Global TelLink v. FCC ( 2017 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 6, 2017 Decided June 13, 2017
Amended August 4, 2017
No. 15-1461
GLOBAL TEL*LINK,
PETITIONER
v.
FEDERAL COMMUNICATIONS COMMISSION AND UNITED
STATES OF AMERICA,
RESPONDENTS
CENTURYLINK PUBLIC COMMUNICATIONS, INC., ET AL.,
INTERVENORS
Consolidated with 15-1498, 16-1012, 16-1029, 16-1038,
16-1046, 16-1057
On Petitions for Review of an Order of
the Federal Communications Commission
2
Mithun Mansinghani, Deputy Solicitor General, Office of
the Attorney General for the State of Oklahoma, argued the
cause for State and Local Government Petitioners. With him
on the briefs were E. Scott Pruitt, Attorney General, Patrick R.
Wyrick, Solicitor General, Nathan B. Hall, Assistant Solicitor
General, James Bradford Ramsay, Jennifer Murphy,
Christopher J. Collins, Mark Brnovich, Attorney General,
Office of the Attorney General for the State of Arizona,
Dominic E. Draye, Deputy Solicitor General, Leslie Rutledge,
Attorney General, Office of the Attorney General for the State
of Arkansas, Lee Rudofsky, Solicitor General, Nicholas Bronni,
Deputy Solicitor General, Danny Honeycutt, Karla L. Palmer,
Tonya J. Bond, Joanne T. Rouse, Derek Schmidt, Attorney
General, Office of the Attorney General for the State of Kansas,
Jeffrey A. Chanay, Chief Deputy Attorney General, Chris
Koster, Attorney General, Office of the Attorney General for
the State of Missouri, J. Andrew Hirth, Deputy General
Counsel, Brad D. Schimel, Attorney General, Office of the
Attorney General for the State of Wisconsin, Misha Tseytlin,
Solicitor General, Daniel P. Lennington, Deputy Solicitor
General, Gregory F. Zoeller, Attorney General, Office of the
Attorney General for the State of Indiana, Thomas M. Fisher,
Solicitor General, Jeff Landry, Attorney General, Office of the
Attorney General for the State of Louisiana, Patricia H. Wilton,
Assistant Attorney General, Adam Paul Laxalt, Attorney
General, Office of the Attorney General for the State of
Nevada, and Lawrence VanDyke, Solicitor General. Jared
Haines, Assistant Solicitor General, Office of the Attorney
General for the State of Oklahoma, David G. Sanders,
Assistant Attorney General, Office of the Attorney General for
the State of Louisiana, and Dean J. Sauer, Attorney, Office of
the Attorney General for the State of Missouri, entered
appearances.
3
Michael K. Kellogg argued the cause for ICS Carrier
Petitioners. With him on the briefs were Aaron M. Panner,
Benjamin S. Softness, Stephanie A. Joyce, Andrew D. Lipman,
Brita D. Strandberg, Jared P. Marx, John R. Grimm, Robert A.
Long, Jr., Kevin F. King, Marcus W. Trathen, Julia C.
Ambrose, and Timothy G. Nelson.
Andrew D. Lipman and Stephanie A. Joyce were on the
brief for petitioner Securus Technologies, Inc.
David M. Gossett, Attorney, Federal Communications
Commission, argued the cause for respondent. On the brief
were Howard J. Symons at the time the brief was filed, General
Counsel, Jacob M. Lewis, Associate General Counsel, Sarah
E. Citrin, Counsel, and Robert B. Nicholson and Daniel E.
Haar, Attorneys, U.S. Department of Justice. Mary H.
Wimberly, Attorney, U.S. Department of Justice, Brendan T.
Carr, Acting General Counsel, Federal Communications
Commission, and Richard K. Welch, Deputy Associate General
Counsel, entered appearances.
Lori Swanson, Attorney General, Office of the Attorney
General for the State of Minnesota, Kathryn Fodness and
Andrew Tweeten, Assistant Attorneys General, Eric T.
Schneiderman, Attorney General, Office of the Attorney
General for the State of New York, Robert W. Ferguson,
Attorney General, Office of the Attorney General for the State
of Washington, Karl A. Racine, Attorney General, Office of the
Attorney General for the District of Columbia, Lisa Madigan,
Attorney General, Office of the Attorney General for the State
of Illinois, Maura Healey, Attorney General, Office of the
Attorney General for the Commonwealth of Massachusetts,
and Hector Balderas, Attorney General, Office of the Attorney
General for the State of New Mexico were on the brief for
4
amici curiae State of Minnesota, et al. in support of
respondents.
Glenn S. Richards was on the brief for intervenors
Network Communications International Corp. in support of
respondents.
Andrew Jay Schwartzman argued the cause for intervenors
The Wright Petitioners. With him on the brief was Drew T.
Simshaw.
Danny Y. Chou was on the brief for amicus curiae The
County of Santa Clara and the County of San Francisco in
support of respondent.
Opinion for the court filed by Senior Circuit Judge
EDWARDS.
Concurring opinion filed by Senior Circuit Judge
SILBERMAN.
Opinion filed by Circuit Judge PILLARD, dissenting as to
Sections II.B through II.F and concurring in part.
Before: PILLARD, Circuit Judge, and EDWARDS and
SILBERMAN, Senior Circuit Judges.
EDWARDS, Senior Circuit Judge: The Communications
Act of 1934 (“1934 Act”) authorized the Federal
Communications Commission (“Commission” or “FCC”) to
ensure that interstate telephone rates are “just and reasonable,”
47 U.S.C. § 201(b), but left regulation of intrastate rates
primarily to the states. In the Telecommunications Act of 1996
(“1996 Act”), Congress amended the 1934 Act to change the
Commission’s limited regulatory authority over intrastate
5
telecommunication so as to promote competition in the
payphone industry.
Before the passage of the 1996 Act, Bell Operating
Companies (“BOCs”) had dominated the payphone industry to
the detriment of other providers. Congress sought to remedy
this situation by authorizing the Commission to adopt
regulations ensuring that all payphone providers are “fairly
compensated for each and every” interstate and intrastate call.
47 U.S.C. § 276(b)(1)(A). “[P]ayphone service” expressly
includes “the provision of inmate telephone service in
correctional institutions, and any ancillary services.” Id.§ 276(d). The issues in this case focus on inmate calling
services (“ICS”) and the rates and fees charged for these calls.
Following the passage of the 1996 Act, the Commission
avoided intrusive regulatory measures for ICS. And prior to the
Order under review in this case, the Commission had never
sought to impose rate caps on intrastate calls. Rather, the FCC
consistently construed its authority over intrastate payphone
rates as limited to addressing the problem of under-
compensation for ICS providers.
Due to a variety of market failures in the prison and jail
payphone industry, however, inmates in correctional facilities,
or those to whom they placed calls, incurred prohibitive per-
minute charges and ancillary fees for payphone calls. In the
face of this problem, the Commission decided to change its
approach to the regulation of ICS providers. In 2015, in the
Order under review, the Commission set permanent rate caps
and ancillary fee caps for interstate ICS calls and, for the first
time, imposed those caps on intrastate ICS calls. Rates for
Interstate Inmate Calling Services (“Order”), 30 FCC Rcd.
12763, 12775–76, 12838–62 (Nov. 5, 2015), 80 Fed. Reg.
79136-01 (Dec. 18, 2015). The Commission also proposed to
6
expand the reach of its ICS regulations by banning or limiting
fees for billing and collection services – so-called “ancillary
fees” – and by regulating video services and other advanced
services in addition to traditional calling services.
Five inmate payphone providers, joined by state and local
authorities, now challenge the Order’s design to expand the
FCC’s regulatory authority. In particular, the Petitioners
challenge the Order’s proposed caps on intrastate rates, the
exclusion of “site commissions” as costs in the agency’s
ratemaking methodology, the use of industry-averaged cost
data in the FCC’s calculation of rate caps, the imposition of
ancillary fee caps, and reporting requirements. And one ICS
provider separately challenges the Commission’s failure to
preempt inconsistent state rates and raises a due process
challenge.
Following the presidential inauguration in January 2017,
counsel for the FCC advised the court that, due to a change in
the composition of the Commission, “a majority of the current
Commission does not believe that the agency has the authority
to cap intrastate rates under section 276 of the Act.” Counsel
thus informed the court that the agency was “abandoning . . .
the contention . . . that the Commission has the authority to cap
intrastate rates” for ICS providers. Counsel also informed the
court that the FCC was abandoning its contention “that the
Commission lawfully considered industry-wide averages in
setting the rate caps.” However, the Commission has not
revoked, withdrawn, or suspended the Order. And one of the
Intervenors on behalf of the Commission, the “Wright
Petitioners,” continues to press the points that have been
abandoned by the Commission.
For the reasons set forth below, we grant in part and deny
in part the petitions for review, and remand for further
7
proceedings with respect to certain matters. We also dismiss
two claims as moot.
 We hold that the Order’s proposed caps on intrastate rates
exceed the FCC’s statutory authority under the 1996 Act.
We therefore vacate this provision.
 We further hold that the use of industry-averaged cost data
as proposed in the Order is arbitrary and capricious because
it lacks justification in the record and is not supported by
reasoned decisionmaking. We therefore vacate this
provision.
 We additionally hold that the Order’s imposition of video
visitation reporting requirements is beyond the statutory
authority of the Commission. We therefore vacate this
provision.
 We find that the Order’s proposed wholesale exclusion of
site commission payments from the FCC’s cost calculus is
devoid of reasoned decisionmaking and thus arbitrary and
capricious. This provision cannot stand as presently
proposed in the Order under review; we therefore vacate
this provision and remand for further proceedings on the
matter.
 We deny the petitions for review of the Order’s site
commission reporting requirements.
 We remand the challenge to the Order’s imposition of
ancillary fee caps to allow the Commission to determine
whether it can segregate proposed caps on interstate calls
(which are permissible) and the proposed caps on intrastate
calls (which are impermissible).
8
 Finally, we dismiss the preemption and due process claims
as moot.
I. BACKGROUND
A. Statutory Background
The 1934 Act, 47 U.S.C. § 151, et seq., established a system
of regulatory authority that divides power between individual
states and the FCC over inter- and intrastate telephone
communication services. New England Pub. Commc’ns
Council, Inc. v. FCC, 334 F.3d 69, 75 (D.C. Cir. 2003). Under
this statutory scheme, the Commission regulates interstate
telephone communication. See id.; 47 U.S.C. § 151. This
regulatory authority includes ensuring that all charges “in
connection with” interstate calls are “just and reasonable.” 47
U.S.C. § 201(b). “The Commission may prescribe such rules
and regulations as may be necessary in the public interest to
carry out” these provisions. Id.The FCC, however, “is generally forbidden from entering
the field of intrastate communication service, which remains
the province of the states.” New England Pub., 334 F.3d at 75
(citing 47 U.S.C. § 152(b)). Section 152(b) of the 1934 Act
erects a presumption against the Commission’s assertion of
regulatory authority over intrastate communications. This is
“not only a substantive jurisdictional limitation on the FCC’s
power, but also a rule of statutory construction” in interpreting
the Act’s provisions. La. Pub. Serv. Comm’n v. FCC, 476 U.S.
355, 373 (1986).
The 1996 Act “fundamentally restructured the local
telephone industry,” New England Pub., 334 F.3d at 71, by
changing the FCC’s authority with respect to some intrastate
activities and “remov[ing] a significant area from the States’
9
exclusive control,” AT&T Corp. v. Iowa Utils. Bd., 525 U.S.
366, 382 n.8 (1999). Nevertheless, the states still primarily
“reign supreme over intrastate rates.” New England Pub., 334
F.3d at 75 (quoting City of Brookings Mun. Tel. Co. v. FCC,
822 F.2d 1153, 1155 (D.C. Cir. 1987)). “Insofar as Congress
has remained silent . . . § 152(b) continues to function. The
Commission could not, for example, regulate any aspect of
intrastate communication not governed by the 1996 Act on the
theory that it had an ancillary effect on matters within the
Commission’s primary jurisdiction.” AT&T Corp., 525 U.S. at382 n.8.
Although the strictures of § 152 remain in force, the
changes imposed by the 1996 Act were significant. Evidence
of this is seen in the “Special Provisions Concerning Bell
Operating Companies.” 47 U.S.C. §§ 271–76. Section 276 was
“specifically aimed at promoting competition in the payphone
service industry.” New England Pub., 334 F.3d at 71. While
local phone services were once thought to be natural
monopolies, “[t]echnological advances . . . made competition
among multiple providers of local service seem possible, and
Congress [in the 1996 Act] ended the longstanding regime of
state-sanctioned monopolies.” AT&T Corp., 525 U.S. at 371;
see also Glob. Crossing Telecomms., Inc. v. Metrophones
Telecomms., Inc., 550 U.S. 45, 50 (2007).
The market history is illuminating. After AT&T had
divested its local exchange carriers into individual BOCs in
1982, BOCs continued to discriminate against non-BOC
payphone providers and effectively foreclosed competition.
The BOCs accomplished this by generally making sure that
other providers were not compensated for calls using BOC-
owned payphone lines. See New England Pub., 334 F.3d at 71.
Thus, because technology constraints forced many non-BOC
providers to use BOC-owned payphone lines, those providers
10
were often left uncompensated for payphone calls. The 1996
Act changed these market practices.
In § 276, Congress clearly aimed to “promote competition
among payphone service providers and promote the
widespread deployment of payphone services to the benefit of
the general public.” 47 U.S.C. § 276(b)(1). Covered payphone
services include “inmate telephone service in correctional
institutions, and any ancillary services.” Id. § 276(d). Section
276 of the 1996 Act authorizes the Commission “to prescribe
regulations consistent with the goal of promoting competition,
requiring that the Commission take five specific steps toward
that goal.” New England Pub., 334 F.3d at 71. One such step is
to “establish a per call compensation plan to ensure that all
payphone service providers are fairly compensated for each
and every completed intrastate and interstate call using their
payphone,” and to prescribe regulations to establish this
compensation plan by November 1996. 47 U.S.C. § 276(b)(1),
(b)(1)(A). The remaining four steps further encourage or force
competition between BOC and non-BOC providers. Id.§ 276(b)(1)(B)–(E). Any state requirements that are
inconsistent with FCC’s regulations adopted pursuant to § 276
are preempted. Id. § 276(c).
B. Factual and Procedural Background
Over the years, payphone providers have sought to provide
inmate calling services to inmates in prisons and jails
nationwide. ICS providers now compete with one another to
win bids for long-term ICS contracts with correctional
facilities. In awarding contracts to providers, correctional
facilities usually give considerable weight to which provider
offers the highest site commission, which is typically a portion
of the provider’s revenue or profits. See Implementation of Pay
Tel. Reclassification & Comp. Provisions of Telecomms. Act of
11
1996, 17 FCC Rcd. 3248, 3252–53 (2002). Site commissions
apparently range between 20% and 63% of the providers’
profits, but can exceed that amount. Id. at 3253 n.34. And ICS
providers pay over $460 million in site commissions annually.
Order, 30 FCC Rcd. at 12821.
Once a long-term, exclusive contract bid is awarded to an
ICS provider, competition ceases for the duration of the
contract and subsequent contract renewals. Winning ICS
providers thus operate locational monopolies with a captive
consumer base of inmates and the need to pay high site
commissions. See 17 FCC Rcd. at 3253. After a decade of
industry consolidation, three specialized ICS firms now control
85% of the market. Order, 30 FCC Rcd. at 12801. And ICS
per-minute rates and ancillary fees together are extraordinarily
high, with some rates as high as $56.00 for a four-minute call.
Id. at 12765 n.4.
In reviewing this market situation, the FCC found that
inmate calling services are “a prime example of market
failure.” Id. at 12765. In its brief to this court, FCC counsel
aptly explains the seriousness of the situation:
Inmates and their families cannot choose for
themselves the inmate calling provider on whose
services they rely to communicate. Instead,
correctional facilities each have a single provider of
inmate calling services. And very often, correctional
authorities award that monopoly franchise based
principally on what portion of inmate calling revenues
a provider will share with the facility—i.e., on the
payment of “site commissions.” Accordingly, inmate
calling providers compete to offer the highest site
commission payments, which they recover through
correspondingly higher end-user rates. See [Order, 30
12
FCC Rcd. at 12818–21]. If inmates and their families
wish to speak by telephone, they have no choice but to
pay the resulting rates.
Br. for FCC at 4.
In February 2000, Intervenor Martha Wright filed a
putative class action against ICS providers on behalf of her
grandson, other inmates, and their loved ones to challenge ICS
rates and fees. Complaint, Wright, et al. v. Corr. Corp. of Am.,
No. 1:00-CV-00293 (D.D.C. Feb. 16, 2000). In 2001, the
District Court stayed the case to afford the FCC the opportunity
to consider the reasonableness of ICS rates in the first instance
through rulemaking. Thereafter, in 2003 and in 2007, Martha
Wright and others petitioned the Commission for rulemaking
to regulate ICS rates and fees. Petition for Rulemaking, FCC
No. 96-128 (Nov. 3, 2003); Petitioners’ Alternative
Rulemaking Proposal, FCC No. 96-128 (Mar. 1, 2007).
The record compiled by the Commission fairly clearly
supports its determination that ICS charges raise serious
concerns. As noted in the FCC’s brief to the court:
Excessive rates for inmate calling deter
communication between inmates and their families,
with substantial and damaging social consequences.
Inmates’ families may be forced to choose between
putting food on the table or paying hundreds of dollars
each month to keep in touch. See [Order, 30 FCC Rcd.
at 12766–67]. When incarcerated parents lack regular
contact with their children, those children—2.7 million
of them nationwide—have higher rates of truancy,
depression, and poor school performance. See [id. at
12766–67 & 12767 n.18]. Barriers to communication
from high inmate calling rates interfere with inmates’
13
ability to consult their attorneys, see [id. at 12765],
impede family contact that can “make[] prisons and
jails safer spaces,” [id. at 12767], and foster
recidivism, see [id. at 12766–67].
Br. for FCC at 4–5. Petitioners do not seriously contest these
facts. See Joint Br. for Pet’rs at 7 (acknowledging that “calling
rates often exceed, sometimes substantially, rates for ordinary
toll calls”).
In 2013, the Commission issued an interim order imposing
a per-minute rate cap for interstate ICS calls, citing its plenary
authority over interstate calls under § 201(b) and its mandate
to ensure that providers are “fairly compensated” under § 276.
Rates for Interstate Inmate Calling Services (“Interim Order”),
28 FCC Rcd. 14107, 14114–15 (2013). ICS providers
petitioned for this court’s review of the Interim Order. The
court stayed application of certain portions of the Interim
Order but allowed its interstate rate caps to remain in effect.
Order, Securus Techs. v. FCC, No. 13-1280 (“Securus I”) (D.C.
Cir. Jan. 13, 2014), ECF No. 1474764 (staying only 47 C.F.R.
§§ 64.6010, 64.6020, and 64.6060). In December 2014, the
court held the petitions in abeyance while the Commission
proceeded to set permanent rates. Order, Securus I (D.C. Cir.
Dec. 16, 2014), ECF No. 1527663.
In 2015, the Commission set permanent rate caps and
ancillary fee caps for interstate ICS calls, and for the first time
the agency imposed caps on intrastate ICS calls. Order, 30 FCC
Rcd. at 12775–76, 12838–62. The rate caps were set for four
categories – “all prisons” and three tiers of jails based on size
– and the rate caps varied by category. Id. at 12770. The rate
caps, which were made effective immediately, ranged from
$.14 to $.49 per minute, but were to decrease as of July 1, 2018,
to $.11 to $.22 per minute. Id. In setting the rate caps, the
14
Commission used a ratemaking methodology based on
industry-average cost data that excluded site commissions as a
cost. Id. at 12790, 12818–38. The Order also imposed
reporting requirements on ICS providers, including for video
visitation services and site commissions. Id. at 12890–93.
ICS providers Global Tel*Link; Securus Technologies,
Inc.; CenturyLink Public Communications, Inc.; Telmate,
LLC; and Pay Tel Communications (“Pay Tel”) (collectively
“Petitioners”) separately petitioned for review. Various state
and local correctional authorities, governments, and
correctional facility organizations petitioned and/or intervened
on behalf of Petitioners. Martha Wright’s putative class and
various inmate-related legal organizations (“Intervenors”)
intervened on behalf of the Commission.
In early 2016, the court consolidated the petitions for
review. On March 7, 2016, the court stayed the application of
the Order’s rate caps and ancillary fee caps as to single-call
services while this case was pending. Order, Global Tel*Link,
et al. v. FCC, No. 15-1461 (“Global Tel*Link”) (D.C. Cir. Mar.
7, 2016), ECF No. 1602581. Subsequently, on March 23, 2016,
the court stayed the application of the Interim Order to
intrastate rates. Order, Global Tel*Link (D.C. Cir. Mar. 23,
2016), ECF No. 1605455.
In August 2016, on reconsideration of the FCC’s Order, the
Commission raised the rate caps to account for a small portion
of site commissions. Rates for Interstate Inmate Calling
Services (“Reconsideration Order”), 31 FCC Rcd. 9300
(2016). ICS providers petitioned for review of the
Reconsideration Order, but the court held those petitions in
abeyance and stayed the Reconsideration Order pending the
outcome of this case. See Order, Securus Techs. v. FCC, No.
15
16-1321 (“Securus II”) (D.C. Cir. Nov. 2, 2016), ECF No.
1644302.
On January 31, 2017, counsel for the FCC filed a letter
advising this court that the Commission had experienced
“significant changes in [its] composition.” Letter at 1, Global
Tel*Link (D.C. Cir. Jan. 31, 2017), ECF No. 1658521. Of the
five Commissioners who had voted on the Order, two of the
three Commissioners in the majority had left the FCC. Id.Because the dissent’s position now commanded a majority,
counsel for the FCC informed the court that “a majority of the
current Commission does not believe that the agency has the
authority to cap intrastate rates under section 276 of the Act.”
Id. Counsel thus advised the court that the FCC was
“abandoning . . . the contention . . . that the Commission has
the authority to cap intrastate rates” for ICS. Id. Counsel
additionally informed the court that the FCC was abandoning
its contention “that the Commission lawfully considered
industry-wide averages in setting the rate caps.” Id. at 2. At oral
argument, counsel for the Commission confirmed the agency’s
abandonment of these aspects of the Order. Tr. of Oral
Argument at 43–45, Global Tel*Link (D.C. Cir. Feb. 6, 2017),
ECF No. 1666379.
II. ANALYSIS
A. The Posture of this Case
The current posture of this case is unusual because counsel
for the FCC has advised the court that the agency will not
oppose two of the principal challenges raised by Petitioners
regarding: (1) the authority of the FCC to set permanent rate
caps and ancillary fee caps for intrastate ICS calls; and (2) the
legality of the Commission’s consideration of industry-wide
averages in setting rate caps. In light of the FCC’s change of
16
position, a question arises as to whether these challenges are
moot.
It is well established that “voluntary cessation of allegedly
illegal conduct does not deprive [a judicial] tribunal of power
to hear and determine the case, i.e., does not make the case
moot.” United States v. W.T. Grant Co., 345 U.S. 629, 632
(1953). As the Court explained:
A controversy may remain to be settled in such
circumstances, e.g., a dispute over the legality of the
challenged practices. The defendant is free to return to
his old ways. This, together with a public interest in
having the legality of the practices settled, militates
against a mootness conclusion. For to say that the case
has become moot means that the defendant is entitled
to a dismissal as a matter of right. The courts have
rightly refused to grant defendants such a powerful
weapon against public law enforcement.
Id. at 632 (citations omitted).
“Voluntary cessation” justifies the dismissal of a case on
grounds of mootness only when “the defendant can
demonstrate that there is no reasonable expectation that the
wrong will be repeated. The burden is a heavy one.” Id. at 633(citation and internal quotation marks omitted); see also
Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc.,
528 U.S. 167, 189 (2000) (“[T]he standard we have announced
for determining whether a case has been mooted by the
defendant’s voluntary conduct is stringent: ‘A case might
become moot if subsequent events made it absolutely clear that
the allegedly wrongful behavior could not reasonably be
expected to recur.’ The ‘heavy burden of persua[ding]’ the
court that the challenged conduct cannot reasonably be
17
expected to start up again lies with the party asserting
mootness.” (quoting United States v. Concentrated Phosphate
Export Ass’n, 393 U.S. 199, 203 (1968))); Payne Enters., Inc.
v. United States, 837 F.2d 486, 491–92 (D.C. Cir. 1988)
(same).
There is absolutely no basis for dismissing as moot the
claims relating to the issues that the FCC has “abandoned.”
Indeed, neither the FCC, the Petitioners, nor the Intervenors
have urged this. The reason is fairly simple: the Order that gave
rise to the petitions for review is still in force. Although counsel
for the FCC has made it clear that the agency will not defend
portions of the Order, the Commission has never acted to
revoke, withdraw, or suspend the Order. Given this posture of
the case, it is plain that there has been no “voluntary cessation”
by the FCC that would warrant dismissal of Petitioners’
challenges to the Order.
B. Standard of Review
Although Petitioners’ challenges to the provisions of the
Order purporting to cap intrastate rates and to apply industry-
wide averages in setting rate caps are not moot, a question
remains as to what standard governs our review of these
provisions. Normally, we would follow the familiar two-step
Chevron framework as the appropriate standard of review. See
Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S.
837 (1984). Under the Chevron framework,
an agency’s power to regulate “is limited to the scope
of the authority Congress has delegated to it.” Am.
Library Ass’n v. FCC, 406 F.3d 689, 698 (D.C. Cir.
2005). Pursuant to Chevron Step One, if the intent of
Congress is clear, the reviewing court must give effect
to that unambiguously expressed intent. If Congress
18
has not directly addressed the precise question at issue,
the reviewing court proceeds to Chevron Step Two.
Under Step Two, “[i]f Congress has explicitly left a
gap for the agency to fill, there is an express delegation
of authority to the agency to elucidate a specific
provision of the statute by regulation. Such legislative
regulations are given controlling weight unless they are
. . . manifestly contrary to the statute.” Chevron, 467
U.S. at 843–44. Where a “legislative delegation to an
agency on a particular question is implicit rather than
explicit,” the reviewing court must uphold any
“reasonable interpretation made by the administrator
of [that] agency.” Id. at 844. But deference to an
agency’s interpretation of its enabling statute “is due
only when the agency acts pursuant to delegated
authority.” Am. Library Ass’n, 406 F.3d at 699.
EDWARDS, ELLIOTT, AND LEVY, FEDERAL STANDARDS OF
REVIEW 166–67 (2d ed. 2013).
The disputed Order in this case was promulgated by the
FCC “carrying the force of law.” United States v. Mead Corp.,
533 U.S. 218, 226–27 (2001). Therefore, it was presumptively
subject to review pursuant to Chevron. Id. The oddity here,
however, is that the agency no longer seeks deference for the
parts of the Order purporting to cap intrastate rates for ICS
providers and to apply industry-wide averages in setting the
rate caps. In these circumstances, it would make no sense for
this court to determine whether the disputed agency positions
advanced in the Order warrant Chevron deference when the
agency has abandoned those positions.
Although the Chevron framework is of no significance with
respect to the cap on intrastate rates and the application of
industry-wide averages issues, this does not affect the court’s
19
jurisdiction to address these issues. See, e.g., New Process
Steel, L.P. v. NLRB, 560 U.S. 674, 679–83 (2010) (deciding the
statutory issue without reference to the Chevron framework).
Therefore, “[w]ith Chevron inapplicable, . . . ‘we must decide
for ourselves the best reading’” of the statutory provisions at
issue in this case. Miller v. Clinton, 687 F.3d 1332, 1342 (D.C.
Cir. 2012) (quoting Landmark Legal Found. v. IRS, 267 F.3d
1132, 1136 (D.C. Cir. 2001)).
It is well recognized that when a disputed agency
interpretation does not carry the force of law, it still may be
“entitled to respect,” at least to the extent that the interpretation
has the “power to persuade.” Skidmore v. Swift & Co., 323 U.S.
134, 140 (1944); see also Mead, 533 U.S. at 227–31;
Christensen v. Harris Cty., 529 U.S. 576, 587 (2000).
However, in this case, because the FCC now offers no
interpretations in support the provisions of the Order
purporting to cap intrastate rates for ICS providers and apply
industry-wide averages in setting the rate caps, the court must
resolve these issues applying the usual rules of statutory
construction. See, e.g., MCI Telecomms. Corp. v. Am. Tel. &
Tel. Co., 512 U.S. 218 (1994); see generally ROBERT A.
KATZMANN, JUDGING STATUTES (2014); WILLIAM N.
ESKRIDGE, JR., ABBE R. GLUCK & VICTORIA F. NOURSE,
STATUTES, REGULATION, AND INTERPRETATION 409–29
(2014).
With respect to the remaining issues before the court, we
will apply the Chevron framework, as applicable. As to all
other issues, we will apply § 706(2)(A) of the Administrative
Procedure Act (“APA”), which provides that a reviewing court
shall “hold unlawful and set aside agency action, findings, and
conclusions found to be . . . arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” 5 U.S.C.
§ 706(2)(A). Under this standard of review, we search for
20
“reasoned decisionmaking.” Motor Vehicle Mfrs. Ass’n of U.S.,
Inc. v. State Farm Mut. Auto. Ins. Co. (“State Farm”), 463 U.S.
29, 52 (1983). This means that we must determine whether the
FCC “examine[d] the relevant data and articulate[d] a
satisfactory explanation for its action including a rational
connection between the facts found and the choice made.” Id.
at 43 (internal quotation marks omitted).
C. The Authority of the FCC to Set Permanent Rate Caps
and Ancillary Fee Caps for Intrastate ICS Calls
In the disputed Order, the Commission asserted authority
to impose rate caps on intrastate ICS calls for the first time. It
did so under the guise of § 276 of the 1996 Act, which requires
the Commission to “establish a per call compensation plan to
ensure that all payphone service providers are fairly
compensated for each and every completed intrastate and
interstate call using their payphone,” and to prescribe
regulations to establish this compensation plan. 47 U.S.C.
§ 276(b)(1), (b)(1)(A). Petitioners assert that the provision in
§ 276, requiring the Commission to ensure that ICS providers
are “fairly compensated,” does not override the command of
§ 152(b), which forbids the FCC from asserting jurisdiction
over “charges, classifications, practices, services, facilities, or
regulations for or in connection with intrastate communication
service.” 47 U.S.C. § 152(b) (emphasis added). Petitioners also
contend that § 276 does not give the Commission ratemaking
authority comparable to the authority that it has under § 201 to
regulate and cap interstate rates. Finally, Petitioners point out
that the intrastate rate caps prescribed in the Order make little
sense in light of the undisputed record evidence showing that
many ICS providers have costs that are higher than the disputed
rate caps. We agree with Petitioners that, on the record in this
case, § 276 did not authorize the Commission to impose
21
intrastate rate caps as prescribed in the Order. Several
considerations have influenced our judgment on this matter.
First, as noted above, § 152(b) of the 1934 Act erects a
presumption against the Commission’s assertion of regulatory
authority over intrastate communications. La. Pub. Serv.
Comm’n, 476 U.S. at 373 (making it clear that this is “not only
a substantive jurisdictional limitation on the FCC’s power, but
also a rule of statutory construction” in interpreting the Act’s
provisions). As we explain below, the Order in this case does
not come close to overcoming this presumption in proposing to
cap intrastate rates.
Second, the Order erroneously treats the Commission’s
authority under § 201 and § 276 as coterminous. Section 201
imbues the Commission with traditional ratemaking powers
over interstate calls, including the imposition of rate caps. The
statute explicitly directs the FCC to ensure that interstate rates
are “just and reasonable,” and to “prescribe such rules and
regulations as may be necessary in the public interest” to carry
out these provisions. 47 U.S.C. § 201(b). Section 276, however,
does not give the Commission authority to determine “just and
reasonable” rates. Rather, § 276 merely directs the Commission
to “ensure that all [ICS] providers are fairly compensated” for
their inter- and intrastate calls. 47 U.S.C. § 276(b)(1)(A).
The language and purpose of § 201 in the 1934 Act are
fundamentally different from the language and purpose of
§ 276 in the 1996 Act. The Order glosses over these differences
in declaring that the Commission has authority to ensure that
rates are “just, reasonable and fair.” See, e.g., Order, 30 FCC
Rcd. at 12766, 12817. This is not what § 201(b) and § 276 say.
And once the Order misquotes the language of § 201(b) and
§ 276, it goes on to conclude that these provisions in their
combined effect authorize the FCC to set rate caps to ensure
22
that both inter- and intrastate rates are “‘just and reasonable’
and do not take unfair advantage of inmates, their families, or
providers consistent with the ‘fair compensation’ mandate of
section 276.” Id. at 12817. In other words, in ignoring the terms
of § 276, the Order conflates two distinct statutory grants of
authority into a synthetic “just, reasonable and fair” standard.
This is impermissible.
Third, the Order asserts that the Commission “has
previously found that the term ‘fairly compensated’ [in § 276]
permits a range of compensation rates . . ., but that the interests
of both the payphone service providers and the parties paying
the compensation must be taken into account,” implying
considerations of fairness to the consumer. Id. at 12814 n.335.
This assertion is unfounded. The truth is that the Commission’s
prior orders align with a narrow reading of the statute that does
not purport to treat the Commission’s authority under § 201
and § 276 as coterminous. The FCC’s prior orders to which the
Order here refers construed the “fairly compensated” mandate
of § 276 as irrelevant to ICS rates reached through contractual
bargaining. This was because the FCC had determined that
“whenever a [payphone provider] is able to negotiate for itself
the terms of compensation for the calls its payphones originate,
then [the Commission’s] statutory obligation to provide fair
compensation is satisfied.” Implementation of the Pay Tel.
Reclassification & Comp. Provisions of the Telecomms. Act of
1996, 11 FCC Rcd. 21233, 21269 (1996). This is hardly
evidence of “just, reasonable and fair” ratemaking under § 276.
Furthermore, it is noteworthy that the Commission’s prior
orders repeatedly acknowledge that § 276 focuses on the
problem of uncompensated calls in situations in which BOC
providers engaged in anti-competitive behavior. In other
words, the FCC recognized that a principal reason for the
enactment of § 276 was to address “the limitation on the ability
23
of [payphone providers] and carriers to negotiate a mutually
agreeable amount” because of technological and regulatory
constraints. Implementation of the Pay Tel. Reclassification &
Comp. Provisions of the Telecomms. Act of 1996, 14 FCC Rcd.
2545, 2551, 2569 (1999). Therefore, the prior orders to which
the Order at issue here refers focused on payphone providers
and carriers to determine whether the providers were fairly
compensated. See, e.g., id. at 2570; Implementation of Pay Tel.
Reclassification & Comp. Provisions of Telecomms. Act of
1996, 17 FCC Rcd. 21274, 21302 (2002) (referring to providers
and the carriers compensating the providers in stating that
§ 276 “implies fairness to both sides”). The prior orders did not
reflect anything approaching “just, reasonable and fair”
ratemaking for intrastate rates as authorized by § 201 for
interstate rates.
In the agency brief that was filed with the court before the
FCC abandoned its support of the intrastate rate caps, counsel
argued that fairness to the consumer is implied in § 276 because
the reference to “fair” (in “fairly compensated”) is “capacious.”
Br. for FCC at 31. This argument finds no support in the Order.
As noted above, the Order simply asserts that intrastate rate
caps are consistent with the Commission’s past orders. And, as
noted above, the Commission’s past orders do not support a
“capacious” interpretation of “fairly compensated” in § 276 to
suggest that it is comparable to “just, reasonable and fair”
ratemaking in § 201. The prior orders merely relied on the
“fairly compensated” language to set a default rate from which
the payphone providers and carriers could negotiate a
departure, not to reduce bargained-for compensation. See, e.g.,
11 FCC Rcd. at 21267–69; 14 FCC Rcd. at 2569–71. The
Commission made it clear that it meant to “g[i]ve primary
importance to Congress’s objective of establishing a market-
based, deregulatory mechanism for payphone compensation, as
24
required both in section 276 and the generally pro-competitive
goals of the 1996 Act.” 14 FCC Rcd. at 2548.
Finally, the Order cites two decisions of this court to justify
an interpretation of the “fair compensation” mandate in § 276
that includes “just and reasonable” ratemaking in § 201. Order,
30 FCC Rcd. at 12815–16 (citing Ill. Pub. Telecomms. Ass’n v.
FCC, 117 F.3d 555, 562 (D.C. Cir. 1997); New England Pub.,
334 F.3d at 75). The Order’s construction of these decisions is
misguided because neither decision compels the conclusion
that § 276 authorizes the Commission to cap intrastate rates
pursuant to “just, reasonable and fair” ratemaking.
The Order first extracts language from the decision in
Illinois saying that § 276 provides the Commission with
“authority to set local coin call rates.” 117 F.3d at 562. But in
the order under review in Illinois, the FCC did not “set” local
coin call rates by imposing caps on intrastate rates. Rather, the
agency merely interpreted the mandate of § 276(b)(1)(A) to
“require[] the Commission to act only with respect to those
types of calls for which a [payphone provider] does not already
receive fair compensation.” Id. at 559 (emphasis added). And
even for those calls, the FCC ultimately determined a default
floor based on the deregulated market rate and allowed the
payphone providers to negotiate a departure from that rate. Id.
at 560.
In reviewing the FCC’s order that was contested in Illinois,
we held that § 276 unambiguously overrode § 152(b)’s
presumption against intrastate jurisdiction insofar as it granted
the Commission authority to “set” reimbursement rates for
local coin calls in order to ensure that payphone operators who
were previously uncompensated were “fairly compensated.”
Id. at 561–63. The court did not say that § 276 overrode the
presumption against intrastate jurisdiction to allow the
25
Commission to reduce already compensatory rates, which is
what the Order at issue in this case suggests. Rather, the Illinois
court said:
If locational monopolies turn out to be a problem,
however, the Commission suggested some ways in
which it might deal with them: a State might be
permitted to require competitive bidding for locational
contracts, or to mandate that additional [payphone
providers] be allowed to provide payphones at the
location; and if these remedies fail, the Commission
may consider the matter further.
Id. at 562–63. None of these options contemplated caps on
intrastate rates.
It is true that the decision in Illinois does not explicitly
preclude the Commission from imposing intrastate rate caps.
That was not the question before the court. But the Order at
issue in this case is wrong in suggesting that the decision in
Illinois reflects “significant judicial precedent [that] supports
the Commission’s authority” to reduce already compensatory
rates. Order, 30 FCC Rcd. at 12815. Indeed, in Illinois the court
reversed the Commission’s decision to exclude certain
uncompensated calls from its mandatory compensation plan
because the failure to provide compensation for this type of
payphone call was “patently inconsistent with § 276’s
command that fair compensation be provided for ‘each and
every completed . . . call.’” 117 F.3d at 566.
The Order at issue in this case also purports to rely on a
statement in the New England decision that § 276
“unambiguously and straightforwardly authorizes the
Commission to regulate . . . intrastate payphone line rates.”
Order at 12815 (quoting New England Pub., 334 F.3d at 75).
26
But here again the cited decision merely confirmed that the
1996 Act expanded the Commission’s intrastate regulatory
authority within the limited parameters of § 276. The New
England court held that Congress had authorized the
Commission to carry out the anti-subsidy and anti-
discrimination mandates of § 276(b)(1)(D)–(E) as to both inter-
and intrastate payphone providers because Congress intended
§ 276 as a whole to “authorize the Commission to eliminate
barriers to competition.” 334 F.3d at 77. But when pressed to
extend § 276’s anti-subsidy and anti-discrimination mandates
to non-BOC carriers, the court said, “the fact remains that
sections 276(a) and 276(b)(1)(C), the sources of the
Commission’s authority to regulate intrastate payphone rates,
expressly apply only to the BOCs.” Id. at 78. The court was
also clear in saying that outside the specific directives of § 276,
general provisions “cannot . . . trump section 152(b)’s specific
command that no Commission regulations shall preempt state
regulations unless Congress expressly so indicates. Absent
authorization to apply its section 276 regulations to non-BOC
[carriers], the Commission may not regulate their intrastate
payphone line rates.” Id. (citation omitted).
Thus, neither Illinois nor New England stands for the
proposition that the Commission has broad plenary authority to
regulate and cap intrastate rates. Rather these decisions confirm
the limited scope of § 276 which must be applied within the
express bounds of its specific directives.
The Order’s misconstruction of our case law stems from its
fundamental misreading of § 276. The Order acknowledges
that the Commission’s authority over intrastate calls is, “except
as otherwise provided by Congress, generally limited by
section [152(b)] of the Act.” Order, 30 FCC Rcd. at 12814. The
Commission thus recognized that to assert jurisdiction over
intrastate rates, the 1996 Act must “unambiguously appl[y] to
27
intrastate services.” Id. The Order errs, however, in concluding
that § 276 required it “to broadly craft regulations to ‘promote
the widespread development of payphone services for the
benefit of the general public,’” and that this constituted a
“general grant of jurisdiction.” Id. (quoting 47 U.S.C. §
276(b)(1)). This misreads the language of § 276. The statute
merely commands the Commission, “[i]n order to promote
competition among payphone service providers and promote
the widespread deployment of payphone services to the benefit
of the general public,” 47 U.S.C. § 276(b)(1), to prescribe
regulations to accomplish “five specific steps toward that
goal,” New England Pub., 334 F.3d at 71. This is not a “general
grant of jurisdiction” over intrastate ratemaking.
The Order at issue in this case is legally infirm because it
purports to cap intrastate rates based on a “just, reasonable and
fair” test that is not enunciated in the statute, conflates distinct
grants of authority under § 201 and § 276, and misreads our
judicial precedent and the FCC’s own prior orders to support
capping already compensatory rates under the guise of ensuring
providers are “fairly compensated.” The point here is
straightforward:
The FCC’s belief that lower ICS calling rates reflect
desirable social policy cannot justify regulations that
exceed its statutory mandate. Section 276 of the
Communications Act authorizes the FCC to ensure that
ICS providers are not deprived of fair compensation
for the use of their payphones; § 201 authorizes it to
ensure that rates for and in connection with interstate
telecommunications services are just and reasonable.
The FCC may not ignore these statutory limits to
advance its preferred correctional policy.
Joint Br. for Pet’rs at 4.
28
We therefore reverse and vacate the provision in the Order
that purports to cap intrastate rates as beyond the statutory
authority of the Commission. We need not decide the precise
parameters of the Commission’s authority under § 276. We
simply hold here that the agency’s attempted exercise of
authority in the disputed Order cannot stand.
D. The Categorical Exclusion of Site Commission Costs
The Petitioners contend that:
The FCC’s exclusion of site commission payments
from the costs used to set ICS rate caps was unlawful.
ICS providers are required by state and local
governments and correctional institutions to pay site
commissions; those commissions are accordingly a
cost of providing service like other state taxes and fees
that the FCC recognizes as recoverable costs. The FCC
acknowledged that, taking site commissions into
consideration, the rate caps were below providers’
costs. This violates the FCC’s obligation to “ensure
that all payphone service providers are fairly
compensated,” 47 U.S.C. § 276(b)(1)(A), § 201’s “just
and reasonable” requirement, and the Constitution’s
Takings Clause.
Joint Br. for Pet’rs at 16. The concerns raised by Petitioners
are compelling.
The Commission’s categorical exclusion of site
commissions from the calculus used to set ICS rate caps defies
reasoned decisionmaking because site commissions obviously
are costs of doing business incurred by ICS providers. Yet, the
Order categorically excluded site commissions and then “set
the rate caps below cost.” Id. at 20. This is hard to fathom. “An
29
agency acts arbitrarily or capriciously if it has . . . offered an
explanation either contrary to the evidence before the agency
or so implausible as not to reflect either a difference in view or
agency expertise.” Defs. of Wildlife & Ctr. for Biological
Diversity v. Jewell, 815 F.3d 1, 9 (D.C. Cir. 2016) (citing State
Farm, 463 U.S. at 43). Ignoring costs that the Commission
acknowledges to be legitimate is implausible.
The FCC’s suggestion that site commissions “have nothing
to do with the provision of ICS,” Order, 30 FCC Rcd. at 12822
(internal quotation marks omitted), makes no sense in light of
the undisputed record in this case. In some instances,
commissions are mandated by state statute, Rates for Interstate
Inmate Calling Services, 27 FCC Rcd. 16629, 16643 (2012),
and in other instances commissions are required by state
correctional institutions as a condition of doing business with
ICS providers, 17 FCC Rcd. at 3252–53. “If agreeing to pay
site commissions is a condition precedent to ICS providers
offering their services, those commissions are ‘related to the
provision of ICS.’” Joint Br. for Pet’rs at 21. And it does not
matter that the states may use the commissions for purposes
unrelated to the activities of correctional facilities. The ICS
providers who are required to pay the site commissions as a
condition of doing business have no control over the funds once
they are paid. None of the other reasons offered by the
Commission to justify the categorical exclusion of site
commissions passes muster.
On the record before us, we simply cannot comprehend the
agency’s reasoning. Where, as here, an agency’s “explanation
for its determination . . . lacks any coherence,” we owe “no
deference to [the agency’s] purported expertise.” Tripoli
Rocketry Ass’n v. Bureau of Alcohol, Tobacco, Firearms, and
Explosives, 437 F.3d 75, 77 (D.C. Cir. 2006); see also Coburn
v. McHugh, 679 F.3d 924 (D.C. Cir. 2012). Not only does the
30
FCC’s reasoning defy comprehension, the categorical
exclusion of site commissions cannot be easily squared with
the requirements of § 276 and § 201. We therefore vacate this
portion of the Order.
In its 2016 Reconsideration Order, the Commission raised
the rate caps specifically to account for a portion of site
commissions, effectively acknowledging that a categorical
exclusion of site commissions from the ratemaking calculus is
implausible. The Commission said:
[W]e have decided, out of an abundance of caution, to
take a more conservative approach and expressly
account for facilities’ ICS-related costs when
calculating our rate caps. Accordingly, we grant the
Hamden Petition in part . . . and increase our interstate
and intrastate rate caps to expressly account for
reasonable facility costs related to ICS.
Reconsideration Order, 31 FCC Rcd. at 9302. Although the
FCC purported to change its position in the Reconsideration
Order, that order does not moot Petitioner’s challenge here.
See, e.g., N.E. Fla. Contractors v. Jacksonville, 508 U.S. 663,
662 (1993) (replacing the challenged law “with one that differs
only in some insignificant respect” and “disadvantages
[petitioners] in the same fundamental way” does not moot the
underlying challenge).
The Reconsideration Order is not before us, so we cannot
say whether it provides a satisfactory response to Petitioners’
challenge. We will leave this for the Commission’s
consideration on remand. We also leave it to the Commission
to assess on remand which portions of site commissions might
be directly related to the provision of ICS and therefore
legitimate, and which are not. In addition, although we
31
conclude that the Order at issue here is arbitrary and capricious
insofar as it categorically excludes site commissions from the
ratemaking calculus, we do not reach Petitioners’ remaining
arguments that the exclusion of site commissions denies ICS
providers fair compensation under § 276 and violates the
Takings Clause of the Constitution because it forces providers
to provide services below cost. These matters should be
addressed by the Commission on remand once it revisits the
exclusion of site commissions from the ratemaking calculus.
E. The Legality of the FCC’s Use of Industry-Wide
Averages in Setting Rate Caps
Petitioners contend that:
Even if site commissions are disregarded, the rate
caps were set too low to ensure compensation “for each
and every completed . . . call.” [47 U.S.C. §
276(b)(1)(A)]. The FCC’s caps are below average
costs documented by numerous ICS providers and
would deny cost recovery for a substantial percentage
of all inmate calls. The FCC’s assertion that ICS
providers with costs above the caps operate
inefficiently is contrary to the record. The FCC relied
on two outlier ICS providers that — combined —
represent 0.1 percent of the ICS market. And it ignored
evidence showing that the cost to provide ICS varies
widely on the basis of regional differences, such as the
age and condition of a given facility or the specific
security features that correctional authorities demand.
****
The record includes two economic analyses, both
concluding that the Order’s rate caps are below cost
32
for a substantial number of ICS calls even after
excluding site commissions. . . .
The Order does not challenge these studies or their
conclusions. On the contrary, it acknowledges that
seven of 14 ICS providers that submitted cost data
reported per-minute costs of “$0.25 or higher,” above
the highest prepaid rate cap of $0.22 per minute.
Joint Br. for Pet’rs at 16–17, 30–31 (quoting Order, 30 FCC
Rcd. at 12669–70, 12795). Petitioners’ claims are well taken
and largely undisputed. And, as noted above, the FCC has
abandoned its contention that the agency lawfully considered
industry-wide averages in setting the rate caps, and for good
reasons.
First, to the extent that the Order purports to set caps for
intrastate rates, it is infirm for the reasons stated above. Second,
the averaging calculus is patently unreasonable. The FCC
calculated its rate caps “using a weighted average per minute
cost,” Order, 30 FCC Rcd. at 12790, allowing providers to
“recover average costs at each and every tier,” id. n.170. This
makes calls with above-average costs in each tier unprofitable,
however, and thus does not fulfill the mandate of § 276 that
“each and every” inter- and intrastate call be fairly
compensated. See Am. Pub. Commc’ns Council v. FCC, 215
F.3d 51, 54, 57–58 (D.C. Cir. 2000).
Moreover, the Order advances an efficiency argument –
that the larger providers can become profitable under the rate
caps if they operate more efficiently – based on data from the
two smallest firms. See Order, 30 FCC Rcd. at 12790–95. Not
only do those firms represent less than one percent of the
industry, but the record shows that regional variation, not
efficiency, accounts for cost discrepancies among providers.
33
See id. at 12965 n.61 (dissenting statement of Commissioner
Pai). The Order does not account for these conflicting record
data.
In sum, the Order’s analysis of the record data in setting
rate caps was not the product of reasoned decisionmaking. We
will therefore vacate that portion of the Order and remand for
further proceedings.
F. The Imposition of Ancillary Fee Caps
Contrary to Petitioners’ contentions, the Order’s
imposition of ancillary fee caps in connection with interstate
calls is justified. The Commission has plenary authority to
regulate interstate rates under § 201(b), including “practices
. . . for and in connection with” interstate calls. The Order
explains that ICS providers use ancillary fees as a loophole in
avoiding per-minute rate caps. Order, 30 FCC Rcd. at 12842.
Furthermore, ancillary fees for interstate calls satisfy the test
of the Commission’s authority under § 201(b) as they are “in
connection with” interstate calls. However, these
considerations do not fully answer the question whether the
disputed imposition of ancillary fee caps is permissible.
As noted above, we have found that, on the record in this
case, the Order’s imposition of intrastate rate caps fails review
under § 276. Therefore, we likewise hold that the FCC had no
authority to impose ancillary fee caps with respect to intrastate
calls. However, we cannot discern from the record whether
ancillary fees can be segregated between interstate and
intrastate calls. We are therefore obliged to remand the matter
to the FCC for further consideration.
34
G. The Imposition of Reporting Requirements
The Commission initially contended that the Order’s
requirements with respect to reporting requirements for video
visitation services and site commissions were unripe for review
because they were pending budgetary approval by the Office
of Management and Budget (“OMB”). After briefing, however,
OMB approval was published. See 82 Fed. Reg. 12182-01
(Mar. 1, 2017). Accordingly, the Commission withdrew its
ripeness challenge. Letter, Global Tel*Link (D.C. Cir. Mar. 1,
2017), ECF No. 1663705. Therefore, the parties agree that we
may review the Commission’s imposition of the disputed
reporting requirements.
We hold that the video visitation services reporting
requirement, 47 C.F.R. § 64.6060(a)(4), is too attenuated to the
Commission’s statutory authority to justify this requirement.
The Commission asserts that whether or not video visitation
services are a form of ICS, they are still subject to the agency’s
jurisdiction. See, e.g., Order, 30 FCC Rcd. at 12891–92; Br. for
FCC at 56–57. We disagree. Before it may assert its jurisdiction
to impose such a reporting requirement, the Commission must
first explain how its statutory authority extends to video
visitation services as a “communication[] by wire or radio”
under § 201(b) for interstate calls or as an “inmate telephone
service” under § 276(d) for interstate or intrastate calls. The
Order under review offers no such explanations. We therefore
vacate the reporting requirement for video visitation services.
In contrast, we find no merit in Petitioners’ challenge to
the site commission payment reporting requirement under 47
C.F.R. § 64.6060(a)(3). The quibble between the parties is
largely over semantics. The Commission agrees that the
definition of site commission payment should be read largely
as Petitioners argue: namely, site commissions are “incentive
35
payments designed to influence a correctional authority’s
selection of its monopoly service provider, not a form of
ordinary tax.” Br. for FCC at 59 (citing Order, 30 FCC Rcd. at
12818–22). So defined, the reporting requirement is lawful on
its face and Petitioners do not disagree. We therefore deny the
petition for review.
H. The Preemption and Due Process Claims
Petitioner Pay Tel separately challenges the Commission’s
refusal to preempt certain state ICS rate caps that are lower than
those the Commission set in the Order. Because we are
vacating the portion of the Order imposing intrastate rate caps
under § 276(b), the preemption provision under § 276(c) is no
longer at issue. There are no relevant regulations under § 276
remaining in the Order with respect to which the lower state
rate caps might be preempted. This issue is therefore moot.
Pay Tel’s claim that its due process rights were infringed
when it was not given timely access to key cost data that the
FCC relied on in setting the rate caps is also moot. We are
vacating the portion of the Order setting rate caps for intrastate
rates; the Commission has acknowledged that its use of
industry-average data to set rates was error; and Pay Tel
obtained access to the disputed data prior to the Commission’s
issuance of the Reconsideration Order setting rate caps that
supersede those in the Order at issue. The concerns raised by
Pay Tel are thus moot.
III. CONCLUSION
In accordance with the foregoing opinion, we grant in part
and deny in part the petitions for review, vacate certain
provisions in the disputed Order, and remand for further
36
proceedings with respect to certain matters. We also dismiss
two claims as moot.
So ordered.
CLARIFICATION AND AMENDMENT
OF THE MAJORITY OPINION
After the opinions in this case were issued, the Wright
Petitioners filed a petition for rehearing en banc, challenging
the panel majority’s decision on three points relating to the
FCC’s Order on interstate and intrastate prison phone rates. On
the three points in issue, the majority opinion reaches the
following judgments:
• We hold that the Order’s proposed caps on
intrastate rates exceed the FCC’s statutory
authority under the 1996 Act. We therefore
vacate this provision.
• We further hold that the use of industry-averaged
cost data as proposed in the Order is arbitrary and
capricious because it lacks justification in the
record and is not supported by reasoned
decisionmaking. We therefore vacate this
provision.
• We find that the Order’s proposed wholesale
exclusion of site commission payments from the
FCC’s cost calculus is devoid of reasoned
decisionmaking and thus arbitrary and capricious.
This provision cannot stand as presently proposed
in the Order under review; we therefore vacate
this provision and remand for further proceedings
on the matter.
Global Tel*Link v. FCC, 859 F.3d 39, 45 (D.C. Cir. 2017).
In its petition for rehearing en banc, the Wright Petitioners
complain that, “[a]lthough this case involves an ambiguous
statute administered by the FCC, the panel did precisely what
2
Chevron disclaimed: it ‘impose[d] its own construction on the
statute’ rather than defer to the FCC’s detailed analysis of an
ambiguous statute. . . . The panel opinion creates a dangerous
loophole to evade judicial review when agencies are unable or
unwilling to justify changed positions.” Br. for Wright
Petitioners at 6, 8 (quoting Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 843 (1984)).
These claims are meritless.
Lest there be any confusion over the majority’s opinion
going forward, there are two points that warrant clarification.
First, the majority opinion carefully analyzes the terms of the
FCC’s Order and the agency’s justifications in support of the
Order. The majority does not second-guess the agency. Rather,
the majority found the FCC’s justifications for the proposed
caps on intrastate rates “manifestly contrary to the statute,”
Chevron, 467 U.S. at 844, and clearly unworthy of deference.
Second, as noted above, after reviewing the entire
record in this case, the majority opinion concludes that “the
Order’s proposed caps on intrastate rates exceed the FCC’s
statutory authority under the 1996 Act.” It goes without saying
that if an agency action exceeds its statutory authority, the
agency is entitled to no deference under Chevron. See, e.g.,
Sullivan v. Zebley, 493 U.S. 521, 541 (1990); Goldstein v. SEC,
451 F.3d 873, 880–81 (D.C. Cir. 2006). As the concurring
opinion notes, “the statute’s structure and context demonstrates
that the agency’s interpretation would fail at Chevron’s second
step; it is an unreasonable (impermissible) interpretation of
section 276.” If this point was lost in the original opinion issued
by the majority, we make it clear now. We need not and do not
decide whether we were required to follow Chevron Step Two
even though the agency declined to defend its position before
the court. The important point here is that we have carefully
3
analyzed the contested provisions of the FCC’s Order and
found that they cannot survive review under either the “best
reading” of the statute standard, Miller v. Clinton, 687 F.3d
1332, 1342 (D.C. Cir. 2012) (quoting Landmark Legal Found.
v. IRS, 267 F.3d 1132, 1136 (D.C. Cir. 2001)), or pursuant to
Chevron Step Two.
There is no Chevron question with respect to the
majority’s decision on the use of industry-averaged cost data
as proposed in the Order. The majority found that provision
arbitrary and capricious because it lacks justification in the
record and is not supported by reasoned decisionmaking. The
same is true with respect to the majority decision on the
Order’s proposed wholesale exclusion of site commission
payments from the FCC’s cost calculus. We found that
provision devoid of reasoned decisionmaking and thus
arbitrary and capricious. It is clear that no Chevron deference
is due to agency decisions that are unsupported by reasoned
decisionmaking.
SILBERMAN, Senior Circuit Judge, concurring: I concur
with Judge Edwards’ opinion in all respects. I especially agree
that Chevron deference would be inappropriate in these unusual
circumstances. I write separately to point out, as to the FCC’s
claimed jurisdiction to set intrastate rate caps, that I think our
result would be the same if the Chevron framework was in play,
i.e., if the FCC had elected to defend this part of its regulation.
There is no question that the relevant statutory language,
“fairly compensated,” is ambiguous. 47 U.S.C. 276(b)(1)(A).
Even the FCC agrees. But Judge Edwards’ careful explanation
of the statute’s structure and context demonstrates that the
agency’s interpretation would fail at Chevron’s second step; it
is an unreasonable (impermissible) interpretation of section 276.
Much of the recent expressed concern about Chevron
ignores that Chevron’s second step can and should be a
meaningful limitation on the ability of administrative agencies
to exploit statutory ambiguities, assert farfetched interpretations,
and usurp undelegated policymaking discretion.1 This case
presents just one example of those kinds of agency tactics.
There are others. Accord Michigan v. EPA, — U.S. —, 135 S.
Ct. 2699, 2713 (2015) (Thomas, J., concurring) (“Although we
hold today that [the agency] exceeded even the extremely
permissive limits on agency power set by our precedents, we
1
See, e.g., City of Arlington v. FCC, — U.S. —, 133 S. Ct. 1863(2013) (Roberts, C.J., dissenting). Of course, some also question “step
two” itself. For example, an essay in the Virginia Law Review
contended that “Chevron Has Only One Step.” Matthew C.
Stephenson & Adrian Vermeule, 95 Va. L. Rev. 597 (2009). But that
position ignores the practical effect on future agency discretion of a
court opinion either affirming or reversing an agency interpretation at
step one versus step two. Cf. Nat’l Cable & Telecomms. Ass’n v.
Brand X Internet Servs., 545 U.S. 967 (2005).
2
should be alarmed that it felt sufficiently emboldened by those
precedents to make the bid for deference that it did here.”)
To be sure, some have lamented that as a practical matter,
under Chevron, either the case is decided at the first step or the
agency prevails once it receives deference under step two. But
that is not what the Chevron case called for.
Chevron itself involved a phrase “stationary source” that
was not at all defined and clearly could equally refer to (a) a
factory complex, or (b) a specific emitter of pollution. 467 U.S.
837, 860-64 (1984). But it would have been unreasonable to
refer to (c) a whole city. Yet too many times agencies have
taken advantage of an ambiguity to pursue a (c), (d), or (f)
interpretation that accorded with policy objectives. See, e.g.,
Verizon v. FCC, 740 F.3d 623, 660 (D.C. Cir. 2014) (Silberman,
J., concurring in part and dissenting in part).
Unfortunately, the Supreme Court for some time after
Chevron contributed to the step one winner-take-all narrative by
neglecting to rely on step two even when it was really called for.
Take for example MCI Telecommunications Corp. v. AT&T Co.,
512 U.S. 218 (1994), in which Justice Scalia—perhaps the
foremost expositor of Chevron—used statutory structure and
context, much like Judge Edwards does in our case, to
demonstrate that the FCC’s reliance on the word “modify” was
unacceptable, see, e.g., id. at 228-29. But he never conceded
that the word “modify” was ambiguous, which it was. Id. at 228(“We have not the slightest doubt that [single definition] is the
meaning the statute intended.”).
Subsequently, however, in AT&T Corp. v. Iowa Utilities
Board, 525 U.S. 366 (1999), Justice Scalia implicitly relied on
step two. He concluded that because the agency failed to
interpret the terms of the statute “in a reasonable fashion,” the
3
rule must be vacated. Id. at 392. Then, in City of Arlington v.
FCC, — U.S. —, 133 S. Ct. 1863 (2013), he admonished that
“where Congress has established an ambiguous line, the agency
can go no further than the ambiguity will fairly allow,” id. at
1874. And most recently in Michigan v. EPA, — U.S. —, 135
S. Ct. 2699 (2015), when invalidating agency action under step
two, he was more explicit still: “Chevron allows agencies to
choose among competing reasonable interpretations of a statute;
it does not license interpretive gerrymanders under which an
agency keeps parts of statutory context it likes while throwing
away parts it does not,” id. at 2708.
We have at times been careful to apply step two review
vigorously. See, e.g., Goldstein v. SEC, 451 F.3d 873 (D.C. Cir.
2006). This is just such a case where the agency’s original
claim for Chevron deference—before the agency’s control
switched—would have been rejected at Chevron step two; a
muscular use of that analysis is a barrier to inappropriate
administrative adventure.
PILLARD, Circuit Judge, dissenting as to Sections II.B
through II.F and concurring in part:
The administrative record is full of compelling evidence
of dysfunction in the inmate-calling marketplace, with harsh
consequences for inmates and their families. The rule under
review began with a 2000 lawsuit filed by inmates, family
members, loved ones, and counsel (referred to in these
proceedings as the Wright Petitioners). Finally acting on the
Wright Petitioners’ concerns, the FCC in 2015 modestly
curtailed exorbitant per-minute calling rates and limited
providers’ ability to extract confusing and unrelated ancillary
fees—amounting to as much as 38 percent of total inmate-
calling revenue—for such things as setting up an account,
funding an account, issuing a refund, and closing an account.
See 30 FCC Rcd. 12763, 12838-42 (2015). The record shows
that these high prices impair the ability of inmates, by
definition isolated physically from the outside world, to sustain
fragile filaments of connection to families and communities
that they might hope to rejoin. The majority’s decision scuttles
a long-term effort to rein in calling costs that are not
meaningfully subject to competition and that profit off of
inmates’ desperation for connection.
The majority’s path to that result is flawed. I cannot agree
that a company is “fairly compensated” under 47 U.S.C.
§ 276(b)(1)(A) when it charges inmates exorbitant prices to use
payphones inside prisons and jails, shielded from competition
by a contract granting it a facility-wide payphone monopoly.
The majority does not question that Congress enacted the
Telecommunications Act of 1996 to combat phone
monopolies, facilitate competition, and thereby ensure better
service at lower prices to consumers. Consistent with the 1996
Act’s general approach of “replac[ing] a state-regulated
monopoly system with a federally facilitated, competitive
market,” section 276 of the Act specifically addressed defects
in the intrastate and interstate payphone market (now largely
obsolete except in cellphone-free environments such as
2
prisons). New England Pub. Commc’ns Council, Inc. v. FCC,
334 F.3d 69, 77 (D.C. Cir. 2003).
The majority holds it beyond debate that “fairly
compensated” is not about fairness to the consumer. It sees no
statutory support for the FCC’s effort to require fairer intrastate
rates for inmates because it reads section 276’s fair-
compensation mandate as unambiguously one-sided, only
empowering the FCC to enhance unfairly low, not to reduce
unfairly high, compensation for calls. It accepts Global
Tel*Link’s characterization of section 276 as nothing but a “no
free calls” provision, Oral Arg. Tr. 40:55, confined to the
enacting Congress’s acknowledged concern about independent
payphone providers going uncompensated for certain calls.
But that reading is truncated. As it typically does, Congress
responded to a particular problem by enacting a law that speaks
in more general terms: here, by requiring that payphone calls
in prisons and elsewhere be “fairly compensated.” It did so for
the stated purpose—fully relevant here—of promoting
competition among payphone providers to expand the
availability of payphone services to consumers. 47 U.S.C. §
276(b)(1).
The majority offers one plausible reading of section 276,
but it is assuredly not the only one. Congress has not “directly
spoken to the precise question at issue” in this case, so the
question for us is whether the FCC’s view when it promulgated
the challenged rule—that section 276 grants authority not only
to raise inadequate rates but also to reduce excessive,
monopoly-driven rates—was a “permissible construction of
the statute.” Chevron, U.S.A., Inc. v. Nat. Res. Def. Council,
Inc., 467 U.S. 837, 842-43 (1984). I think it was. If the FCC
under new management wishes by notice and comment to
change its rule, the statute gives it latitude to do so. We should
uphold the rule that is on the books and leave to the agency to
decide whether and how to change it.
3
I.
The FCC reasonably interpreted section 276 to “authorize
the Commission to impose intrastate rate caps as prescribed in
the Order.” Op. at 20-21. Congress instructed the FCC to
“establish a per call compensation plan to ensure that all
payphone service providers are fairly compensated for each
and every completed intrastate and interstate call using their
payphone[s].” 47 U.S.C. § 276(b)(1)(A). To begin with,
nobody contests that authority to establish “a per call
compensation plan” includes some authority over end-user
calling rates. Indeed, this court already so held. See Illinois
Public Telecommunications Ass’n v. FCC, 117 F.3d 555, 562
(D.C. Cir. 1997) (“Because … there is no indication that the
Congress intended to exclude local coin rates from the term
‘compensation’ in § 276, we hold that the statute
unambiguously grants the Commission authority to regulate
the rates for local coin calls.”). And the plain text of the statute
grants that authority over both intrastate and interstate
payphone services, including “inmate telephone service in
correctional institutions.” 47 U.S.C. § 276(d). Thus, the only
dispute is whether the word “fairly” implies an ability to reduce
excesses, as well as bolster deficiencies, in the compensation
that payphone providers would otherwise receive.
Importantly, Congress chose “fairly” rather than, say,
“adequately,” “sufficiently,” or “amply.” Those words have
different meanings. Had it used any of the latter three terms, I
would agree that Congress only authorized regulation to
prevent under-compensation, but its choice of the word “fairly”
denotes no such limitation. Compare WEBSTER’S NEW
COLLEGIATE DICTIONARY 407 (1980) (defining “fair” as, inter
alia, “marked by impartiality and honesty: free from self-
interest, prejudice, or favoritism”), with id. at 14 (defining
“adequate” as, inter alia, “sufficient for a specific
requirement”), and id. at 1156 (defining “sufficient” as, inter
4
alia, “enough to meet the needs of a situation or a proposed
end”). Those words are also used differently in everyday
language. See Schindler Elevator Corp. v. U.S. ex rel. Kirk,
563 U.S. 401, 407 (2011) (court looks to “ordinary meaning”
in absence of statutory definition). If a grocer demanded $20
for a banana, we might call that price adequate, sufficient, or
ample—but nobody would call it fair.
The statutory context shows that Congress’ choice of the
word “fairly” reasonably connotes its concern for unfairly
excessive as well as deficient compensation. Elsewhere in the
Communications Act, Congress used the term “fair” in
conjunction with “just” and “reasonable”—familiar terms of
art used in connection with rate-setting authority. See 47
U.S.C. § 204(b) (providing for partial authorization of new
charges, which would otherwise be stayed, if the FCC
determines “that such partial authorization is just, fair, and
reasonable”); id. § 205(a) (authorizing the FCC to prescribe
“what classification, regulation, or practice is or will be just,
fair, and reasonable”). And the fact that section 276 is one of
several “Special Provisions Concerning Bell Operating
Companies,” see Op. at 9, does not suggest that Congress
exclusively intended to regulate the relationship between
BOCs and non-BOCs to boost the latter’s compensation and
was wholly unconcerned about the risk that callers would be
charged excessive rates.
The purpose and history behind the congressional action
here comport with this reading of the statutory text and context.
In passing the 1996 Telecommunications Act, Congress aimed
to “promot[e] competition in the payphone service industry.”
New England, 334 F.3d at 71; see also 47 U.S.C. § 276(b)(1)
(stating congressional purpose “to promote competition among
payphone service providers and promote the widespread
deployment of payphone services to the benefit of the general
public”). To be sure, the immediate anti-competitive
5
malfunction confronting Congress at the time was that certain
payphone providers were, under certain circumstances, under-
compensated. See Illinois Pub. Telecomms. Ass’n v. FCC, 752
F.3d 1018, 1026 (D.C. Cir. 2014). But the central aim was to
advance competition to the benefit of the end users of payphone
services. Senator Kerry, for instance, explained that his goal in
introducing section 276 was “to establish a level playing field
for independent payphone providers,” and thereby to enable
competition “on the basis of price, quality and service, rather
than on marketshare and subsidies.” 3 Reams & Manz, Federal
Telecommunications Law: A Legislative History of the
Telecommunications Act of 1996, Pub. L. No. 104-104, 110
Stat. 56 (1996), at S710.
Consistent with that pro-competitive agenda, the FCC and
this court have long assumed that section 276 provides tools for
addressing monopoly power and market failure in the
payphone market. For instance, in Illinois, the state petitioners
argued that the FCC had unlawfully ignored the problem of
“locational monopolies,” that is, situations in which a
payphone provider “obtains an exclusive contract for the
provision of all payphones at an isolated location, such as an
airport, stadium, or mall, and is thereby able to charge an
inflated rate for local calls made from that location.” 117 F.3d
at 562. We recognized that the FCC had not ignored the
problem of locational monopolies; it had simply “concluded
that it would deal with them if and when specific [providers]
are shown to have substantial market power.” Id. Now, twenty
years later, the FCC has identified a discrete area where
payphone providers do have substantial market power: prisons
and jails. The inmate-calling market is, the FCC found, “a
prime example of market failure” because, instead of
competing to reduce rates and improve services for callers,
providers compete to offer ever-higher site commissions to
correctional facilities so as to gain monopoly access to a
literally captive consumer base. 30 FCC Rcd. at 12765 & n.9.
6
Nevertheless, the majority cites four considerations that
influenced its rejection of the FCC’s claimed authority over
intrastate inmate calling services. Op. at 21-24. None is
compelling.
First, the majority notes that section 152(b) “erects a
presumption against the Commission’s assertion of regulatory
authority over intrastate communications.” Op. at 21 (citing
Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 373
(1986)). That is true, but section 276, by its plain terms,
“overcom[es] this presumption.” Op. at 21. Congress
instructed the FCC to ensure fair compensation for all
payphone calls—interstate and intrastate. 47 U.S.C. §
276(b)(1)(A). To that end, Congress expressly provided for
preemption of inconsistent state regulation. Id. § 276(c). This
case is thus unlike Louisiana, which held that federal power
over depreciation charges pursuant to section 220 was limited
to the interstate ratemaking context; it is simply not “possible”
here that section 276 “do[es] no more than spell out the
authority of the FCC . . . in the context of interstate regulation.”
Louisiana, 476 U.S. at 377. Whatever section 276 means, it
applies in both the interstate and intrastate contexts. Cf. N.Y.
& Pub. Serv. Comm’n of N.Y. v. FCC, 267 F.3d 91, 102-03 (2d
Cir. 2001) (concluding that section 251(e) clearly “grants the
FCC authority to act with respect to those areas of intrastate
service encompassed by the terms ‘North American
Numbering Plan’ and ‘numbering administration,’” and
applying Chevron deference to agency’s interpretation of
“what either term encompasses”).
Second, the majority says that “the Order erroneously
treats the Commission’s authority under § 201 and § 276 as
coterminous.” Op. at 21. My colleagues appear to draw that
conclusion from the FCC’s repeated use of the phrase “just,
reasonable, and fair”—an amalgam of the two provisions’ key
terms. As I read the Order, the bundling of those three words
7
simply reflects that the FCC’s authority over inmate calling
derives from the sum of those authorizations. The majority’s
inference that the Order fails to respect the difference between
sections 201 and 276, and in particular, fails to appreciate that
section 201 applies only to interstate rates, has no support in
the record.
Third, the majority concludes that the FCC erred in finding
support for its approach in prior agency orders. Op. at 22-23.
The majority says that “the prior orders . . . focused on
payphone providers and carriers to determine whether the
providers were fairly compensated.” Op. at 23. But this court
has held that “compensation” includes end-user rates; it is not
limited to payments between payphone providers and carriers.
Illinois, 117 F.3d at 562 (“[W]e hold that the statute
unambiguously grants the Commission authority to regulate
the rates for local coin calls.”).
Fourth, the majority says the FCC mistakenly relied on this
court’s decisions in Illinois and New England. Op. at 24-26.
The majority acknowledges that Illinois “held that § 276
unambiguously overrode § 152(b)’s presumption against
intrastate jurisdiction insofar as it granted the Commission
authority to ‘set’ reimbursement rates for local coin calls in
order to ensure that payphone operators who were previously
uncompensated were ‘fairly compensated.’” Op. at 24.
According to the majority, however, setting rates to increase
providers’ compensation is different from reducing “already
compensatory rates.” Op. at 25. Yet Illinois ratified the FCC’s
assertion of authority to regulate “locational monopolies.” 117
F.3d at 562. The majority responds that the FCC never said it
would consider intrastate rate caps as the means of breaking up
such monopolies. See Op. at 25. But the FCC, as we noted in
Illinois, “specifically reserved the right to modify its
deregulation scheme, for example, by limiting the number of
compensable calls from each payphone.” 117 F.3d at 563.
8
Limiting the number of compensable calls per phone is, of
course, economically similar to limiting the rate per call; either
incentivizes broader deployment of payphones to maintain the
same revenue levels. Thus, the FCC contemplated, and the
Court approved, just the sort of pro-consumer regulation the
FCC eventually undertook in the Order under review.
Petitioners argue that in the rule at issue in Illinois, the
FCC had merely claimed the authority “to adjust the per-call
compensation scheme that the FCC itself put in place to ensure
fair compensation,” not the “authority to regulate existing
market rates.” ICS Pet’rs Br. 46 n.31. That is a false
dichotomy. Cf. Illinois, 117 F.3d at 563 (“A market-based
approach is as much a compensation scheme as a rate-setting
approach.”). The bottom line is that the FCC anticipated the
problem of monopoly power in the provision of payphone
services, and this Court ratified the agency’s authority to
combat that problem by reducing providers’ compensation,
including by adjusting end-user rates. There is thus no basis
for the majority’s contention that “the FCC consistently
construed its authority over intrastate payphone rates as limited
to addressing the problem of under-compensation for ICS
providers.” Op. at 5.
The majority also takes issue with the Order’s invocation
of New England, but the FCC correctly relied on that precedent
for the limited point that “section 276 unambiguously and
straightforwardly authorizes the Commission to regulate [the
Bell Operating Companies’] intrastate payphone line rates.” 30
FCC Rcd. at 12815 (quoting 334 F.3d at 75). The fact that the
FCC and this court previously articulated section 276 authority
in terms of generic rate regulation is relevant here. And,
contrary to the majority, New England’s holding that section
276(b)(1)(C) does not apply to non-Bell Operating Companies
has no resonance in this case. The provision at issue here,
section 276(b)(1)(A), is indisputably applicable to non-BOCs:
9
it requires that “all payphone service providers [be] fairly
compensated.” 47 U.S.C. § 276(b)(1)(A) (emphasis added).
None of this is to suggest that the FCC has the same “broad
plenary authority to regulate and cap intrastate rates” that it has
over interstate rates. Op. at 26. Notably, whereas section 201
broadly requires that “[a]ll charges, practices, classifications,
and regulations for and in connection with [interstate]
communication service[] shall be just and reasonable,” section
276 is more narrowly focused on “compensation.” The FCC
simply did not need “broad plenary authority” to conclude that
inmate calling service providers charging as much as $56.00
for a four-minute call, see Op. at 11, were not being “fairly
compensated.”
II.
The majority also holds that the FCC’s complete exclusion
of site commissions from its cost calculus and its use of
industry-wide averages were arbitrary and capricious. See Op.
at 28-33. It is unclear why the majority finds it necessary to
address how the caps were calculated, given its rejection of the
FCC’s power to cap at all. In any event, the majority’s analysis
is misguided.
Regarding site commissions, the majority says that
“[i]gnoring costs that the Commission acknowledges to be
legitimate is implausible.” Op. at 29. But the FCC did not
acknowledge site commissions as legitimate costs. Quite to the
contrary, the FCC agreed with a commenter who described site
commissions as “legal bribes to induce correctional agencies to
provide ICS providers with lucrative monopoly contracts.” 30
FCC Rcd. at 12821. In other words, the FCC viewed site
commissions not as real costs of doing business, but as “an
apportionment of profit” between providers and correctional
facilities. Id. at 12822. The majority suggests that if site
commissions are “directly related to the provision” of inmate
10
calling services in that they are conditions of receiving
contracts to provide such services, they are “therefore
legitimate.” Op. at 30. That equation makes no sense; the fact
that a cost was charged under a prior regulatory regime cannot
mean the agency is required to recognize that cost as
“legitimate” and is disempowered from regulating it.
Simply put, the fact that a state may demand them does not
make site commissions a legitimate cost of providing calling
services. The majority asserts that “[i]n some instances,
commissions are mandated by state statute,” Op. at 29, but the
record reflects that there is only one such statute, Tex. Gov’t
Code Ann. § 495.027(a)(2). That statute categorically
demands site commissions of at least 40 per cent of the
provider’s gross revenue, which only illustrates the problem
that site commissions are a form of monopoly rent not tied to
actual costs.
Indeed, considering site commissions as a compensable
cost would effectively negate the FCC’s authority to mitigate
locational monopolies. Imagine that a payphone provider (in
the pre-cell phone era) contracted with a large stadium to
provide just three payphones, anticipating that its monopoly
would enable it to charge several dollars per minute while
kicking back some percentage to the stadium. Plainly, the
statutory goals of “competition” and “widespread deployment
of payphone services” could be well served by a rule imposing
reasonable, market-sensitive price caps to spur providers to
offer more phones to maintain the same levels of revenue. 47
U.S.C. § 276(b)(1). But any such price cap would be worthless
if it had to be calculated to ensure that the provider could
continue its kickbacks to the stadium. The kickback
arrangement might, in some sense, be “related” to the provision
of payphone services at the stadium, but it is not “reasonably”
related because acceding to such preexisting contractual
relationships is inconsistent with the statutory scheme.
11
On the averaging issue, the majority concludes that
because the Order “makes calls with above-average costs . . .
unprofitable,” it “does not fulfill the mandate of § 276 that
‘each and every’ inter- and intrastate call be fairly
compensated.” Op. at 32. This holding seems to follow from
the majority’s pinched interpretation of section 276 as a one-
way ratchet whereby providers are always entitled to recoup
“actual” costs incurred under monopoly conditions, no matter
how extravagant. As I have explained, I believe that section
276 conveys some authority to lower rates, which means the
FCC need not take as given “calls with above-average costs.”
Additionally, the majority fails to reckon with the FCC’s
independent authority to cap rates for interstate calls under
section 201, despite acknowledging that this power is “broad”
and “plenary.” Op. at 26. In my view, the FCC has wide
discretion under its section 201 “just and reasonable” interstate
ratemaking authority to decide which costs to take into account
and to use industry-wide averages that do not necessarily
compensate “each and every” call, as section 276 requires. See
Nat’l Ass’n of Regulatory Util. Comm’rs v. FERC, 475 F.3d
1277, 1280 (D.C. Cir. 2007) (agency is not “weaponless
against conduct that might encourage or cloak the running up
of unreasonable costs”). As the state petitioners aptly
summarized, section 201 “gave the Commission broad
regulatory authority over interstate communication in a
‘traditional form,’ mirroring regulation of railroads and public
utilities, enabling it to set rates to allow a monopolistic utility
to recover a reasonable profit but also protect the consumer
from unjustly high prices.” State Pet’rs Br. at 28-29. The
majority never explains why the FCC’s rate-setting
methodology would be impermissible as to the interstate caps.
III.
Finally, I note that the majority offers no persuasive reason
for abandoning the Chevron framework (which it admittedly
12
does only in dicta, as Chevron deference plays no role in an
opinion holding section 276 unambiguous). It acknowledges
that the Order is “presumptively subject” to deferential review,
but then concludes that “it would make no sense for this court
to determine whether the disputed agency positions advanced
in the Order warrant Chevron deference when the agency has
abandoned those positions.” Op. at 18. Absent any briefing on
the subject or any citation to precedent, I cannot agree.
The FCC, through notice-and-comment rulemaking, took
certain positions—most notably that section 276 authorizes
regulation of the fairness of intrastate inmate-calling rates—
and defended them vigorously in briefing before this court.
Less than a month before argument, the court on its own motion
directed the parties to explain whether this case should be held
in abeyance in light of recent personnel changes at the FCC.
The FCC responded that the court should “move forward on
the current schedule.” Doc. No. 1656116 (Jan. 17, 2017). Two
weeks later, and just a week before argument, the FCC
informed us that it would no longer defend certain points that
it had briefed, but that the Wright Petitioners would “defend all
aspects of the Order.” Doc. No. 1658521 (Jan. 31, 2017). The
FCC has not committed to formally reviewing the Order, as
other similarly situated agencies have recently done. See, e.g.,
Murray Energy Corp. v. EPA, No. 15-1385, Doc. No. 1670218
(April 7, 2017) (requesting postponement of oral argument so
that agency could “fully review” the relevant rule). By
suggesting that agencies can relinquish judicial deference
through such limited and belated maneuvers as refusing to
defend portions of their briefs during oral argument, the
majority risks enabling agencies to end-run the principle that
they must “use the same procedures when they amend or repeal
a rule as they used to issue the rule in the first instance.” Perez
v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1206 (2015).
***
13
The majority appears to leave an opening for the FCC—
on some other record and by some other reasoning—to rein in
excessive inmate-calling rates, both interstate and intrastate.
See Op. at 20, 29, 32 (limiting its analysis to the record in this
case). And the majority invites the FCC to determine whether
some “portions of site commissions” are illegitimate and non-
compensable. Op. at 30. Still, because the majority
shortchanges the FCC’s authority to reduce excessive,
monopoly-driven rates, finds “implausible” the agency’s
reasoned approach to a grave problem, and unnecessarily
suggests limitations on Chevron deference, I respectfully
dissent from Sections II.B through II.F of the majority opinion.