OCTOBER TERM, 2001
Syllabus
VERIZON COMMUNICATIONS INC. ET AL.
v.
FEDERAL COMMUNICATIONS COMMISSION ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH
CIRCUIT
No. 00-511. Argued October 10, 200l-Decided May 13,2002*
In order to foster competition between monopolistic carriers
providing local telephone service and companies seeking to enter
local markets, provisions of the Telecommunications Act of 1996
(Act) entitle the new entrants to lease elements of the incumbent
carriers' local-exchange networks, 47 U. S. C. §251(c), and direct
the Federal Communications Commission (FCC) to prescribe methods
for state utility commissions to use in setting rates for the
sharing of those elements, § 252(d). Such "just and reasonable
rates" must,
inter alia, be "based on the cost (determined
without reference to a rate-of-return or other rate-based
proceeding) of providing the ... network element." §
252(d)(1)(A)(i). Regulations appended to the FCC's First Report and
Order under the Act provide, among other things, for the treatment
of "cost" under § 252(d)(1)(A)(i) as "forward-looking economic
cost," 47 CFR § 51.505, something distinct from the kind of
historically based cost previously relied on in valuing a rate
base, see,
e. g., FPC v.
Hope Natural Gas Co.,
320 U. S. 591,
596-598, 605; define the "forward-looking economic cost of an
element [as] the sum of (1) the total element long-run incremental
cost of the element [TELRIC,] and (2) a reasonable allocation of
forward-looking common costs," § 51.505(a), "incurred in providing
a group of elements that "cannot be attributed directly to
individual elements," § 51.505(c)(1); and, most importantly,
specify that the TELRIC "should be measured based on the use of the
most efficient telecommunications technology currently available
and the lowest cost network configuration, given the existing
location of the incumbent['s] wire centers," § 51.505(b)(1). The
regulations also contain so-called "combination" rules requiring an
incumbent, upon request and compensation, to perform the functions
necessary to combine network ele-
*Together with No. 00-555, World Com, Inc., et al. v. Verizon
Communications Inc. et al., No. 00-587, Federal Communications
Commission et al. v. Iowa Utilities Board et al., No. 00-590,
AT&T Corp. v. Iowa Utilities Board et al., and No. 00-602,
General Communications, Inc. v. Iowa Utilities Board et al., also
on certiorari to the same court.
468
ments for an entrant, unless the combination is not technically
feasible. §§ 51.315(b)-(f). Challenges to the regulations, mostly
by incumbent carriers and state commissions, were consolidated in
the Eighth Circuit, which initially held,
inter alia, that
the FCC had no authority to control state commissions' ratesetting
methodology and that the FCC misconstrued § 251(c)(3)'s plain
language in implementing the combination rules. Reversing in large
part in
AT&T Corp. v.
Iowa Utilities Bd.,
525 U. S. 366,
384-385, this Court, among its rulings, upheld the FCC's
jurisdiction to impose a new rate setting methodology on the States
and reinstated the principal combination rule, Rule 315(b), which
forbids incumbents to separate currently combined network elements
before leasing them to entrants who ask for them in a combined
form. On remand, the incumbents' primary challenge went to the
FCC's ratesetting methodology. The Eighth Circuit understood §
252(d)(1) to be ambiguous as between "forward-looking" and
"historical" cost, so that a forward-looking ratesetting method
would presumably be reasonable, but held that § 252(d)(1)
foreclosed the use of the TELRIC methodology because the Act
plainly required rates based on the actual, not hypothetical, cost
of providing the network element. The court also invalidated the
additional combination rules, Rules 315(c)-(f), reading §
251(c)(3)'s reference to "allow[ing] requesting carriers to combine
... elements" as unambiguously requiring requesting carriers, not
providing incumbents, to do any and all combining.
Held:
1. The FCC can require state commissions to set the rates
charged by incumbents for leased elements on a forward-looking
basis untied to the incumbents' investment. Because the incumbents
have not met their burden of showing unreasonableness to defeat the
deference due the FCC, see
Chevron U. S.
A. Inc. v.
Natural Resources Defense Council, Inc., 467 U. S. 837, 843-845,
the Eighth Circuit's judgment is reversed insofar as it invalidated
TELRIC. Pp. 497-528.
(A) This Court rejects the incumbents' argument that "cost" in §
252(d)(1)'s requirement that "the ... rate ... be ... based on the
cost ... of providing the ... network element" can only mean, in
plain language and in this particular technical context, the past
cost to an incumbent of furnishing the specific network element
actually, physically, to be provided, as distinct from its value or
the price that would be paid for it on the open market. At the most
basic level of common usage, "cost" has no such clear implication.
A merchant asked about the "cost" of his goods may reasonably quote
their current wholesale market price, not the cost of the items on
his shelves, which he may have bought at higher or lower prices.
When the reference shifts into
469
the technical realm, the incumbents are still unconvincing.
"Cost" as used in calculating the rate base under the traditional
cost-of-service method did not stand for all past capital
expenditures, but at most for those that were prudent, while
prudent investment itself could be denied recovery when unexpected
events rendered investment useless.
Duquesne Light Co. v.
Barasch, 488
U. S. 299, 312. And even when investment was wholly includable
in the rate base, ratemakers often rejected the utilities'
"embedded costs," their own book-value estimates, which typically
were geared to maximize the rate base with high statements of past
expenditures and working capital, combined with unduly low
depreciation rates. See,
e. g., Hope Natural Gas Co., supra,
at 597-598. Equally important, the incumbents' plain-meaning
argument ignores the statutory setting in which the mandate to use
"cost" in valuing network elements occurs. First, the Act uses
"cost" as an intermediate term in the calculation of "just and
reasonable rates," § 252(d)(1), and it was the very point of
Hope Natural Gas that regulatory bodies required to set
rates expressed in these terms have ample discretion to choose
methodology, 320 U. S., at 602. Second, it would be strange to
think Congress tied "cost" to historical cost without a more
specific indication, when the very same sentence that requires
"cost" pricing also prohibits any reference to a "rate-of-return or
other rate-based proceeding," § 252(d)(1), each of which has been
identified with historical cost ever since
Hope Natural Gas
was decided. Without any better indication of meaning than the
unadorned term, the word "cost" in § 252(d)(1) gives ratesetting
commissions broad methodological leeway, but says little about the
method to be employed.
Iowa Utilities Bd., supra, at 423.
Pp. 497-501.
(B) Also rejected is the incumbents' alternative argument that,
because TELRIC calculates the forward-looking cost by reference to
a hypothetical, most efficient element at existing wire centers,
not the actual network element being provided, the FCC's particular
methodology is neither consistent with § 252(d)(1)'s plain language
nor within the zone of reasonable interpretation subject to
Chevron deference. Pp. 501-522.
(1) The term "cost" is simply too protean to support the
incumbents' argument that plain language bars a definition of
"cost" untethered to historical investment. What the incumbents
call the "hypothetical" element is simply the element valued in
terms of a piece of equipment an incumbent may not own. P. 501.
(2) Similarly, the claim that TELRIC exceeds reasonable
interpretative leeway is open to the objection that responsibility
for "just and reasonable" rates leaves methodology largely subject
to discretion.
E. g., Permian Basin Area Rate Cases,
390 U. S. 747,
790.
470
The incumbents nevertheless field three arguments, which the
Court rejects. Pp. 501-522.
(a) The incumbents argue, first, that a method of calculating
wholesale lease rates based on the costs of providing hypothetical,
most efficient elements may simulate the competition envisioned by
the Act but does not induce it. There are basically three answers
to this no-stimulation unreasonableness claim. Pp. 503-517.
(i) The basic assumption of the no-stimulation argumentthat in a
perfectly efficient market, no one who can lease at a TELRIC rate
will ever build-is contrary to fact. TELRIC does not assume a
perfectly efficient wholesale market or one that is likely to
resemble perfection in any foreseeable time, cf.
Iowa Utilities
Bd., supra, at 389-390, but includes several features of
inefficiency that undermine the incumbents' argument. First,
because the FCC has qualified any assumption of efficiency by
requiring ratesetters to calculate cost on the basis of the
existing location of the incumbent's wire centers, § 51.505(b)(1),
certain network elements will not be priced at their most efficient
cost and configuration. Second, TELRIC rates in practice will
differ from the products of a perfectly competitive market owing to
lags in price adjustments built into the state-commission rate
setting process. Finally, because measurement of the TELRIC is
based on the use of the most efficient telecommunications
technology currently available,
ibid., the marginal cost of
a most efficient element that an entrant alone has built and uses
would not set a new pricing standard until it became available to
competitors as an alternative to the incumbent's corresponding
element. Pp. 504-507.
(ii) It cannot be said that the FCC acted unreasonably in
picking TELRIC to promote the mandated competition. Comparison of
TELRIC with alternatives proposed by the incumbents as more
reasonable-embedded-cost methodologies, an efficient component
pricing rule, and "Ramsey pricing," the most commonly proposed
variant of fixed-cost recovery rate setting-are plausibly answered
by the FCC's stated reasons to reject the alternatives, §
51.505(d); First Report and Order ~~ 655, 696, 705, 709. Pp.
507-516.
(iii) The claim that TELRIC is unreasonable as a matter of law
because it simulates, but does not produce, facilities-based
competition founders on fact. The entrants say that they invested
$55 billion in new facilities from 1996 through 2000, and the
incumbents do not contest the figure. A regulatory scheme that can
boast such substantial competitive capital spending in four years
is not easily described as an unreasonable way to promote
competitive investment in facilities. Pp. 516-517.
471
(b) Also unavailing is the incumbents' second reason for calling
TELRIC an unreasonable exercise of the FCC's regulatory discretion:
the supposed incapacity of this methodology to provide enough
depreciation and allowance for capital costs to induce rational
competition on the theory's own terms. This argument rests upon a
fundamentally false premise, that the TELRIC rules limit the
depreciation and capital costs that rate setting commissions may
recognize. On the contrary, First Report and Order ~ 702 gave state
commissions considerable discretion on these matters, specifically
permitting more favorable allowances for costs of capital and
depreciation than were generally allowed under traditional
ratemaking practice. The incumbents' fallback position, that
existing rates of depreciation and costs of capital are not even
reasonable starting points, is unpersuasive. This attack tends to
argue in highly general terms, whereas TELRIC rates are calculated
on the basis of individual elements. Those rates leave plenty of
room for differences in the appropriate depreciation rates and
risk-adjusted capital costs depending on the nature and technology
of the specific element to be priced. In light of the many TELRIC
rates to be calculated by state commissions across the country, the
FCC's prescription of a general "starting point" is reasonable
enough. pp. 517-522.
(c) Finally, the incumbents' third argument, that TELRIC is
needlessly and unreasonably complicated and impracticable, is
unpersuasive. The record suggests that TELRIC rate proceedings are
surprisingly smooth-running affairs, with incumbents and
competitors typically presenting two conflicting economic models
supported by expert testimony, and state commissioners customarily
assigning rates based on some predictions from one model and others
from its counterpart. At bottom, battles of experts are bound to be
part of any rate setting scheme, and the FCC was reasonable to
prefer TELRIC over alternative fixed-cost schemes that preserve
home-field advantages for the incumbents. P. 522.
(C) The incumbents' attempt to apply the rule of
constitutional avoidance does not present a serious question. They
say that "cost" should be construed by reference to historical
investment in order to avoid the serious constitutional question
whether a methodology so divorced from actual investment will lead
to a taking of property in violation of the Fifth (or Fourteenth)
Amendment. However, they do not argue that any particular, actual
TELRIC rate is so unjust as to be confiscatory, despite the fact
that some state commissions have already put TELRIC rates in place.
This want of any rate to be reviewed is significant, given that
this Court has never considered a taking challenge to a rate
setting methodology without being pre-
472
sented with specific rate orders alleged to be confiscatory.
See,
e. g., Duquesne, 488 U. S., at 303-304.
Indeed, the general rule is that any question about the
constitutionality of rate setting is raised by rates, not methods.
See,
e. g., Hope Natural Gas Co., 320 U. S., at 602. Thus,
the policy of construing a statute to avoid constitutional
questions is presumptively out of place when construing a measure
like TELRIC that prescribes a method. The incumbents argue
unpersuasively that this action is placed outside the general rule
by strong signs that takings will occur if the TELRIC
interpretation of § 252(d)(1) is allowed. First, their comparison
of historical investment in local telephone markets with the
corresponding estimate of a TELRIC evaluation is spurious because
their assumed numbers are clearly wrong. Second, they misplace
their reliance on dicta in
Duquesne, supra, at 315, to the
effect that there may be a taking challenge if a ratemaking body
makes opportunistic methodology changes just to minimize a
utility's return on capital investment. There is no evidence that
the decision to adopt TELRIC was arbitrary, opportunistic, or
undertaken with a confiscatory purpose. Indeed, the indications in
the record are very much to the contrary. Pp. 523-528.
2. The FCC can require incumbents to combine elements of their
networks at the request of entrants who cannot combine themselves,
when they lease them to the entrants. Thus, the Eighth Circuit
erred in invalidating the additional combination rules, Rules
315(c)-(f). Pp. 528-539.
(A) The Court rejects the incumbents' threshold objection that
the Government's and competing carriers' challenge to the rules
invalidation is barred by waiver because the
Iowa Utilities
Bd. petition to review the Eighth Circuit's earlier
invalidation of Rule 315(b) did not extend to its simultaneous
invalidation of Rules 315(c)-(f). The incumbents argue that the
Eighth Circuit exceeded the scope of this Court's mandate when it
revisited the unchallenged portion of its earlier holding, and that
this Court should decline to reach the validity of Rules 315(c)-(f)
because doing so would encourage the sort of strategic, piecemeal
litigation disapproved in
Communist Party of United States
v.
Subversive Activities Control Bd., 367 U. S. 1, 30-31.
However, that case does not block consideration of Rules 315(c)-(f)
here. Addressing the issue now would not "make waste" of years of
efforts by the FCC or the Eighth Circuit,
id., at 32, n. 8,
would not threaten to leave a constitutional ruling pointless, and
would direct the Court's attention not to an isolated, "long-stale"
procedural error by the agency,
ibid., but to the
invalidation of FCC rules meant to have general and continuing
applicability. There is no indication that litigation tactics
473
prompted the failure last time to appeal on these rules, which
were reexamined on remand at the Eighth Circuit's behest, not the
Government's nor the competing carriers'. Any issue pressed or
passed upon by a federal court is subject to this Court's broad
discretion on certiorari, and there are good reasons to look at
Rules 315(c)-(f). The Eighth Circuit passed on a significant issue
that has been placed in a state of flux by a split among federal
cases. Pp. 528-531.
(B) The Eighth Circuit read 47 U. S. C. §251(c)(3)'s requirement
that "[a]n incumbent ... provide ... network elements in a manner
that allows requesting carriers to combine such elements" as
unambiguously excusing incumbents from any obligation to combine
provided elements. But the language is not that plain. If Congress
had treated incumbents and entrants as equals, it probably would be
plain enough that the incumbents' obligations stopped at furnishing
an element that could be combined. The Act, however, proceeds on
the understanding that incumbent monopolists and contending
competitors are unequal. Cf. § 251(c). And because, within the
actual statutory confines, it is not self-evident that in
obligating incumbents to furnish, Congress silently negated a duty
to combine, the Court reads § 251(c)(3)'s language as leaving open
who should do the work of combination. Under
Chevron, that
leaves the additional combination rules intact unless the
incumbents can show them to be unreasonable. The Court finds,
however, that those rules reflect a reasonable reading of the
statute. They are meant to remove practical barriers to competitive
entry into localexchange markets while avoiding serious
interference with incumbent network operations. The rules sayan
incumbent shall, for payment, "perform the functions necessary,"
Rules 315(c) and (d), to combine elements in order to put a
competing carrier on an equal footing with the incumbent when the
requesting carrier is unable to combine, First Report and Order ~
294, when it would not place the incumbent at a disadvantage in
operating its own network, and when it would not place other
competing carriers at a competitive disadvantage, Rule 315(c)(2).
This duty is consistent with the Act's goals of competition and
nondiscrimination, and imposing it is a sensible way to reach the
result the Act requires. Pp. 531-538.
219 F.3d
744, affirmed in part, reversed in part, and remanded.
SOUTER, J., delivered the opinion of the Court, in which
REHNQUIST, C. J., and STEVENS, KENNEDY, and GINSBURG, JJ., joined,
in which SCALIA and THOMAS, JJ., joined as to Part III, and in
which THOMAS, J., also joined as to Part IV. BREYER, J., filed an
opinion concurring in part and dissenting in part, in which SCALIA,
J., joined as to Part VI,
post,
474
p. 539. O'CONNOR, J., took no part in the consideration or
decision of the cases.
William P. Barr argued the cause for Verizon Communications,
Inc., et al., petitioners in No. 00-511, and for BellSouth Corp. et
al., respondents in Nos. 00-555, etc. With him on the briefs were
M. Edward Whelan, Patrick F. Philbin, Michael E. Glover, Mark L.
Evans, Michael K. Kellogg, Henk Brands, Charles R. Morgan, James G.
Harralson, Andrew G. McBride, Scott Delacourt, Roger K. Toppins,
Gary Phillips, Sean A. Lev, and Steven G. Bradbury.
Solicitor General Olson argued the cause for the federal
parties, petitioners in Nos. 00-587, etc., and respondents in No.
00-511. With him on the briefs were
Acting Solicitor General
Underwood, Acting Assistant Attorney General Nannes, Deputy
Solicitor General Wallace, Barbara McDowell, Catherine G.
O'Sullivan, Nancy C.
Garrison, and
Laurence N.
Bourne. David P. Murray filed briefs for respondent Sprint
Corporation in Nos. 00-511, etc., in support of petitioner federal
parties and in opposition to petitioners Verizon Communications,
Inc., et al.
Donald B. Verrilli, Jr., argued the cause for WorldCom,
Inc., et al., petitioners in No. 00-555 and respondents in No.
00-511, and for AT&T Corp., petitioner in No. 00-590 and
respondent in Nos. 00-511, etc. With him on the briefs for World
Com, Inc., et al. were
Jodie L. Kelley, Ian Heath Gershengorn,
Thomas F. O'Neil III, William Single TV, Carol Ann Bischoff, Robert
M. McDowell, and
Robert J. Aamoth. David W
Carpenter, Peter D. Keisler, Stephen B. Kinnaird, C.
Frederick Beckner III, and
Mark C.
Rosenblum
filed briefs for AT&T.
Briefs for respondents in Nos. 00-511, etc., were filed by
Irwin A. Popowsky for the National Association of State
Utility Consumer Advocates, by
James Bradford Ramsay and
Lawrence G.
Malone for the Public Service Commission
of New York et al., and by
William T. Lake, John H. Har-
475
wood II, and
Robert B. McKennna for Qwest
Communications International, Inc. t
JUSTICE SOUTER delivered the opinion of the Court.* These cases
arise under the Telecommunications Act of 1996. Each is about the
power of the Federal Communications Commission to regulate a
relationship between monopolistic companies providing local
telephone service and companies entering local markets to compete
with the incumbents. Under the Act, the new entrants are entitled,
among other things, to lease elements of the local telephone
networks from the incumbent monopolists. The issues are whether the
FCC is authorized (1) to require state utility commissions to set
the rates charged by the incumbents for leased elements on a
forward-looking basis untied to the incumbents' investment, and (2)
to require incumbents to combine such elements at the entrants'
request when they lease them to the entrants. We uphold the FCC's
assumption and exercise of authority on both issues.
I
The 1982 consent decree settling the Government's antitrust suit
against the American Telephone and Telegraph Company (AT&T)
divested AT&T of its local-exchange carriers, leaving AT&T
as a long-distance and equipment company, and limiting the divested
carriers to the provision of local telephone service.
United
States v.
American Telephone &
Telegraph Co.,
552 F. Supp. 131
(DC 1982), aff'd
sub nom. Maryland
v.
United States, 460 U. S. 1001 (1983).
The decree did nothing, however, to increase competition in the
persistently monopolistic local markets, which were thought
t
Harisha J. Bastiampillai and
Morton J. Posner filed a brief for Allegiance
Telecom, Inc., et al. as
amici curiae urging affirmance in
No. 00-511.
*JUSTICE SCALIA joins Part III of this opinion. JUSTICE THOMAS
joins Parts III and IV.
476
to be the root of natural monopoly in the telecommunications
industry. See S. Benjamin, D. Lichtman, & H. Shelanski,
Telecommunications Law and Policy 682 (2001) (hereinafter Benjamin
et al.); P. Huber, M. Kellogg, & J. Thorne, Federal
Telecommunications Law § 2.1.1, pp. 84-85 (2d ed. 1999)
(hereinafter Huber et al.); W. Baumol & J. Sidak, Toward
Competition in Local Telephony 7-10 (1994); S. Breyer, Regulation
and Its Reform 291-292,314 (1982). These markets were addressed by
provisions of the Telecommunications Act of 1996 (1996 Act or Act),
Pub L. 104-104, 110 Stat. 56, that were intended to eliminate the
monopolies enjoyed by the inheritors of AT&T's local
franchises; this objective was considered both an end in itself and
an important step toward the Act's other goals of boosting
competition in broader markets and revising the mandate to provide
universal telephone service. See Benjamin et al. 716.
Two sets of related provisions for opening local markets concern
us here. First, Congress required incumbent localexchange carriers
to share their own facilities and services on terms to be agreed
upon with new entrants in their markets. 47 U. S. C. §251(c) (1994
ed., Supp. V). Second, knowing that incumbents and prospective
entrants would sometimes disagree on prices for facilities or
services, Congress directed the FCC to prescribe methods for state
commissions to use in setting rates that would subject both
incumbents and entrants to the risks and incentives that a
competitive market would produce. § 252(d). The particular method
devised by the FCC for setting rates to be charged for
interconnection and lease of network elements under the Act, §
252(d)(1),1 and regulations the FCC imposed to implement the
statutory duty to share these elements, § 251(c)(3), are the
subjects of this litigation, which must be understood against the
background of ratemaking for public
1 Section 252(d) separately provides for rate setting with
respect to reciprocal compensation for interconnected facilities, §
252(d)(2), and resale, § 252(d)(3).
477
utilities in the United States and the structure of local
exchanges made accessible by the Act.
A
Companies providing telephone service have traditionally been
regulated as monopolistic public utilities.2 See J. Bonbright,
Principles of Public Utility Rates 3-5 (1st ed. 1961) (hereinafter
Bonbright); 1. Barnes, Economics of Public Utility Regulation 37-41
(1942) (hereinafter Barnes). At the dawn of modern utility
regulation, in order to offset monopoly power and ensure
affordable, stable public access to a utility's goods or services,
legislatures enacted rate schedules to fix the prices a utility
could charge. See
id., at 170-173; C. Phillips, Regulation
of Public Utilities 111-112, and n. 5 (1984) (hereinafter
Phillips). See,
e. g., Smyth v.
Ames, 169 U. S. 466, 470-476
(1898) (statement of case);
Munn v.
Illinois,
94 U. S. 113, 134
(1877). As this job became more complicated, legislatures
established specialized administrative agencies, first local or
state, then federal, to set and regulate rates. Barnes 173-175;
Phillips 115-117. See,
e. g., Minnesota Rate Cases, 230 U. S. 352, 433 (1913)
(Interstate Commerce Commission);
Shreveport Rate Cases,
234 U. S. 342,
354-355 (1914) (jurisdictional dispute between ICC and Texas
Railroad Commission). See generally T. McCraw, Prophets of
Regulation 11-65 (1984). The familiar mandate in the enabling Acts
was to see that rates be "just and reasonable" and not
discriminatory. Barnes 289. See,
e. g.,
Transportation Act of 1920, 49 U. S. C. § 1(5) (1934 ed.).
2 Nationalization, the historical policy choice for regulation
of telephone service in many other countries, was rejected in the
United States. Cohen, The Telephone Problem and the Road to
Telephone Regulation in the United States, 1876-1917,3 J. of Policy
History 42, 46, 55-56, 65 (1991) (hereinafter Cohen); S. Vogel,
Freer Markets, More Rules: Regulatory Reform in Advanced Industrial
Countries 26-27 (1996).
478
All rates were subject to regulation this way: retail rates
charged directly to the public and wholesale rates charged among
businesses involved in providing the goods or services offered by
the retail utility. Intrastate retail rates were regulated by the
States or municipalities, with those at wholesale generally the
responsibility of the National Government, since the transmission
or transportation involved was characteristically interstate.3 See
Phillips 143.
Historically, the classic scheme of administrative ratesetting
at the federal level called for rates to be set out by the
regulated utility companies in proposed tariff schedules, on the
model applied to railroad carriers under the Interstate Commerce
Act of 1887, 24 Stat. 379. After interested parties had had notice
of the proposals and a chance to comment, the tariffs would be
accepted by the controlling agency so long as they were
"reasonable" (or "just and reasonable") and not "unduly
discriminatory." Hale, Commissions, Rates, and Policies, 53 Harv.
L. Rev. 1103, 1104-1105 (1940). See,
e. g., Southern Pacific
Co. v.
ICC, 219 U. S. 433, 445
(1911). The States generally followed this same tariffschedule
model. Barnes 297-298. See,
e. g., Smyth, supra, at
470-476.
3 The first noteworthy federal rate-regulation statute was the
Interstate Commerce Act of 1887, 24 Stat. 379, which was
principally concerned with railroad rates but generally governed
all interstate rates. It was the model for subsequent federal
public-utility statutes like the Federal Power Act of 1920, 41
Stat. 1063, the Communications Act of 1934, 48 Stat. 1064, the
Natural Gas Act of 1938, 52 Stat. 821, and the Civil Aeronautics
Act of 1938, 52 Stat. 973. The Communications Act of 1934 created
the FCC and was the first statute to address interstate telephone
regulation in an independent and substantive way. Federal
regulation in the area had previously been undertaken incidentally
to general interstate carrier regulation under the Interstate
Commerce Act. The Mann-Elkins Act of 1910, 36 Stat. 539, was the
earliest federal statute prescribing rates for interstate and
foreign telephone and telegraph carriers, as part of revisions to
railroad rates set by the ICC. See R. Vietor, Contrived
Competition: Regulation and Deregulation in America 171 (1994)
(hereinafter Vietor).
479
The way rates were regulated as between businesses (by the
National Government) was in some respects, however, different from
regulation of rates as between businesses and the public (at the
state or local level). In wholesale markets, the party charging the
rate and the party charged were often sophisticated businesses
enjoying presumptively equal bargaining power, who could be
expected to negotiate a "just and reasonable" rate as between the
two of them. Accordingly, in the Federal Power Act of 1920,41 Stat.
1063, and again in the Natural Gas Act of 1938, 52 Stat. 821,
Congress departed from the scheme of purely tariff-based regulation
and acknowledged that contracts between commercial buyers and
sellers could be used in rate s etting, 16 U. S. C. § 824d(d)
(Federal Power Act); 15 U. S. C. § 717c(c) (Natural Gas Act). See
United Gas Pipe Line Co. v.
Mobile Gas Service Corp.,
350 U. S. 332,
338-339 (1956). When commercial parties did avail themselves of
rate agreements, the principal regulatory responsibility was not to
relieve a contracting party of an unreasonable rate,
FPC v.
Sierra Pacific Power Co., 350 U. S. 348, 355 (1956)
("its improvident bargain"), but to protect against potential
discrimination by favorable contract rates between allied
businesses to the detriment of other wholesale customers. See
ibid. Cf.
New York v.
United States, 331 U. S. 284, 296 (1947)
("The principal evil at which the Interstate Commerce Act was aimed
was discrimination in its various manifestations"). This Court once
summed up matters at the wholesale level this way:
"[WJhile it may be that the Commission may not normally
impose upon a public utility a rate which would produce less
than a fair return, it does not follow that the public utility may
not itself agree by contract to a rate affording less than a fair
return or that, if it does so, it is entitled to be relieved of its
improvident bargain. In such circumstances the sole concern of the
Commission would seem to be whether the rate is so low as to
480
adversely affect the public interest-as where it might impair
the financial ability of the public utility to continue its
service, cast upon other consumers an excessive burden, or be
unduly discriminatory." Sierra Pacific Power Co., supra, at
355 (citation omitted).
See also United Gas Pipe Line Co., supra, at 345.
Regulation of retail rates at the state and local levels was, on
the other hand, focused more on the demand for "just and
reasonable" rates to the public than on the perils of rate
discrimination. See Barnes 298-299. Indeed, regulated local
telephone markets evolved into arenas of statesanctioned
discrimination engineered by the public utility commissions
themselves in the cause of "universal service." Huber et al. 80-85.
See also Vietor 167-185. In order to hold down charges for
telephone service in rural markets with higher marginal costs due
to lower population densities and lesser volumes of use, urban and
business users were charged subsidizing premiums over the marginal
costs of providing their own service. See Huber et al. 84.
These cross subsidies between markets were not necessarily
transfers between truly independent companies, however, thanks
largely to the position attained by AT&T and its satellites.
This was known as the "Bell system," which by the mid-20th century
had come to possess overwhelming monopoly power in all telephone
markets nationwide, supplying local-exchange and long-distance
services as well as equipment. Vietor 174-175. See also R. Garnet,
Telephone Enterprise: Evolution of Bell System's Horizontal
Structure, 1876-1909, pp. 160-163 (1985) (Appendix A). The same
pervasive market presence of Bell providers that made it simple to
provide cross subsidies in aid of universal service, however, also
frustrated conventional efforts to hold retail rates down. See
Huber et al. 84-85. Before the Bell system's predominance,
regulators might have played competing carriers against one another
to get lower rates for the public, see Cohen 47-50, but the
strategy became virtually
481
impossible once a single company had become the only provider in
nearly every town and city across the country. This regulatory
frustration led, in turn, to new thinking about just and reasonable
retail rates and ultimately to these cases.
The traditional regulatory notion of the "just and reasonable"
rate was aimed at navigating the straits between gouging utility
customers and confiscating utility property.
FPC v.
Hope
Natural Gas Co., 320 U. S. 591, 603
(1944). See also Barnes 289-290; Bonbright 38. More than a century
ago, reviewing courts charged with determining whether utility
rates were sufficiently reasonable to avoid unconstitutional
confiscation took as their touchstone the revenue that would be a
"fair return" on certain utility property known as a "rate base."
The fair rate of return was usually set as the rate generated by
similar investment property at the time of the rate proceeding, and
in
Smyth v.
Ames, 169 U. S., at 546, the Court held
that the rate base must be calculated as "the fair value of the
property being used by [the utility] for the convenience of the
public." In pegging the rate base at "fair value," the
Smyth
Court consciously rejected the primary alternative standard, of
capital actually invested to provide the public service or good.
Id., at 543-546. The Court made this choice in large part to
prevent "excessive valuation or fictitious capitalization" from
artificially inflating the rate base,
id., at 544, lest
"'[t]he public ... be subjected to unreasonable rates in order
simply that stockholders may earn dividends,'"
id., at 545
(quoting
Covington &
Lexington Turnpike Road Co.
v.
Sandford, 164 U. S. 578, 596
(1896)).4
But
Smyth proved to be a troublesome mandate, as Justice
Brandeis, joined by Justice Holmes, famously observed
4 And the Court had no doubt who should make the sacrifice in
that situation. "'If a corporation cannot maintain such a highway
and earn dividends for stockholders, it is a misfortune for it and
them which the Constitution does not require to be remedied by
imposing unjust burdens upon the public.'''
Smyth v.
Ames, 169 U. S., at 545 (citation omitted).
482
25 years later.
Missouri ex rel. Southwestern Bell Telephone
Co. v.
Public Servo Comm'n of Mo., 262 U. S. 276, 292 (1923)
(dissenting opinion). The
Smyth Court itself had described,
without irony, the mind-numbing complexity of the required enquiry
into fair value, as the alternative to historical investment:
"[I]n order to ascertain [fair] value, original cost of
construction, the amount expended in permanent improvements, the
amount and market value of its bonds and stock, the present as
compared with the original cost of construction, the probable
earning capacity of the property under particular rates prescribed
by statute, and the sum required to meet operating expenses, are
all matters for consideration, and are to be given such weight as
may be just and right in each case. We do not say that there may
not be other matters to be regarded in estimating the value of the
property." 169 U. S., at 546-547.
To the bewildered,
Smyth simply threw up its hands,
prescribing no one method for limiting use of these numbers but
declaring all such facts to be "relevant." 5
Southwestern Bell
Telephone Co., 262 U. S., at 294-298, and n. 6 (Brandeis, J.,
dissenting). What is more, the customary checks on calculations of
value in other circumstances were hard to come by for a utility's
property; its costly facilities rarely changed hands and so were
seldom tagged with a price a buyer would actually pay and a seller
accept,
id., at 292;
West v.
Chesapeake &
Potomac Telephone Co. of Baltimore, 295 U. S. 662, 672
(1935). Neither could reviewing courts resort to a utility's
revenue as an index of fair value, since its reve-
5 One of the referents of value that did prove possible was
current replacement or reproduction cost, a primitive version of
the criterion challenged in these cases. See
McCardle V.
Indianapolis Water Co., 272 U. S. 400, 417
(1926); Goddard, The Problem of Valuation: The Evolution of Cost of
Reproduction as the Rate Base, 41 Harv. L. Rev. 564, 570-571
(1928).
483
nues were necessarily determined by the rates subject to review,
with the rate of return applied to the very property subject to
valuation.
Duquesne Light Co. v.
Barasch, 488 U. S.
299, 309, n. 5 (1989);
Hope Natural Gas Co., supra, at
60l.
Small wonder, then, that Justice Brandeis was able to
demonstrate how basing rates on
Smyth's galactic notion of
fair value could produce revenues grossly excessive or insufficient
when gauged against the costs of capital. He gave the example
(simplified) of a $1 million plant built with promised returns on
the equity of $90,000 a year.
Southwestern Bell Telephone Co.,
supra, at 304-306. If the value were to fall to $600,000 at the
time of a rate proceeding, with the rate of return on similar
investments then at 6 percent,
Smyth would say a rate was
not confiscatory if it returned at least $36,000, a shortfall of
$54,000 from the costs of capital. But if the value of the plant
were to rise to $1,750,000 at the time of the rate proceeding, and
the rate of return on comparable investments stood at 8 percent,
then constitutionality under
Smyth would require rates
generating at least $140,000, $50,000 above capital costs.
The upshot of
Smyth, then, was the specter of utilities
forced into bankruptcy by rates inadequate to payoff the costs of
capital, even when a drop in value resulted from general economic
decline, not imprudent investment; while in a robust economy, an
investment no more prescient could claim what seemed a rapacious
return on equity invested. Justice Brandeis accordingly advocated
replacing "fair value" with a calculation of rate base on the cost
of capital prudently invested in assets used for the provision of
the public good or service, and although he did not live to enjoy
success, his campaign against
Smyth came to fruition in
FPC v.
Hope Natural Gas Co., 320 U. S. 591 (1944).
In
Hope Natural Gas, this Court disavowed the position
that the Natural Gas Act and the Constitution required fair value
as the sole measure of a rate base on which "just and
484
reasonable" rates were to be calculated.
Id., at 601-602.
See also
FPC v.
Natural Gas Pipeline Co., 315 U. S. 575, 602-606
(1942) (Black, Douglas, and Murphy, JJ., concurring). In the matter
under review, the Federal Power Commission had valued the rate base
by using "actual legitimate cost" reflecting "sound depreciation
and depletion practices," and so had calculated a value roughly 25
percent below the figure generated by the natural-gas company's
fair-value methods using "estimated reproduction cost" and "trended
original cost."
Hope Natural Gas, 320 U. S., at 596-598, and
nn. 4-5. The Court upheld the Commission. "Rates which enable the
company to operate successfully, to maintain its financial
integrity, to attract capital, and to compensate its investors for
the risks assumed certainly cannot be condemned as invalid, even
though they might produce only a meager return on the so-called
'fair value' rate base."6
Id., at 605. Although
Hope
Natural Gas did not repudiate everything said in
Smyth,
since fair value was still "the end product of the process of
rate-making," 320 U. S., at 601, federal and state commissions
setting rates in the aftermath of
Hope Natural Gas largely
abandoned the old fair-value approach and turned to methods of
calculating the rate base on the basis of "cost." A. Kahn,
Economics of Regulations: Principles and Institutions 40-41
(1988).
"Cost" was neither self-evident nor immune to confusion,
however; witness the invocation of "reproduction cost" as a
6 The fair-value concept survived to some degree in the "used
and useful" qualification to the prudent-investment rule, that a
utility can only recover prudently invested capital that is being
"used and useful" in providing the public a good or service. For
example, the Pennsylvania rate statute upheld in
Duquesne Light
Co. v.
Barasch, 488 U. S. 299 (1989),
provided that capital invested with prudence at the time but
rendered useless by unforeseen events would not be recoverable
through regulated rates, just as it would be worthless in terms of
market value.
Id., at 311-312, n. 7 ("The loss to utilities
from prudent ultimately unsuccessful investments under such a
system is greater than under a pure prudent investment rule, but
less than under a fair value approach").
485
popular method for calculating fair value under
Smyth,
see n. 5,
supra, and the Federal Power Commission's
rejection of "trended original cost" (apparently, a straight-line
derivation from the cost of capital originally invested) in favor
of "actual legitimate cost,"
Hope Natural Gas, supra, at
596. Still, over time, general agreement developed on a method that
was
primus inter pares, and it is essentially a modern gloss
on that method that the incumbent carriers say the FCC should have
used to set the rates at issue here.
The method worked out is not a simple calculation of rate base
as the original cost of "prudently invested" capital that Justice
Brandeis assumed, presumably by reference to the utility's balance
sheet at the time of the rate proceeding.
Southwestern Bell
Telephone Co., 262 U. S., at 304-306. Rather, "cost" came to
mean "cost of service," that is, the cost of prudently invested
capital used to provide the service. Bonbright 173; P. Garfield
& W. Lovejoy, Public Utility Economics 56 (1964). This was
calculated subject to deductions for accrued depreciation and
allowances for working capital,7 see Phillips 282-283 (table 8-1)
("a typical electric utility rate base"), naturally leading
utilities to minimize depreciation by using very slow depreciation
rates (on the assumption of long usefullives),8 and to maximize
working capital claimed as a distinct rate-base constituent.
7 Operating cash, inventory, and accounts receivable constitute
typical current assets. Current liabilities consist of accounts
payable, such as taxes, wages, rents, interest payable, and
short-term debt. Because, for example, accounts receivable may not
be collected until after liabilities come due, working capital is
capital needed to pay current liabilities in the interim. Z. Bodie
& R. Merton, Finance 427 (prelim. ed. 1998).
8For example, in 1997, regulated incumbent local-exchange
carriers had an average depreciation cycle of 14.4 years for their
assets (an average depreciation cost of $127 per line as against
gross plant investment of $1,836 per line), roughly twice as long
as the average cycle of 7.4 years for unregulated competitive
carriers like Worldcom. Weingarten & Stuck, Rethinking
Depreciation, 28 Business Communications Review 63 (Oct. 1998).
486
This formula, commonly called the prudent-investment rule,
addressed the natural temptations on the utilities' part to claim a
return on outlays producing nothing of value to the public. It was
meant, on the one hand, to discourage unnecessary investment and
the "fictitious capitalization" feared in
Smyth, 169 U. S.,
at 543-546, and so to protect ratepayers from supporting excessive
capacity, or abandoned, destroyed, or phantom assets. Kahn,
Tardiff, & Weisman, Telecommunications Act at three years: an
economic evaluation of its implementation by the Federal
Communications Commission, 11 Information Economics & Policy
319, 330, n. 27 (1999) (hereinafter Kahn, Telecommunications Act).
At the same time, the prudent-investment rule was intended to give
utilities an incentive to make smart investments deserving a "fair"
return, and thus to mimic natural incentives in competitive markets
9 (though without an eye to fostering the actual competition by
which such markets are defined). In theory, then, the
prudent-investment qualification gave the ratepayer an important
protection by mitigating the tendency of a regulated market's lack
of competition to support monopolistic prices.
But the mitigation was too little, the prudent-investment rule
in practice often being no match for the capacity of utilities
having all the relevant information to manipulate the rate base and
renegotiate the rate of return every time a rate was set. The
regulatory response in some markets was adoption of a rate-based
method commonly called "price caps,"
United States Telephone
Assn. v.
FCC, 188 F.3d
521,
524 (CADC 1999), as, for example, by the FCC's
setting of maximum access charges paid to large local-exchange
com-
9 In a competitive market, a company may not simply raise prices
as much as it may need to compensate for poor investments (say, in
a plant that becomes unproductive) because competitors will then
undersell the company's goods. See N. Mankiw, Principles of
Economics 308-310 (1998) (hereinafter Mankiw).
487
panies by interexchange carriers, In re Policy and Rules
Concerning Rates for Dominant Carriers, 5 FCC Red. 6786, 6787, ~ 1
(1990).
The price-cap scheme starts with a rate generated by the
conventional cost-of-service formula, which it takes as a benchmark
to be decreased at an average of some 2-3 percent a year to reflect
productivity growth, Kahn, Telecommunications Act 330-332, subject
to an upward adjustment if necessary to reflect inflation or
certain unavoidable "exogenous costs" on which the company is
authorized to recover a return. 5 FCC Red., at 6787, ~ 5. Although
the price caps do not eliminate gamesmanship, since there are still
battles to be fought over the productivity offset and allowable
exogenous costs,
United States Telephone Assn., supra, at
524, they do give companies an incentive "to improve productivity
to the maximum extent possible," by entitling those that outperform
the productivity offset to keep resulting profits, 5 FCC Red., at
6787-6788, ~~ 7-9. Ultimately, the goal, as under the basic
prudent-investment rule, is to encourage investment in more
productive equipment.
Before the passage of the 1996 Act, the price cap was, at the
federal level, the final stage in a century of developing
ratesetting methodology. What had changed throughout the era
beginning with
Smyth v.
Ames was prevailing opinion
on how to calculate the most useful rate base, with the
disagreement between fair-value and cost advocates turning on
whether invested capital was the key to the right balance between
investors and ratepayers, and with the price-cap scheme simply
being a rate-based offset to the utilities' advantage of superior
knowledge of the facts employed in costof-service ratemaking. What
is remarkable about this evolution of just and reasonable rate
setting, however, is what did not change. The enduring feature of
rate setting from
Smyth v.
Ames to the institution of
price caps was the idea that calculating a rate base and then
allowing a fair rate of
488
return on it was a sensible way to identify a range of rates
that would be just and reasonable to investors and ratepayers.
Equally enduring throughout the period was dissatisfaction with the
successive rate-based variants. From the constancy of this
dissatisfaction, one possible lesson was drawn by Congress in the
1996 Act, which was that regulation using the traditional
rate-based methodologies gave monopolies too great an advantage and
that the answer lay in moving away from the assumption common to
all the rate-based methods, that the monopolistic structure within
the discrete markets would endure.
Under the local-competition provisions of the Act, Congress
called for ratemaking different from any historical practice, to
achieve the entirely new objective of uprooting the monopolies that
traditional rate-based methods had perpetuated. H. R. Conf. Rep.
No. 104-230, p. 113 (1996). A leading backer of the Act in the
Senate put the new goal this way:
"This is extraordinary in the sense of telling private industry
that this is what they have to do in order to let the competitors
come in and try to beat your economic brains out ....
"It is kind of almost a jump-start .... I will do everything I
have to let you into my business, because we used to be a
bottleneck; we used to be a monopoly; we used to control
everything.
"Now, this legislation says you will not control much of
anything. You will have to allow for nondiscriminatory access on an
unbundled basis to the network functions and services of the Bell
operating companies network that is at least equal in type,
quality, and price to the access [a] Bell operating company affords
to itself." 141 Congo Rec. 15572 (1995) (remarks of Sen. Breaux
(La.) on Pub. L. 104-104).
489
For the first time, Congress passed a rate setting statute with
the aim not just to balance interests between sellers and buyers,
but to reorganize markets by rendering regulated utilities'
monopolies vulnerable to interlopers, even if that meant swallowing
the traditional federal reluctance to intrude into local telephone
markets. The approach was deliberate, through a hybrid
jurisdictional scheme with the FCC setting a basic, default
methodology for use in setting rates when carriers fail to agree,
but leaving it to state utility commissions to set the actual
rates.
While the Act is like its predecessors in tying the methodology
to the objectives of "just and reasonable" and nondiscriminatory
rates, 47 U. S. C. § 252(d)(1), it is radically unlike all previous
statutes in providing that rates be set "without reference to a
rate-of-return or other rate-based proceeding," § 252(d)(1)(A)(i).
The Act thus appears to be an explicit disavowal of the familiar
public-utility model of rate regulation (whether in its fair-value
or cost-of-service incarnations) presumably still being applied by
many States for retail sales, see
In re Implementation of Local
Competition in Telecommunications Act of 1996, 11 FCC Rcd.
15499, 15857, ~ 704 (1996) (First Report and Order), in favor of
novel rate setting designed to give aspiring competitors every
possible incentive to enter local retail telephone markets, short
of confiscating the incumbents' property.
B
The physical incarnation of such a market, a "local exchange,"
is a network connecting terminals like telephones, faxes, and
modems to other terminals within a geographical area like a city.
From terminal network interface devices, feeder wires, collectively
called the "local loop," are run to local switches that aggregate
traffic into common "trunks." The local loop was traditionally, and
is still largely, made of copper wire, though fiber-optic cable is
also used, albeit to a
490
far lesser extent than in long-haul markets.10 Just as the loop
runs from terminals to local switches, the trunks run from the
local switches to centralized, or tandem, switches, originally
worked by hand but now by computer, which operate much like railway
switches, directing traffic into other trunks. A signal is sent
toward its destination terminal on these common ways so far as
necessary, then routed back down another hierarchy of switches to
the intended telephone or other equipment. A local exchange is thus
a transportation network for communications signals, radiating like
a root system from a "central office" (or several offices for
larger areas) to individual telephones, faxes, and the like.
It is easy to see why a company that owns a local exchange (what
the Act calls an "incumbent local exchange carrier," 47 U. s. C. §
251(h)) would have an almost insurmountable competitive advantage
not only in routing calls within the exchange, but, through its
control of this local market, in the markets for terminal equipment
and long-distance calling as well. A newcomer could not compete
with the incumbent carrier to provide local service without coming
close to replicating the incumbent's entire existing network, the
most costly and difficult part of which would be laying down the
"last mile" of feeder wire, the local loop, to the thousands (or
millions) of terminal points in individual houses and businesses.ll
The incumbent company could also control its local-loop plant so as
to connect only with terminals it manufactured or selected, and
could place conditions or fees (called "access charges") on
long-distance carriers seeking to con-
10 Some loop lines employ coaxial cable and fixed wireless
technologies, but these constitute less than 1 percent of the total
number of reported local-exchange lines in the United States. FCC,
Local Telephone Competition: Status as of June 30, 2001 (Feb. 27,
2002) (table 5).
11 A mininetwork connecting only some of the users in the local
exchange would be of minimal value to customers, and,
correspondingly, any value to customers would be exponentially
increased with the interconnection of more users to the network.
See generally W. Arthur, Increasing Returns and Path Dependence in
the Economy 1-12 (1994).
491
nect with its network. In an unregulated world, another
telecommunications carrier would be forced to comply with these
conditions, or it could never reach the customers of a local
exchange.
II
The 1996 Act both prohibits state and local regulation that
impedes the provision of "telecommunications service," § 253(a),12
and obligates incumbent carriers to allow competitors to enter
their local markets, § 251(c). Section 251(c) addresses the
practical difficulties of fostering local competition by
recognizing three strategies that a potential competitor may
pursue. First, a competitor entering the market (a "requesting"
carrier, § 251(c)(2)) may decide to engage in pure facilities-based
competition, that is, to build its own network to replace or
supplement the network of the incumbent. If an entrant takes this
course, the Act obligates the incumbent to "interconnect" the
competitor's facilities to its own network to whatever extent is
necessary to allow the competitor's facilities to operate. §§
251(a) and (c)(2). At the other end of the spectrum, the statute
permits an entrant to skip construction and instead simply to buy
and resell "telecommunications service," which the incumbent has a
duty to sell at wholesale. §§ 251(b)(1) and (c)(4). Between these
extremes, an entering competitor may choose to lease certain of an
incumbent's "network elements," 13 which
12 Title 47 U. S. C. §253(a) (1994 ed., Supp. V) provides:
"No State or local statute or regulation, or other State or
local legal requirement, may prohibit or have the effect of
prohibiting the ability of any entity to provide any interstate or
intrastate telecommunications service."
13 "Network element" is defined as "a facility or equipment used
in the provision of a telecommunications service. Such term also
includes features, functions, and capabilities that are provided by
means of such facility or equipment, including subscriber numbers,
databases, signaling systems, and information sufficient for
billing and collection or used in the transmission, routing, or
other provision of a telecommunications service." § 153(29).
492
the incumbent has a duty to provide "on an unbundled basis" at
terms that are "just, reasonable, and nondiscriminatory." §
251(c)(3).
Since wholesale markets for companies engaged in resale,
leasing, or interconnection of facilities cannot be created without
addressing rates, Congress provided for rates to be set either by
contracts between carriers or by state utility commission rate
orders. §§ 252(a)-(b). Like other federal utility statutes that
authorize contracts approved by a regulatory agency in setting
rates between businesses,
e. g., 16 U. S. C. §
824d(d) (Federal Power Act); 15 U. S. C. § 717c(c) (Natural Gas
Act), the Act permits incumbent and entering carriers to negotiate
private rate agreements, 47 U. S. C. § 252(a); 14 see also §
251(c)(1) (duty to negotiate in good faith). State utility
commissions are required to accept any such agreement unless it
discriminates against a carrier not a party to the contract, or is
otherwise shown to be contrary to the public interest. §§ 252(e)(1)
and (e)(2)(A). Carriers, of course, might well not agree, in which
case an entering carrier has a statutory option to request
mediation by a state commission, § 252(a)(2). But the option comes
with strings, for mediation subjects the parties to the duties
specified in § 251 and the pricing standards set forth in § 252(d),
as
14 Section 252(a) provides:
"(a) Agreements arrived at through negotiation "(1) Voluntary
negotiations
"Upon receiving a request for interconnection, services, or
network elements pursuant to section 251 of this title, an
incumbent local exchange carrier may negotiate and enter into a
binding agreement with the requesting telecommunications carrier or
carriers without regard to the standards set forth in subsections
(b) and (c) of section 251 of this title. The agreement shall
include a detailed schedule of itemized charges for interconnection
and each service or network element included in the agreement. The
agreement, including any interconnection agreement negotiated
before February 8, 1996, shall be submitted to the State commission
under subsection (e) of this section."
493
interpreted by the FCC's regulations, § 252(e)(2)(B). These
regulations are at issue here.
As to pricing, the Act provides that when incumbent and
requesting carriers fail to agree, state commissions will set a
"just and reasonable" and "nondiscriminatory" rate for
interconnection or the lease of network elements based on "the cost
of providing the ... network element," which "may include a
reasonable profit." 15 § 252(d)(1). In setting these rates, the
state commissions are, however, subject to that important
limitation previously unknown to utility regulation: the rate must
be "determined without reference to a rate-of-return or other
rate-based proceeding."
Ibid. In
AT&T Corp. v.
Iowa Utilities Bd., 525 U. S. 366, 384-385
(1999), this Court upheld the FCC's jurisdiction to impose a new
methodology on the States when setting these rates. The attack
today is on the legality and logic of the particular methodology
the Commission chose.
As the Act required, six months after its effective date the FCC
implemented the local-competition provisions in its First Report
and Order, which included as an appendix the new regulations at
issue. Challenges to the order, mostly by incumbent local-exchange
carriers and state commissions, were consolidated in the United
States Court of Appeals for the Eighth Circuit.
Iowa Utilities
Bd. v.
FCC, 120 F.3d
753, 792 (1997), aff'd in part and rev'd in part,
525 U. S. 366, 397
(1999). See also
California v.
FCC, 124 F.3d
934, 938 (1997), rev'd in part,
525 U. S. 366, 397 (1999)
(challenges to
In re Implementation of Local Competition
Provisions in Telecommunications Act of 1996, 11 FCC Rcd. 19392
(1996) (Second Report and Order)).
So far as it bears on where we are today, the initial decision
by the Eighth Circuit held that the FCC had no au-
15 Rates for wholesale purchases of telecommunications services
are covered separately, and must be based on the incumbent's retail
rates. § 252(d)(3).
494
thority to control the methodology of state commISSIOns setting
the rates incumbent local-exchange carriers could charge entrants
for network elements, 47 CFR § 51.505(b)(1)
(1997). Iowa
Utilities Bd. v.
FCC, supra, at 800. The Eighth Circuit
also held that the FCC misconstrued the plain language of §
251(c)(3) in implementing a set of "combination" rules, 47 CFR §§
51.315(b)-(f) (1997), the most important of which provided that "an
incumbent LEC shall not separate requested network elements that
the incumbent LEC currently combines," § 51.315(b). 120 F. 3d, at
813. On the other hand, the Court of Appeals accepted the FCC's
view that the Act required no threshold ownership of facilities by
a requesting carrier, First Report and Order ~~ 328-340, and upheld
Rule 319, 47 CFR § 51.319 (1997), which read "network elements"
broadly, to require incumbent carriers to provide not only
equipment but also services and functions, such as operations
support systems
(e. g., billing databases), § 51.319(f)(1),
operator services and directory assistance, § 51.319(g), and
vertical switching features like call-waiting and caller 1. D.,
First Report and Order ~~ 263,413. 120 F. 3d, at 808-810.
This Court affirmed in part and in larger part reversed.
AT&T Corp. v.
Iowa Utilities Bd., 525 U. S.,
at 397. We reversed in upholding the FCC's jurisdiction to "design
a pricing methodology" to bind state ratemaking commissions,
id., at 385, as well as one of the FCC's combination rules,
Rule 315(b), barring incumbents from separating currently combined
network elements when furnishing them to entrants that request them
in a combined form,
id., at 395. We also reversed in
striking down Rule 319, holding that its provision for blanket
access to network elements was inconsistent with the "necessary"
and "impair" standards of 47 U. S. C. §251(d)(2), 525 U. S., at
392. We affirmed the Eighth Circuit, however, in upholding the
FCC's broad definition of network elements to be provided,
id., at 387, and
495
the FCC's understanding that the Act imposed no
facilitiesownership requirement,
id., at 392-393. The case
then returned to the Eighth Circuit.
Id., at 397.
With the FCC's general authority to establish a pricing
methodology secure, the incumbent carriers' primary challenge on
remand went to the method that the Commission chose. There was also
renewed controversy over the combination rules (Rules 315(c)-(f))
that the Eighth Circuit had struck down along with Rule 315(b), but
upon which this Court expressed no opinion when it reversed the
invalidation of that latter rule.
219 F.3d
744, 748 (2000).
As for the method to derive a "nondiscriminatory," "just and
reasonable rate for network elements," the Act requires the FCC to
decide how to value "the cost ... of providing the ... network
element [which] may include a reasonable profit," although the FCC
is (as already seen) forbidden to allow any "reference to a
rate-of-return or other ratebased proceeding," § 252(d)(1). Within
the discretion left to it after eliminating any dependence on a
"rate-of-return or other rate-based proceeding," the Commission
chose a way of treating "cost" as "forward-looking economic cost,"
47 CFR § 51.505 (1997), something distinct from the kind of
historically based cost generally relied upon in valuing a rate
base after
Hope Natural Gas. In Rule 505, the FCC defined
the "forward-looking economic cost of an element [as] the sum of
(1) the total element long-run incremental cost of the element
[TELRIC]; [and] (2) a reasonable allocation of forward-looking
common costs," § 51.505(a), common costs being "costs incurred in
providing a group of elements that "cannot be attributed directly
to individual elements," § 51.505(c)(1). Most important of all, the
FCC decided that the TELRIC "should be measured based on the use of
the most efficient telecommunications technology currently
available and the lowest cost network configuration, given the
existing location of the incumbent['s] wire centers." §
51.505(b)(1).
496
"The TELRIC of an element has three components, the operating
expenses, the depreciation cost, and the appropriate risk-adjusted
cost of capital." First Report and Order ~ 703 (footnote omitted).
See also 47 CFR §§ 51.505(b)(2)(3) (1997). A concrete example may
help. Assume that it would cost $1 a year to operate a most
efficient loop element; that it would take $10 for interest
payments on the capital a carrier would have to invest to build the
lowest cost loop centered upon an incumbent carrier's existing wire
centers (say $100, at 10 percent per annum); and that $9 would be
reasonable for depreciation on that loop (an ll-year useful life);
then the annual TELRIC for the loop element would be $20.16
The Court of Appeals understood § 252(d)(1)'s reference to "the
cost ... of providing the ... network element" to be ambiguous as
between "forward-looking" and "historical" cost, so that a
forward-looking ratesetting method would presumably be a reasonable
implementation of the statute. But the Eighth Circuit thought the
ambiguity afforded no leeway beyond that, and read the Act to
require any forward-looking methodology to be "based on the
incremental costs that an [incumbent] actually incurs or will incur
in providing ... the unbundled access to its specific network
elements." 219 F. 3d, at 751-753. Hence, the Eighth Circuit held
that § 252(d)(1) foreclosed the use of the TELRIC methodology. In
other words, the court read the Act as plainly requiring rates
based on the "actual" not "hypothetical" "cost ... of providing the
... network element," and reasoned that TELRIC was clearly the
latter.
Id., at
16 The actual TELRIC rate charged to an entrant leasing the
element would be a fraction of the TELRIC figure, based on a
"reasonable projection" of the entrant's use of the element
(whether on a flat or per-usage basis) as divided by aggregate
total use of the element by the entrant, the incumbent, and any
other competitor that leases it. 47 CFR § 51.511 (1997). See also
First Report and Order ~ 682.
497
750-751. The Eighth Circuit added, however, that if it were
wrong and TELRIC were permitted, the claim that in prescribing
TELRIC the FCC had effected an unconstitutional taking would not be
"ripe" until "resulting rates have been determined and applied."
Id., at 753-754.
The Court of Appeals also, and for the second time, invalidated
Rules 315(c)-(f), 47 CFR §§ 51.315(c)-(f) (1997), the FCC's
so-called "additional combination" rules, apparently for the same
reason it had rejected them before, when it struck down Rule
315(b), the main combination rule. 219 F. 3d, at 758-759. In brief,
the rules require an incumbent carrier, upon request and
compensation, to "perform the functions necessary to combine"
network elements for an entrant, unless the combination is not
"technically feasible."
Id., at 759. The Eighth Circuit read
the language of § 251(c)(3), with its reference to "allow[ing]
requesting carriers to combine ... elements," as unambiguously
requiring a requesting carrier, not a providing incumbent, to do
any and all combining.
Ibid.
Before us, the incumbent local-exchange carriers claim error in
the Eighth Circuit's holding that a "forward-looking cost"
methodology (as opposed to the use of "historical" cost) is
consistent with § 252(d)(1), and its conclusion that the use of the
TELRIC forward-looking cost methodology presents no "ripe" takings
claim. The FCC and the entrants, on the other side, seek review of
the Eighth Circuit's invalidation of the TELRIC methodology and the
additional combination rules. We granted certiorari, 531 U. S. 1124
(2001), and now affirm on the issues raised by the incumbents, and
reverse on those raised by the FCC and the entrants.
III A
The incumbent carriers' first attack charges the FCC with
ignoring the plain meaning of the word "cost" as it occurs
498
in the provision of § 252(d)(1) that "the just and reasonable
rate for network elements ... shall be ... based on the cost
(determined without reference to a rate-of-return or other
rate-based proceeding) of providing the ... network element .... "
The incumbents do not argue that in theory the statute precludes
any forward-looking methodology, but they do claim that the cost of
providing a competitor with a network element in the future must be
calculated using the incumbent's past investment in the element and
the means of providing it. They contend that "cost" in the statute
refers to "historical" cost, which they define as "what was in fact
paid" for a capital asset, as distinct from "value," or "the price
that would be paid on the open market." Brief for Petitioners in
No. 00-511, p. 19. They say that the technical meaning of "cost" is
"past capital expenditure,"
ibid., and they suggest an
equation between "historical" and "embedded" costs,
id., at
20, which the FCC defines as "the costs that the incumbent LEC
incurred in the past and that are recorded in the incumbent LEC's
books of accounts," 47 CFR § 51.505(d)(1) (1997). The argument
boils down to the proposition that "the cost of providing the
network element" can only mean, in plain language and in this
particular technical context, the past cost to an incumbent of
furnishing the specific network element actually, physically, to be
provided.
The incumbents have picked an uphill battle. At the most basic
level of common usage, "cost" has no such clear implication. A
merchant who is asked about "the cost of providing the goods" he
sells may reasonably quote their current wholesale market price,
not the cost of the particular items he happens to have on his
shelves, which may have been bought at higher or lower prices.
When the reference shifts from common speech into the technical
realm, the incumbents still have to attack uphill. To begin with,
even when we have dealt with historical costs as a rate setting
basis, the cases have never assumed a sense
499
of "cost" as generous as the incumbents seem to claimP "Cost" as
used in calculating the rate base under the traditional
cost-of-service method did not stand for all past capital
expenditures, but at most for those that were prudent, while
prudent investment itself could be denied recovery when unexpected
events rendered investment useless,
Duquesne Light Co. v.
Barasch, 488 U. S., at 312. And even when investment was
wholly includable in the rate base, ratemakers often rejected the
utilities' "embedded costs," their own book-value estimates, which
typically were geared to maximize the rate base with high
statements of past expenditures and working capital, combined with
unduly low rates of depreciation. See,
e. g., Hope Natural
Gas, 320 U. S., at 597598. It would also be a mistake to forget
that "cost" was a term in value-based ratemaking and has figured in
contemporary state and federal ratemaking untethered to historical
valuation.18
What is equally important is that the incumbents' plainmeaning
argument ignores the statutory setting in which the mandate to use
"cost" in valuing network elements occurs. First, the Act uses
"cost" as an intermediate term
17Nor is it possible to argue that "cost" would have to mean
past incurred cost if the technical context were economics. See D.
Carlton & J. Perloff, Modern Industrial Organization 50-74 (2d
ed. 1994) (hereinafter Carlton & Perloff). "Sunk costs" are
unrecoverable past costs; practically every other sort of economic
"cost" is forward looking, or can be either historical or forward
looking. "Opportunity cost," for example, is "the value of the best
forgone alternative use of the resources employed,"
id., at
56, and as such is always forward looking. See Sidak & Spulber,
Tragedy of the Telecommons: Government Pricing of Unbundled Network
Elements Under the Telecommunications Act of 1996, 97 Colum. L.
Rev. 1081, 1093 (1997) (hereinafter Sidak & Spulber,
Telecommons) ("Opportunity costs are ... by definition
forward-looking").
18 See, e. g., Mobil Oil Exploration & Producing Southeast,
Inc. v.
United Distribution Cos.,
498 U. S. 211, 224-225
(1991); Potomac Elec. Power Co. v. ICC,
744 F.2d
185, 193-194 (CADC 1984); Alabama Elec. Coop., Inc. v. FERC,
684 F.2d
20, 27 (CADC 1982). Cf. National Assn. of Greeting Card
Publishers v. Postal Service,
462 U. S. 810, 832
(1983).
500
in the calculation of "just and reasonable rates," 47 U. S. C. §
252(d)(1), and it was the very point of
Hope Natural Gas
that regulatory bodies required to set rates expressed in these
terms have ample discretion to choose methodology, 320 U. S., at
602. Second, it would have been passing strange to think Congress
tied "cost" to historical cost without a more specific indication,
when the very same sentence that requires "cost" pricing also
prohibits any reference to a "rate-of-return or other rate-based
proceeding," § 252(d)(1), each of which has been identified with
historical cost ever since
Hope Natural Gas was
decided.19
The fact is that without any better indication of meaning than
the unadorned term, the word "cost" in § 252(d)(1), as in
accounting generally, is "a chameleon,"
Strickland v.
Commissioner, Maine Dept. of Human Services, 96 F.3d
542,
546 (CA1 1996), a "virtually meaningless" term, R.
Estes, Dictionary of Accounting 32 (2d ed. 1985). As JUSTICE BREYER
put it in
Iowa Utilities Bd., words like "cost" "give
ratesetting commissions broad methodological leeway; they say
little about the 'method employed' to determine a par-
19 The incumbents make their own plain-language argument based
on statutory context, relying on the part of § 252(d)(1)(B) which
provides that a just and reasonable rate "may include a reasonable
profit." They say that because separate provision is made in §
252(d)(1)(A) for factoring "cost" into the rate, "reasonable
profit" may only be understood as income above recovery of the
actual cost of an incumbent's investment. But as the FCC has noted,
"profit" may also mean "normal" profit, which is "the total revenue
required to cover all of the costs of a firm, including its
opportunity costs." First Report and Order ~ 699, and n. 1705
(citing D. Pearce, MIT Dictionary of Modern Economics 310 (1994)).
That is to say, a "reasonable profit" may refer to a "normal"
return based on "the cost of obtaining debt and equity financing"
prevailing in the industry. First Report and Order ~ 700. This
latter sense of "cost" (and accordingly "reasonable profit") is
fully incorporated in the FCC's provisions as to "risk-adjusted
cost of capital," namely, that "States may adjust the cost of
capital if a party demonstrates ... that either a higher or a lower
level of cost of capital is warranted, without ... conducting a
'rate-of-return or other rate based proceeding.'''
Id., ~
702.
501
ticular rate." 525 U. S., at 423 (opinion concurring in part and
dissenting in part). We accordingly reach the conclusion adopted by
the Court of Appeals, that nothing in § 252(d)(1) plainly requires
reference to historical investment when pegging rates to
forward-looking "cost."
B
The incumbents' alternative argument is that even without a
stern anchor in calculating "the cost ... of providing the ...
network element," the particular forward-looking methodology the
FCC chose is neither consistent with the plain language of §
252(d)(1) nor within the zone of reasonable interpretation subject
to deference under
Chevron U. S.
A. Inc. v.
Natural Resources Defense Council, Inc., 467 U. S. 837, 843-845
(1984). This is so, they say, because TELRIC calculates the
forward-looking cost by reference to a hypothetical, most efficient
element at existing wire centers, not the actual network element
being provided.
1
The short answer to the objection that TELRIC violates plain
language is much the same as the answer to the previous
plain-language argument, for what the incumbents call the
"hypothetical" element is simply the element valued in terms of a
piece of equipment an incumbent may not own. This claim, like the
one just considered, is that plain language bars a definition of
"cost" untethered to historical investment, and as explained
already, the term "cost" is simply too protean to support the
incumbents' argument.
2
Similarly, the claim that TELRIC exceeds reasonable
interpretative leeway is open to the objection already noted, that
responsibility for "just and reasonable" rates leaves methodology
largely subject to discretion.
Permian Basin Area Rate
Cases, 390 U. S.
747, 790 (1968) ("We must re-
502
iterate that the breadth and complexity of the Commission's
responsibilities demand that it be given every reasonable
opportunity to formulate methods of regulation appropriate for the
solution of its intensely practical difficulties"). See generally
Chevron, supra, at 843-845, 866 ("When a challenge to an
agency construction of a statutory provision, fairly
conceptualized, really centers on the wisdom of the agency's
policy, rather than whether it is a reasonable choice within a gap
left open by Congress, the challenge must fail").20 The incumbents
nevertheless field three ar-
20 While JUSTICE BREYER does not explicitly challenge the
propriety of
Chevron deference, he relies on our decision in
Motor Vehicle Mfrs. Assn. of United States, Inc. v.
State
Farm Mut. Automobile Ins. Co., 463 U. S. 29,56 (1983), to
argue that the FCC's choice of TELRIC bears no "rational
connection" to the Act's deregulatory purpose. See
post, at
542, 554 (opinion concurring in part and dissenting in part).
State Farm involved review of an agency's "changing its
course" as to the interpretation of a statute, 463 U. S., at 42;
these cases, by contrast, involve the FCC's first interpretation of
a new statute, and so
State Farm is inapposite to the extent
that it may be read as prescribing more searching judicial review
under the circumstances of that case. (Indeed,
State Farm
may be read to suggest the obverse conclusion, that the FCC would
have had some more explaining to do if it had not changed its
course by favoring TELRIC over forward-looking methodologies
tethered to actual costs, given Congress's clear intent to depart
from past rate setting statutes in passing the 1996 Act.)
But even on JUSTICE BREYER'S own terms, FCC rules stressing low
wholesale prices are by no means inconsistent with the deregulatory
and competitive purposes of the Act. As we discuss below, a policy
promoting lower lease prices for expensive facilities unlikely to
be duplicated reduces barriers to entry (particularly for smaller
competitors) and puts competitors that can afford these wholesale
prices (but not the higher prices the incumbents would like to
charge) in a position to build their own versions of less expensive
facilities that are sensibly duplicable. See n. 27,
infra.
See also
infra, at 515-516 (discussing FCC's objection to
Ramsey pricing). And while it is true, as JUSTICE BREYER says, that
the Act was "deregulatory," in the intended sense of departing from
traditional "regulatory" ways that coddled monopolies, see
supra, at 488 (remarks of Sen. Breaux), that deregulatory
character does not necessarily require the FCC to employ passive
pricing rules deferring to incumbents' proposed methods and
503
guments. They contend, first, that a method of calculating
wholesale lease rates based on the costs of providing hypothetical,
most efficient elements may simulate the competition envisioned by
the Act but does not induce it. Second, they argue that even if
rates based on hypothetical elements could induce competition in
theory, TELRIC cannot do this, because it does not provide the
depreciation and risk-adjusted capital costs that the theory
compels. Finally, the incumbents say that even if these objections
can be answered, TELRIC is needlessly, and hence unreasonably,
complicated and impracticable.
a
The incumbents' (and JUSTICE BREYER'S) basic critique of TELRIC
is that by setting rates for leased network elements on the
assumption of perfect competition, TELRIC perversely creates
incentives against competition in fact. See
post, at
548-551. The incumbents say that in purporting to set incumbents'
wholesale prices at the level that would exist in a perfectly
competitive market (in order to make retail prices similarly
competitive), TELRIC sets rates so low that entrants will always
lease and never build network elements. See
post, at
549-550. And even if an entrant would otherwise consider building a
network element more efficient than the best one then on the market
(the one assumed in setting the TELRIC rate), it would likewise be
deterred by the prospect that its lower cost in building and
operating this new element would be immediately available to its
competitors; under TELRIC, the incumbents assert, the lease rate
for an incumbent's existing element would in-
cost data. On the contrary, the statutory provisions obligating
the incumbents to lease their property, § 251(c)(3), and offer
their services for resale at wholesale rates, § 251(c)(4), are
consistent with the promulgation of a rate setting method leaving
state commissions to do the work of setting rates without any
reliance on historical-cost data provided by incumbents.
504
stantly drop to match the marginal cost 21 of the entrant's new
element once built. See
ante, at 550; Brief for Respondents
BellSouth et al. in Nos. 00-555, etc., pp. 28-29. According to the
incumbents, the result will be, not competition, but a sort of
parasitic free riding, leaving TELRIC incapable of stimulating the
facilities-based competition intended by Congress.
We think there are basically three answers to this nostimulation
claim of unreasonableness: (1) the TELRIC methodology does not
assume that the relevant markets are perfectly competitive, and the
scheme includes several features of inefficiency that undermine the
plausibility of the incumbents' no-stimulation argument; (2)
comparison of TELRIC with alternatives proposed by the incumbents
as more reasonable are plausibly answered by the FCC's stated
reasons to reject the alternatives; and (3) actual investment in
competing facilities since the effective date of the Act simply
belies the no-stimulation argument's conclusion.
(1)
The basic assumption of the incumbents' no-stimulation argument
is contrary to fact. As we explained, the argument rests on the
assumption that in a perfectly efficient market, no one who can
lease at a TELRIC rate will ever build. But TELRIC does not assume
a perfectly efficient wholesale market or one that is likely to
resemble perfection in any foreseeable time. The incumbents thus
make the same mistake we attributed in a different setting to the
FCC itself. In
Iowa Utilities Bd., we rejected the FCC's
necessary-and-impair rule, 47 CFR § 51.319 (1997), which required
incumbents to lease any network element that might reduce, however
slightly, an entrant's marginal cost of providing a
telecommunications service, as compared with providing the service
using the entrant's own equivalent
21 "Marginal cost" is "the increase in total cost [of producing
goods] that arises from an extra unit of production." See Mankiw
272; see also
id., at 283-288, 312-313; Carlton &
Perloff 51-52.
505
element. 525 U. S., at 389-390. "In a world of perfect
competition, in which all carriers are providing their service at
marginal cost, the Commission's total equating of increased cost
(or decreased quality) with 'necessity' and 'impairment' might be
reasonable, but it has not established the existence of such an
ideal world."
Id., at 390.
Not only that, but the FCC has of its own accord allowed for
inefficiency in the TELRIC design in additional ways affecting the
likelihood that TELRIC will squelch competition in facilities.
First, the Commission has qualified any assumption of efficiency by
requiring ratesetters to calculate cost on the basis of "the
existing location of the incumbente's] wire centers." 47 CFR §
51.505(b)(1) (1997). This means that certain network elements,
principally local-loop elements, will not be priced at their most
efficient cost and configuration to the extent, say, that a shorter
loop could serve a local exchange if the incumbent's wire centers
were relocated for a snugger fit with the current geography of
terminal locations.
Second, TELRIC rates in practice will differ from the products
of a perfectly competitive market owing to built-in lags in price
adjustments. In a perfectly competitive market, retail prices drop
instantly to the marginal cost of the most efficient company. See
Mankiw 283-288, 312-313. As the incumbents point out, this would
deter market entry because a potential entrant would know that even
if it could provide a retail service at a lower marginal cost, it
would instantly lose that competitive edge once it entered the
market and competitors adjusted to match its price. See Brief for
Respondents BellSouth et al. in Nos. 00-555, etc., at 2829.
Wholesale TELRIC rates, however, are set by state commissions,
usually by arbitrated agreements with 3- or 4-year terms, see Brief
for Respondent Qwest Communications International, Inc., in Nos.
00-511, etc., p. 39; Reply Brief for Petitioners Worldcom, Inc., et
al. 6; Reply Brief for Respondent Sprint Corp. 7, and n. 3; Reply
Brief for Peti-
506
tioner AT&T Corp. 11-12; and no one claims that a competitor
could receive immediately on demand a TELRIC rate on a leased
element at the marginal cost of the entrant who introduces a more
efficient element.
But even if a competitor could call for a new TELRIC rate
proceeding immediately upon the introduction of a more efficient
element by a competing entrant, the competitor would not
necessarily know enough to make the call; the fact of the element's
greater efficiency would only become apparent when reflected in
lower retail prices drawing demand away from existing competitors
(including the incumbent), forcing them to look to lowering their
own marginal costs. In practice, it would take some time for the
innovating entrant to install the new equipment, to engage in
marketing offering a lower retail price to attract business, and to
steal away enough customer subscriptions (given the limited
opportunity to capture untapped customers for local telephone
service) for competitors to register the drop in demand.
Finally, it bears reminding that the FCC prescribes measurement
of the TELRIC "based on the use of the most efficient
telecommunications technology currently available," 47 CFR §
51.505(b)(1) (1997). Owing to that condition of current
availability, the marginal cost of a most efficient element that an
entrant alone has built and uses would not set a new pricing
standard until it became available to competitors as an alternative
to the incumbent's corresponding element.22
22 The Michigan state commission's September 1994 order
implementing a long-run incremental cost method for leasing
local-exchange network elements, which the FCC considered, see
First Report and Order ~ 631, and n. 1508, makes this limitation
more explicit by specifying that rates are to be set based on the
costs of elements using the most efficient technology "currently
available for purchase." Michigan Pub. Servo Comm'n, Re A
Methodology to Determine Long Run Incremental Cost, 156 P. U. R.
4th 1, 7, 13 (1994).
507
As a reviewing Court we are, of course, in no position to assess
the precise economic significance of these and other exceptions to
the perfectly functioning market that the incumbents' criticism
assumes. Instead, it is enough to recognize that the incumbents'
assumption may well be incorrect. Inefficiencies built into the
scheme may provide incentives and opportunities for competitors to
build their own network elements, perhaps for reasons unrelated to
pricing (such as the possibility of expansion into
data-transmission markets by deploying "broadband" technologies,
cf.
post, at 552 (BREYER, J., concurring in part and
dissenting in part), or the desirability of independence from an
incumbent's management and maintenance of network elements). In any
event, the significance of the incumbents' mistake of fact may be
indicated best not by argument here, but by the evidence of actual
investment in facilities-based competition since TELRIC went into
effect, to be discussed at Part III-B-2a-(3),
infra.23
(2)
Perhaps sensing the futility of an unsupported theoretical
attack, the incumbents make the complementary argument that the
FCC's choice of TELRIC, whatever might be said about it on its own
terms, was unreasonable as a matter of law because other methods of
determining cost would have done a better job of inducing
competition. Having consid-
23JU8TICE BREYER characterizes these built-in inefficiencies as
well as provisions for state-commission discretion as to permitted
costs of depreciation and capital, see Part III-B-2-a-(2),
infra, as "coincidences" that have favored considerable
competitive investment by sheer luck. See
post, at 552. He
thus shares the assumption of an efficient market made by the
incumbents in their argument, and like the incumbents, dismisses
departures from the theoretical assumption of a perfectly
competitive market as inconsistencies rather than pragmatic
recognitions. The FCC is, of course, under no obligation to adopt a
rate setting scheme committed to realizing perfection in economic
theory, see First Report and Order ~ 683 (rejecting pricing
premised on a fully "hypothetical least-cost most efficient
network").
508
ered the proffered alternatives and the reasons the FCC gave for
rejecting them, 47 CFR § 51.505(d) (1997); First Report and Order
~~ 630-711, we cannot say that the FCC acted unreasonably in
picking TELRIC to promote the mandated competition.
The incumbents present three principal alternatives for setting
rates for network elements: embedded-cost methodologies, the
efficient component pricing rule, and Ramsey pricing.24 The
arguments that one or another of these methodologies is preferable
to TELRIC share a basic claim: it was unreasonable for the FCC to
choose a method of setting rates that fails to include, at least in
theory, some additional costs beyond what would be most efficient
in the long run,25 because lease rates that incorporate such costs
will do a better job of inducing competition.26 The theory is that
once an
24JUSTICE BREYER proposes a "less formal kind of 'play it by
ear' system" based on recent European Community practices as yet
another alternative, see
post, at 558; but the incumbents do
not appear to have advocated such an informal ratesetting scheme to
the FCC, see First Report and Order ~~ 630-671, nor have they
argued for this alternative before this Court. And to the extent
that JUSTICE BREYER'S proposal emphasizes state commissions'
discretion to vary rates according to local circumstances and the
particulars of each case, this is a feature that is already built
into TELRIC. See
infra, at 519-520.
25 In the long run, "all of a firm's costs become variable or
avoidable."
First Report and Order ~ 677. See also Kahn, Telecommunications
Act 326 ("[A]ll costs are variable and minimized"). In general, the
costs of producing a good include variable and fixed costs.
Variable costs depend on how much of a good is produced, like the
cost of copper to make a loop which rises as the loop is made
longer; fixed costs, like rent, must be paid in any event without
regard to how much is produced. See Carlton & Perloff 51-56.
The long run is a timeframe of sufficient duration that a company
has no fixed costs of production.
26 The argument that rates incorporating fixed costs are
necessary to avoid an unconstitutional taking is taken up in Part
III-C,
infra. Indeed, the expert literature the incumbents
rely on to advocate fixed-cost ratesetting systems, see
infra, at 514-515, do so almost exclusively on the premise
of averting unwanted confiscation, and thus offer little
support
509
entrant has its foot in the door, it will have a greater
incentive to build and operate its own more efficient network
element if the lease rates reflect something of the incumbents'
actual and inefficient marginal costs. And once the entrant
develops the element at its lower marginal cost and the retail
price drops accordingly, the incumbent will have no choice but to
innovate itself by building the most efficient element or finding
ways to reduce its marginal cost to retain its market share.
The generic feature of the incumbents' proposed alternatives, in
other words, is that some degree of long-run inefficiency ought to
be preserved through the lease rates, in order to give an entrant a
more efficient alternative to leasing. Of course, we have already
seen that TELRIC itself tolerates some degree of inefficient
pricing in its existing wire-center configuration requirement and
through the ratemaking and development lags just described. This
aside, however, there are at least two objections that generally
undercut any desirability that such alternatives may seem to offer
over TELRIC.
The first objection turns on the fact that a lease rate that
compensates the lessor for some degree of existing inefficiency (at
least from the perspective of the long run) is simply a higher
rate, and the difference between such a higher rate and the TELRIC
rate could be the difference that keeps a potential competitor from
entering the market. See n. 27,
infra. Cf. First Report and
Order ~ 378 ("[I]n some areas, the most efficient means of
providing competing service may be through the use of unbundled
loops. In such cases, preventing access to unbundled loops would
either discourage a potential competitor from entering the market
in that area, thereby denying those consumers the benefits of
competition, or cause the competitor to construct unnecessarily
du-
for the incumbents' argument that recovery of fixed costs is a
better way to spur competition (as opposed to compensating
incumbents).
510
plicative facilities, thereby misallocating societal
resources"). If the TELRIC rate for bottleneck elements is $100 and
for other elements (say, switches) is $10, an entering competitor
that can provide its own, more efficient switch at what amounts to
a $7 rate can enter the market for $107. If the lease rate for the
bottleneck elements were higher (say, $110) to reflect some of the
inefficiency of bottleneck elements that actually cost the
incumbent $150, then the entrant with only $107 will be kept out.
Is it better to risk keeping more potential entrants out, or to
induce them to compete in less capital-intensive facilities with
lessened incentives to build their own bottleneck facilities? It
was not obviously unreasonable for the FCC to prefer the
latter.27
27 JUSTICE BREYER may be right that "firms that share existing
facilities do not compete in respect to the facilities that they
share,"
post, at 550 (at least in the near future), but this
is fully consistent with the FCC's point that entrants may need to
share some facilities that are very expensive to duplicate (say,
loop elements) in order to be able to compete in other, more
sensibly duplicable elements (say, digital switches or
signal-multiplexing technology). In other words, JUSTICE BREYER
makes no accommodation for the practical difficulty the FCC faced,
that competition as to "unshared" elements may, in many cases, only
be possible if incumbents simultaneously share with entrants some
costly-to-duplicate elements jointly necessary to provide a desired
telecommunications service. Such is the reality faced by the
hundreds of smaller entrants (without the resources of a large
competitive carrier such as AT&T or Worldcom) seeking to gain
toeholds in local-exchange markets, see FCC, Local Telephone
Competition: Status as of June 30, 2001, p. 4, n. 13. (Feb. 27,
2002) (485 firms self-identified as competitive local-exchange
carriers). JUSTICE BREYER elsewhere recognizes that the Act "does
not require the new entrant and incumbent to compete in respect to"
elements, the "duplication of [which] would prove unnecessarily
expensive,"
post, at 546. It is in just this way that the
Act allows for an entrant that may have to lease some
"unnecessarily expensive" elements in conjunction with building its
own elements to provide a telecommunications service to consumers.
In this case, low prices for the elements to be leased become
crucial in inducing the competitor to enter and build. Cf. First
Report and Order ~ 630 (wholesale prices should send "appropriate
signals").
511
The second general objection turns the incumbents' attack on
TELRIC against the incumbents' own alternatives. If the problem
with TELRIC is that an entrant will never build because at the
instant it builds, other competitors can lease the analogous
existing (but less efficient) element from an incumbent at a rate
assuming the same most efficient marginal cost, then the same
problem persists under the incumbents' methods. For as soon as an
entrant builds a more efficient element, the incumbent will be
forced to price to match,28 and that rate will be available to all
other competitors. The point, of course, is that things are not
this simple. As we have said, under TELRIC, price adjustment is not
instantaneous in rates for a leased element corresponding to an
innovating entrant's more efficient element; the same would
presumably be true under the incumbents' alternative methods,
though they do not come out and say it.
Once we get into the details of the specific alternative
methods, other infirmities become evident that undermine the claim
that the FCC could not reasonably have preferred TELRIC. As for an
embedded-cost methodology, the problem with a method that relies in
any part on historical cost, the cost the incumbents say they
actually incur in leasing network elements, is that it will pass on
to lessees the difference between most efficient cost and embedded
cost.29 See First Report and Order ~ 705. Any such cost difference
is an inefficiency, whether caused by poor management resulting in
higher operating costs or poor investment strategies
28 That is to say, if the entrant could offer a
telecommunications service at a lower retail price, competitors
including the incumbent would have to match that price by looking
into ways to reduce their marginal costs, and the incumbents'
recalibrated costs would form the basis of new lease rates.
29 In theory, embedded cost could be lower than efficient cost,
see Brief for Respondent Federal Parties 17, n. 8 (though the
incumbents, understandably, do not avail themselves of this tack);
in which case the goal of efficient competition would be set back
for the different reason of too much market entry.
512
that have inflated capital and depreciation. If leased elements
were priced according to embedded costs, the incumbents could pass
these inefficiencies to competitors in need of their wholesale
elements, and to that extent defeat the competitive purpose of
forcing efficient choices on all carriers whether incumbents or
entrants. The upshot would be higher retail prices consumers would
have to pay.
Id., ~~ 655 and 705.
There are, of course, objections other than inefficiency to any
method of ratemaking that relies on embedded costs as allegedly
reflected in incumbents' book-cost data, with the possibilities for
manipulation this presents. Even if incumbents have built and are
operating leased elements at economically efficient costs, the
temptation would remain to overstate book costs to ratemaking
commissions and so perpetuate the intractable problems that led to
the price-cap innovation. See
supra, at 486-487.
There is even an argument that the Act itself forbids
embedded-cost methods, and while the FCC rejected this absolutistic
reading of the statute, First Report and Order ~ 704,30 it seems
safe to say that the statutory language places a heavy presumption
against any method resembling the traditional
embedded-cost-of-service model of ratesetting.31 At the very least,
proposing an embedded-cost
30 "We find that the parenthetical, '(determined without
reference to a rate-of-return or other rate-based proceeding),'
does not further define the type of costs that may be considered,
but rather specifies a type of proceeding that may not be employed
to determine the cost of interconnection and unbundled network
elements." First Report and Order ~ 704 (footnote omitted).
31 The parenthetical provision that "cost" for ratemaking
purposes must be "determined without reference to a rate-of-return
or other rate-based proceeding," 47 U. S. C. § 252(d)(1)(A)(i), was
in the Senate version of the 1996 Act, but not in the House
version. S. 652, 104th Cong., 1st Sess., § 251(d)(6)(A) (1995)
("[T]he charge ... (A) shall be (i) based on the cost (determined
without reference to a rate-of-return or other rate-based
proceeding) of providing the unbundled element ... "). Both the
Senate and House bills contained additional language that was not
enacted to the ef-
513
alternative is a counterintuitive way to show that selecting
TELRIC was unreasonable.
Other incumbents say the FCC was unreasonable to pick TELRIC
over a method of rate setting commonly called the efficient
component pricing rule (ECPR). See Brief for Respondent Qwest
Communications International, Inc., in Nos. 00-511, etc., at 40-41.
ECPR would base the rate for a leased element on its most efficient
long-run incremental cost (presumably, something like the TELRIC)
plus the opportunity cost to the incumbent when the entrant
leasing
fect that "rate of return regulation" would be "eliminated" or
prescribing its "abolition." S. 652, 104th Cong., 1st Sess., §
301(a)(3) (1995) provided:
"Rate of Return Regulation Eliminated-
"(A) In instituting the price flexibility required under
paragraph (1) the Commission and the States shall establish
alternative forms of regulation for Tier 1 telecommunications
carriers that do not include regulation of the rate of return
earned by such carrier .... "
H. R. 1555, 104th Cong., 1st Sess., § 248(b) (1995) stated:
"Notwithstanding any other provision of law, to the extent that
a carrier has complied with sections 242 and 244 of this part, the
Commission, with respect to rates for interstate or foreign
communications, and State commissions, with respect to rates for
intrastate communications, shall not require rate-of-return
regulation."
The Commission inferred from the omission of the express
prohibitions that Congress intended to forbid a "type of
proceeding" not a method. This was a reasonable inference in light
of the common practice of setting wholesale rates by contracts
incorporating retail rates set in state rate-ofreturn proceedings,
see,
e. g., Boston Edison Co. v.
FERC,
233 F.3d
60, 62, and n. 1
(CA1 2000), though not the only one:
Congress may, for example, have balked at limiting state regulation
at such a level of specificity. Less plausible is JUSTICE BREYER'S
interpretation of the statutory language, as "reflect[ing]
Congress' desire to obtain not perfect prices but speedy results,"
post, at 559; he concludes that the provision "specifies
that States need not use formal methods, relying instead upon
bargaining and yardstick competition,"
ibid. Section
252(d)(1), however, specifies how a state commission should set
rates when an incumbent and an entrant fail to reach a bargain, §
252(a)(2); it seems strange, then, to read the statutory
prohibition as affirmatively urging more bargaining and regulatory
flexibility, rather than as firing a warning shot to state
commissions to steer clear of entrenched practices perceived to
perpetuate incumbent monopolies.
514
the element provides a competing telecommunications service
using it. See
Iowa Utilities Bd., 525 U. S., at 426 (BREYER,
J., concurring in part and dissenting in part); J. Sidak & D.
Spulber, Deregulatory Takings and the Regulatory Contract 284-285
(1997); First Report and Order ~ 708. The opportunity cost is
pegged to the retail revenue loss suffered by the incumbent when
the entrant provides the service in its stead to its former
customers.
Ibid.
The FCC rejected ECPR because its calculation of opportunity
cost relied on existing retail prices in monopolistic
local-exchange markets, which bore no relation to efficient
marginal cost. "We conclude that ECPR is an improper method for
setting prices of interconnection and unbundled network elements
because the existing retail prices that would be used to compute
incremental opportunity costs under ECPR are not cost-based.
Moreover, the ECPR does not provide any mechanism for moving prices
towards competitive levels; it simply takes prices as given."
Id., ~ 709. In effect, the adjustment for opportunity cost,
because it turns on pre-existing retail prices generated by
embedded costs, would pass on the same inefficiencies and be
vulnerable to the same asymmetries of information in ratemaking as
a straightforward embedded-cost scheme.32
The third category of alternative methodologies proposed focuses
on costs over an intermediate term where some fixed costs are
unavoidable, as opposed to TELRIC's long run. See n. 25,
supra (defining the long run). The fundamental intuition
underlying this method of rate setting is that competition is
actually favored by allowing incumbents rate re-
32 ECPR advocates have since responded that the FCC was wrong to
assume a static tether to uncompetitive retail prices, because
ECPR, properly employed, would dynamically readjust the
opportunity-cost factor as retail prices drop. Sidak & Spulber,
Telecommons 1097-1098. But this would not cure the distortions
caused by passing any difference between retail price and most
efficient cost back to the incumbents as a lease premium.
515
covery of certain fixed costs efficiently incurred in the
intermediate term.
The most commonly proposed variant of fixed-cost recovery rate
setting is "Ramsey pricing." See
Iowa Utilities Bd.,
supra, at 426-427 (BREYER, J., concurring in part and
dissenting in part). Ramsey pricing was originally theorized as a
method of discriminatory taxation of commodities to generate
revenue with minimal discouragement of desired consumption. Ramsey,
A Contribution to the Theory of Taxation, 37 Econ. J. 47, 58-59
(1927). The underlying principle is that goods should be taxed or
priced according to demand: taxes or prices should be higher as to
goods for which demand is relatively inelastic. K. Train, Optimal
Regulation: The Economic Theory of Natural Monopoly 122125 (1991).
As applied to the local-exchange wholesale market, Ramsey pricing
would allow rate recovery of certain costs incurred by an incumbent
above marginal cost, costs associated with providing an unbundled
network element that are fixed and unavoidable over the
intermediate run, typically the 3- or 4-year term of a rate
arbitration agreement. The specific mechanism for recovery through
wholesale lease rates would be to spread such costs across the
different elements to be leased according to the demand for each
particular element. First Report and Order ~ 696. Cf. B. Mitchell
& 1. Vogelsang, Telecommunications Pricing:
Theory and Practice 43-61 (1991). Thus, when demand among
entrants for loop elements is high as compared with demand for
switch elements, a higher proportion of fixed costs would be added
as a premium to the loop-element lease rate than to the switch
lease rate.
But this very feature appears to be a drawback when used as a
method of setting rates for the wholesale market in unbundled
network elements. Because the elements for which demand among
entrants will be highest are the costly bottleneck elements,
duplication of which is neither likely nor desired, high lease
rates for these elements would be
516
the rates most likely to deter market entry, as our earlier
example showed: if the rate for bottleneck elements went from $100
to $110, the $107 competitor would be kept out. This is what the
FCC has said:
"[WJe conclude that an allocation methodology that relies
exclusively on allocating common costs in inverse proportion to the
sensitivity of demand for various network elements and services may
not be used. We conclude that such an allocation could unreasonably
limit the extent of entry into local exchange markets by allocating
more costs to, and thus raising the prices of, the most critical
bottleneck inputs, the demand for which tends to be relatively
inelastic. Such an allocation of these costs would undermine the
pro-competitive objectives of the 1996 Act." First Report and Order
~ 696 (footnote omitted).
(3)
At the end of the day, theory aside, the claim that TELRIC is
unreasonable as a matter of law because it simulates but does not
produce facilities-based competition founders on fact. The entrants
have presented figures showing that they have invested in new
facilities to the tune of $55 billion since the passage of the Act
(through 2000), see Association for Local Telecommunications
Services, Local Competition Policy & the New Economy 4 (Feb. 2,
2001); Hearing on H. R. 1542 before the House Committee on Energy
and Commerce, Ser. No. 107-24, p. 50 (2001) (statement of James H.
Henry, Managing General Partner, Greenfield Hill Capital, LLP); see
also M. Glover & D. Epps, Is the Telecommunications Act of 1996
Working?, 52 Admin. L. Rev. 1013, 1015 (2000) ($30 billion invested
through 1999). The FCC's statistics indicate substantial resort to
pure and partial facilities-based competition among the three entry
strategies: as of June 30, 2001, 33 percent of entrants were using
their own facilities; 23 percent were reselling services; and 44
percent were leas-
517
ing network elements (26 percent of entrants leasing loops with
switching; 18 percent without switching). See FCC, Local Telephone
Competition: Status as of June 30, 2001, p. 2 (Feb. 27, 2002)
(tables 3-4). The incumbents do not contradict these figures, but
merely speculate that the investment has not been as much as it
could have been under other ratemaking approaches, and they note
that investment has more recently shifted to nonfacilities entry
options. We, of course, have no idea whether a different
forward-looking pricing scheme would have generated even greater
competitive investment than the $55 billion that the entrants
claim, but it suffices to say that a regulatory scheme that can
boast such substantial competitive capital spending over a 4-year
period is not easily described as an unreasonable way to promote
competitive investment in facilities.33
b
The incumbents' second reason for calling TELRIC an unreasonable
exercise of the FCC's regulatory discretion is the supposed
incapacity of this methodology to provide enough depreciation and
allowance for capital costs to induce rational competition on the
theory's own terms. This challenge must be assessed against the
background of utilities' customary preference for extended
depreciation schedules in ratemaking (so as to preserve high rate
bases), see n. 8,
supra; we have already noted the
consequence of the utilities' approach, that the "book" value or
embedded costs of capital presented to traditional ratemaking
bodies often bore
33 Nor, for that matter, does the evidence support JUSTICE
BREYER'S assertion that TELRIC will stifle incumbents' "incentive
... either to innovate or to invest" in new elements.
Post,
at 551. As JUSTICE BREYER himself notes, incumbents have invested
"over $100 billion" during the same period.
Post, at 552.
The figure affirms the commonsense conclusion that so long as
TELRIC brings about some competition, the incumbents will continue
to have incentives to invest and to improve their services to hold
on to their existing customer base.
518
little resemblance to the economic value of the capital. See FCC
Releases Audit Reports on RBOCs' Property Records, Report No. CC
99-3, 1999 WL 95044 (FCC, Feb. 25, 1999) ("[B]ook costs may be
overstated by approximately $5 billion"); Huber et al. 116 (We now
know that "[b]y the early 1980s, the Bell System had accumulated a
vast library of accounting books that belonged alongside dime-store
novels and other works of fiction .... By 1987, it was widely
estimated that the book value of telephone company investments
exceeded market value by $25 billion dollars"). TELRIC seeks to
avoid this problem by basing its valuation on the market price for
most efficient elements; when rates are figured by reference to a
hypothetical element instead of an incumbent's actual element, the
incumbent gets no unfair advantage from favorable depreciation
rates in the traditional sense.
This, according to the incumbents, will be fatal to competition.
Their argument is that TELRIC will result in constantly changing
rates based on ever cheaper, more efficient technology; the
incumbents will be unable to write off each new piece of technology
rapidly enough to anticipate an even newer gadget portending a new
and lower rate. They will be stuck, they say, with sunk costs in
less efficient plant and equipment, with their investment
unrecoverable through depreciation, and their increased risk
unrecognized and uncompensated.34
34 The incumbents also contend that underdepreciation, i.
e., book values in excess of the economic value of assets,
is another reason for increasing depreciation costs under TELRIC.
Brief for Petitioners in No. 00-511, pp. 4-5. This argument is
unpersuasive. As we have described, underdepreciation (to the
extent of its continuation today, which the Government disputes,
Brief for Respondent Federal Parties 38-39) was undertaken largely
by the incumbents themselves, not forced upon them by regulators,
as a means to keep the rate base inflated under the publicutility
model of regulation. See
supra, at 485-487, 499. For all we
know, the incumbent carriers may yet be seeking low rates of
depreciation in state retail-rate proceedings still conducted under
that model, even as
519
The argument, however, rests upon a fundamentally false premise,
that the TELRIC rules limit the depreciation and capital costs that
rate setting commissions may recognize. In fact, TELRIC itself
prescribes no fixed percentage rate as risk-adjusted capital costs
and recognizes no particular useful life as a basis for calculating
depreciation costs. On the contrary, the FCC committed considerable
discretion to state commissions on these matters.
"Based on the current record, we conclude that the currently
authorized rate of return at the federal or state level is a
reasonable starting point for TELRIC calculations, and incumbent
LECs bear the burden of demonstrating with specificity that the
business risks that they face in providing unbundled network
elements and interconnection services would justify a different
risk-adjusted cost of capital or depreciation rate .... States may
adjust the cost of capital if a party demonstrates to a state
commission that either a higher or a lower level of cost of capital
is warranted, without that commission conducting a 'rate-of-return
or other rate based proceeding.' We note that the risk-adjusted
cost of capital need not be uniform for all elements. We intend to
re-examine the issue of the appropriate riskadjusted cost of
capital on an ongoing basis, particularly in light of the state
commissions' experiences in addressing this issue in specific
situations." First Report and Order ~ 702.
The order thus treated then-current capital costs and rates of
depreciation as mere starting points, to be adjusted upward if the
incumbents demonstrate the need. That is, for
they seek high depreciation rates here today to factor into the
wholesale prices they may charge for the same elements they use to
provide retail services. In short, the incumbents have already
benefited from underdepreciation in the calculation of retail
rates, and there is no reason to allow them further recovery
through wholesale rates.
520
calculating leased element rates, the Commission specifically
permits more favorable allowances for costs of capital and
depreciation than were generally allowed under traditional
ratemaking practice.
The incumbents' fallback position, that existing rates of
depreciation and costs of capital are not even reasonable starting
points, is unpersuasive. As to depreciation rates, it is well to
start by asking how serious a threat there may be of galloping
obsolescence requiring commensurately rising depreciation rates.
The answer does not support the incumbents. The local-loop plant
makes up at least 48 percent of the elements incumbents will have
to provide, see
id., ~ 378, n. 818 ("As of ... 1995 ...
[l]ocal loop plant comprises approximately $109 billion of total
plant in service, which represents ... 48 percent of network
plant"), and while the technology of certain other elements like
switches has evolved very rapidly in recent years, loop technology
generally has gone no further than copper twistedpair wire and
fiber-optic cable in the past couple of decades. See n. 10,
supra (less than 1 percent of local-exchange telephone lines
employ technologies other than copper or fiber). We have been
informed of no specter of imminently obsolescent loops requiring a
radical revision of currently reasonable depreciation.35 This is
significant because the FCC found as a general matter that
federally prescribed rates of depreciation and counterparts in many
States are fairly up to date with the current state of
telecommunications technologies as to different elements. See First
Report and Order ~ 702.
35 JUSTICE BREYER makes much of the availability of new
technologies, specifically, the use of fixed wireless and
electrical conduits, see
post, at 549; but the use of
wireless technology in local-exchange markets is negligible at
present (36,000 lines in the entire Nation, less than 0.02 percent
of total lines, FCC, Local Telephone Competition: Status as of June
30, 2001 (Feb. 27, 2002) (table 5)), and the FCC has not reported
any use whatsoever of electrical conduits to provide local
telecommunications service.
521
As for risk-adjusted costs of capital, competition in fact has
been slow to materialize in local-exchange retail markets (as of
June 30, 2001, the incumbents retained a 91 percent share of the
local-exchange markets, FCC, Local Telephone Competition: Status as
of June 30, 2001 (Feb. 27, 2002) (table 1)), and whether the FCC's
assumption about adequate risk adjustment was based on hypothetical
or actual competition, it seems fair to say that the rate of 11.25
percent mentioned by the FCC, First Report and Order ~ 702, is a
"reasonable starting point" for return on equity calculations based
on the current lack of significant competition in local-exchange
markets.
A basic weakness of the incumbents' attack, indeed, is its
tendency to argue in highly general terms, whereas TELRIC rates are
calculated on the basis of individual elements. TELRIC rates leave
plenty of room for differences in the appropriate depreciation
rates and risk-adjusted capital costs depending on the nature and
technology of the specific element to be priced (as between
switches and loops, for example). For that matter, even the blanket
assumption that on a TELRIC valuation the estimated purchase price
of a most efficient element will necessarily be lower than the
actual costs of current elements is suspect. The New York Public
Service Commission, for example, used the cost of the more
expensive fiber-optic cable as the basis for its TELRIC loop fixed
rates, notwithstanding the fact that competitors argued that the
cheaper copper-wire loop was more efficient for voice
communications and should have been the underlying valuation for
loop rates. See 2 Lodging Material for Respondents Worldcom, Inc.,
et al. 655-657 (Opinion No. 972, effective Apr. 1, 1997 (Opinion
and Order Setting Rates for First Group of Network Elements)). In
light of the many different TELRIC rates to be calculated by state
commissions across the country, see Brief for Petitioners Worldcom,
Inc., et al. in No. 00-555, p. 21 ("millions"), the Commis-
522
sion's prescription of a general "starting point" is reasonable
enough.
c
Finally, as to the incumbents' accusation that TELRIC is too
complicated to be practical, a criticism at least as telling can be
leveled at traditional ratemaking methodologies and the
alternatives proffered. "One important potential advantage of the
T[E]LRIC approach, however is its relative ease of calculation.
Rather than estimate costs reflecting the present [incumbent]
network-a difficult task even if [incumbents] provided reliable
data-it is possible to generate T[E]LRIC estimates based on a
'green field' approach, which assumes construction of a network
from scratch." App. 182 (Reply Comments of the National
Telecommunications and Information Administration 24 (May 30,
1996)). To the extent that the traditional public-utility model
generally relied on embedded costs, similar sorts of complexity in
reckoning were exacerbated by an asymmetry of information, much to
the utilities' benefit. See
supra, at 486-487, 499. And what
we see from the record suggests that TELRIC rate proceedings are
surprisingly smooth-running affairs, with incumbents and
competitors typically presenting two conflicting economic models
supported by expert testimony, and state commissioners customarily
assigning rates based on some predictions from one model and others
from its counterpart. See,
e. g., 1 Lodging Material
for Respondents Worldcom, Inc., et al. 146-147, 367-368 (Fla. Pub.
Servo Comm'n,
In re:
Determination of cost of basic local telecommunications
service, pursuant to Section 36.1,.025, Florida Statutes,
issued Jan. 7, 1999); 2
id., at 589-598,701-704 (N. Y. Pub.
Servo Comm'n, Opinion No. 97-2,
supra). At bottom, battles
of experts are bound to be part of any rate setting scheme, and the
FCC was reasonable to prefer TELRIC over alternative fixed-cost
schemes that preserve home-field advantages for the incumbents.
523
***
We cannot say whether the passage of time will show competition
prompted by TELRIC to be an illusion, but TELRIC appears to be a
reasonable policy for now, and that is all that counts. See
Chevron, 467 U. S., at 866. The incumbents have failed to
show that TELRIC is unreasonable on its own terms, largely because
they fall into the trap of mischaracterizing the FCC's departures
from the assumption of a perfectly competitive market (the
wire-center limitation, regulatory and development lags, or the
refusal to prescribe high depreciation and capital costs) as
inconsistencies rather than pragmatic features of the TELRIC plan.
Nor have they shown it was unreasonable for the FCC to pick TELRIC
over alternative methods, or presented evidence to rebut the
entrants' figures as to the level of competitive investment in
local-exchange markets. In short, the incumbents have failed to
carry their burden of showing unreasonableness to defeat the
deference due the Commission. We therefore reverse the Eighth
Circuit's judgment insofar as it invalidated TELRIC as a method for
setting rates under the Act.
C
The incumbents' claim of TELRIC's inherent inadequacy to deal
with depreciation or capital costs has its counterpart in a further
argument. They seek to apply the rule of constitutional avoidance
in saying that "cost" ought to be construed by reference to
historical investment in order to avoid a serious constitutional
question, whether a methodology so divorced from investment
actually made will lead to a taking of property in violation of the
Fifth (or Fourteenth) Amendment. The Eighth Circuit did not think
any such serious question was in the offing, 219 F. 3d, at 753-754,
and neither do we.
At the outset, it is well to understand that the incumbent
carriers do not present the portent of a constitutional
524
taking claim in the way that is usual in ratemaking cases. They
do not argue that any particular, actual TELRIC rate is "so unjust
as to be confiscatory," that is, as threatening an incumbent's
"financial integrity."
Duquesne Light Co., 488 U. S., at
307, 312. Indeed, the incumbent carriers have not even presented us
with an instance of TELRIC rates, which are to be set or approved
by state commissions and reviewed in the first instance in the
federal district courts, 47 U. S. C. §§ 252(e)(4) and (e)(6). And
this, despite the fact that some States apparently have put rates
in place already using TELRIC. See First Report and Order ~ 631 and
accompanying footnotes ("A number of states already employ, or have
plans to utilize, some form of [long-run incremental cost]
methodology in their approach to setting prices for unbundled
network elements").
This want of any rate to be reviewed is significant, given that
this Court has never considered a taking challenge on a ratesetting
methodology without being presented with specific rate orders
alleged to be confiscatory. See,
e. g., Duquesne
Light Co., supra, at 303-304 (denial of $3.5 million and $15.4
million increases to rate bases of electric utilities);
Smyth v.
Ames, 169 U. S., at 470-476 (Nebraska
carrier-rate tariff schedule alleged to effect a taking). Granted,
the Court has never strictly held that a utility must have rates in
hand before it can claim that the adoption of a new method of
setting rates will necessarily produce an unconstitutional taking,
but that has been the implication of much the Court has said. See
Hope Natural Gas Co., 320 U. S., at 602 ("The fact that the
method employed to reach [just and reasonable rates] may contain
infirmities is not ... important");
Natural Gas Pipeline
Co., 315 U. S., at 586 ("The Constitution does not bind
rate-making bodies to the service of any single formula or
combination of formulas");
Los Angeles Gas &
Elec.
Corp. v.
Railroad Comm'n of Cal., 289 U. S. 287, 305 (1933)
("[M]indful of its distinctive function in the enforcement of
constitutional rights, the Court has refused to be bound by
525
any artificial rule or formula which changed conditions might
upset"). Undeniably, then, the general rule is that any question
about the constitutionality of rate setting is raised by rates, not
methods, and this means that the policy of construing a statute to
avoid constitutional questions where possible is presumptively out
of place when construing statutes prescribing methods.
The incumbents say this action is one of the rare ones placed
outside the general rule by signs, too strong to ignore, that
takings will occur if the TELRIC interpretation of § 252(d)(1) is
allowed. First, they compare, at the level of the entire network
(as opposed to element-by-element), industry balance-sheet
indications of historical investment in local telephone markets
with the corresponding estimate of a TELRIC evaluation of the cost
to build a new and efficient national system of local exchanges
providing universal service. Brief for Petitioners in No. 00-511,
at 10-11, and n. 6. As against an estimated $180 billion for such a
new system, the incumbents juxtapose a value representing "total
plant" on the industry balance sheet for 1999 of roughly $342
billion. They argue that the huge and unreasonable difference is
proof that TELRIC will necessarily result in confiscatory rates.
Ibid. (citing FCC, 1999 Statistics of Communications Common
Carriers 51 (Aug. 1, 2000) (table 2.9, line no. 32)).
The comparison, however, is spurious because the numbers assumed
by the incumbents are clearly wrong. On the one side, the $180
billion is supposed to be based on constructing a barebones
universal-service telephone network, and so it fails to cover
elements associated with more advanced telecommunications services
that incumbents are required to provide by lease under 47 U. S. C.
§ 251(c)(3). See
Application by Bell Atlantic New York for
Authorization under Section 271
of the Communications Act,
15 FCC Rcd. 3953, ~ 245 (1999), aff'd,
220 F.3d
607 (CADC 2000). See also
In re Federal-State
Joint Bd. on Universal Serv., 14 FCC Rcd. 20432, ~ 41, and n.
125 (1999) (explaining that the universal-
526
service model may not be "appropriate [for] determining ...
prices for unbundled network elements"). We do not know how much
higher the efficient replacement figure should be, but we can
reasonably assume that $180 billion is too low.
On the other side of the comparison, the "balance sheet" number
is patently misstated. As explained above, any rates under the
traditional public-utility model would be calculated on a rate base
(whether fair value or cost of service) subject to deductions for
accrued depreciation. See Phillips 310-315. The net plant
investment after depreciation is not $342 billion but $166 billion,
FCC, Statistics of Communications Common Carriers, at 51 (table
2.9, line no. 50), an amount less than the TELRIC figure the
incumbents would like us to assume. And even after we increase the
$166 billion by the amount of net current liabilities ($22 billion)
on the balance sheet,
ibid. (line no. 64 minus line no. 13),
as a rough (and generous) estimate of the working-capital allowance
under cost of service, the rate base would then be $188 billion,
still a far cry from the $342 billion the incumbents tout, and less
than 5 percent above the incumbents' $180 billion universal-service
TELRIC figure. What the best numbers may be we are in no position
to say: the point is only that the numbers being thrown out by the
incumbents are no evidence that TELRIC lease rates would be
confiscatory, sight unseen.
The incumbent carriers' second try at nonrate constitutional
litigation focuses on reliance interests allegedly jeopardized by
an intentional switch in rate setting methodologies. They rely on
Duquesne, where we held as usual that a rate setting
methodology would normally be judged only by the "overall impact of
the rate orders," 36 but went further
36 The Court upheld a Pennsylvania statute barring rate recovery
of capital prudently invested in canceled power plants because the
"overall impact of the rate orders," which allowed returns on
common equity of 16 percent and overall returns of 11 to 12
percent, was not "constitutionally objectionable." 488 U. S., at
312; see also
id., at 314 (" 'It is not
527
in dicta. We remarked that "a State's decision to arbitrarily
switch back and forth between methodologies in a way which required
investors to bear the risk of bad investments at some times while
denying them the benefit of good investments at others would raise
serious constitutional questions." 488 U. S., at 315.37 In other
words, there may be a taking challenge distinct from a
plain-vanilla objection to arbitrary or capricious agency action 38
if a ratemaking body were to make opportunistic changes in
ratesetting methodologies just to minimize return on capital
investment in a utility enterprise.
In
Duquesne itself, there was no need to decide whether
there might be an exception to the rate-order requirement for a
claim of taking by rates, and there is no reason here to decide
whether the policy of constitutional avoidance should be invoked in
order to anticipate a rate-order taking claim. The reason is the
same in each case: the incumbent carriers here are just like the
electric utilities in
Duquesne in failing to present any
evidence that the decision to adopt TELRIC
theory, but the impact of the rate order which counts''')
(quoting
FPC v.
Hope Natural Gas Co., 320 U. S. 591, 602
(1944)). The utilities in
Duquesne, like the incumbents
here, made "[n]o argument ... that ... reduced rates jeopardize the
financial integrity of the companies, either by leaving them
insufficient operating capital or by impeding their ability to
raise future capital." 488 U. S., at 312. Nor did they show that
allowed rates were "inadequate to compensate current equity holders
for the risk associated with their investments under a modified
prudent investment scheme."
Ibid.
37 JUSTICE SCALIA, joined by Justice White and JUSTICE O'CONNOR,
concurred, and noted that "all prudently incurred investment may
well have to be counted" to determine "whether the government's
action is confiscatory."
Id., at 317.
38 The incumbents make the additional argument that it was
arbitrary or capricious for the FCC to reject historical costs,
Brief for Petitioners in No. 00-511, at 44-49, but this is simply a
restatement of the argument that the FCC was unreasonable in
interpreting § 252(d)(1) to foreclose the use of historical cost in
rate setting, which we have already addressed, see Part III-B-2,
supra.
528
was arbitrary, opportunistic, or undertaken with a confiscatory
purpose. What we do know is very much to the contrary. First of
all, there was no "switch" of methodologies, since the wholesale
market for leasing network elements is something brand new under
the 1996 Act. There was no replacement of any predecessor methods,
much less an opportunistic switch "back and forth." And to the
extent that the incumbents argue that there was at least an
expectation that some historically anchored cost-of-service method
would set wholesale lease rates, no such promise was ever made.
First Report and Order ~ 706 ("[C]ontrary to assertions by some
[incumbents], regulation does not and should not guarantee full
recovery of their embedded costs. Such a guarantee would exceed the
assurances that [the FCC] or the states have provided in the
past"). Cf.
Duquesne, supra, at 315. Any investor paying
attention had to realize that he could not rely indefinitely on
traditional ratemaking methods but would simply have to rely on the
constitutional bar against confiscatory rates.39
IV A
The effort by the Government and the competing carriers to
overturn the Eighth Circuit's invalidation of the additional
39 In fact, the FCC's order is more hospitable to early taking
claims than any court would be under
Duquesne: "Incumbent
LECs may seek relief from the Commission's pricing methodology, if
they provide specific information to show that the pricing
methodology, as applied to them, will result in confiscatory
rates." First Report and Order ~ 739. The FCC, in other words, is
willing to consider a challenge to TELRIC in advance of a rate
order, but any challenger needs to go beyond general criticism of a
method's tendency, and to show with "specific information" that a
confiscatory rate is bound to result. Additionally, as the FCC has
acknowledged, the smallest, rural incumbent local-exchange carriers
most likely to suffer immediately from the imposition of unduly low
rates are expressly exempt from the TELRIC pricing rules under 47
U. S. C. § 252(f)(1), see First Report and Order ~ 706, and other
rural incumbents may obtain exemptions from the rules by applying
to their state commissions under § 252(f)(2).
529
combination rules, 47 CFR §§ 51.315(c)-(f) (1997), draws the
incumbents' threshold objection that the challenge is barred by
waiver, since the 1999 petition to review the 1997 invalidation of
Rule 315(b) did not extend to the Eighth Circuit's simultaneous
invalidation of the four companion rules, Rules 315(c)-(f), 120 F.
3d, at 813, 819, n. 39.40 The incumbents must, of course,
acknowledge that the Court of Appeals
sua sponte invited
briefing on the status of Rules 315(c)_(f)41 on remand after this
Court's reinstatement of Rule 315(b),
Iowa Utilities Bd.,
525 U. S., at 395, and specifically struck them down again, albeit
on its 1997 rationale, 219 F. 3d, at 758-759. But the incumbent
carriers argue that the Eighth Circuit exceeded the scope of this
Court's mandate when it revisited the unchallenged portion of its
earlier holding, so that this Court should decline to reach the
validity of Rules 315(c)-(f) today. To do so, they say, would
encourage the sort of strategic, piecemeal litigation disapproved
in
Communist Party of United States v.
Subversive
Activities Control Bd., 367 U. S. 1, 30-31 (1961):
"The demands not only of orderly procedure but of due procedure
as the means of achieving justice according to law require that
when a case is brought here for review of administrative action,
all the rulings of the agency upon which the party seeks reversal,
and which are then available to him, be presented. Otherwise we
would be promoting the 'sporting theory' of justice, at the
potential cost of substantial expenditures of agency time. To allow
counsel to withhold in this Court and save for a later stage
procedural error would tend to foist upon
40 AT&T did not raise the issue in the relevant petition for
certiorari as it claims. See Pet. for Cert. in
AT&T
Corp. v.
Iowa Utilities Bd., O. T. 1998, No. 97-826, pp.
9-10, 13.
41 See Order in
Iowa Utilities Bd. v.
FCC, No.
96-3321, etc.
(CA8, June 10, 1999), pp. 2-3 ("The briefs
should also address whether or not, in light of the Supreme Court's
decision, this court should take any further action with respect to
... § 315(c)-(f)").
530
the Court constitutional decisions which could have been avoided
had those errors been invoked earlier."
We do not think
Communist Party blocks our consideration
of Rules 315(c)-(f). The issue there was raised by the petitioner's
failure on an earlier trip to this Court to pursue a procedural
objection to agency action. Litigation of the procedural point
would not only have obviated the Court's need to review the
constitutionality of an Act of Congress when the case got here, but
could have saved five years of litigation during which time "the
Board and the Court of Appeals [had] each twice more reconsidered
[the] steadily growing record .... "
Id., at 31-32, n. 8.
After all that time, petitioner sought review of the procedural
point.
Nothing like that can be said about these cases. Addressing the
issue now would not "make waste" of years of efforts by the FCC or
the Court of Appeals,
id., at 32, n. 8, would not threaten
to leave a constitutional ruling pointless, and would direct the
Court's attention not to an isolated, "longstale" procedural error
by the agency,
ibid., but to the invalidation of FCC rules
meant to have general and continuing applicability. There is no
indication of litigation tactics behind the failure last time to
appeal on these rules, which were reexamined on remand at the
behest of the court, not the Government or the competing
carriers.
Any issue "pressed or passed upon below" by a federal court,
United States v.
Williams, 504 U. S. 36, 41 (1992)
(internal quotation marks omitted), is subject to this Court's
broad discretion over the questions it chooses to take on
certiorari, and there are good reasons to look at Rules 315(c)-(f).
The Court of Appeals passed on a significant issue, and one placed
in a state of flux, see
Virginia Bankshares, Inc. v.
Sandberg, 501
U. S. 1083, 1099, n. 8 (1991) (citations omitted), by the split
between these cases and
US West Communications v.
MFS
Intelenet, Inc., 193 F.3d
1112, 1121
(CA9 1999), (affirming identical
state-commission rules), cert. denied, 530 U. S. 1284 (2000). We
accordingly rejected the incumbents'
531
claim of waiver when they raised it in opposition to the
petition for certiorari, and we reject it again today. See
Stevens v.
Department of Treasury, 500 U. S. 1, 8 (1991).
B
The Eighth Circuit found the four additional combination rules
at odds with the plain language of the final sentence of 47 U. S.
C. § 251(c)(3), which we quote more fully:
"[E]ach incumbent local exchange carrier has ...
"[t]he duty to provide, to any requesting telecommunications
carrier for the provision of a telecommunications service,
nondiscriminatory access to network elements on an unbundled basis
at any technically feasible point on rates, terms, and conditions
that are just, reasonable, and nondiscriminatory .... An incumbent
local exchange carrier shall provide such unbundled network
elements in a manner that allows requesting carriers to combine
such elements in order to provide such telecommunications
service."
"Bundling" and "combination" are related but distinct concepts.
Bundling is about lease pricing. To provide a network element "on
an unbundled basis" is to lease the element, however described, to
a requesting carrier at a stated price specific to that element.
Iowa Utilities Bd., supra, at 394. The FCC's regulations
identify in advance a certain number of elements for separate
pricing, 47 CFR § 51.319 (1997), but the regulations do not limit
the elements subject to specific rates. A separately priced element
need not be the simplest possible configuration of equipment or
function, and a predesignated unbundled element might actually
comprise items that could be considered separate elements
themselves. For example, "if the states require incumbent LECs to
provision subloop elements [which together constitute a local
loop], incumbent LECs must still provision a local loop
532
as a single, combined element when so requested, because we
identify local loops as a single element in this proceeding." First
Report and Order ~ 295. The "combination" provided for in Rules
315(b)-(f), on the other hand, refers to a mechanical connection of
physical elements within an incumbent's network, or the connection
of a competitive carrier's element with the incumbent's network "in
a manner that would allow a requesting carrier to offer the
telecommunications service."
Id., ~ 294, n. 620.
The additional combination rules are best understood as meant to
ensure that the statutory duty to provide unbundled elements gets a
practical result. A separate rate for an unbundled element is not
much good if an incumbent refuses to lease the element except in
combination with others that competing carriers have no need of; or
if the incumbents refuse to allow the leased elements to be
combined with a competitor's own equipment. And this is just what
was happening before the FCC devised its combination rules.
Incumbents, according to the FCC's findings, were refusing to give
competitors' technicians access to their physical plants to make
necessary connections.
In re Implementation of the Local
Competition Provisions of the Telecommunications Act of 1996, 15
FCC Rcd. 3696, 3910, ~ 482 (1999) (Third Report and Order),
petitions for review pending
sub nom. United States Telecom
Assn. v.
FCC, Nos. 00-1015, etc.
(CADC).
The challenged additional combination rules, issued under §
251(c)(3), include two that are substantive and two that are
procedural, the latter having no independent significance here.
Rule 315(c) requires an incumbent to "perform the functions
necessary to combine unbundled network elements in any manner, even
if those elements are not ordinarily combined" in the incumbent's
own network, so long as the combination is "[t]echnically feasible"
and "[w]ould not impair the ability of other carriers to obtain
access to unbundled network elements or to interconnect" with
the
533
incumbent's network. The companion Rule 315(d) likewise requires
the incumbent to do the combining between the network elements it
leases and a requesting carrier's own elements, so long as
technically feasible.42
The rules are challenged alternatively as inconsistent with
statutory plain language and as unreasonable interpretations. The
plain language in question is the sentence that "[a]n incumbent
local exchange carrier shall provide such unbundled network
elements in a manner that allows requesting carriers to combine
such elements in order to provide such telecommunications service."
47 U. s. C. § 251(c)(3). The Eighth Circuit read this as
unambiguously excusing incumbents from any obligation to combine
provided elements, 219 F. 3d, at 759. The ruling has a familiar
ring, for this is the same reason that the Court of Appeals
invalidated these rules in 1997 along with Rule 315(b), as being
inconsistent with a plain limit on incumbents' obligation under §
251(c)(3) to provide elements "on an unbundled basis." 120 F. 3d,
at 813.
But the language is not that plain. Of course, it is true that
the statute would not be violated literally by an incumbent that
provided elements so that a requesting carrier could combine them,
and thereafter sat on its hands while any combining was done. But
whether it is plain that the incumbents have a right to sit is a
question of context as much as grammar. If Congress had treated
incumbents and entrants as equals, it probably would be plain
enough that the incumbents' obligations stopped at furnishing an
element that could be combined. The Act, however, proceeds on the
understanding that incumbent monopolists and contending competitors
are unequal, cf. § 251(c) ("Additional obligations of incumbent
local exchange carriers"), and within the actual statutory confines
it is not self-evident that in obligating
42 Under Rules 315(e)-(f), an incumbent that denies a requested
combination has the burden to prove technical infeasibility or to
show how the combination would impede others' access.
534
incumbents to furnish, Congress negated a duty to combine that
is not inconsistent with the obligation to furnish, but not
expressly mentioned. Thus, it takes a stretch to get from
permissive statutory silence to a statutory right on the part of
the incumbents to refuse to combine for a requesting carrier, say,
that is unable to make the combination, First Report and Order ~
294, or may even be unaware that it needs to combine certain
elements to provide a telecommunications service.
Id., ~
293. And these are the only instances in which the additional
combination rules obligate the incumbents according to the FCC's
clarification in the First Report and Order.
The conclusion that the language is open is certainly in harmony
with, if not required by, our holding in
Iowa Utilities Bd.,
dealing with Rule 315(b). In reinstating that rule, we rejected the
argument that furnishing elements "on an unbundled basis," §
251(c)(3), must mean "physically separated," 525 U. S., at 394, and
expressly noted that "§ 251(c)(3) is ambiguous on whether leased
network elements mayor must be separated,"
id., at 395. We
relied on that ambiguity in holding that an incumbent has no
statutory right to separate elements when a competitor asks to
lease them in the combined form employed by the incumbent in its
own network.
Ibid. That holding would make a very odd
partner with a ruling that an ambiguous § 251(c)(3) plainly
empowers incumbent carriers to refuse to combine elements even when
requesting carriers cannot. We accordingly read the language of §
251(c)(3) as leaving open who should do the work of combination,
and under
Chevron U. S.
A. Inc. v.
Natural
Resources Defense Council, Inc., 467 U. S. 837 (1984),
that leaves the FCC's rules intact unless the incumbents can show
them to be unreasonable.
For the decision whether Rules 315(c)-(f) survive
Chevron
step two,
Iowa Utilities Bd. is, to be sure, less immediate
help, since in that case we found Rule 315(b) reasonable because it
prevented incumbents from dismantling exist-
535
ing combinations to sabotage competitors, 525 U. S., at 395,
whereas here we deal not with splitting up but with joining
together. We think, nonetheless, that the additional combination
rules reflect a reasonable reading of the statute, meant to remove
practical barriers to competitive entry into local-exchange markets
while avoiding serious interference with incumbent network
operations.
At the outset, it is well to repeat that the duties imposed
under the rules are subject to restrictions limiting the burdens
placed on the incumbents. An obligation on the part of an incumbent
to combine elements for an entrant under Rules 315(c) and (d) only
arises when the entrant is unable to do the job itself. First
Report and Order ~ 294 ("If the carrier is unable to combine the
elements, the incumbent must do so"). When an incumbent does have
an obligation, the rules specify a duty to "perform the functions
necessary to combine," not necessarily to complete the actual
combination. 47 CFR §§ 51.315(c)-(d) (1997). And the entrant must
pay "a reasonable cost-based fee" for whatever the incumbent does.
Brief for Petitioner Federal Parties in Nos. 00-587, etc., p. 34.
See also
id., at 10, 34, n. 14.
The force of the objections is limited further by the FCC's
implementation in the rules of the statutory conditions that the
incumbents' duty arises only if the requested combination does not
discriminate against other carriers by impeding their access, and
only if the requested combination is "technically feasible," §
251(c)(3). As to the latter restriction, the Commission "decline[d]
to adopt the view proffered by some parties that incumbents must
combine network elements in any technically feasible manner
requested." First Report and Order ~ 296. The concern was that such
a rule "could potentially affect the reliability and security of
the incumbent's network, and the ability of other carriers to
obtain interconnection, or request and use unbundled elements."
Ibid.
536
Thus, the incumbents are wrong to claim that the restriction to
"technical feasibility" places only minimal limits on the duty to
combine, since the First Report and Order makes it clear that what
is "technically feasible" does not mean merely what is
"economically reasonable,"
id., ~ 199, or what is simply
practical or possible in an engineering sense, see
id., ~~
196-198. The limitation is meant to preserve "network reliability
and security,"
id., ~ 296, n. 622, and a combination is not
technically feasible if it impedes an incumbent carrier's ability
"to retain responsibility for the management, control, and
performance of its own network,"
id., ~ 203.
This demanding sense of "technical feasibility," as a condition
protecting the incumbent's ability to control the performance of
its own network, is in accord with what we said in
Iowa
Utilities Bd. There, for example, we reinstated the
Commission's "pick and choose" rule 43 in part because the duty to
provide network elements on matching terms to all comers did not
arise when it was "not technically feasible," § 51.809(b)(2). 525
U. S., at 396. If "technically feasible" meant what is merely
possible, it would have been no limitation at all.
The two substantive rules each have additional features that are
consistent with the purposes of § 251(c)(3). Rule 315(c), to the
extent that it raises a duty to combine what is "ordinarily
combined," neatly complements the facially similar Rule 315(b),
upheld in
Iowa Utilities Bd., id., at 395, forbidding
incumbents to separate currently combined network elements when the
entrant requests them in a combined form. If the latter were the
only rule, an incumbent
43 "An incumbent LEC shall make available without unreasonable
delay to any requesting telecommunications carrier any individual
interconnection, service, or network element arrangement contained
in any agreement to which it is a party that is approved by a state
commission pursuant to section 252 of the Act, upon the same rates,
terms, and conditions as those provided in the agreement." 47 CFR §
51.809(a) (1997).
537
might well be within its rights to insist, for example, on
providing a loop and a switch in a combined form when a naive
entrant asked just for them, while refusing later to combine them
with a network interface device, which is also ordinarily combined
with the loop and the switch, and which is necessary to set up a
telecommunications link. But under Rule 315(c), when the entrant
later requires the element it missed the first time, the
incumbent's obligation is to "perform the functions necessary," 47
CFR § 51.315(c) (1997), for a combination of what the entrant
cannot combine alone, First Report and Order ~ 294, and would not
have needed to combine if it had known enough to request the
elements together in a combined form in the first place. Cf.
id., ~ 297 ("[I]ncumbent[s] must work with new entrants to
identify the elements the new entrants will need to offer a
particular service in the manner the new entrants intend").
Of course, it is not this aspect of Rule 315(c), requiring the
combination of what is ordinarily combined, that draws the
incumbents' (or JUSTICE BREYER'S, see
post, at 563)
principal objection; they focus their attack, rather, on the
additional requirement of Rule 315(c), that incumbents combine
unbundled network elements "even if those elements are not
ordinarily combined in the incumbent['s] network." 47 CFR §
51.315(c) (1997). To build upon our previous example, this would
seemingly require an incumbent to combine the loop, switch, and
interface (ordinarily combined in its network) with a second loop
and network interface (provided by the incumbent as a separate
unbundled element), so that the competitive carrier could charge
for a second-line connection, as for a fax or modem. See Brief for
Petitioners Worldcom, Inc., et al. in No. 00-555, at 48 (providing
the example).
But this provision of Rule 315(c) is justified by the statutory
requirement of "nondiscriminatory access." § 251(c)(3). As we have
said, the FCC has interpreted the rule as obli-
538
gating the incumbent to combine "[i]f the carrier is unable to
combine the elements." First Report and Order ~ 294. There is no
dispute that the incumbent could make the combination more
efficiently than the entrant; nor is it contested that the
incumbent would provide the combination itself if a customer wanted
it or the combination otherwise served a business purpose. See
Third Report and Order ~ 481. It hardly seems unreasonable, then,
to require the incumbent to make the combination, for which it will
be entitled to a reasonable fee; otherwise, an entrant would not
enjoy true "nondiscriminatory access" notwithstanding the bare
provision on an unbundled basis of the network elements it needs to
provide a service.
As to Rule 315(d), it is hard to see how this rule is any less
reasonable than § 251(c)(2), which imposes a statutory duty to
interconnect. The rule simply requires the incumbent to perform
functions necessary to combine the unbundled elements it provides
with elements owned by the requesting carrier "in any technically
feasible manner." Essentially, it appears to be nothing more than
an elementto-element version of the incumbents' statutory duty "to
provide, for the facilities and equipment of any requesting ...
carrier, interconnection with the local exchange carrier's
network," in § 251(c)(2).
In sum, what we have are rules that sayan incumbent shall, for
payment, "perform the functions necessary," 47 CFR §§ 51.315(c) and
(d) (1997), to combine network elements to put a competing carrier
on an equal footing with the incumbent when the requesting carrier
is unable to combine, First Report and Order ~ 294, when it would
not place the incumbent at a disadvantage in operating its own
network, and when it would not place other competing carriers at a
competitive disadvantage, 47 CFR § 51.315(c)(2) (1997). This duty
is consistent with the Act's goals of competition and
nondiscrimination, and imposing it is a sensible way to reach the
result the statute requires.
539
***
The 1996 Act sought to bring competition to localexchange
markets, in part by requiring incumbent localexchange carriers to
lease elements of their networks at rates that would attract new
entrants when it would be more efficient to lease than to build or
resell. Whether the FCC picked the best way to set these rates is
the stuff of debate for economists and regulators versed in the
technology of telecommunications and microeconomic pricing theory.
The job of judges is to ask whether the Commission made choices
reasonably within the pale of statutory possibility in deciding
what and how items must be leased and the way to set rates for
leasing them. The FCC's pricing and additional combination rules
survive that scrutiny.
The judgment of the Court of Appeals is reversed in part and
affirmed in part, and the cases are remanded for further
proceedings consistent with this opinion.
It is so ordered.
JUSTICE O'CONNOR took no part in the consideration or decision
of these cases.
JUSTICE BREYER, with whom JUSTICE SCALIA joins as to Part VI,
concurring in part and dissenting in part.
I agree with the majority that the Telecommunications Act of
1996 (Act or Telecommunications Act), 47 U. S. C. §251
et
seq. (1994 ed. and Supp. V), does not require a historical cost
pricing system. I also agree that, at the present time, no taking
of the incumbent firms' property in violation of the Fifth
Amendment has occurred. I disagree, however, with the Court's
conclusion that the specific pricing and unbundling rules at issue
here are authorized by the Act.
I
The primary goal of the Telecommunications Act is to "promote
competition and reduce regulation" in both local
540
and long-distance telecommunications markets. Preamble, 110
Stat. 56; see also H. R. Conf. Rep. No. 104-458, p.1 (1996). As
part of that effort, the Act requires incumbent local
telecommunications firms to make certain "elements" of their local
systems available to new competitors seeking to enter those local
markets. 47 U. S. C. § 251(c)(3) (1994 ed., Supp. V). If the
incumbents and competitors cannot agree on the price that an
incumbent can charge a new entrant, local regulators will determine
the price. § 252. The regulated price will depend upon the
element's "cost." § 252(d) (l)(A). In
AT&T Corp. v.
Iowa Utilities Bd., 525 U. S. 366 (1999),
this Court held that the Act authorizes the Federal Communications
Commission (FCC or Commission) to set rules for determining those
prices.
These cases require the Court to review the Commission's rules.
Those rules create a "start-from-scratch" version of what the
Commission calls a "Total Element Long-Run Incremental Cost" system
(TELRIC). See Kahn, Tardiff, & Weisman, The Telecommunications
Act at three years: an economic evaluation of its implementation by
the Federal Communications Commission, 11 Info. Econ. & Policy
319, 326 (1999) (hereinafter Kahn) (referring to the FCC's system
as "TELRIC-Blank Slate"). In essence, the Commission requires local
regulators to determine the cost of supplying a particular
incumbent network "element" to a new entrant, not by looking at
what it has cost
that incumbent to supply the element in the
past, nor by looking at what it will cost
that incumbent to
supply that element in the future. Rather, the regulator must look
to what it would cost
a hypothetical perfectly efficient
firm to supply that element in the future, assuming that the
hypothetical firm were to build essentially from scratch a new,
perfectly efficient communications network. The only concession to
the incumbent's actual network is the presumption that presently
existing wire centers-which hold the switching equipment for a
local area-will remain in their current locations.
541
See
In re Implementation of Local Competition Provisions in
the Telecommunications Act of 1996, 11 FCC Rcd. 15499,
15848-15849, ~ 685 (1996) (hereinafter Order) (describing TELRIC as
"based on costs that assume that wire centers will be placed at the
incumbent LEC's current wire center locations, but that the
reconstructed local network will employ the most efficient
technology for reasonably foreseeable capacity requirements").
An example will help explain the system as I understand it.
Imagine an incumbent local telephone company's major switching
center, say, in downtown Chicago, from which cables and wires run
through conduits or along poles to subsidiary switching equipment,
other electronic equipment, and eventually to end-user equipment,
such as telephone handsets, computer modems, or fax machines
located in office buildings or private residences. A new
competitor, whom the law entitles to use an "element" of the
incumbent firm's system, asks for use of such an "element," say, a
single five-block portion of this system, thereby obtaining access
to 20 downtown office buildings. Under the Commission's TELRIC, the
incumbent's "cost" (upon which "rates" must be based) equals not
the real resources that the Chicago incumbent must spend to provide
the five-block "element" demanded, but the resources that a
hypothetical perfectly efficient new supplier would spend were that
supplier rebuilding the entire downtown Chicago system, other than
the local wire center, from scratch. This latter figure, of course,
might be very different from any incumbent's actual costs.
As a reviewing Court, we must determine, among other things,
whether the Commission has" 'abuse[dJ''' its statutorily delegated"
'discretion'" to create implementing rules.
Motor Vehicle Mfrs.
Assn. of United States, Inc. v.
State Farm Mut. Automobile
Ins. Co., 463 U.
S. 29, 41 (1983) (quoting Administrative Procedure Act, 5 U. S.
C. § 706(2)(A)). In doing so, we must assume that Congress intended
to grant
542
the Commission broad legal leeway in respect to the substantive
content of the rules,
Citizens to Preserve Overton Park,
Inc. v.
Volpe, 401 U. S. 402, 416
(1971);
FPC v.
Hope Natural Gas Co., 320 U. S. 591, 602
(1944), particularly since the subject matter is a highly technical
one, namely, ratemaking, where the agency possesses expert
knowledge.
Chevron U. S.
A. Inc. v.
Natural
Resources Defense Council, Inc., 467 U. S. 837, 843-844
(1984).
Nonetheless, that leeway is not unlimited. It is bounded, for
example, by the scope of the statute that grants authority and by
the need for the agency to show a "rational connection" between the
regulations and the statute's purposes.
State Farm, 463 U.
S., at 56. We must determine whether, despite the leeway given
experts on technical subject matter, agency regulations exceed
these legal limits. See
id., at 43;
Overton Park,
supra, at 416; Administrative Procedure Act, 5 U. S. C. §
706(2)(A) (requiring agency action to be set aside if "arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance
with law"). And, reluctantly, I have come to the conclusion that
they do. After considering the incumbents' objections and the
Commission's responses, I cannot find that "rational connection"
between statutory purpose and implementing regulation that the law
demands.
State Farm, supra, at 56.
II
Because the critical legal problem concerns the relation of the
Commission's regulations to the statute's purpose, I must ask at
the outset, what is that purpose? The relevant statutory provision
says only that the agency shall set "rate[sJ" (for "elements")
"based on ... cost." 47 U. S. C. § 252(d)(1). At first blush the
word "cost" calls to mind traditional cost-based ratesetting. See
Natural Gas Act, 15 U. S. C. § 717 c; Natural Gas Act of 1938, § §
4a, 5, 52 Stat. 824; Interstate Commerce Act, 49 U. S. C. § 10701
(1994 ed., Supp. V); Federal Aviation Act of 1958, 49 U. S. C. §
1302(c) (1976 ed., Supp. II) (repealed 1980); see also
ante,
at 478
543
(discussing traditional ratesetting); J. Bonbright, A.
Danielsen, & D. Kamerschen, Principles of Public Utility Rates
109-110,388 (2d ed. 1988) (hereinafter Bonbright);
In re
Implementation of Sections of the Cable Television Consumer
Protection and Competition Act of 1992:
Rate Regulation, 9
FCC Rcd. 4527, 4555, ~ 55 (1994) (Commission rules referring to
"[o]riginal cost" as traditional basis "for public utility
valuation").
An agency engaged in traditional ratemaking will seek to protect
consumers by mandating low prices as the end result. In doing so,
the agency will sometimes try to mimic the prices that it believes
(hypothetically) the regulated firm (often a legal monopoly) would
have set had it been an unregulated firm in a competitively
structured industry. See
ante, at 486; Bonbright 89 ("[M]any
economists have declared that ... the prices that would result
without regulation but under pure or perfect competition would be
the 'ideal' prices"); 1 A. Kahn, Economics of Regulation:
Principles and Institutions 63 (1988) (hereinafter Economics of
Regulation) ("The traditional legal criteria of proper public
utility rates have always borne a strong resemblance to the
criteria of the competitive market in long-run equilibrium"). And
the Commission's regulations are at least arguably consistent with
an agency effort to find prices that replicate the end results of
theoretically perfect competition. See Order ~~ 679,738.
But that regulatory objective-low, competitionmimicking
prices-is not the objective of the relevant statutory provision
here. The Telecommunications Act is not a ratemaking statute
seeking better regulation. It is a deregulatory statute seeking
competition. It assumes that, given modern technology, local
telecommunications markets may now prove large enough for several
firms to compete in the provision of some services-but not
necessarily all services-without serious economic waste. It finds
the competitive process an indirect but more effective way to
bring
544
about the common objectives of competition and regulation alike,
namely, low prices, better products, and more efficient production
methods. But it authorizes the Commission to promulgate rules that
will help achieve that procedural goal-the substitution of
competition for regulation in local markets-where that
transformation is economically feasible. See
ante, at 539
(accepting this rationale). The Act does not authorize the
Commission to promulgate rules that would hinder the transition
from a regulated to a competitive marketplace-whether or not those
rules directly mandate lower "element" prices along the way.
Five considerations, taken together, convince me that the
description of the statutory goal I have just given is an accurate
one. First, the Act itself says that its objective is to substitute
competition for regulation. Preamble, 110 Stat. 56 (stating that
the goal of the Act is to "promote competition and reduce
regulation" in both local and longdistance telecommunications
markets); see also H. R. Conf. Rep. No. 104-458, at 1;
ante,
at 489.
Second, the Act's history suggests the Congress would have
thought that goal a reasonable one. The 20th century's history of
telecommunications markets is primarily one of regulation. For
decades experts justified regulation on the ground that
telecommunications providers were "natural monopolists," i.
e., telecommunications markets would not support more than
one firm of efficient size. See
ante, at 475-476. But
beginning in the 1970's, technological developments led to a change
of expert opinion by undermining the "natural monopoly" rationale.
Long-distance telecommunications markets seemed newly capable of
supporting several competing firms without significant economic
waste. See R. Vietor, Contrived Competition: Regulation and
Deregulation in America 185-190 (1994). And opinion began to change
similarly in respect to local markets. In the case of local
markets, however, the change was marked by hesitation and lingering
uncertainty. See P. Huber, M. Kellogg, &
545
J. Thorne, Federal Telecommunications Law 53, 86-87 (2d ed.
1999) (hereinafter Huber); P. Huber, M. Kellogg, & J. Thorne,
The Geodesic Network II: 1993 Report on Competition in the
Telephone Industry 2.1-2.5 (1992). That is because local
telecommunications service had long demanded expensive fixed
investment, for example, digging up streets to lay cables or
stringing wires on overhead poles. See
ante, at 489491. And
whether, or the extent to which, a new competitor could replicate,
or avoid, that kind of investment without significantly wasting
resources remained unclear. See Huber 34, 206. Thus, at the time
Congress wrote the new Act, technological development seemed to
permit nonwasteful competition in respect to some aspects of local
service; but in respect to other aspects an incumbent local
telecommunications provider might continue to possess "natural
monopoly" advantages.
Id., at 206-207. And these
circumstances made it reasonable for Congress to try to secure
local competition insofar as that competition would prove
economically feasible, i.
e., where competition would not
prove seriously wasteful. See Order ~ 1. See also 47 U. S. C. §§
271(c)(1)(A), 271(c)(1)(B) (recognizing that some local markets
will not support more than one firm).
Third, the Act's structure and language indicate a congressional
effort to secure that very end. The Act dismantles artificial legal
barriers to new entry in local markets, thereby
permitting
new firms to enter if they wish. § 253(a); see
ante, at 491,
and n. 12. But the Act recognizes that simple permission may not
prove sufficient-perhaps because the incumbent will retain a
"natural monopoly" form of control over certain necessary elements
of service. It consequently goes on to
promote new entry in
three ways. See
ante, at 491-492. First, it requires
incumbents to "interconnect" with new entrants (at a price
determined by the regulations before us), thereby allowing a new
entrant's small set of subscribers to connect with the incumbent
firm's likely larger customer base. § 251(c)(2). Second, it
requires
546
incumbents to sell retail services to new entrants at wholesale
rates, thereby allowing newly entering firms automatically to
compete in retailing if they so desire. § 251(c)(4). Third, it
requires incumbents to provide new entrants "access to network
elements," say, telephone lines connecting homes or offices with
switching centers, "on an unbundled basis." § 251(c)(3). This third
requirement permits a new entrant to compete selectively without
replicating (or substituting) all of the elements the incumbent
uses to offer the service in question.
Suppose, for example, the incumbent's control of certain
existing cables, lines, or switching equipment would put the new
entrant at an economic disadvantage because duplication of those
"elements" would prove unnecessarily expensive. The new Act does
not require the new entrant and incumbent to compete in respect to
those elements, say, through wasteful duplication. Rather,
the Act permits the new entrant to offer, and to compete with
respect to, a related service by obtaining "access" to (and
therefore using)
those "elements" of the incumbent's
network, while finding on its own other elements necessary to the
service. It is as if a railroad regulator, anxious to promote
railroad competition between City A and City B but aware that it
would prove wasteful to duplicate a certain railroad bridge across
the Mississippi River, ordered the bridge's owner to share the
bridge with new competitors. The sharing would avoid wasteful
duplication of the hard-to-duplicate resource-namely, the bridge.
But at the same time it would facilitate competition in the
remaining aspects of the A-to-B railroad service. That, I assume,
is why the Act says that the "elements" that must be shared are
those for which access is "necessary" and in respect to which
"failure to provide access" would "impair" the ability of the new
entrant "to provide the services that it seeks to offer." §
251(d)(2). See
Iowa Utilities Bd., 525 U. S., at 392
(Commission must give "substance to the 'necessary' and 'impair'
require-
547
ments"); cf.
id., at 416-417 (BREYER, J., concurring in
part and dissenting in part) (stating that the "necessary" and
"impair" provision's object is to require access to, and thereby
force sharing of, those elements of an incumbent's system that
would prove, to a significant degree, economically wasteful to
duplicate).
To put the matter more concretely, imagine that a communications
firm-a potential new entrant-wishes to sell voice, data, text,
pictures, entertainment, or other communications services, perhaps
in competition with the incumbent. That firm must decide how its
service will reach a customer inside a house or office. Should the
firm (1) run its own new cable into the house? (2) run wires
through an already-existing electricity conduit? (3) communicate
without wires, say, by wireless or one-way or two-way satellite?
(4) or use the incumbent's pair of twisted copper telephone service
wires already in place? If the potential new entrant claims that
all but the last of these possibilities are impractical or far too
expensive-that using existing telephone wires is far cheaper (in
terms of real resources expended) than the alternatives-then the
new entrant is claiming that the incumbent's wires are a kind of
"bridge" to which it must have access. And it may ask the regulator
to make its new entry feasible by requiring the incumbent to permit
it to use that "element" at a reasonable price.
Fourth, the Commission has described the Act's goals as
including promotion of nonwasteful competition. The preamble to the
Commission's price regulations describes their statutorily based
aim as "giv[ing] appropriate signals to producers and consumers and
ensur[ing]
efficient entry and utilization of the
telecommunications infrastructure." Order ~ 630 (emphasis added).
The Commission also says that "the prices that potential entrants
pay for these elements should reflect forward-looking economic
costs in order to encourage
efficient levels of investment
and entry."
Id., ~ 672 (emphasis added). And it adds that
"Congress spe-
548
cifically determined that input prices should be based on costs
because this would foster competition in the retail market."
Id., ~ 710; see also
id., ~ 1.
Fifth, the Solicitor General confirmed this view at oral
argument when he said that the rates in question should be set in
order to "encourage new entrants to come into the market," Tr. of
Oral Arg. 60, to "allow them to enter the market at competitive
rates,"
ibid., and to "encourage them to develop new
technologies,"
id., at 61.
The statute, then, seeks new local market competition insofar as
local markets can support that competition without serious waste.
And we must read the relevant rate setting provision-including the
critical word "cost"-with that goal in mind.
III
The Commission's critics- Verizon, other incumbents, and experts
whose published articles Verizon has lodged with the Court-concede
that the statute grants the Commission broad authority to define
"cost[s]." They also concede that every ratesetting system has
flaws. Cf.,
e. g., Missouri ex rel. Southwestern Bell Telephone
Co. v.
Public Servo Comm'n of Mo., 262 U. S. 276, 311-312
(1923) (Brandeis, J., joined by Holmes, J., dissenting)
(criticizing "reproduction cost" systems because of the
administrative difficulty of determining costs); Economics of
Regulation 109-111 (criticizing "historical cost" systems because
of their failure to provide proper incentives).
Nonetheless, the critics argue, the Commission cannot lawfully
choose a system that thwarts a basic statutory purpose without
offering any significant compensating advantage. They take the
relevant purpose as furthering local competition where feasible.
See Part II,
supra. They add that rates will further that
purpose (1) if they discourage new firms from using the incumbent's
facilities or "elements" when it is significantly less expensive,
economically speaking, for the entrant to build or to buy
elsewhere, and (2) if
549
they encourage new firms to use the incumbent's facilities when
it is significantly less expensive, economically speaking, for the
entrant to do so. They point out that prices that approximately
reflect an
actual incumbent's
actual additional costs
of supplying the services (or "element") demanded will come close
to doing both these things. See Kahn 330 (prices set at
"incremental cost," the cost of supplying an added "increment,"
will give challengers the "proper target at which to shoot" only if
that cost reflects "the cost that society will
actually
incur if they purchase more" or the resources that it would save if
they purchase less); Knieps, Interconnection and Network Access, 23
Ford. Int'l L. J. 90 (2000); see also J. Sidak & D. Spulber,
Deregulatory Takings and the Regulatory Contract (1998) (arguing
that a market-determined efficient component pricing rule (M-ECPR)
satisfies these objectives and that the FCC has misunderstood the
M-ECPR system). But prices like the Commission's, based on the
costs that a
hypothetical "most efficient" firm would incur
if
hypothetically building largely from scratch, Order ~
685, would do neither. Indeed, they would do exactly the opposite,
creating incentives that hinder rather than further the statute's
basic objective.
First, the critics ask, why, given such a system, would a new
entrant ever build or buy a new element? After all, the
Commission's ratesetting system sets the incumbent's compulsory
leasing rate at a level that would rarely exceed the price of
building or buying elsewhere. That is because the Commission's rate
setting system chooses as its basis the hypothetical cost of the
most efficient method of providing the relevant service-i.
e., the cost of entering a house through the use of
electrical conduits or of using wireless (if cheaper in general),
and it then applies those costs (based on, say, hypothetical
wireless)
as if they were the cost of the system in place
(the twisted pair of wires). Why then would the new entrant use an
electrical conduit, or a wireless system, to enter a house when, by
definition, the Commis-
550
sion will require the incumbent to lease its pair of twisted
wires at an equivalent price or lower-whether or not the incumbent
will have to spend more, in fact, to provide the twisted wires? The
rules further discourage independent building or buying by
assessing a special penalty upon the new entrant that does so, for
that entrant will have to worry that soon another newer new entrant
will insist upon sharing the incumbent's equivalent of that very
element at a still lower regulation-determined price based on
subsequent technological developments.
The Commission's system will tend to create instances in which
(1) the incumbent's
actual future cost of maintaining an
element (say, a set of wires) will exceed (2) the new entrant's
cost of building or buying elsewhere (say, through wireless or
wires in electrical conduits) which, in turn, will equal (or even
exceed) (3) the
hypothetical future "best practice" cost
(namely, what the experts decide will, in general, be cheapest). In
such a case (or in related cases, where technological improvements,
actual or predicted, tend to offset various cost differences), the
new entrant will uneconomically share the incumbent's facilities by
leasing rather than building or buying elsewhere. And that result,
in the assumed circumstances, is wasteful. It undermines the
efficiency goal that the majority itself claims the Act seeks to
achieve. Cf.
ante, at 509-510, 539.
Nor is the "sharing" of facilities
(e. g., the wire
pairs) that this result embodies consistent with the competition
that the Act was written to promote. That is because firms that
share existing facilities do not compete in respect to the
facilities that they share, any more than several grain producers
who auction their grain at a single jointly owned market compete in
respect to
auction services. Cf.
Iowa Utilities Bd.,
525 U. S., at 429 (BREYER, J., concurring in part and dissenting in
part) ("It is in the unshared, not in the shared, portions of the
enterprise that meaningful competition would likely emerge"). Yet
rules that combine a
551
strong monetary incentive to share with a broad definition of
"network element," see 47 CFR §§ 51.319(f)-(g) (1997); Order ~ 413,
will tend to produce widespread sharing of entire incumbent systems
under regulatory supervision-a result very different from the
competitive market that the statute seeks to create. See
Iowa
Utilities Bd., supra, at 386-387 (affirming the Commission's
broad definition of "network element"). At the least, those rules
are inconsistent with the Commission's own view that they will
sometimes "serve as a transitional arrangement until fledgling
competitors could develop a customer base and complete the
construction of their own networks."
In re Implementation of the
Local Competition Provisions of the Telecommunications Act of
1996, 15 FCC Rcd. 3696, 3700, ~ 6 (1999) (Third Report and Order).
Why, given the pricing rules, would those "fledgling competitors"
ever try to fly on their own?
Second, what incentive would the Commission's rules leave the
incumbents either to innovate or to invest in a new "element?" The
rules seem to say that the incumbent will share with competitors
the cost-reducing benefits of a successful innovation, while
leaving the incumbent to bear the costs of most unsuccessful
investments on its own. But see
infra, at 552. Why would
investment not then stagnate? See,
e. g., Jorde,
Sidak, & Teece, Innovation, Investment, and Unbundling, 17 Yale
J. Reg. 1, 8 (2000) ("It makes no economic sense for the
[incumbent] to invest in technologies that lower its own marginal
costs, so long as competitors can achieve the identical cost
savings by regulatory fiat"); Sidak & Spulber, Deregulation and
Managed Competition in Network Industries, 15 Yale J. Reg. 117,
124-125 (1998) ("If deprived of a return to capital facilities
after capital has been sunk in irreversible investments, or if
faced with reduced returns to investments already made, any
economically rational company will eliminate or reduce similar
capital investments in the future"); Armstrong, AT&T Scoffs at
Possible Common Carrier Status, Telecommunications Reports,
552
Nov. 9, 1998 (Chief Executive Officer of AT&T, which here
supports the Commission's regulations), cited in Huber 206, n. 611
(" 'No company will invest billions of dollars ... if competitors
who have not invested a penny of capital, nor taken an ounce of
risk, can come along and get a free ride on the investments and
risks of others' ").
I recognize that no regulator is likely to enforce the
Commission's rules so strictly that investment literally slows to a
trickle. Indeed, the majority cites figures showing that in the
past several years new firms have invested $30 to $60 billion in
local communications markets. See
ante, at 516. We do not
know how much of this investment represents facilities, say,
broadband, for which an incumbent's historical network offers no
substitute. Nor do we know whether this number is small or large
compared with what might have been. Cf. FCC, Statistics of
Communications Common Carriers 51 (table 2.7); FCC, Statistics of
Communications Common Carriers 42 (table 2.7); FCC, Statistics of
Communications Common Carriers 29 (table 2.7); FCC, Statistics of
Communications Common Carriers 1 (table 2.7) (incumbents' similar
investment over the same period amounts to over $100 billion); cf.
FCC, 2000/2001 Statistics of Communications Common Carriers 51
(table 2.9) (total depreciated investment plus working capital
equals $220 billion);
ante, at 516, 521 (new entrants'
market share provided by entrants' own facilities alone is 33%).
Regardless, given the incentives, this independent investment would
seem to have been made despite the "start from scratch" rules, not
because of them. At best, such statistics do no more than show that
at least some of the coincidences I describe below have, happily
for the Commission and the public alike, come to pass. See
infra, at 554, 556, 560-561.
The critics mention several other problems as well. They say,
for example, that the Commission's regulations will exacerbate the
problem of "stranded costs" -i.
e., the need for a
once-regulated incumbent to recover its reasonable, but now
553
technologically outdated, historical investment. See Part III-C,
ante. They add that the regulations will make nearly
redundant the statute's provisions for "element" rates set through
negotiation. See 47 U. S. C. § 252(a)(1). After all, given the
Commission's regulations, how much is there to negotiate about? The
regulations entitle the new entrant to a price equal to, or lower
than, the price to which any rational incumbent could agree. See
Brief for United States in
Mathias v.
Worldcom
Technologies, Inc., O. T. 2001, No. 00-878, p. 18, n. 5 ("[A]s
a practical matter" carriers have little incentive to
negotiate).
Nor, in the critics' view, do the regulations possess any
offsetting advantages. They lack that ease of administration that
led Justices Holmes and Brandeis to favor use (for rate setting
purposes) of an incumbent's historic costs despite their economic
inaccuracy. See
Southwestern Bell Telephone Co., 262 U. S.,
at 292-296 (dissenting opinion); see also
ante, at 481-483.
The hypothetical nature of the Commission's system means that
experts must estimate how imaginary firms would rebuild their
systems from scratchwhether, for example, they (hypothetically)
would receive permission to dig up streets, to maintain unsightly
telephone poles, or to share their pole costs with other users,
say, cable operators-and they must then estimate what would turn
out to be most "efficient" in such (hypothetical) future
circumstances. The speculative nature of this enterprise, the
critics say, will lead to a battle of experts, each asking a
commission to favor what can amount to little more than a guess.
See Kahn 333, 334, n. 36, 335 (describing three models introduced
in regulatory proceedings, one of which reduced all actual expenses
by 27% because railroad regulation had brought similar efficiency
gains, another of which assumed that all utilities, including
electricity producers, would rebuild entire systems from scratch at
the same time, and the third of which assumed New Hampshire's
telecommunications system was administratively most efficient but
then reduced its actual administrative expenses by 25%).
554
These administrative difficulties seem far greater than any
difficulty likely involved in an effort to determine an actual
incumbent's actual (past or likely future) costs. See Affidavits of
W. Baumol, J. Ordover, & R. Willig, Comments of AT&T Corp.,
CC Docket 96-98: In the Matter of Implementation of Local
Competition Provisions in the Telecommunications Act of 1996, ~ 25
(May 16, 1996), App. 67 (TELRIC's estimates "do not simply accept
the architecture, sizing, technology, or operating decisions" of
the incumbents "as bases for calculating" costs). Assumptions are
inevitable. And the resulting uncertainties mean a somewhat random
sort of rate that can either exacerbate the incentive problems
previously mentioned or alleviate those problems by a kind of
regulatory coincidence. See
ante, at 522 (describing how
state commissioners "customarily assig[n] rates based on some
predictions from one model and others from its counterpart").
IV
The criticisms described in Part III are serious, potentially
severing any rational relation between the Commission's regulations
and the statutory provision's basic purposes.
State Farm,
463 U. S., at 56. Hence, the Commission's responses are important.
Do those responses reduce the force of the criticisms, blunt their
edges, or suggest offsetting virtues? I have found six major
responses. But none of them is convincing.
First, the FCC points out that rates will include not only a
charge reflecting hypothetical "most-efficient-firm" costs but also
a depreciation charge-a charge that can reconcile a firm's initial
historic investment, say, in equipment, and the equipment's current
value, which diminishes over time. See Order ~ 686 ("[P]roperly
designed depreciation schedules should account for expected
declines in the value of capital goods"). If, for example, an
incumbent's reasonable investment, measured actually and
historically, came to $50 million, but FCC experts predict a
"most-efficient-
555
firm-building-from-scratch" future replication cost of $30
million, a depreciation charge could permit the incumbent to recoup
the otherwise missing $20 million. And, in theory, a state
commission might structure a potentially complex depreciation
charge so as both to permit recovery of historic investment and
also to offset many of the improper investment incentives described
in Part II,
supra.
This response, however, does not reflect what the Commission's
regulations actually say. Those regulations say nothing about
permitting recovery of reasonable historic investment nor about
varying the charge to offset perverse investment incentives.
Rather, they strongly indicate the opposite. They clearly require
state commissions to use
current depreciation rates right
alongside the Commission's new and different
"most-efficient-firm-building-from-scratch" charges. See Order ~
702. They do create an exception from "current" rates. But to take
advantage of that exception "incumbent LECs" have to bear the
"burden of demonstrating with specificity that the
business
risks that they face in providing unbundled network elements
and interconnection services would justify a different ...
depreciation rate."
Ibid. Unless the exception is to swallow
the rule, the term "business risks" must refer to some special
situation-not to the ordinary circumstance in which a new entrant
simply asks to share an "element" at rates determined under
Commission "most-efficient-firm" rules. In any event, that is how
24 state commissions have read the language. See 1998
Biennial
Regulatory Review-Review of Depreciation Requirements for Incumbent
Local Exchange Carriers, 15 FCC Rcd. 242, ~ 69 (1999). And the
FCC nowhere explicitly says to the contrary. Hence the FCC
depreciation rules as written do not respond to the critics' claims
in the ordinary case, nor do they otherwise transform its
"most-efficient-firm-building-from-scratch" system into a system
that reflects historic costs.
556
Second, the FCC points out that a state commission can adjust
permissible profit rates. In theory, such an adjustment could
offset many of the improper investment incentives described in Part
II,
supra. But, like the depreciation regulations, the
profit regulations say nothing about the matter. Indeed, like the
depreciation regulations, they suggest the opposite. The relevant
FCC regulations say that "the
currently authorized rate of
return at the federal or state level is a reasonable starting
point." Order ~ 702 (emphasis added). They, too, add an
exception, available to "incumbent LEC's" that successfully "bear
the burden of demonstrating with specificity that the
business
risks that they face in providing unbundled network elements
and interconnection services would justify a different riskadjusted
cost of capital."
Ibid. But this exception, like the
depreciation exception, cannot respond to the critics' claims in
the ordinary case for similar reasons.
The FCC adds that it did not have "time" to offer more than
"tentative guidance," Reply Brief for Federal Parties 11-12, that
profits now may be too high, Order ~ 702, and that the incumbents
may find other ways to lower their capital costs,
id., ~
687. These additions, however, concede the critics' basic
point-that the "profit" rules as written do not provide an answer
to Part Ill's claims. Rather,
considered as a response to those
claims, they must rest upon no more than hope for a regulatory
coincidence. Most significantly, they hope that current market
conditions mean that current profit rates somehow magically offset
the adverse effects of the Commission's other regulations, see Part
III,
supra. See Reply Affidavit of J. Hausman ~ 9, n. 8,
submitted with Reply Comments of the United States Telcom
Association, CC Docket No. 96-98 (FCC filed May 30, 1996), App. 197
(testifying for critics that profit rates would have to double or
triple to secure investment). Cf. G. Hubbard & W. Lehr, Capital
Recovery Issues in TELRIC Pricing: Response to Professor Jerry A.
Hausman (July 18, 1996), App. 216, 221
557
(arguing for FCC defenders that Hausman overstates the need for
change, but stating that "if any adjustments ... are required ...
such adjustments would be modest"). And the majority relies on its
belief that that hope has been realized.
Ante, at 521
(stating that in light of the fact that "competition in fact has
been slow to materialize," "it seems fair to say" that the current
rate is a "'reasonable starting point' "). Of course, one must
sympathize with the FCC's time problem. But the statute did not
require the FCC so quickly to create so complex a system. Rather,
the statute seems to foresee rates set, not by FCC regulations
primarily or in detail, but by negotiations among the parties, 47
U. S. C. § 252(a)(1), if not by state commissions. See
Iowa
Utilities Bd., 525 U. S., at 412-420 (BREYER, J.,
concurring in part and dissenting in part).
Third, the Commission supports the reasonableness and
practicality of its system with the claim that "a number of states"
have used it successfully, as have several European nations. Order
~ 681. As to domestic experience, I can find no evidence that,
prior to the promulgation of the rules at issue here, any State had
successfully implemented the FCC's version of TELRIC. It is hardly
surprising that since then several States have tried to apply it.
Nor is it surprising that their implementation has produced
criticisms similar to those made here. See,
e. g., MCI
Telecommunications Corp. v.
GTE Northwest, Inc., 41 F.
Supp. 2d 1157, 1168-1169, and n. 7 (are. 1999) (discussing problems
with the FCC's TELRIC).
And the "foreign nation" part of the Commission's claim rests
only upon a 1997 European Community paper referring to a "best
current practice" approach as a future goal. See Commission of
European Communities, Recommendation on Interconnection in a
liberalised telecommunications market,
C(97) 3148, §§
3.3,3.5 (Oct. 15, 1997),
http://europa.eu.int/
ISPO/infosoc/telecompolicy/en/r3148-en.htm (Apr. 17, 2002). Indeed,
Britain's FCC counterpart has said that, in the
558
absence of a showing of inefficiency, the incumbent's
actual current expenditures on capacity additions should be
used "as the starting point." See Office of Telecommunications (Of
tel), Access to Bandwidth: Indicative prices and pricing principles
~ 9 (May 2000),
http://www.oftel.gov.ukl
publications/broadband/llu/llu0500.htm (Apr. 17, 2002).
In fact, as I understand the European system, it may turn out in
practice to work roughly as follows: The relevant European
regulatory agency, seeking competition, encourages new firms to
enter local markets in order to provide new voice, data, text,
picture, entertainment, or other communications service. Like the
Commission, the agency normally has the authority to insist that an
incumbent firm "unbundle,"
e. g., that it permit a
new entrant to use its pair of twisted wires running from switching
center to the inside of a house. It also has the authority to set
prices. But in exercising that authority, it has neither required,
nor is it likely to rely upon, anyone ratesetting method. Rather,
it may encourage negotiation among the parties in order to reach
agreed-upon prices low enough to prevent the incumbent from
blocking entry but high enough to encourage the new firm to
consider other entry methods, such as use of electricity conduits,
or new cables, where economically feasible. If no agreement can be
reached, the regulator, in determining the price, can use formulas,
modified to take proper account of depreciation and historical
cost, or it can look to prices set in other European nations as a
yardstick to help produce competition.
This less formal kind of "play it by ear" system, in my view, is
what the statute before us intended. The Act provides for price
negotiation among the parties, it brings in state regulators where
necessary to break deadlocks, and it permits the States to use a
variety of different rate setting approaches, looking to experience
in other States as appropriate, in order to determine proper
prices. The mysterious statutory parenthetical phrase "(determined
without ref-
559
erence to a rate-of-return or other rate-based proceeding)," §
252(d)(1), makes sense from this point of view. It reflects
Congress' desire to obtain not perfect prices but speedy results.
It specifies that States need not use formal methods, relying
instead upon bargaining and yardstick competition. See
Iowa
Utilities, supra, at 424-425 (BREYER, J., concurring in part
and dissenting in part); cf. Order ~ 631 (describing how the New
York Commission "se[t] prices on a case-by-case basis"). I
recognize, however, that the FCC has rejected this approach in
favor of extraordinarily complex national rate setting standards,
which we review only to determine whether they will further, or
serve as obstacles to, the competitive marketplace that the statute
seeks.
Fourth, the FCC adds that its system seeks to base rates on the
costs a hypothetical "most efficient firm" hypothetically would
incur were it "building from scratch." And such a system, in its
view, will "simulate" or "best replicat[e], to the extent possible,
the conditions of a competitive market." Order ~ 679; see also
id., ~ 738. This response, however, does not do more than
describe that very feature of the system upon which the critics
focus their attack.
As I have previously said,
supra, at 543, such an
objective is perhaps consistent with an ordinary ratesetting
statute that seeks only low prices. But the problem before us-that
of a lack of "rational connection" between the regulations and the
statute-grows out of the fact that the Telecommunications Act is
not a typical regulatory statute asking regulators simply to seek
low prices, perhaps by trying to replicate those of a hypothetical
competitive market. Rather, this statute is a deregulatory statute,
and it asks regulators to create prices that will induce
appropriate new entry. See Part II,
supra. That being so, we
may assume, purely for argument's sake, that the FCC rules could
successfully "replicate" the prices toward which perfectly
efficient, perfectly competitive markets would tend. But see Kahn
326-327 (stating that such prices are never achieved in any
actual
560
market); A. Kahn, Whom the Gods Would Destroy, or How Not to
Deregulate 4 (2001) (stating that a firm in an actual market would
determine efficient investment in light of its actual system, not a
hypothetical system built from scratch). Still, those rules, if
successful, would produce the strong incentives to demand sharing,
and the strong disincentives to build independently, that Part II
describes-for they would create a "sharing" or "interconnection"
price equal to or lower than any price associated with the creation
of independent facilities. They would thereby tend toward a system
in which regulatory price setting would
supplant, not
promote, competition. And however congenial institutional
regulators might find such a system, it differs dramatically from
the system that the statute seeks to bring about. See Part II,
supra. Cf.
Iowa Utilities Bd., 525 U. S., at 387-392
(setting aside Commission rules granting new entrants power to
obtain access to virtually any existing element). At least that is
the claim that underlies much of the criticism set forth in Part
III,
supra. And the Commission's response that its system
simulates the conditions of a competitive market does not respond
to that basic criticism.
Fifth, the Commission says that its regulations are simply
suggestive, leaving States free to depart. Reply Brief for Federal
Parties 11-12. The short but conclusive answer to this response is
that the Commission considered a "suggestive" approach and rejected
it. See Order ~ 66 (refusing to characterize rules as setting
forth, not "requirements," but "'preferred outcomes,'" because the
latter approach "would fail to establish explicit national
standards for arbitration, and would fail to provide sufficient
guidance to the parties' options in negotiations").
Sixth, the majority (but not the Commission) points out that
local commissions are likely to leave any given set of rates in
effect for some period of time. And this "regulatory lag" will
solve the problem. See
ante, at 505-506. I do not understand
how it could solve the main problem-that of
561
leading new entrants to lease a more costly incumbent "element"
where building or buying independently could prove less costly. See
supra, at 548-550. Nor, given any new entrant's legal right
to obtain a regulator's decision, am I certain that lags will prove
significant. But, in any event, lags will differ, depending upon
regulator, time, and circumstance, thereby introducing a near
random element that might, or might not, ameliorate the system's
otherwise adverse effects.
In sum, neither the Commission's nor the majority's responses
are convincing.
v
Judges have long recognized the difficulty of reviewing the
substance of highly technical agency decisionmaking. Compare
Ethyl Corp. v.
EPA, 541 F.2d
1, 66
(CADC 1976) (en banc) (Bazelon, C. J.,
concurring) ("[T]he best way for courts to guard against
unreasonable ... administrative decisions is not ... themselves to
scrutinize the technical merits ... [but to] establish a
decision-making process that assures a reasoned decision" (internal
quotation marks omitted)), with
id., at 69 (Leventhal, J.,
concurring) (stating that judges must assure, on substantive
review, "conformance to statutory standards and requirements of
rationality," acquiring "whatever technical background is
necessary"). This Court has emphasized the limitations the law
imposes upon judges' authority to insist upon special agency
procedures.
Vermont Yankee Nuclear Power Corp. v.
Natural
Resources Defense Council, Inc., 435 U. S. 519, 543-548
(1978). But it has also made clear that judges nonetheless must
review for rationality the substance of agency decisions, including
technical decisions.
State Farm, 463 U. S., at 56. That
review requires agencies to undertake the difficult task of
translating technical matters into language that judges can
understand and preparing technical responses to challenges of the
sort found here. But, despite the difficulty, review by generalist
judges is important, both
562
because technical agency decisions are often of great importance
to the general public and because the law forbids agencies, in the
name of technical expertise, to wrest themselves free of public
control.
Agencies are, of course, expert in technical areas. That is why
Judge Leventhal wrote that "the judges," when reviewing the
rationality of substantive decisions, "must act with restraint."
Ethyl Corp., 541 F. 2d, at 69. And I agree. But, he added,
judges may not "abstain from any substantive review."
Id.,
at 68. And again I agree. In these cases, the critics' claims are
strong. They suggest that the FCC's pricing rule, together with its
original "forced leasing" twin, see
Iowa Utilities Bd.,
supra, at 388-392 (finding original leasing rule unlawful),
would bring about, not the competitive marketplace that the statute
demands, but a highly regulated marketplace characterized by
widespread sharing of facilities with innovation and technological
change reflecting mandarin decisionmaking through regulation rather
than decentralized decisionmaking based on the interaction of
freely competitive market forces. And the Commission's replies are
unsatisfactory. The majority nonetheless finds the Commission's
pricing rules reasonable. As a regulatory theory, that conclusion
might be supportable. But under this
deregulatory statute,
it is not. Under these circumstances, it would amount to abstention
from, indeed abdication of, "rational basis" review, were I to
agree that the record here demonstrates the "rational connection"
between regulations and statutory purpose upon which the law
insists.
State Farm, supra, at 56; Administrative Procedure
Act, 5 U. s. C. § 706(2)(A); see also
State Farm, supra, at
43 ("[WJe may not supply a reasoned basis for the agency's action
that the agency itself has not given"). As Judge Leventhal properly
put it, "Restraint, yes, abdication, no."
Ethyl Corp.,
supra, at 69. The Court, of course, with 65 pages of careful
analysis, does not abdicate its reviewing responsibility; but for
the reasons stated here I cannot agree with
563
its substantive conclusion. Consequently, I would affirm the
Eighth Circuit's determination that the regulations are
unlawful.
VI
I disagree with the majority about one further legal issue.
The statute imposes upon an incumbent the
"duty to provide ... for the provision of a telecommunications
service, nondiscriminatory access to network elements on an
unbundled basis ... in a manner that allows requesting carriers
to combine such elements in order to provide such
telecommunications service." 47 U. s. C. § 251(c)(3) (emphasis
added).
The FCC, pointing to this provision, has said that (upon
request) incumbents must themselves combine, among other things,
elements that are ordinarily not combined. Rules 315(c)-(f), 47 CFR
§§ 51.315(c)-(f) (1997). How, the incumbents ask, can a statute
that speaks of the
requesting carriers combining elements
grant the FCC authority to insist that
they, the incumbents,
combine the elements?
In
Iowa Utilities Bd., the Court found authority for a
somewhat similar rule-a rule that forbids incumbents to uncombine
elements ordinarily found in combination. But, as the majority
recognizes,
ante, at 534-535, that different rule rests upon
a rationale absent here. If an incumbent takes apart elements that
it ordinarily keeps together, it is normally discriminating against
the requesting carriers. And the statutory provision forbids
discrimination. But here the incumbent simply keeps apart elements
that it ordinarily keeps apart in the absence of a new entrant's
demand. How does that discriminate? And if it does not
discriminate, where does this statutory provision give the FCC
authority to forbid it?
I cannot find the statutory authority. And I consequently would
affirm the lower court on the point.
For these reasons, I dissent.
Comments
Be the first to comment
Leave a Comment