the lower of two permissible X-Factors ¾ and thus suffer a smaller reduction in service rates ¾ if they shared with consumers any access revenues received in excess of the LEC’s prescribed rate of return. Thus, the 1990 X-Factor rate of 4.3% had a counterpart rate of 3.3% that was available to ILECs that engaged in sharing.

In 1997, the Commission adopted several significant changes to its application of the X-Factor. Price Cap Performance Review for Local Exchange Carriers, Fourth Report and Order, 12 FCC Rcd. 16,642 (1997) ("1997 Price Cap Order"). The Commission (1) eliminated the sharing concept and its accompanying lower X-Factor, (2) raised the X-Factor to 6.5% for all LECs, and (3) retroactively applied the new 6.5% X-Factor to 1996 service rates beginning July 1, 1997. Several parties appealed this Order and the case was consolidated in the Court of Appeals for the D.C. Circuit.

The D.C. Circuit reviewed the 1997 Price Cap Review Order in the case United States Telephone Association v. FCC, 188 F.3d 521 (D.C. Cir. 1999). The court reversed the Order only as to the FCC’s designation of 6.5% as the new X-Factor. 188 F.3d at 531. The court questioned the agency’s reliance upon an "alleged upward trend" in LEC productivity that purportedly justified the sharp increase from prior X-Factor levels. Analyzing the aggregate data presented to the agency, the court found that "year-to-year fluctuations [in productivity] swamped the trend increments. Where’s the trend? As the underlying variables appear to be thrashing about wildly, the FCC’s conclusion that the trend . . . had some predictive value requires explanation." 188 F.3d at 526. Concluding that the 6.5% X-Factor was an unexplained departure from past agency policy, the D.C. Circuit held that this decision was arbitrary and capricious and remanded the issue to the FCC for further consideration.

The Commission issued its notice for comment on remand on November 15, 1999. Price Cap Performance Review for Local Exchange Carriers, Further Notice of Proposed Rulemaking, 14 FCC Rcd. 19,717 (1999). Comments in this proceeding were submitted during the Commission’s deliberation of access charges in the proceeding here on appeal. CALLS Order ¶ 139.

The CALLS Proceeding

The CALLS Proceeding originated as the confluence of related ongoing rulemakings at the Commission. As discussed above, the FCC in 1999 was revisiting two Orders that had been remanded by courts of appeal: the Access Charge First Report and Order, remanded by the Fifth Circuit; and the 1997 Price Cap Review Order, remanded by the D.C. Circuit.

The Commission issued notices in these proceedings to seek public comment on the available policy alternatives in light of the decisions by the courts of appeal in SWBT v. FCC and TOPUC v. FCC. Access Charge Reform, Notice of Proposed Rulemaking, CC Docket Nos. 96-262 et al., FCC 99-235 (rel. Sept. 15, 1999) ("CALLS NPRM") (initial comments due October 29, 1999, reply comments due November 19, 1999); Price Cap Performance Review For Local Exchange Carriers, CC Docket No. 94-1, Further Notice of Proposed Rulemaking, FCC 99-345, 14 FCC Rcd. 19,717 (1999) ("Price Cap FNPRM") ( initial comments due January 7, 2000, reply comments due January 24, 2000). The CALLS Original Proposal of July 29, 1999 provided the substance of the CALLS NPRM.

After release of these Notices, the CALLS Coalition, comprised of major IXCs and ILECs, submitted its Modified Proposal on access charges on March 8, 2000. This Modified Proposal "respond[ed] to the concerns that have been raised" in the first comment period; the FCC immediately sought comment on the Modified Proposal on a highly abbreviated schedule, with initial comments due April 3, 2000 and reply comments due April 17, 2000. Coalition for Affordable Local and Long Distance Service Modified Proposal, Public Notice, CC Docket Nos. 96-262 et al., DA 00-533 (rel. Mar. 8, 2000) ("CALLS Notice"). The resulting intersection of comment periods in these proceedings, which continued from October 1999 through April 2000, created an atmosphere of considerable confusion. Indeed, it remains difficult to inform this Court accurately of the precise chain of events that led to release of the CALLS Order.

What is known is that the CALLS Proposal became the template for the CALLS Order very early in the process. Members of the CALLS Coalition, comprising AT&T, BellSouth, Bell Atlantic, GTE, SBC and Sprint, attended several extensive meetings with the FCC that were closed to the public, the results of which are not part of the record of the proceeding. For the first several months in which the FCC conducted these private negotiations, several key interested parties were neither informed of nor invited to any meetings. These parties include Time Warner Telecom and the Association for Local Telecommunications Service ("ALTS"), the largest trade association for competitive local telephone carriers in the nation, as well as petitioner NASUCA.

According to the formal dissent of Commissioner Harold Furchtgott-Roth, several matters unrelated to access charges became included in the CALLS negotiations at the behest of several Coalition members. For example, some of the incumbent LEC participants apparently conditioned their approval of the CALLS Proposal on the Commission’s favorable decision on two unrelated issues: ILECs’ ability to obtain waivers of capital depreciation requirements; and ILECs’ right to refuse to permit competitors to use combined UNEs to provide finished special access services. CALLS Order, Furchtgott-Roth Dissent at 2. In addition, AT&T and Sprint, in an effort to secure FCC approval of the CALLS Proposal, made "commitments" to the Commission that they would pass their savings on access charges through to end users. These commitments, made public late in the rulemaking process, were not known to the public at the time comment on the CALLS FNPRM or the CALLS Proposal was sought. E.g., AT&T Reply Comments, CC Docket Nos. 96-262 et al., at 6-8 (Apr. 17, 2000).

The CALLS Order

In the CALLS Order, the FCC adopted significant changes to its access charge and universal service policies as implemented pursuant to the 1996 Act. Presented as an attempt to "resolve[] historically vexing issues, some going back nearly two decades, in a manner that benefits consumers," CALLS Order ¶ 2, the Order indeed represents a substantial departure from established agency policy under the 1996 Act.

The CALLS Order includes several amendments to Commission rules that are particularly germane to this appeal. First, the Order abolishes the PICC, established in the Access Charge First Report and Order, as applied to primary residential lines. Secondly, to offset the elimination of the PICC, the Commission raised its longstanding cap on the SLC for primary residential lines to as much as $6.50 by July 1, 2003. Third, the CALLS Order uses the 6.5% X-Factor, presently on remand from the D.C. Circuit in USTA v. FCC, 188 F.3d 521 (D.C. Cir. 1999), to permit LECs to lower certain classes of network rates, such as switching, but without any link to an increase in LEC productivity from which the X-Factor initially had been derived. Finally, the CALLS Order establishes an additional $650 million Universal Service Fund funded by an additional $0.35 surcharge paid by end users. This plan would remain in place for five years. CALLS Order ¶¶ 29-30.

The FCC noted in the CALLS Order that its new rules were not the product of consensus among the participating LECs. Thus, "out of an abundance of caution," the FCC established two alternatives for compliance with the CALLS Order. Id. ¶ 57. The first alternative is for the LEC to adopt the plan in its entirety for the full five-year period. The second alternative is to submit a detailed cost study in accordance with 1996 Act principles but, because analysis of such studies will require considerable Commission resources, to implement the plan "on an interim basis, subject to true-up." Id.

Several parties, including Time Warner Telecom, ALTS and petitioner NASUCA, opposed adoption of the CALLS Order, in both its versions, as being ill-conceived and likely detrimental to the development of competition. Indeed, of the parties commenting on the Modified Proposal, approximately one-half of the parties opposed the plan. Notably, the General Services Administration ("GSA"), in its reply comments on the Modified Proposal, remarked that "it is evident from the great majority of comments submitted by users, state regulators, and other carriers that the amended plan still has significant infirmities," and among those were "that rules for application of the regulatory scheme to all market participants are undefined, anticompetitive, and possibly impractical to implement." GSA Reply Comments at i, 7 (Apr. 17, 2000).

The new rules established in the CALLS Order became effective July 21, 2000.

The CALLS Order is a badly conceived plan, drafted via an unlawful, closed proceeding, that reverses longstanding FCC policies with no rational explanation or record support. In the CALLS Order, the FCC abrogated its statutory duties under the Telecommunications Act of 1996 and instead capitulated to a political compromise structured by the largest industry players to craft new access charge rules in their own favor. As a result of the agency’s procedural and substantive errors, "consumers are left holding the bag."

The Commission’s CALLS Order is not the product of the open, on-the-record rulemaking required by administrative law. Rather, the record here strongly suggests that CALLS Order resulted from the Commission’s acceptance of a compromise negotiated in a series of closed meetings with a small subset of interested parties — the CALLS Coalition members. By brokering a deal in private with the largest telecommunications industry members and by failing to provide fair and adequate opportunity for the general public either to participate in or comment on these negotiated rules, the Commission violated its obligations under the Negotiated Rulemaking Act and the "sunshine" provisions of the Administrative Procedure Act.

Substantively, the Commission acted contrary to Congress’s mandates in the 1996 Act and its own established access charge and universal service policies. First, the FCC’s decision to increase the Subscriber Line Charge ("SLC") assessed on end users in exchange for eliminating the Presubscribed Interexchange Carrier Charge ("PICC") ¾ formerly imposed directly on IXCs ¾ does not even address, let alone rationalize, its 1997 holding that such SLC increases would threaten universal service in violation of Section 254 of the Act. Secondly, the CALLS Order creates a new $650 million Universal Service Fund at the behest of the CALLS Coalition without any independent analysis of the necessity, propriety or size of this additional fund. Third, the FCC departed from its established access charges policy, for example, its long-held conviction that telecommunications competition will drive down costs, on the basis of arbitrary assumptions that have no basis in reality. Finally, the FCC irrationally adopted the X-Factor, historically used to maintain price cap regulation, as a means for decreasing access charges in a manner that the record demonstrates is anticompetitive and in conflict with the Act’s purposes.

Each of these decisions is fundamental to the CALLS Order such that this Court need find only one of them unlawful to vacate the order in its entirety. NASUCA will demonstrate, however, that all of these decisions violate Congressional mandates in the 1996 Act as well as settled principles of administrative law, warranting that this Court vacate the CALLS Order and remand it to the Commission for reconsideration.

The record in this proceeding indicates that the FCC actively brokered a political consensus among adverse industry participants and accepted that compromise through a series of closed meetings without releasing all relevant factors and alternatives for public scrutiny. Because it was formulated and sanctioned through such private negotiations with the Commission, the CALLS Order did not adhere to the agency’s procedural obligations under the Negotiated Rulemaking Act of 1990, 5 U.S.C. § 563 ("NRA"), and the APA, and should be vacated.

There is no dispute that the FCC accepted the CALLS Modified Proposal as a compromise. E.g., CALLS Order ¶¶ 48, 198, 202. Yet the record in this proceeding also reveals that the FCC conducted closed meetings with the CALLS Coalition, an ad hoc group comprised entirely of major incumbent LECs and IXCs, to review and adjust their plan to implement wholesale revisions to fundamental Commission policy. As Commissioner Harold Furchgott-Roth explained in dissent, the agency "held a series of meetings with a select group of some – but by no means all – of the parties with interests in this proceeding. The substance of what was discussed at these meetings was not publicly disclosed." CALLS Order, Furchtgott-Roth Dissent at 1.

Only the parties who were present know the actual extent and duration of these closed meetings, or indeed when the off-the-record negotiations were initiated. To illustrate, the CALLS Original Proposal was submitted July 29, 1999 and was released for public comment on September 15, 1999. CALLS NPRM, CC Docket No. 96-262 (rel. Sept. 15, 1999). On or before March 8, 2000, after the close of the comment period in that docket, the Coalition submitted its Modified Proposal. This Modified Proposal was released for an extremely abbreviated public comment period, with reply comments due April 17, 2000, and was adopted seven weeks later.

The speed with which the FCC adopted the Modified Proposal suggests that at least tacit approval had been granted long before initiation of the second comment period. Given that rulemaking proceedings typically require 12 to 18 months of deliberation at the FCC, the abbreviated schedule of the CALLS proceeding indicates that the FCC in fact anticipated and perhaps formulated the policies that appeared in the Modified Proposal. None of this activity, however, was memorialized and made available for public review. Thus, the record strongly suggests that the Commission "refereed the negotiations at these meetings" and that the Modified Proposal "simply memorialized aspects of the agreement that was reached between these parties and the Commission in the course of the meetings." CALLS Order, Furchtgott-Roth Dissent at 2.

Although it is black-letter administrative law than an agency has the discretion to adopt policies through either party-specific adjudication or rulemakings of general applicability, here the FCC has impermissibly followed neither procedure. Where an agency desires to base new rules on a negotiated "consensus" among interested parties, it is obligated to follow the procedures set forth in the Negotiated Rulemaking Act. The NRA leaves the initial choice of whether to conduct a negotiated rulemaking to the agency, but prescribes that in so doing an agency "shall consider" whether there are "a limited number of identifiable interests" on which representative parties can "reach a consensus . . . within a fixed period of time." Id. §§ 563(a)(2), (a)(4).

The CALLS Coalition is precisely such an identifiable group that the agency here used to facilitate a consensus on issues that had long divided the telecommunications industry. Thus, rather than proceeding by way of ex post facto rulemaking to rubber-stamp its conclusions, the Commission instead was required to convene a formal "negotiated rulemaking committee" and follow the specific procedures set forth in Section 564 of the NRA, 5 U.S.C. § 564(a), for notice and participation by parties "who will be significantly affected by a proposed rule." 5 U.S.C. § 564(b). The FCC’s failure to do so is reversible error. An agency retains the choice between APA rulemakings and NRA negotations, but cannot substantively participate in structuring a private, negotiated compromise without first invoking the procedural protections guaranteed to non-participants by the NRA.

Even if the NRA were not directly applicable, the general "sunshine" provisions of the APA — that an agency provide adequate public notice of proposed rules, address substantive public comments on its proposals, and make decisions based solely on the public record — clearly apply. The APA requires that federal agencies conduct rulemaking proceedings in a manner that invites and considers public comment and in which all agency findings are made on the basis of the public record. 5 U.S.C. § 553. Rules not promulgated in accordance with these procedures warrant vacation. United States v. Garner, 767 F.2d 104 (5^th Cir. 1985); United States Steel Corp. v. EPA, 595 F.2d 207, 215 (5^th Cir. 1979). Despite the evidence of ongoing discussions and negotiations between the CALLS Coalition and the Commission, no public record of ex parte communication appears until February 25, 2000, just before release of the Modified Proposal.

Thus, much of the discussion surrounding the CALLS Proposal was never made public, and unlawfully formed the basis of the Commission’s decision in violation of these settled rules of administrative procedure.

The fact that the FCC later formally sought comment on the Modified Proposal indicates more the agency’s desire to paper over its defective procedure rather than an effort to comply with the APA. If, as the record and Commissioner Furchgott-Roth’s dissent strongly indicate, the agency in fact "signed off" on the CALLS Modified Proposal before its submission, then the public comment period was merely a sham. In this regard, it is instructive that a substantial number of commenters ¾ as many as half of the parties that submitted reply comments on the Modified Proposal ¾ voiced myriad, substantive concerns with the proposal, in both its methodology and its potential anticompetitive impact, that remain unaddressed by the Commission. As a procedural matter, of course, the FCC’s failure to consider and address all submitted comments is itself an established ground for vacating the CALLS Order. 5 U.S.C. § 553; Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Ins., 463 U.S. 29 (1983).

The courts have interpreted the notice-and-comment requirements of Section 553 of the APA simply to mean that "[t]he inadequacy of comment in turn leads in the direction of arbitrary decision-making." United States v. Nova Scotia Food Products Corp., 568 F.2d 240, 250 (2d Cir. 1976). Accord, Garner, 767 F.2d at 120. Indeed, this Circuit has vacated agency rules that were not promulgated in accordance with the notice procedures of the APA. Garner, 767 F.2d at 121; United States Steel Corp., 595 F.2d at 215 (rejecting agency’s attempt to justify non-compliance with Section 553 with post hoc comments). Accepting a brokered compromise in advance of public comment is perhaps the epitome of flawed notice-and-comment procedure. In sum, therefore, because "the process by which the original CALLS Proposal was modified is fundamentally inconsistent with principles of neutrality and transparency that must govern agency rulemaking," CALLS Order, Furchtgott-Roth Dissent at 2, the CALLS Order should be vacated and remanded by this Court, quite apart from its substantive defects addressed below.

REVERSES SETTLED FCC POLICIES ON ACCESS CHARGES

AND UNIVERSAL SERVICE

The CALLS Order flouts the Congressional mandates in the 1996 Act and inexplicably departs from long-held FCC policies implementing those statutory provisions. The 1996 Act codifies the requirement that all Americans have access to "universal" basic local telephone service at "affordable" and uniform rates, 47 U.S.C. §§ 254(b), 254(i), and establishes the overarching procompetitive requirement that all ILEC prices reflect the actual cost of providing a service or network element. 47 U.S.C. §§ 251(c), 252(d)(1), 254(b)(5). In the four years since passage of the 1996 Act, the FCC has consistently fostered these principles as it implemented Congress’s competitive mandates. In the CALLS Order, however, the FCC suddenly and without explanation reversed its long-standing policies with respect both to universal service and access charge pricing. This dramatic reversal of policy contradicts the plain language of the statute and constitutes arbitrary and capricious action that warrants vacation under the APA.

the 1996 Act and Is An Unexplained Reversal of the FCC’s Access Charge Policy

Section 254 of the 1996 Act establishes several requirements for the FCC’s creation of a viable, reformed universal service regime. The FCC did not consider these principles in adopting the CALLS Order, nor did it act in accordance with its own decisions implementing these principles.

In Section 254(k) of the 1996 Act, Congress sought to ensure that no one class of telephone services, namely those core services designated for universal service support, are burdened with recovering all costs incurred by the network in providing several class of service. 47 U.S.C. § 254(k). To prevent the overburdening of one service, Section 254(k) requires that

Services "included in the definition of universal service" are, in essence, traditional local telephone service. Universal Service First Report and Order, 12 FCC Rcd. at 8809; 47 C.F.R. § 54.202(b). Among the components of local service is the end user’s right to have access to the interexchange network for the purpose of obtaining long distance service. Id.

The "reasonable share" requirement of Section 254(k) codifies the long-standing telecommunications doctrine that, when the same network supports several classes of service, one class of service must not bear the full cost of administering and maintaining the network. Smith v. Illinois, 282 U.S. 133, 151 (1930)("It is obvious that, unless an apportionment [of costs] is made, the intrastate service to which the exchange property is allocated will bear an undue burden[.]"). For this reason, the Commission has for decades maintained a policy of studying the proper allocation of costs as between intrastate and interstate telecommunications services. E.g., Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Notice of Proposed Rulemaking (rel. Nov. 10, 1997).

In addition, the Commission has concluded in the contexts of several different proceedings that loop costs (the recovery of which underlies the end user SLC) are caused by both local and long-distance carriers and thus must be apportioned accordingly. In 1987, almost ten years prior to enactment of Section 254, the Commission held that long distance services must reimburse LECs for 50% of loop costs, in accordance with its observation that long distance services are as equally supported by local loops as are local services. MTS and WATS Market Structure, CC Docket Nos. 78-72 et al., Report and Order, 2 FCC Rcd. 2324 ¶ 49 (1987). Later, in 1997, in the very Order adopted pursuant to Section 254(k), the Commission held that "the second provision of Section 254(k) places a continuing obligation on the Commission to ensure that the treatment of joint and common costs . . . will safeguard the availability of universal service." Implementation of Section 254(k) of the Communications Act of 1934, as amended, 12 FCC Rcd. 6415, 6515 (1997).

The Commission’s reasoning remained consistent throughout its several post-1996 Act dockets. In the Local Competition docket, for example, the Commission defined loops as "common lines that are jointly used for local exchange service and exchange access and interstate interexchange services." Local Competition Provisions in the Telecommunications Act of 1996, CC Docket No. 96-98, First Report and Order, 11 FCC Rcd. at 15,847 ("Local Competition First Report and Order") (emphasis added); 47 C.F.R. § 36.154. Further, the Commission explained that "[t]he costs of local loops and their associated line cards in local switches, for example, are common with respect to interstate access service and local exchange service[.]" Local Competition First Report and Order, 11 FCC Rcd. at 15,846. In another proceeding, the Commission reasoned that "the cost of a residential loop used to provide traditional telephony services usually is common to local, intrastate toll, and interstate toll services." Jurisdictional Separations Reform, CC Docket No. 80-286, Notice of Proposed Rulemaking ¶ 15 (rel. Nov. 10, 1997). This consistent reasoning demonstrates that the FCC fully recognizes the need to apportion loop costs among services, rather than impose 100% of them on the "services included in the definition of universal service." 47 U.S.C. § 254(k).

Section 254(k) does not prescribe an exact figure or formula for the apportionment of costs between services supported by universal service and other non-supported services. Rather, it requires some reasonable Commission assessment of the relative costs of providing those services and a rational apportionment of those costs. The CALLS Order, in imposing an increased end user SLC as the sole method of interstate loop cost recovery, fails completely to create any rational apportionment. The imposition of 100% of all interstate loop costs on one group of services cannot be deemed reasonable. This observation is especially true when the one group designated for paying 100% of costs ¾ basic local service ¾ is the service for which Congress seeks to ensure affordability and universal service.

Several commenters, including NASUCA, raised this issue in the CALLS Proceeding. Notably, several state members of the Federal-State Joint Board, advisor to the FCC on universal issues, submitted comments on the Original CALLS Proposal to caution the FCC that even the existing cap of $3.50 on the primary residential SLC "is much greater than a reasonable share of [network] costs . . . [and] must be reduced or eliminated in order to respond to the requirement of Section 254(k)[.]" Comments of the Federal-State Joint Board on Universal Service, CC Docket Nos. 96-262 et al., at 2 (July 23, 1999). In response, the FCC defended abolishing the PICC and the concomitant SLC increase by relying upon the Eighth Circuit’s decision in SWBT v. FCC, which held that the SLC is "not an allocation of [network] costs between supported and unsupported services" and therefore cannot implicate the requirements of Section 254(k). 153 F.3d at 559. The FCC then explained that it "has complied with the requirements of section 254(k) by allocating joint and common costs to various interstate services, including those that are supported by universal service[.]" CALLS Order ¶ 96.

The Commission’s failure to analyze Section 254(k)’s language belies its oblique reference to the Eighth Circuit. The fundamental precept of Section 254 remains that one group of services is protected by statute from being saddled with charges intended to recover costs that are caused by several classes of service on the shared network. This provision requires that no supported service may bear "more than a reasonable share" of costs; it is indifferent to the precise allocation of costs among services, so long as all network-related charges are not imposed on one group of services. Thus, although the Eighth Circuit correctly reasoned that the SLC is simply "a method of recovering loop costs" and not itself an allocation of costs, the court failed to appreciate Section 254(k)’s prohibition on assessing the entirety of loop costs ¾ costs that both local and long distance services cause to the network ¾ on basic local residential services. The FCC, in adopting the Eighth Circuit’s faulty reasoning, committed the same error.

Further, the elimination of some of the interstate access costs paid by long-distance carriers is irrelevant to the Commission’s Section 254 universal service obligations. Carrier access to the local network is not a supported "universal" service under the 1996 Act or the FCC’s decisions. Rather, it is the customer’s right to access the interexchange network that is guaranteed as a universal service. 47 C.F.R. § 54.202(b). As the Commission stated in the Universal Service First Report and Order, the Joint Board intended that "interexchange access¾ meaning the ability of a subscriber to place and receive interexchange calls ¾ is a supported service." Universal Service First Report and Order, 12 FCC Rcd. at 8809. In the CALLS Order, however, the Commission has all but excused IXCs from paying access charges, has placed that burden solely on end users, and then has created a new universal service funded by an additional surcharge.

Imposing these costs on end users cannot be squared with the provisions of Section 254(k), because the statute creates a new structure for the analysis of access charge cost recovery. Although the Eighth Circuit was correct that the FCC’s 1983-era access charge structure, based on the imposition of loop costs entirely on end users, was an economically efficient theory, the "reasonable share" directive of Section 254(k) overrules that policy by explicit statutory language. All services, including both long distance services and access services, must bear a "reasonable share" of interstate loop costs under the 1996 Act’s plain language. Where, as here, a statute is unambiguous, the role of the courts is to implement the congressional judgment. Consumer Product Safety Comm’n v. GTE Sylvania, 447 U.S. 102, 108 (1980). Quite apart from considerations of universal service and affordability, addressed below, the 1996 Act erects a direct barrier to the substantive result of the CALLS Order.

Therefore, the Commission’s decision in the CALLS Order to eliminate IXCs’ obligation to pay PICC fees and to shift all interstate loop costs to end user SLCs Section 254(k) and should be reversed.

Section 254 also requires that services supported by universal service mechanisms be affordable. Section 254(b) provides that "the Commission shall base policies for the preservation and advancement of universal service" on the principle that "quality services should be available at just, reasonable, and affordable rates[.]" 47 U.S.C. § 254(b)(1) (emphasis supplied). In addition, Section 254(i) requires that "[t]he Commission and the States should ensure that universal service is available at rates that are just, reasonable, and affordable." Id. § 254(i).

The CALLS Order asserts that "[o]ur rate restructuring today will result in lower overall charges than consumers experience with the current SLC and PICC." CALLS Order ¶ 85. This statement, however, does not substantively address the Commission’s statutory obligation to maintain affordability of basic local service. Nor is the statement entirely accurate, because although in 2000 the SLC will decrease from $5.04 (combined SLC and PICC) to $4.35 (new SLC), see id. ¶ 78, the SLC will increase every year until reaching a maximum of $6.50 in 2004. Id. ¶ 29. The SLC in 2004 will be a 90% increase from the $3.50 SLC that was in place prior to the CALLS Order. Thus, end uses pay far more under the CALLS Order than they otherwise would for local telephone service.

NASUCA presents the following comparison of the old SLC with the new SLC:

SLC PICC USF Total

Current $3.50 $1.51 --- $5.01

CALLS

July 1, 2000 $4.35 --- $0.35 $4.70

July 1, 2001 $5.00 --- $0.35 $5.35

July 1, 2002 $6.00 --- $0.35 $6.35

July 1, 2003 $6.50 --- $0.35 $6.85

Increase $3.00 $0.35 $1.84

% Increase 37%

At no point does the FCC acknowledge that this sharp rise in end user charges implicates affordability concerns under Section 254(b) and 254(i). Yet the language of Section 254(b) squarely obligates the FCC to keep affordability concerns at the forefront of its ratemaking decisions. That provision, stating that the Commission "shall base" its decisions on, inter alia, service affordability, is not a precatory suggestion but a Congressional mandate. 47 U.S.C. § 254(b) (emphasis added). As Justice Scalia held in the seminal 1996 Act case Iowa Utilities Board v. FCC, Congress’s use of the word "shall" in the 1996 Act in the context of shaping FCC decisionmaking means that "the Commission cannot, consistent with the statute, blind itself" to Congress’s prescribed policy. Iowa Utilities Bd. v. FCC, 525 U.S. 366,389 (1999) (interpreting language of Section 251 providing that "the Commission shall consider, at a minimum," certain aspects of network components before requiring incumbent LECs to lease them to competitors).

For these reasons, NASUCA respectfully disagrees with this Court’s suggestion in TOPUC v. FCC that Section 254(b) does not impose a binding Congressional mandate but rather "reflects a Congressional intent to delegate these difficult policy choices to agency discretion[.]" 183 F.3d at 411. NASUCA believes that this Court’s conclusion, made in the context of GTE’s challenge that the Universal Service First Report and Order violated Section 254(b)(4) by permitting inequitable imposition of Universal Service Fund charges on certain carriers, is not dispositive of the very different affordability concerns protected by Section 254(b)(1). In TOPUC, the FCC defended its decision to limit recovery of universal service costs to the actual, forward-looking costs of providing those services. All carriers were submitted to the same cost standard. 183 F.3d at 411-412. Further, the Commission’s adoption of this cost methodology was supported by a detailed agency explanation that the 1996 Act requires that carriers receive only the true costs of providing service and that imposing cost-based criteria will foster competition. Id. On this basis, this Court properly held that GTE’s argument that adoption of cost-based methodology violated Section 254(b)(4) was not sustainable.

In this case, however, the FCC has plainly ignored its mandate to consider rate affordability. Looking only to the near-term end user long distance savings under the CALLS plan, the Commission flatly refused to consider that the prescribed annual increase in the SLC could cause basic local rates to exceed an amount that low-income end users can pay. This refusal constitutes an outright failure to remember, let alone adhere to, Congress’s mandate in Section 254(b)(1) and Section 254(i). Therefore, the FCC’s decision to increase the SLC imposed on all end users violates Section 254 and should be vacated.

the FCC’s policy not to impose all access costs on end users

Pursuant to the very universal service provisions discussed above, the FCC has expressly held several times that basic local telephone services cannot be assessed charges for LECs’ recovery of all network costs. In both the Access Charge Reform docket and the Universal Service Reform docket, the Commission has steadfastly refused to raise the SLC assessed on primary residential lines ¾ lines used for provision of basic local service ¾ as a means of rationalizing access charges and universal service. Access Charge Reform First Report and Order, 12 FCC Rcd. at 16,010-011; Universal Service First Report and Order, 12 FCC Rcd. at 9162. In stark contrast to this long-held policy, the FCC has now determined in the CALLS Order that raising the SLC on primary residential lines is appropriate. E.g., CALLS Order ¶ 79.

Settled administrative law dictates that when federal agencies adopt rules that reverse prior agency policy, a rational explanation for the reversal must accompany the decision. Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Automobile Inc., 463 U.S. 29, 46-47 (1983). In State Farm, the Supreme Court held that "while the agency is entitled to change its view on the acceptability of [an existing policy], it is obligated to explain its reasons for doing so. Id., 463 U.S. at 56; followed, Garner, 767 F.2d at 118-119. See also Arlington Oil Mills v. Knebel, 543 F.2d 1092, 1099 (5^th Cir. 1976).

In the Access Charge First Report and Order, the FCC held that "it would be inappropriate to make significant changes to the SLC cap for primary residential and single-line business lines. [These lines] are central to the provision of universal service." Access Charge First Report and Order, 12 FCC Rcd. at 16,010-011. This decision became a fundamental policy in the FCC’s consideration of access charge reform. See, e.g., Access Charge Reform, Third Order on Reconsideration, FCC 98-257 ¶ 6 & n.10 (Oct. 5, 1998).

Likewise, the Commission held in the Universal Service First Report and Order that "the SLC, as a charge assessed directly on local telephone subscribers, has an impact on universal service concerns such as affordability. Consistent with these premises, the Joint Board concluded that the current $3.50 SLC cap on primary residential and single-business lines should not be increased." Universal Service First Report and Order, 12 FCC Rcd. at 9162. In adherence to the Joint Board, the FCC unequivocally stated that "we will not permit any increase in the primary residential line SLC and will not order the creation of any additional end-user charges for local service over these lines." 12 FCC Rcd. at 8781.

The CALLS Order does not recognize, let alone harmonize, its decision to increase the SLC with the Commission’s prior recognition of the universal service constraints against doing so. The FCC made no attempt to establish that affordability criteria for local service had changed or that there were some different circumstances in 2000 warranting a different conclusion than it reached on the same questions in 1997. In fact, the CALLS Order neither cites nor discusses the FCC’s prior refusal to increase the end user SLC. For an agency that "justifiably determined that an increase in the SLC ceiling for primary residential lines world threaten universal service," SWBT v. FCC, 153 F.3d at 538, the Commission’s failure to explain its change of policy is a marked departure from its APA obligation in adopting such a radical, short-term shift in direction.

The only "explanation" provided by the Commission in support of the new SLC increase is its informal observation that IXCs had been assessing fees on long distance users that were greater than the PICCs that the IXCs themselves paid. CALLS Order ¶ 86. For example, Sprint had been imposing a "blended" charge of $1.51 on end users to recover a combination of the $1.04 PICC as well as costs associated with uncollectible billed charges and transaction costs. Id. The Commission apparently viewed this practice as distasteful and determined that abolition of the PICC in favor of a directly increased SLC was the more appropriate means of cost recovery.

But any reductions in long-distance rates are decidedly irrelevant to the Commission’s Section 254 analysis on local rate affordability. Because long-distance service is not a "universal" service under the 1996 Act, the statute does not give the FCC the discretion to balance increases in protected local rates against asserted decreases (even if real) in long-distance prices. Moreover, the FCC’s analysis comes dangerously close to advocating a policy of "two wrongs make a right." If it is true that IXCs were taking advantage of end users by over-recovering their PICC costs, the FCC could and should have denounced and penalized this practice in accordance with its plenary authority to monitor telecommunications rates in the public interest. 47 U.S.C. § 205(a). To simply relieve IXCs of their PICC obligations and place those obligations squarely on the shoulders of the end users, who allegedly had been cheated, seems a curious way to remedy past wrongs. Not only does the increased SLC represent a marked departure from Commission policy, but it in fact furthers the very inequity it purports to rectify. Thus, the Commission has not provided the requisite State Farm rational explanation but rather offers an excuse.

Finally, the FCC curiously attempts to defend its sudden decision to raise the SLC on primary residential lines by asserting that the Eighth Circuit’s decision in SWBT v. FCC supported such a policy. CALLS Order ¶ 95. In that case, however, the Eighth Circuit supported the Commission’s decision in the Access Charge First Report and Order to raise the SLC only on second residential and multi-line business lines. 153 F.3d at 538. The decision did not, and indeed could not have, supported a Commission decision to raise the primary residential SLC, because the Commission had expressly declined to take such action. Far from supporting an increase in the primary residential SLC, the Eighth Circuit decision in SWBT v. FCC in fact holds the increase suspect.

Still Continues to Flout Congress’s Mandate and Settled FCC Policy Requiring All Network Charges to Reflect the Actual Cost of

Providing Service

The 1996 Act contains as a core principle the requirement that charges associated with use of the network reflect actual and documented costs of provisioning and administering the network. See, e.g., 47 U.S.C. § 252(d)(1). In fact, the House Report accompanying the Act states that Congress sought to "promote competition and reduce regulation in order to secure lower prices" for telecommunications services for all Americans. H.R. Rep. No. 104-204, 104^th Cong. 2d Sess. at 1 (1996). Not only a Congressional requirement, this policy has been the cornerstone of FCC regulation since the enactment of the 1996 Act. The CALLS Order admittedly fails meaningfully to adhere to this requirement in violation of the 1996 Act and established policy.

CALLS Order violate the 1996 Act requirement that all

charges reflect a competitive market

The Commission admits in the CALLS Order that it has not, nor will it soon, perform a detailed study of the costs associated with shared use of the local network among local and long-distance services. CALLS Order ¶¶ 57, 83-84. In making this admission, the Commission reveals its failure to comply with Congress’s 1996 Act mandates for cost-based rate regulation.

Section 252 of the 1996 Act, for example, requires that the rates imposed by incumbent LECs for lease of UNEs to competitors "shall be based on the cost (determined without reference to rate-of-return or other rate-based proceeding)" and must be nondiscriminatory. 47 U.S.C. § 252(d)(1). In addition, Section 251 requires that incumbent LECs provide interconnection and UNEs to competitors at just and reasonable rates. 47 U.S.C. §§ 251(c)(2), 251(c)(3). The Commission has interpreted this mandate to require, among other things, that incumbent LECs provide detailed cost data in order to "prove to the state commission the nature and magnitude" of the costs it incurs. Local Competition First Report and Order, 11 FCC Rcd. at 15,847.

Despite its emphasis on provable, documented cost data, the FCC has never initiated a proceeding to analyze interstate access costs. In the Access Charge First Report and Order, the FCC declined to perform costing analysis, deferring instead to "market forces" to guarantee "that interstate access services will ultimately be priced at competitive levels even without direct regulation of those service prices." Access Charge First Report and Order, 12 FCC Rcd. at 16,094. The FCC recognized that, at that time, its ability to determine proper costing, and to devote the requisite resources to make that determination, was decidedly lacking. The Commission thus stated that "the experience we gain from observing the effects of emerging competition on interstate access services will permit us more effectively to implement any prescriptive measures that may be needed[.]" Id., 12 FCC Rcd. at 16,097. Further, the FCC foresaw that "we will eventually prescribe rates for those services at forward-looking economic cost levels, to ensure that all consumers reap the benefits of economically-efficient prices." Id., 12 FCC Rcd. at 16,099. In other words, the FCC decided to do costing later. The Eighth Circuit found this approach reasonable in the interim, specifically noting that the initial Access Charge Reform rules were a "temporary, transitional arrangement" in affirming the Order. SWBT v. FCC, 153 F.3d at 538. See also TOPUC, 183 F.3d at 411 (affirming FCC’s decision interim decision to rely on existing ILEC depreciation schedules to determine costs of providing universal service).

We are now more than four years hence from passage of the 1996 Act. The FCC has declared that meaningful, irreversible local competition has developed. E.g., Local Competition, Industry Analysis Division, Common Carrier Bureau (December 1998) (available at <http://www.fcc.gov/ccb/stats.php>). Nearly every state in the country has completed one, if not more, comprehensive cost-based rate reviews and has established cost-based rates for UNEs and resold services. And yet still, in the CALLS Order, the FCC has postponed any review of costing analysis, explaining that "[i]nitiating and completing a cost study would take a considerable amount of time." CALLS Order ¶ 84.

Indeed, the CALLS Order makes it unlikely that the FCC will ever perform costing analysis for access charges, though it professes to require it. The CALLS plan lasts five years, at the close of which access charges will remain static. If any LEC elects not to implement CALLS and instead file a cost study, the Commission will not commence review of these cost studies until July 2001 at the earliest. CALLS Order ¶ 62. Moreover, the FCC has not issued guidelines to govern the creation of LEC cost studies and expressly denied US West’s petition for clarification of its cost study requirements. Access Charge Reform, CC Docket Nos. 96-262 et al., FCC 00-249 ¶¶ 5-6 (July 14, 2000).

This continued postponement and lack of clarity with respect to access charge cost review precludes the CALLS Order from comporting with Congress’s pricing mandates in the 1996 Act. Access charges cannot reflect actual cost if the FCC never determines what are actual costs. In continually refusing to make this determination, the FCC has violated its duty under the 1996 Act to ensure the establishment of cost-based network charges.

As discussed above, see supra Section II.A.3., an agency decision that reverses existing policy must provide a reasoned explanation for the reversal. State Farm, 463 U.S. at 56; Garner, 767 F.2d at 120-121. In this case, the FCC has again flouted its own policy in declining to perform cost analysis for access charges.

The Commission has consistently endorsed cost-based access charge rates in accordance with the 1996 Act. In the Access Charge First Report and Order, it described its policy goal: "By rationalizing the access charge rate structure, we ensure that charges more accurately reflect the manner in which the costs are incurred, thereby facilitating the movement to a competitive market." Access Charge First Report and Order, 12 FCC Rcd. at 15,989. Similarly, in the Universal Service docket, the Commission stated that "[c]onsistent with our plan to make support mechanisms explicit, we begin here to take steps towards reforming the existing mechanisms for the recovery of subscriber loop costs . . . to make them consistent with universal service goals and the development of competitive telecommunications markets." Universal Service First Report and Order, 12 FCC Rcd. at 9162.

Thus, the Commission’s repeated evasion of determining the proper cost-based level for access charges departs from, and indeed forgets, its earlier support for costing analysis. The sole reason for this apparently boundless delay appears to be the agency’s disinclination to devote time and resources to the project. E.g., CALLS Order ¶ 57. It is inarguable, however, that "we didn’t have time" does not satisfy the "rational connection" and "reasoned analysis" requirements for change in agency policy under State Farm. 463 U.S. at 56, 57. And in any event, while a temporary, transitional delay in cost studies may have been justifiable in 1996, given the Act’s rapid timetables, it cannot be justified in 2000 and beyond, because doing so would stretch the concept of a temporary rule beyond all recognition. Thus, the FCC’s adoption of the CALLS plan without completion or initiation of costing analysis is arbitrary and capricious, warranting reversal under the APA. 5 U.S.C. § 702(a).

the solution to above-cost access charge rates

Settled administrative law establishes that federal agency decisions must be rational and based on the record before it. This Circuit has adopted the Supreme Court’s reasoning State Farm to hold that

In this case, the FCC’s CALLS Order patently "runs counter to the evidence" and is "implausible." The FCC attempts to justify its failure to prescribe truly cost-based access charges on the basis of its belief that "increased competition will serve to constrain access rates" after the termination of the five-year CALLS plan, obviating any need for prescriptive action." CALLS Order ¶ 166. Not only is this conclusion nonsensical, it directly contradicts another similar Commission finding included in the same Order.

The CALLS Order indicates that "[b]ecause PICCs are an external cost to the IXCs that they cannot reduce by managing it better or being more efficient, PICCs are unlikely to be competed away." Id. ¶ 89. For this reason, the FCC found it more appropriate to abolish the PICC and raise the SLC, which will somehow encourage LECs to "avoid costs and reduce prices as [they] face[] increased competition from competing local exchange carriers." Id. This reasoning is baseless.

It is undisputed that competition is more robust for interexchange services than for local services. IXCs constantly compete for end users by adopting innovative calling plans, lowering rates, and improving quality of service. Incumbent LECs, by contrast, still retain the lion’s share of the local services market. One does not see prime time television commercials discussing the "dime lady" and "the nation’s first all-fiber network" for local telephone services. Thus, to suppose that incumbent LECs, having continued dominance in their markets, will lower the SLC in response to aggressive competition, and simultaneously to conclude that IXCs have no incentive to win customers by lowering PICC pass-throughs, is counterfactual and arbitrary. Further, these assumptions provide no basis for the FCC to conclude that "prescriptive rates" for access charges are unnecessary.

rather than on reasoned judgment

The CALLS Order creates a new $650 million Universal Service Fund to be derived largely from its new access charges. CALLS Order ¶¶ 186, 201-205. This figure comes not from the Commission’s determination of a continued need for bolstering of the Universal Service Fund by a certain amount, but simply from the political compromise offered to the Commission by the CALLS Coalition. Modified CALLS Proposal § 2.2.1 (March 8, 2000). The adoption of this new fund is an arbitrary and capricious application of agency decisionmaking that warrants vacation by this Court.

As an initial matter, the Commission’s designation of $650 million as the proper figure cannot be upheld as a "universal service" mechanism, for two reasons. First, Section 254 of the 1996 Act requires the Commission to consult with and receive the certification of the Joint Board on any further action on Universal Service Fund issues after adoption of its initial universal service rules. 47 U.S.C. § 254(e). The Commission weakly notes its awareness of this requirement in the CALLS Order and states that it "value[s] these suggestions and insights from our state colleagues, and [has] responded to their comments in appropriate sections of this Order." CALLS Order ¶ 233. Yet because the CALLS Proposal was never referred to the Joint Board for consideration, the FCC’s action cannot be affirmed as an exercise of its Section 254 universal service authority. Receiving comments from some of the members of the Joint Board is not a substitute for the formal referral process dictated in the statute.

Secondly, as a substantive infirmity, the $650 million figure has no basis in reasoned Commission judgment or analysis. In brief, the CALLS Coalition made it up and the Commission adopted it. The Commission never conducted an inquiry into the basis for the number or the need for an additional Fund in the first instance. See CALLS Order ¶¶ 195-203. Rather, the FCC stated that $650 million fell "within the range of estimates that have been submitted in the universal service proceeding," id. ¶ 202, the breadth of which is "largely due to variations in model inputs." Id. ¶ 202 n.442. Such summary adoption of the proposal of a private party represents an unlawful misuse of Commission authority.

Federal agencies must conduct independent analysis prior to adopting any rule, even a rule that was formulated primarily through negotiation with an industry. Natural Resources Defense Council v EPA, 859 F.2d 156, 194 (D.C. Cir. 1988). Agencies must not simply use the conclusions and suggestions of private parties, without more, as the basis for their decision making. USA Group Loan Svcs. v. Riley, 82 F.3d 708 (7^th Cir. 1996). Such action constitutes "abdication of regulatory authority to the regulated." 82 F.3d at 725. See also Association of Oil Pipe Lines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996); City of New Orleans v. SEC, 969 F.2d 1163 (D.C. Cir. 1992). Agency action that is patently in derogation of statutory duty is arbitrary and capricious and requires vacating the rules. 5 U.S.C. § 706(a); State Farm, 463 U.S. at 43-44. In this case, the FCC’s adoption of a $650 million fund represents precisely this type of derogation of duty.

CALLS Order to derive its pre-determined result

The CALLS Order uses the X-Factor in an unprecedented application and scope contrary to the concerns raised by a majority of commenters and without a reasoned explanation. This decision is arbitrary and capricious and should be vacated by this Court. State Farm, 463 U.S. at 43, 56; Garner, 767 F.2d at 121; Knebel, 543 F.2d at 1099.

The X-Factor historically has been applied by the FCC as a predictable mechanism for decreasing price caps for local services. CALLS Order ¶ 135. The X-Factor is expressed as a percentage, derived as the sum of LEC productivity growth over the previous year less the rate of inflation. By applying the X-Factor to components of local service, the Commission ensured that the rates associated with each component decreased, thus providing an overall decrease in the price cap allotted to a LEC. Id. ¶ 136. The X-Factor has thus applied only to price cap regulation since its inception.

In the CALLS Order, the FCC adopted the X-Factor concept to "serve a different function," that is, the regulation of access charges. Id. ¶ 140. This decision was unlawfully adopted without any explanation of its necessity or proprietary. State Farm, 463 U.S. at 56. More troublesome than this lack of explanation is the FCC’s blatant dismissal of the many commenters’ concerns, see supra at 21, that this new application of the X-Factor would have inevitable and severe anticompetitive effects.

As an initial matter, the 6.5% X-Factor applied by the Commission has already been vacated by the D.C. Circuit in its review of the 1997 Price Cap Review Order. In USTA v. FCC, 188 F.3d 521 (D.C. Cir. 1999), the court of appeals held that the Commission’s adoption of a 6.5 % X-Factor, representing a marked increase from the previous 3.3% figure, was not supported by the record and therefore arbitrary and capricious. 188 F.3d at 530. The FCC, in a shocking arrogation of authority, simply transplants the vacated 6.5% X-Factor into the access charge rules with nary a word to explain its justification. The CALLS Order merely contains a brief exposition of the ranges of X-Factors proposed by commenters in its proceeding on remand and proceeds to discuss the beneficial effects that a 6.5% X-Factor will have on access charges. CALLS Order ¶¶ 138-140.

On a more general level, as prescribed under the CALLS Order, the X-Factor will be applied to target rates for competitive network services, such as transport and switching, which competitive carriers can obtain from vendors fairly ubiquitously, but not to target non-competitive network services, such as incumbent LEC-owned local loops. Modified Proposal § 3.2.4. This sporadic application of the X-Factor will permit incumbent LECs to create price squeezes against their competitors by maintaining high loop rates ¾ which all competitors need ¾ while undercutting competitors’ switching costs. The FCC fails entirely to address these significant concerns in the CALLS Order.

An additional concern raised regarding the X-Factor is the Commission’s decision to "freeze" the percentage figure after a few years to reflect only the rate of inflation. Thus, LEC price-capped rates would cease to decrease according the LEC productivity growth, thus locking in service rates. Several parties argued that creating a static X-Factor is an arbitrary decision that will halt the downward trend of service rates as Congress had intended in the 1996 Act. See Supplemental Comments of NASUCA at 19 (Apr. 3. 2000); MCI WorldCom Comments at 17 (Apr. 3, 2000).

The Commission’s familiar answer to these concerns is that "switched access usage charges will be reduced immediately to $2.1 billion on July 1, 2000. CALLS Order ¶ 166. In further support, the Commission restated its belief that, regardless of the application or the level of the X-Factor, "increased competition will serve to constrain access rates in the later years of the CALLS Proposal as X-Factor reductions are phased out." Id. As NASUCA demonstrated above, see supra section II.B.3., this statement has no basis in the FCC’s experience.

The Commission manipulated its policy with respect to the X-Factor to achieve the end result that the CALLS Coalition has already prescribed. Moreover, it adopted the decidedly skewed self-interest of the incumbent LECs in maintaining high rates for non-competitive services. This action is unsustainable as a matter of agency policy and administrative law.

For all these reasons, this Court should vacate the CALLS Order and remand it to the FCC in its entirety for reconsideration.

Respectfully submitted,

By: _______________________

Matthew F. Stowe

Stephanie A. Joyce

Patton Boggs, LLP

2550 M Street, N.W.

Washington, D.C. 20037

202.457.6000

202.457.6315 fax

Michael J. Travieso

National Association of State

Utility Consumer Advocates

6 St. Paul Street, Suite 2102

Baltimore, MD 21202

410.767.8150

410.333.3616 fax

Attorneys for National Association of State Utility Consumer Advocates

Dated: September 20, 2000

I, Stephanie A. Joyce, pursuant to Fed. R. App. P. 25(d) and 5^th Circuit Rule 25, hereby certify that on this, the 20^th day of September, 2000, two paper copies and one electronic copy of the foregoing brief was served on all parties to this appeal via First Class Mail.

Catherine G. O’Sullivan Nancy C. Garrison United States Department of Justice Antitrust Division 601 D Street, NW, Room 10535 Washington, D.C. 20530	Laurence N. Bourne John E. Ingle Christopher J. Wright William E. Kennard Federal Communications Commission 445 Twelth Street, SW Washington, D.C. 20554
Suzi Ray McLellan Ricardo Guzman Texas Office of Public Utility Counsel 1701 N. Congress Avenue, 9-180 P.O. Box 12397 Austin, TX 78711-2397	The Honorable Janet Reno Attorney General of the United States United States Department of Justice Constitution Ave. and 10th Street, NW Washington, D.C. 20530
Robert B. McKenna Jeffry A. Bruggeman US WEST Communications, Inc. 1020 19th Street, NW, Suite 700 Washington, D.C. 20036	Joel I. Klein, Esq. Assistant Attorney General Appellate Section, Room 3224 Uni