GTE Service Corp., et al. v. Federal Communications Commission, et al.

By: Sean Neumann, Medill News Service

Questions presented

(1) Did the 5th Circuit err in upholding the FCC's determination that funding should no longer be based on actual, historical costs that carriers incur in providing service, but rather should be based on projections of costs that would be incurred by hypothetical, most-efficient carrier? (2) Did the 5th Circuit err by ignoring Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989), both that the FCC's switch in rate methodologies raises ""serious constitutional questions,"" and that, when there has been a switch in rate methodologies, constitutionality must be tested by determining whether it would continue to provide a constitutionally adequate return on rate base as measured under the old methodology? (3) Did the 5th Circuit err by holding, in conflict with decisions of other circuits, that it should defer to the FCC's interpretation of the Telecommunications Act under Chevron USA Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984), even when the FCC's construction raised serious constitutional questions under the just compensation clause of the 5th Amendment?

Brief

After the passage of the 1996 Telecommunications Act, the FCC decided to change its pricing methodology by using ""forward-looking"" costs to calculate the relevant costs of a carrier serving a given geographical area. In essence, the FCC bet that carriers would be encouraged to operate efficiently by having their costs based on hypothetical standards of efficiency instead of historical standards of market efficiency.

Furthermore, under the FCCs new standards, carriers and some non-telecommunications carriers were required to contribute money in proportion to their share of end-user telecom revenues to reduce the price burden upon individual carriers while broadening the revenue base by requiring carriers to include their international telecom revenues to the equation.

In May 1997, the FCC released its Universal Service Order to implement provisions of the Act. The intent of the Act is to provide affordable telecommunications service for all Americans. The orders ""e-rate"" seeks to provide qualifying schools and libraries with discounted access to telecommunications service, the Internet and internal connections.

The FCC mandated that fees be levied on long distance and local phone service providers which would then be passed on to consumers. The FCC also determined that a ""high cost"" fund needed to be established to keep basic telephone service affordable for low-income and rural areas.

Prior to the legislation, the FCC would calculate telecommunications service costs based on implicit and explicit subsidies that would lower operating costs for providers and lower expenses for customers. For instance, if a provider ran low-cost services for low-profit rural customers and gave free service to low-income urban customers, that provider would receive a substantial grant from the FCC to cover operating expenses.

Companies that did not receive direct subsidies from the FCC balked at being required to pitch into the fund, but the FCC rebuked their arguments and forced them to contribute to the plan citing provisions of the Act.

The Texas Office of Public Utility Counsel, the GTE Corp., the State of California, Celpage, Inc., Cincinnati Bell Telephone Company and numerous other parties challenged the expanded ""e-rate"" program, claiming that universal funds could only be used for telecommunications services and not for internal services or Internet connections and access. They also contended that the universal support service system for high-cost areas (including the new pricing methodology, allocation of funding responsibilities between the FCC and the states, and restrictions on how carriers can recover universal service costs) as well as the FCCs inclusion of intrastate and international revenues are unconstitutional.

In late 1997, the utilities sought to stay the FCCs order in the 5th Circuit Court of Appeals. The motion was denied, and after consolidating a number of related cases, the 5th Circuit, on July 30, 1999, issued a unanimous opinion that mainly upheld the FCCs Universal Service Order.

The appeals court affirmed the FCCs authority to provide ""e-rate"" discounts to schools and libraries for internal access and Internet connections on the basis that the Telecommunications Act was unclear in defining what ""additional services"" should be covered by the program.

Rejecting the utility companies argument that the plan violates the just compensation clause of the 5th Amendment, the appeals court also stated that the FCC did not violate the statutory requirements of the Act or the Constitution and affirmed the FCCs decision to implement the high-cost support program, citing the 1984 Supreme Court opinion in Chevron USA Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837.

Furthermore, the court allowed the FCC to use a cost model for figuring universal service contributions but said that the actual parameters of any such model would be subject to further litigation.

The court also said that the FCC was within its rights to remove implicit subsidies one at a time instead of cutting them by May 1997.

The court did reverse two aspects of the FCCs Order and remanded one that addressed calculating and collecting universal service contributions. The FCC can no longer require local exchange carriers (like GTE) under price cap regulations to raise carrier-to-carrier fees on long distance carriers for interconnecting calls with their networks as a means of netting universal service contributions because the method falls under the definition of an implicit subsidy, which is banned by the Act, the 5th Circuit held.

The court also ruled that the FCC may only use interstate revenues to determine a providers contributions to universal service and cannot use intrastate nor international service revenues for a measuring stick. The court added that the FCC cannot restrict state commissions from creating their own eligibility requirements for universal service and struck down the FCCs ""no disconnect rule"" for low-income customers who do not pay their bills.

On June 5, 2000, the U.S. Supreme Court granted certiorari in the case, with Justice Sandra Day O Connor not taking part in the consideration, and on Nov. 2, the Court dismissed the case.