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 

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 
SETH P. WAXMAN 

Solicitor General 

Counsel of Record 
Department of Justice 
Washington, D.C. 20530-0001 
(202) 514–2217 

QUESTIONS PRESENTED 

1. Whether the universal-service provisions of 47 
U.S.C. 254 (Supp. III 1997) violate the Taxing Clause or 
the Origination Clause or are void for vagueness. 

2. Whether the Federal Communications Com- 
mission (FCC) reasonably determined that, under 47 
U.S.C. 254(f) and 332(c)(3)(A) (Supp. III 1997), pro- 
viders of commercial mobile radio services must contri- 
bute to state universal-service subsidies. 

3. Whether the FCC may, consistent with the 
Takings Clause, adopt a forward-looking cost methodol- 
ogy to determine the proper level of federal universal- 
service subsidies. 

4. Whether the FCC has statutory jurisdiction to 
consider a telecommunications carrier’s intrastate reve- 
nues, as well as its interstate revenues, to determine 
the carrier’s contribution to the federal universal- 
service program for schools, libraries, and rural health- 
care facilities. 

(I) 

TABLE OF CONTENTS 

Page 

Opinions below ............................................................................... 
1 

Jurisdiction ...................................................................................... 2 

Statement ........................................................................................ 2 

Argument ........................................................................................ 14 

Conclusion ....................................................................................... 30 

TABLE OF AUTHORITIES 

Cases: 

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 

(1999) ........................................................................................ 7 

Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970) ............ 

14 

Brooks-Scanlon Co. v. Railroad Comm’n, 251 U.S. 

396 (1920) ................................................................................. 

13, 25 

Cellular Telecomms. Indus. Ass’n v. FCC, 168 F.3d 

1332 (D.C. Cir. 1999) ............................................................. 

19, 20 

Chevron U.S.A. Inc. v. Natural Resources 

Defense Council, Inc., 467 U.S. 837 (1984) .................... 

12, 19 

Dane v. Jackson, 256 U.S. 589 (1921) ................................. 

17 

Delta Air Lines, Inc. v. August, 450 U.S. 346 

(1981) ........................................................................................ 14 

Duquesne Light Co. v. Barasch, 488 U.S. 299 

(1989) .............................................................. 

12, 13, 21, 22, 23, 24 

Edye v. Robertson (Head Money Cases), 112 U.S. 

580 (1884) ................................................................................. 

17 

FPC v. Hope Natural Gas Co., 320 U.S. 591 

(1994) ..................................................................... 

21-22, 24, 25-26 

GTE South, Inc. v. Morrison, 6 F. Supp. 2d 517 

(E.D. Va. 1998), aff ’d on other grounds, 199 F.3d 

733 (4th Cir. 1999) .................................................................. 

26 

Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 

1997) .............................................................................. 

7, 26, 27, 28 

Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355 

(1986) ........................................................................................ 2 

Market St. Ry. v. Railroad Comm’n, 324 U.S. 548 

(1945) ........................................................................................ 2, 23 

(III) 

IV 

Cases—Continued: Page 

Mistretta v. United States, 488 U.S. 361 (1989) ............... 

16 

Mobil Oil Exploration & Producing S.E., Inc. 

v. United Distrib. Cos., 498 U.S. 211 (1991) ........... 

12-13, 23 

NEPCO Mun. Rate Comm. v. FERC, 668 F.2d 

1327 (D.C. Cir. 1981) ............................................................. 

24 

National Cable Television Ass’n v. United States, 

415 U.S. 336 (1974) ................................................................ 

17 

Pennsylvania Dep’t of Corrections v. Yeskey, 

524 U.S. 206 (1998) ................................................................ 

14 

Skinner v. Mid-America Pipeline Co., 490 U.S. 

212 (1989) ................................................................................. 

15, 17 

Smith v. Illinois Bell Tel. Co., 282 U.S. 133 (1930) ......... 

2 

Smyth v. Ames, 169 U.S. 466 (1898) ................................... 

23 

Southwestern Bell Tel. Co. v. AT&T Communica- 
tions of the Southwest, No. A97-CA-13255, 1998 

WL 657717 (W.D. Tex. Aug. 31, 1998) ............................... 

26 

Sprint Spectrum v. State Corp. Comm’n, 149 F.3d 

1058 (10th Cir. 1998) .............................................................. 

19 

Thomas v. Network Solutions, Inc., 176 F.3d 

500 (D.C. Cir. 1999) ............................................................... 

17 

United States v. Munoz-Flores, 495 U.S. 385 

(1990) ......................................................................... 

11, 15, 16, 17 

United States v. Riverside Bayview Homes, Inc., 

474 U.S. 121 (1985) ................................................................ 

21 

United States v. United States Shoe Corp., 

523 U.S. 360 (1998) ................................................................ 

17 

Valuation Proceedings Under §§ 303(c) and 306 of the 

Regional Rail Reorganization Act, In re, 439 F. Supp. 

1351 (Spec. Ct. 1977) ............................................................. 

24-25 

Constitution and statutes: 

U.S. Const.: 

Art. I: 

§ 7, Cl. 1 (Origination Clause) .......................... 

11, 15, 16, 17 

§ 8 (Taxing Clause) ................................................... 

14, 15, 18 

Amend. V (Takings Clause) ............................ 13, 17, 20, 26, 27 

V 

Statutes—Continued: Page 

Communications Act of 1934, 47 U.S.C. 151 et seq.: 

47 U.S.C. 151 ......................................................................... 

2, 3 

47 U.S.C. 152 ......................................................................... 

2 

47 U.S.C. 152(b) ..................................................... 

13, 14, 22, 29 

47 U.S.C. 201 ......................................................................... 

2 

47 U.S.C. 201(b) .................................................................... 

27 

47 U.S.C. 214(e)(2) ............................................................... 

29 

47 U.S.C. 221(c) .................................................................... 

2 

47 U.S.C. 251 ......................................................................... 

4, 26 

47 U.S.C. 251(c)(2) ................................................................ 

4 

47 U.S.C. 251(c)(3) ................................................................ 

4 

47 U.S.C. 252 ......................................................................... 

4, 26 

47 U.S.C. 252(d)(1) ............................................................... 

4 

47 U.S.C. 254 ................................................ 

5, 13, 14, 16, 18, 19 

47 U.S.C. 254(a) .................................................................... 

18 

47 U.S.C. 254(a)(1) ............................................................... 

5 

47 U.S.C. 254(a)(2) ............................................................... 

5 

47 U.S.C. 254(b) .................................................................... 

15, 18 

47 U.S.C. 254(b)(1) ............................................................... 

5, 15 

47 U.S.C. 254(b)(2) ............................................................... 

5, 15 

47 U.S.C. 254(b)(3) ............................................................... 

5, 6 

47 U.S.C. 254(b)(4) ............................................................... 

6 

47 U.S.C. 254(b)(5) ............................................................... 

6, 27 

47 U.S.C. 254(b)(6) ............................................................... 

5 

47 U.S.C. 254(c) .................................................................... 

27 

47 U.S.C. 254(d) ............................................................ 

15, 18, 27 

47 U.S.C. 254(e) .................................................................... 

5 

47 U.S.C. 254(f) ............................................................. 

12, 20, 27 

47 U.S.C. 254(h) .................................................................... 

5 

47 U.S.C. 254(j) ..................................................................... 

5 

47 U.S.C. 332(c)(3)(A) ................................. 

8, 11, 12, 18, 19, 20 

47 U.S.C. 410(c) .................................................................... 

5 

Telecommunications Act of 1996, Pub. L. No. 104-104, 

110 Stat. 56 .............................................................................. 4 

VI 

Miscellaneous: Page 

Federal-State Joint Bd. on Universal Serv., In re: 

12 F.C.C.R. 8776 (1997) ................ 

7, 8, 9, 10, 14, 21, 22, 24, 25 

12 F.C.C.R. 18,514 (1997) ..................................................... 

10 

cc Docket No. 96-45, FCC 99-306 (adopted Oct. 21, 

1999), appeal pending sub nom. U.S. West v. FCC, 

No. 99-9546 (10th Cir. filed Dec. 10, 1999) ........................ 

10 

cc Docket No. 96-45, FCC 99-304 (adopted Oct. 21, 1999), 

appeal pending sub nom. U.S. West v. FCC, No. 99- 

9547 (10th Cir. filed Dec. 10, 1999) ..................................... 

10 

Implementation of Local Competition Provisions in 

the Telecomms. Act of 1996, In re, 11 F.C.C.R. 

15,499 (1996) ............................................................................ 6, 7 

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; Celpage Pet. App. 1-110; GTE Pet. App. 1a- 
98a) is reported at 183 F.3d 393. The Order of the 
Federal Communications Commission (excerpted in 

(1) 

2 

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. Petitions for rehearing were denied on 
September 28, 1999 (AT&T Pet. App. 116a-118a). Cel- 
page 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 juris- 
diction 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 et seq., as originally enacted, in- 
dividual States generally regulated the rates and terms 
of local telephone service and the Federal Communi- 
cations Commission (FCC) generally regulated the 
rates and terms of interstate long-distance service. 47 
U.S.C. 152, 201; see Louisiana Pub. Serv. Comm’n v. 
FCC, 476 U.S. 355, 360 (1986). Initially, most of the 
rates set by the States and the FCC entitled local tele- 
phone companies, known as “local exchange carriers” or 
“LECs,” to a reasonable rate of return based on pru- 
dently incurred historical costs. 

Many components of the telephone network are used 
to provide both local and long-distance service. The 
costs associated with each component have traditionally 
been allocated between the interstate domain and the 
intrastate domain 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 
allocated to the interstate domain are generally re- 
covered by local exchange carriers through access 
charges imposed on long-distance carriers for the use of 

3 

the local network. Costs allocated to the intrastate 
domain are generally recovered through the rates that 
consumers pay for local service. 

b. The 1934 Act required the FCC to regulate inter- 
state communications “so as to make available, so far as 
possible, to all the people of the United States * * * a 
rapid, efficient, Nation-wide, and world-wide wire and 
radio communications service with adequate facilities at 
reasonable charges.” 47 U.S.C. 151 (1994 & Supp. III 
1997). Without some type of direct or indirect financial 
assistance, some Americans could not afford telephone 
service. For people living in rural or isolated areas, for 
example, the cost of telephone service could be pro- 
hibitively high, because of the greater expense of 
installing telephone lines and the reduced economies of 
scale. Moreover, people with low incomes, regardless of 
where they live, might not be able to afford telephone 
service. 

The FCC and the States established a variety of sub- 
sidy mechanisms to ensure affordable telephone service 
for all Americans, i.e., “universal service.” For ex- 
ample, the FCC modified the separations process for 
the smallest local exchange carriers (those with fewer 
than 50,000 lines) by allocating a greater-than-usual 
portion of traffic-sensitive switching costs to the inter- 
state domain. That modification, by shifting more of 
those shared costs from local customers to long- 
distance customers, subsidized local rates. Other 
federal universal-service subsidies include the “Link- 
Up” and “Lifeline” programs, which reduce initial con- 
nection charges and monthly basic local service fees for 
low-income customers. See FCC C.A. Br. 9-13. 

Many States, in turn, have required local exchange 
carriers to charge the same rate for service throughout 
their service areas, even though some parts of each 

4 

area may be more costly to serve than other parts. 
Such “geographic averaging” creates a subsidy from 
customers in low-cost areas to customers in high-cost 
areas. In addition, many States have set business rates 
at higher levels than residential rates, even though the 
cost of providing service to business and residential 
customers may be the same. Some States also have ex- 
plicit subsidy programs to achieve universal service. 
See FCC C.A. Br. 11-12 & n.8. 

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

2. The Telecommunications Act of 1996 (1996 Act), 
Pub. L. No. 104-104, 110 Stat. 56, fundamentally 
changed the regulation of telecommunications. In the 
core “local competition” provisions of the 1996 Act, 
Congress established requirements and procedures 
designed to open local telephone markets to full com- 
petition. 47 U.S.C. 251, 252.1 In particular, incumbent 
local exchange carriers were required to interconnect 
their networks with those of competing providers and 
to lease their network elements to those competing 
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 rates for local telephone service to 
move toward the carriers’ forward-looking costs. Con- 
gress also anticipated that such a process would erode 
the implicit subsidies supporting universal service. For 
example, competition for customers who can be served 

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

5 

at low cost—e.g., customers in high-density areas— 
could be expected to reduce those customers’ rates to 
close to cost. As a consequence, the implicit subsidies 
from those customers to customers in high-cost areas 
could be expected to diminish. 

Congress addressed such concerns in 47 U.S.C. 254, 
titled “Universal service,” which was designed to pre- 
serve and advance universal service in a competitive 
environment. Section 254 codified the FCC’s policy of 
providing federal universal-service support for low- 
income consumers and consumers in high-cost areas. 47 
U.S.C. 254(b)(3), (e) and (j). Section 254 also created a 
new program to provide discounted telecommunications 
and information services to 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, pursuant to 47 U.S.C. 410(c), to recom- 
mend changes to the FCC in federal universal-service 
policies. 47 U.S.C. 254(a)(1). The FCC, in turn, was dir- 
ected to promulgate universal-service rules, “includ- 
[ing] a definition of the services that are supported by 
Federal universal service support mechanisms and a 
specific timetable for implementation,” by May 1997. 47 
U.S.C. 254(a)(2). 

Congress set forth several “principles” to guide the 
FCC and the Joint Board in that process. First, Con- 
gress stated that “[q]uality services should be available 
at just, reasonable, and affordable rates.” 47 U.S.C. 
254(b)(1). Second, Congress stated that “[a]ccess to 
advanced telecommunications and information services 
should be provided in all regions of the nation.” 47 
U.S.C. 254(b)(2). Third, Congress stated that “[c]on- 
sumers in all regions of the Nation, including low- 
income consumers and those in rural, insular, and high 
cost areas,” should have access to telecommunications 

6 

and information services that are “reasonably com- 
parable to those services provided 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 equitable and nondiscri- 
minatory contribution to the preservation and advance- 
ment of universal service.” 47 U.S.C. 254(b)(4). Fifth, 
Congress stated that “[t]here should be specific, pre- 
dictable and sufficient Federal and State mechanisms to 
preserve and advance universal service.” 47 U.S.C. 
254(b)(5). And, finally, Congress stated that schools, 
libraries, and rural health-care facilities “should have 
access to advanced telecommunications services.” 47 
U.S.C. 254(b)(6). 

3. In August 1996, the FCC adopted rules imple- 
menting the local-competition provisions of the 1996 
Act. In re Implementation of Local Competition Pro- 
visions in the Telecomms. Act of 1996, 11 F.C.C.R. 
15,499 (1996). Among other things, the FCC estab- 
lished a pricing methodology, based on forward-looking 
economic costs, that state public utility commissions are 
to use in determining the prices that an incumbent local 
exchange carrier may charge competitors to lease the 
incumbent’s network elements or to interconnect with 
the incumbent’s network. The prices set under that 
methodology reflect the incumbent’s long-run economic 
cost of providing network elements, assuming that the 
incumbent acts rationally to provide service in an 
efficient manner; those prices also reflect a reasonable 
share of the incumbent’s joint and common costs, an 
economic rate of depreciation that reflects the true 
changes in economic value of an asset, and a reasonable 
return on investment that reflects the risks incurred by 
investors, including the risks of increased competition. 

7 

See id. at 15,848-15,849, 15,851-15,854, 15,856. The FCC 
explained that a pricing methodology based on forward- 
looking costs, which approximates prices in a 
competitive market, would encourage efficient 
competitive entry into traditionally monopolistic 
markets. Id. at 15,844. 

The Eighth Circuit invalidated the FCC’s pricing 
rules (along with certain other rules) on the ground that 
the 1996 Act gives state public utility commissions, not 
the FCC, general jurisdiction to interpret the pricing 
provisions 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’s jurisdictional 
ruling, holding that the FCC has statutory authority to 
establish pricing 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 (among other 
things) the substantive validity of the FCC’s pricing 
methodology based on forward-looking costs. Id. at 
397. Those remand proceedings are pending. 

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

a. The FCC adopted rules regarding who must 
contribute to universal service, who may receive 
universal-service support, and which services are elig- 
ible for support. The FCC required all telecommuni- 

8 

cations carriers (as well as certain other providers 
of telecommunications services) to contribute to 
universal-service support in proportion to their share 
of end-user telecommunications revenues. 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 paging providers, should be exempted 
from the contribution requirement or permitted to 
make reduced contributions. Id. at 9188-9189. The 
FCC also rejected arguments that the federal preemp- 
tion provisions of 47 U.S.C. 332(c)(3)(A) preclude States 
from requiring universal-service contributions from 
providers of commercial mobile radio services. 12 
F.C.C.R. at 9181. 

The FCC determined that federal universal-service 
subsidies would be available for telecommunications 
services, internal connections, and Internet access pro- 
vided 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 federal sub- 
sidies for providing telecommunications services to 
such entities. The FCC also concluded, however, 
that the 1996 Act did not prohibit, and public policy 
interests favored, permitting any provider, including a 
non-telecommunications carrier, to receive federal sub- 
sidies for providing internal connections or Internet 
access to such entities. Id. at 9086-9089. 

b. The FCC determined that it had jurisdiction to 
calculate a carrier’s federal universal-service contribu- 
tions based on both its interstate (including inter- 
national) revenues and its intrastate revenues. Uni- 
versal Service Order, 12 F.C.C.R. at 9192- 9197 (AT&T 
Pet. App. 210a-221a). The FCC then decided that 
carriers’ contributions to the universal-service program 

9 

for schools, libraries, and rural health-care providers 
should be assessed based on their intrastate as well as 
interstate revenues. The FCC reasoned that, because 
the States did not have programs to subsidize service to 
those entities, carriers could be required to contribute 
to the federal program based on their total revenues. 
Id. at 9203 (AT&T Pet. App. 231a-232a). In contrast, 
the FCC decided to determine carriers’ contributions to 
the universal-service programs for low-income con- 
sumers and consumers in high-cost areas based solely 
on interstate revenues. Id. at 9200 (AT&T Pet. App. 
226a). 

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

c. The FCC determined that the amount of federal 
universal-service support for carriers providing service 
to high-cost areas should be based, in part, on the 
forward-looking economic costs of providing such 
service. Universal Service Order, 12 F.C.C.R. at 8899. 
The FCC explained that a methodology based on 
forward-looking costs would “send the correct signals 
for entry, investment, and innovation” and would there- 
by encourage efficient competitive market entry. Ibid. 
The FCC stated that forward-looking costs could be 
determined, at the State’s election, based either on 
“state-conducted forward-looking economic cost studies 
approved by the Commission” or on “cost models devel- 

10 

oped by the Commission, in consultation with the Joint 
Board.” Ibid. 

The FCC stated that rural carriers serving high-cost 
areas would continue to receive federal universal- 
service support under the existing mechanisms until 
the FCC, working with the Joint Board, had an op- 
portunity to develop a 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 for its consideration were not 
yet capable of doing so. Id. at 8909- 8910. 

After the issuance of the Universal Service Order, 
the FCC implemented a multi-phase process to develop 
a model based on forward-looking costs to determine 
the amount of federal universal-service support for non- 
rural carriers serving high-cost areas. See In re 
Federal-State Joint Bd. on Universal Service, 12 
F.C.C.R. 18,514 (1997) (Further Notice of Proposed 
Rulemaking). That process was completed in Novem- 
ber 1999. See In re Federal-State Joint Bd. on Uni- 
versal 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 Joint 
Bd. 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 challenges were consolidated in 
the Fifth Circuit, which affirmed in part and reversed 

11 

in part. GTE Pet. App. 1a-98a.2 We discuss only those 
portions of the court’s opinion that are challenged in the 
petitions for certiorari. 

a. The court of appeals rejected Celpage’s claim that 
Section 254, as applied to paging providers, violates the 
Origination Clause, U.S. Const. Art. I, § 7, Cl. 1, which 
requires that “[a]ll Bills for raising Revenue shall 
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 contributions are part of a particular program 
supporting the expansion of, and increased access to, 
the public institutional telecommunications network”— 
a program from which “[e]ach paging carrier directly 
benefits” through the 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 provision of universal service,” prevents those 
payments from being classified as “revenue” within the 
meaning of the Origination Clause. Ibid. 

The court of appeals observed that Celpage had not 
raised a Taxing Clause claim in its initial brief. “There- 
fore,” said the court, “we will not consider it.” GTE 
Pet. App. 49a-50a. 

The court of appeals also rejected Celpage’s conten- 
tion that the States’ authority to assess universal- 
service contributions from providers of commercial 
mobile radio services (CMRS) is preempted by 47 
U.S.C. 332(c)(3)(A), which states, in pertinent part, that 

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

12 

“no State or local government shall have any authority 
to regulate the entry of or the rates charged by any 
commercial mobile service * * * except that this 
paragraph shall not prohibit a State from regulating the 
other terms and conditions of commercial mobile 
services.” 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 re- 
quiring CMRS providers to contribute to state 
universal-service programs. GTE Pet. App. 60a-61a. 
The court explained that such a construction of Section 
332(c)(3)(A) gives full effect to Section 254(f), which 
authorizes States to require universal-service contri- 
butions from “[e]very telecommunications carrier that 
provides intrastate telecommunications services.” GTE 
Pet. App. 61a. 

b. The court of appeals generally affirmed the FCC’s 
determinations regarding federal universal-service 
support for carriers serving high-cost areas. The court, 
applying the methodology of Chevron U.S.A. Inc. v. 
Natural Resources Defense Council, Inc., 467 U.S. 837, 
842-845 (1984), determined that Section 254 is ambigu- 
ous as to whether the FCC may calculate such support 
based on carriers’ forward-looking costs. The court 
concluded that the FCC’s decision to use such a meth- 
odology was reasonable and, consequently, was per- 
missible under Chevron. GTE Pet. App. 15a-17a. The 
court noted that this Court has consistently refused 
to foreclose ratemaking alternatives that could benefit 
consumers 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 upheld the use 
of similar cost models that were not based on historical 
costs, ibid. (citing Mobil Oil Exploration & Producing 

13 

S.E., Inc. v. United Distrib. Cos., 498 U.S. 211, 224-225 

n.5 (1991)). 
The court of appeals rejected GTE’s contention that 
the FCC’s decision to use a methodology based on 
forward-looking costs violated the Takings Clause. The 
court explained that, under Duquesne Light, a party 
cannot successfully attack a cost methodology without 
showing that the methodology will produce an un- 
reasonable rate. The court found that GTE had 
failed to make such a showing. GTE Pet. App. 19a 

n.14. Distinguishing Brooks-Scanlon Co. v. Railroad 
Comm’n, 251 U.S. 396 (1920), the court observed that 
the FCC is not “requiring the [incumbent local ex- 
change carriers] to remain open or to charge low rates.” 
GTE Pet. App. 19a n.14. 

c. Finally, the court of appeals held that the FCC 
lacked statutory jurisdiction to calculate carriers’ 
universal-service contributions based on their intra- 
state revenues as well as their interstate revenues. 
GTE Pet. App. 92a-94a. The court stated that the 
FCC’s exercise of such jurisdiction violated the “broad 
language” of Section 2(b) of the 1934 Act, 47 U.S.C. 
152(b), which provides that, with certain exceptions, 
“nothing in this [Act] shall be construed to apply or to 
give the Commission jurisdiction with respect to * * * 
charges, classifications, practices, services, facilities, or 
regulations for or in connection with intrastate com- 
munication service.” GTE Pet. App. 92a-93a. The court 
concluded that “the inclusion of intrastate revenues in 
the calculation of universal service contributions easily 
constitutes a ‘charge . . . in connection with intrastate 
communication service’ ” within the meaning of that 
statute. Id. at 93a. The court further concluded that 
Section 254 was not a sufficiently unambiguous grant of 

14 

authority to the 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 assess- 
ment base for the federal universal-service programs 
for schools, libraries, and rural health-care facilities. 
But we did not ourselves seek certiorari because, on 
balance, we concluded that the court’s decision on that 
issue is not so significant as to warrant this Court’s 
review. We adhere to that judgment now. We there- 
fore urge that all three petitions be denied. 

1. a. Celpage principally contends (Pet. 12-21) that 
47 U.S.C. 254, the universal-service provision of the 
1996 Act, and the FCC’s Universal Service Order vio- 
late the Taxing Clause, U.S. Const. Art I, § 8, because 
the universal-service assessments are a “tax” that may 
be imposed only by Congress, and not by the FCC. The 
court of appeals declined to reach that claim, however, 
because Celpage did not raise the claim in a timely 
manner. See GTE Pet. App. 49a-50a (“Celpage * * * 
does not raise a Taxing Clause claim until its reply 
brief. Therefore, we will not consider it.”). 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 

3 The court of appeals did not, as Celpage suggests (Pet. 12 

n.15), excuse Celpage’s failure to raise a timely Taxing Clause 
claim. The court merely observed in a footnote that, “[e]ven if 

15 

In any event, Celpage’s Taxing Clause claim, even if 
properly presented, would not warrant review for two 
reasons. First, the universal-service assessments are 
not a tax, but a fee paid by members of the tele- 
communications industry to 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, between a tax provision and a “special assess- 
ment provision [that] was passed as 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 as a “tax,” this Court has recog- 
nized that Congress may “delegate discretionary 
authority under its taxing power” to federal agencies. 
Skinner v. Mid-America Pipeline Co., 490 U.S. 212, 221 
(1989). Such delegations are “subject to no consti- 
tutional scrutiny greater than that * * * applied to 
other nondelegation challenges.” Id. at 223. Section 
254 does not contravene ordinary non-delegation prin- 
ciples, because Congress did not leave the FCC without 
any “intelligible guidelines for [the universal-service] 
assessments.” Id. at 224. In Section 254(b), Congress 
established a set of “universal service principles” to be 
applied by the FCC and the Joint Board. And, in 
Section 254(d), Congress made clear that “[e]very tele- 
communications carrier that provides interstate tele- 
communications services shall contribute, on an 
equitable and non-discriminatory basis, to the specific, 
predictable, and sufficient mechanisms established by 

Celpage’s Taxing Clause argument were properly before us,” the 
argument would lack merit. GTE Pet. App. 49a-50a n.52. 

16 

the Commission to preserve and advance universal 
service.” See generally Mistretta v. United States, 488 
U.S. 361, 373 (1989) (noting that this Court has upheld 
“without deviation” since 1935 “Congress’ ability to 
delegate power under broad standards”). 

b. Celpage also contends (Pet. 19, 21) that Section 
254 violates the Origination Clause, U.S. Const. Art. I, 
§ 7, Cl. 1, because the 1996 Act originated in the Senate, 
not the House of Representatives. As this Court has 
explained, however, “a statute that creates a particular 
governmental program and that raises revenue to 
support that program, as opposed to a statute that 
raises revenue to support Government generally, is not 
a ‘Bil[l] for raising Revenue’ within the meaning of 
the Origination Clause.” Munoz-Flores, 495 U.S. at 
398. That is so even where the “assessments are not 
collected for the benefit of the payors” because “the 
beneficiaries of the bill are not relevant.” Id. at 400. 
Celpage nonetheless insists that an assessment must 
be considered the product of a “revenue bill” if no close 
relationship exists between the payors and benefi- 
ciaries. The court of appeals, which accepted Celpage’s 
argument on that point (see GTE Pet. App. 52a n.56), 
found that such a relationship exists here. As the court 
explained, “Congress designed the universal service 
scheme to exact payments from those companies bene- 
fiting from the provision of universal service.” Id. at 
51a. Celpage and other paging carriers, as entities 
engaged in the business of providing telecommuni- 
cations services, “directly benefit[] from [the] larger 
and larger network” that is created, in part, as a result 
of the universal-service program. Ibid.4 

4 The court of appeals’ rejection of the Origination Clause 
claim is not, as Celpage asserts (Pet. 18-19, 21), inconsistent with 

17 

Contrary to Celpage’s suggestion, the mere fact that 
universal-service contributions are reflected in the 
federal budget does not mean that the contributions 
derive from a “Bill[] for raising Revenue.” As the court 
of appeals observed, the relevant issue is not the nature 
of the government’s “accounting designations,” but 
“whether the funds are ‘part of a particular program to 
provide money for that program.’ ” GTE Pet. App. 50a- 
51a (quoting Munoz-Flores, 495 U.S. at 399); see also 
Edye v. Robertson (Head Money Cases), 112 U.S. 580, 
596 (1884). The universal-service contributions are part 
of such a program and, consequently, do not implicate 
the Origination Clause.5 

any decision of this Court. In National Cable Television Ass’n v. 
United States, 415 U.S. 336 (1974), a statute expressly required the 
FCC to determine fees based, in part, on “the value to the reci- 
pient.” Id. at 340. Section 254, in contrast, does not require the 
FCC to base a carrier’s contributions to the universal-service pro- 
gram on the value of the benefits that the carrier receives from the 
program. Cf. Skinner, 490 U.S. at 224 (rejecting a broader 
constitutional reading of National Cable Television). In Dane v. 
Jackson, 256 U.S. 589 (1921), the Court did not distinguish be- 
tween user fees and taxes, but instead considered whether a 
State’s method of distributing income-tax collections violated the 
Takings Clause, which Celpage has not invoked. In United States 

v. United States Shoe Corp., 523 U.S. 360 (1998), the Court con- 
fined its holding to the special considerations raised by the Export 
Clause. The Court distinguished, and left undisturbed, decisions 
arising under other constitutional provisions. See id. at 367-369. 
Nor is the court of 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, without deciding, that a particular 
assessment was a tax rather than a fee (id. at 506), and then con- 
cluded that Congress had, in any event, authorized the agency to 
make the assessment (id. at 506-507). 

5 The Congressional Budget Office report cited by Celpage 
confirms that universal-service contributions are used only to 

18 

c. Celpage contends (Pet. 22, 26) that, because 
Section 254 “provides no guidance as to who must pay 
these universal service assessments, or the amount 
owed,” “the entire statutory program is unconsti- 
tutionally vague.” See Pet. iii (questions presented) 
(directing the vagueness challenge to “the Universal 
Service statute”). Celpage’s vagueness claim, like its 
Taxing Clause claim, is inappropriate for the Court’s re- 
view. Celpage raised no vagueness challenge to Section 
254 below. The court of appeals 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 program 
consistent with those principles, 47 U.S.C. 254(a). In 
addition, Congress specifically provided that “[e]very 
telecommunications carrier that provides interstate 
telecommunications services shall contribute, on an 
equitable and nondiscriminatory basis, to the specific, 
predictable, and sufficient mechanisms established by 
the Commission to preserve and advance universal 
service.” 47 U.S.C. 254(d). The statute leaves no 
ambiguity as to whether Celpage, which indisputably 
provides “interstate telecommunications service,” is 
required to make such contributions. That Congress 
left it to the FCC to fill in certain details—for example, 

support the universal-service program. The contributions are not 
treated as general revenues of the federal government. Celpage 
Pet. App. 142-143. 

6 The only vagueness challenge that the court of appeals 
identified was directed at the FCC’s administrative procedures for 
assessing contributions. GTE Pet. App. 56a. The court did not 
identify or address any claim that Section 254 itself is unconsti- 
tutionally vague. 

19 

the precise services to receive universal-service 
support and the precise levels of support to be 
provided—does not render Section 254 unconsti- 
tutionally vague. It is well settled that Congress may 
leave statutory “gap[s] for the agency to 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) precludes States from requiring 
commercial mobile radio service (CMRS) providers to 
contribute to state universal-service programs.7 That 
claim lacks merit. Such claims have been rejected by 
the D.C. Circuit and the Tenth Circuit as 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 language of Section 332(c)(3)(A) pre- 
cludes the States only from “regulat[ing] the entry of 
or the rates charged by” CMRS providers. It explicitly 

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

[N]o State or local government shall have any authority to 

regulate the entry of or the rates charged by any commercial 
mobile service or any private mobile service, except that this 
paragraph shall not prohibit a State from regulating the other 
terms and conditions of commercial mobile services. Nothing 
in this subparagraph shall exempt providers of commercial 
mobile services (where such services are a substitute for land 
line telephone exchange service for a substantial portion of the 
communications within such State) from requirements im- 
posed by a State commission on all providers of telecommuni- 
cations services necessary to ensure the universal availability 
of telecommunications services at affordable rates. 

20 

exempts from preemption other types of state 
regulation—i.e., regulation of “the other terms and 
conditions of commercial mobile services,” 47 U.S.C. 
332(c)(3)(A)—including regulation requiring CMRS 
providers to contribute to state universal-service 
programs. Such a construction of Section 332(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]very telecommunications carrier that 
provides intrastate telecommunications services shall 
contribute” to state universal-service programs. See 
Cellular Telecomms. Indus. Ass’n, 168 F.3d at 1336 
(Section 254(f) “is strong support for the proposition” 
that States may require CMRS providers to contribute 
to universal service). 

That construction does not, as Celpage contends (Pet. 

29), render superfluous the second sentence of Section 
332(c)(3)(A), which allows more extensive state regu- 
lation where commercial mobile services “are a sub- 
stitute for land line telephone exchange service for a 
substantial portion of the communications within [a] 
State.” 47 U.S.C. 332(c)(3)(A). As the court of appeals 
recognized (GTE Pet. App. 60a), that sentence simply 
“clarifies the ability of states to regulate rates and 
entry in the name of universal service” in certain cir- 
cumstances; in contrast, “the ‘other terms and con- 
ditions clause’ [of the first sentence of Section 
332(c)(3)(A)] opens the door to all other universal 
service regulation,” whether or not the condition stated 
in the second sentence is satisfied. 

3. GTE contends (Pet. 15-30) that the Takings 
Clause precludes the FCC’s choice of a forward-looking 
cost methodology in determining the amount of federal 
universal-service support for carriers serving high-cost 
areas. GTE does not claim to have suffered any actual 

21 

taking. Instead, concerned that such carriers may not 
be as well compensated under a methodology based on 
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 prevent 
any consideration of forward-looking costs. The court 
of appeals correctly rejected 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 methodology based 
on forward-looking costs would necessarily subject 
incumbent local exchange carriers to regulatory takings 
in the future. See United States v. Riverside Bayview 
Homes, Inc., 474 U.S. 121, 128 n.5 (1985) (declining to 
apply the principle of constitutional avoidance in the 
absence of any “identifiable set of instances in which 
[the regulatory action] will necessarily or even prob- 
ably constitute a taking”). As this Court has explained, 
“[i]t is not theory, but the impact of the rate order 
which counts,” because “[t]he Constitution protects the 
utility from the 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. Hope 

8 GTE claims (Pet. 12) that the FCC’s approach “assume[s] 

* * * a hypothetical, ideally efficient network.” That is not 
entirely accurate. The FCC has explained that an appropriate 
model for determining forward-looking costs must take into 
account the location of an incumbent local exchange carrier’s 
existing wire centers, see Universal Service Order, 12 F.C.C.R. at 
8913, even though a “hypothetical, ideally efficient” carrier might 
have arranged those wire centers differently. As the court of 
appeals recognized (GTE Pet. App. 18a), the FCC “departed from 
its general ‘most efficient’ methodology” in ways that benefit GTE 
and other incumbent local exchange carriers. 

22 

Natural Gas Co., 320 U.S. 591, 602 (1944)); accord id. at 
317 (Scalia, J., concurring). Accordingly, “[i]f the total 
effect of the rate order cannot be said to be unrea- 
sonable, judicial inquiry . . . is at an end.” Id. at 310. 
“The fact that the method employed to reach that result 
may contain infirmities is not then important.” Ibid. 

There is no reason to assume that the FCC’s 
forward-looking cost methodology will produce con- 
fiscatory results in any context. A local exchange 
carrier’s costs, 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 customers in 
high-cost areas. It is likewise the State, not the FCC, 
that determines the rates that the carrier may charge 
its customers. See Universal Service Order, 12 
F.C.C.R. at 8785 (“The Commission * * * does not 
have control over the local rate-setting process.”); 47 
U.S.C. 152(b). And the States have traditionally borne 
a large share of the responsibility for universal-service 
support for carriers serving high-cost areas. The 
dispute presented here concerns only the FCC’s choice 
of methodology for determining the federal share of 
such support. GTE fails to explain how the FCC’s 
choice of one methodology over another would trigger a 
chain of events that would necessarily cause the States 
to take measures that would have confiscatory results 
for local exchange carriers.9 

9 Even considered in isolation, the FCC’s choice of a 
methodology based on forward-looking costs may not, in appli- 
cation, necessarily disadvantage local exchange carriers at all, 
much less threaten to constitute a taking. GTE does not attempt 
to demonstrate that the FCC’s new methodology, which was 
finalized after the Universal Service Order at issue here, will cause 
GTE’s affiliates to receive a smaller amount of explicit federal 

23 

Moreover, even if, contrary to Duquesne, a regu- 
lator’s general methodology for 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 
one time, it was thought that the Constitution required 
rates to be set according to 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. Although this 
Court ultimately determined that such a “fair value” 
approach is not constitutionally required, that approach 
has always been a permissible form of ratemaking, 
which has the salutary effect of “giv[ing] utilities strong 
incentive to manage their affairs well and to provide 
efficient service to the public.” Id. at 309. The courts 
have routinely upheld ratemaking orders that denied a 
utility full recovery of its historical costs. See, e.g., id. 
at 312-314 (denying a utility the recovery of prudently 
incurred historical expenditures); Mobil Oil Explora- 
tion & Producing S.E., Inc. v. United Distrib. Cos., 498 
U.S. 211, 224- 225 & n.5 (1991); Market St. Ry. v. 
Railroad Comm’n, 324 U.S. 548, 553-554, 564-568 
(1945). 

10 

universal-service support than they received under the prior 
methodology based on historical costs. 

10 GTE argues (Pet. 16) that Duquesne holds that “when 
methodologies are changed, the end result of the new system must 
still * * * provide an adequate rate of return on the full 
investment as measured under the old system.” No such issue was 
presented in Duquesne. Instead, the Court, after observing that 
“[a]t all relevant times, Pennsylvania’s rate system has been 
predominantly but not entirely based on historical cost,” found that 
“it has not been shown that the rate orders as modified * * * fail 

24 

GTE erroneously contends that the court of appeals’ 
approval of the FCC’s methodology is inconsistent with 
Brooks-Scanlon Co. v. Railroad Comm’n, 251 U.S. 396 
(1920), which GTE invokes for the proposition that 
courts must constitutionally scrutinize the rates for 
each aspect of a utility’s operations. That proposition is 
inconsistent with the rule—adopted in Hope Natural 
Gas and reaffirmed in Duquesne—that the appropriate 
constitutional inquiry begins and 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 Valuation 
Proceedings Under §§ 303(c) and 306 of the Regional 

to give a reasonable rate of return on equity given the risks under 
such a regime.” 488 U.S. at 315 (emphases added). The Court also 
emphasized that “[t]he adoption of a single theory of valuation as a 
constitutional requirement would be inconsistent” with long- 
standing precedent. Id. at 316. 

GTE also invokes (Pet. 15-16) the Court’s observation in 
Duquesne that “a State’s decision to arbitrarily switch back and 
forth between methodologies in a way which required investors to 
bear the risk of bad investments at some times while denying them 
the benefit of good investments at others would raise serious 
constitutional questions.” 488 U.S. at 315. But the FCC has not 
“switch[ed] back and forth between methodologies.” Nor did 
the FCC act “arbitrarily” in adopting a methodology based on 
forward-looking costs, which the FCC concluded was necessary 
given Congress’s decision in the 1996 Act to open local tele- 
communications markets to competition. Moreover, although the 
new methodology requires incumbent local exchange carriers to 
bear “the risk of bad investments” (just as they did under a 
historical cost methodology, which typically excludes costs that 
were not prudently incurred, see, e.g., NEPCO Mun. Rate Comm. 

v. FERC, 668 F.2d 1327, 1332-1333 (D.C. Cir. 1981)), the new 
methodology does not deny such carriers “the benefit of good in- 
vestments.” It merely gives carriers an incentive to operate 
efficiently to ensure a reasonable profit. See Universal Service 
Order, 12 F.C.C.R. at 8899-8901, 8913-8914. 

25 

Rail Reorganization Act, 439 F. Supp. 1351, 1357 

n.12 (Spec. Court 1977) (Friendly, J.) (observing that 
Brooks-Scanlon’s statement that “a carrier cannot be 
compelled to 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 is unavailing 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, the FCC, is not requiring the 
[incumbent local exchange carriers] to remain open or 
to charge low rates, thereby forcing them to operate at 
a permanent loss.”). 

Finally, GTE asserts (Pet. 25-26) that the decision of 
the Fifth Circuit, in deferring to the FCC’s imple- 
mentation of Section 254, conflicts with decisions of 
other circuits that have declined to defer to agency 
action that raised grave constitutional concerns. This 
case is readily distinguishable because, as the Fifth 
Circuit recognized, the Universal Service Order pre- 
sents no such concerns. As this Court observed in Hope 
Natural Gas, an agency’s “order does not become sus- 
pect by reason of the fact that it is challenged.” 320 

11 In any event, GTE’s argument proves too much. Histori- 
cally, state regulators allowed local exchange carriers to charge 
some customers for intrastate service at rates far above cost so 
that the carriers could charge other customers at rates below cost. 
The implication of GTE’s argument is that the traditional system, 
which is only now being phased out, is pervasively unconsti- 
tutional. Although GTE argues (Pet. 22-23) that competition is 
altering the constitutional analysis by eroding the protected status 
of incumbent local exchange carriers as regulated monopolies, such 
arguments are properly presented to the States, which decide 
which intrastate carriers must serve which customers and at which 
rates. 

26 

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 claim is correct and does not conflict 
with any decision of this Court or any other court of 
appeals. The petition therefore raises no issue that 
warrants the Court’s review. GTE requests that, at a 
minimum, its petition be held pending 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 methodology based on 
forward-looking costs to determine carrier-to-carrier 
rates under Sections 251 and 252 for interconnection 
and unbundled access to an incumbent’s network 
elements. If the Eighth Circuit were to rule in GTE’s 
favor, that case would warrant this Court’s review, 
because invalidation of the FCC’s pricing rules 
implementing Sections 251 and 252 would cause dis- 
array in the telecommunications industry. 

12 If the 
Eighth Circuit were to rule for GTE on the takings 
issue before the date on which this Court would other- 
wise act on the petitions in this case, GTE’s petition in 

12 Before this Court issued its decision in Iowa Utilities Board, 
the Eighth Circuit stayed the FCC’s pricing rules for inter- 
connection and unbundled access. While the stay was in effect, the 
vast majority of state commissions independently implemented the 
pricing provisions of Sections 251 and 252 by adopting a forward- 
looking cost methodology in that context. The federal courts have 
consistently upheld that choice of methodology, rejecting claims 
that 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 other grounds, 199 F.3d 733 (4th Cir. 1999); Southwestern 
Bell Tel. Co. v. AT&T Communications, No. A97-CA-13255, 1998 
WL 657717, at *10-*13 (W.D. Tex. Aug. 31, 1998). 

27 

this case might appropriately be held pending this 
Court’s review of the Eighth Circuit’s decision. But 
there is no reason to suppose that the Eighth Circuit 
will rule in GTE’s favor, much less that the Eighth 
Circuit will do so based on the Takings Clause. The 
mere possibility of a future circuit conflict is insufficient 
to 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 outright 
if, by the time this Court considers the petition, the 
Eighth Circuit has not ruled in GTE’s favor on its 
takings claim. 

4. AT&T challenges (Pet. 13-23) the court of appeals’ 
holding that the FCC lacks jurisdiction to include a 
carrier’s intrastate revenues (together with its inter- 
state revenues) in the assessment base used to deter- 
mine its contribution to the universal-service program 
for schools, libraries, and rural health-care facilities. 
We agree that the holding is incorrect, essentially for 
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 jurisdiction embraces the 
substantive scope of the Communications Act, including 
the provisions added in 1996, even where the Act ex- 
pressly grants concurrent jurisdiction to the States. 
See 525 U.S. at 377-380. Here, in including intrastate 
revenues in the assessment base, the FCC was imple- 
menting Section 254, which authorizes the FCC, after 
consultation with the Federal-State Joint 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 telecommunications providers, both 
interstate and intrastate, see 47 U.S.C. 254(b)(5), (d) 
and (f). Universal service has always focused on ensur- 
ing affordable local telephone service for customers 

28 

who have low incomes or who live in high-cost areas. 
There is thus no meaningful respect in which Section 
254 could be said not to “apply” to intrastate matters. 
Under Iowa Utilities Board, the FCC has jurisdiction 
to implement Section 254 by establishing an effective 
universal-service program, without regard to the for- 
mal “interstate” or “intrastate” character of the mat- 
ters being regulated. 

Nonetheless, we concluded that the Fifth Circuit’s 
jurisdictional error does not present a question of 
national significance that warrants this Court’s inter- 
vention. Strictly construed, the court’s jurisdictional 
holding is confined to a determination that the FCC 
may not include intrastate revenues in its assessment 
base for the universal-service programs for schools, 
libraries, and rural health-care facilities. The court did 
not consider whether the FCC had jurisdiction to do so 
with respect to the other universal-service programs— 

i.e., the programs for low-income consumers and high- 
cost consumers—because the FCC had determined not 
to include intrastate revenues in the assessment bases 
for those programs. See AT&T Pet. App. 226a. The 
court’s holding disadvantages carriers, such as AT&T, 
that provide predominantly interstate services. But 
the court’s decision does not clearly purport to divide 
universal service into discrete interstate and intrastate 
spheres and to preclude the FCC from exercising any 
jurisdiction in the latter. 

Indeed, as AT&T observes (Pet. 19), any such cate- 
gorical division would be untenable, because Congress 
did not intend to strip the FCC of its longstanding 
authority to assist in subsidizing universal service, 
which, as noted, has traditionally focused on the pro- 
vision of affordable local telephone service. Unlike 
AT&T (see Pet. 21), we do not read the decision below 

29 

to hold otherwise. Despite isolated language sug- 
gesting that the FCC may lack the authority “to fund 
intrastate universal services” (GTE Pet. App. 94a), the 
court of appeals separately affirmed that the FCC may 
use federal universal-service contributions to subsidize 
intrastate services, even where the FCC is not required 
to do so, and that the FCC may attach conditions to 
such contributions (GTE Pet. App. 87a). To be sure, in 
other portions of the opinion not directly challenged 
here, the court compounded its error by invalidating 
additional FCC rules on jurisdictional grounds. See, 

e.g., GTE Pet. App. 36a-44a (no-disconnect rule). 

13 In 
our view, however, the court’s jurisdictional analysis is 
sufficiently unclear that it is unlikely to have appreci- 
able persuasive force beyond this case. So limited, the 
court’s decision does not threaten the basic integrity of 
the federal government’s universal-service programs. 
If the decision is given broader significance, however, 
this Court’s intervention may become necessary. 

13 Although AT&T blames “the Fifth Circuit’s sweeping 
‘jurisdictional’ rulings” (Pet. 20) for the invalidation of FCC rules 
governing a carrier’s eligibility for universal-service support, the 
Fifth Circuit purported not to “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)). 

30 

CONCLUSION 

The petitions for a writ of certiorari should be denied. 

Respectfully submitted. 

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 
SETH P. WAXMAN 

Solicitor General 

MARCH 2000