Verizon Communications Inc. v. Federal Communications Commission

VERIZON COMMUNICATIONS INC. et al. v.

FEDERAL COMMUNICATIONS

COMMISSION et al. 10, 2001 13, 2002* No. 00-511. October Argued May —Decided 00-555, WorldCom,Inc., et al. v. Verizon Commu- *Together with No. al., Inc. nications et 00-587, Federal Communications Commission No. al., et al. v. et Iowa Utilities AT&T 00-590, Board No. Corp. Iowa v. al., et Utilities Board 00-602, Communications, General Inc. v. and No. al., Iowa Utilities Board et also certiorari to the same court. William, P. Barr for Verizon Communica- cause argued tions, Inc., 00-511, et No. and for BellSouth al., petitioners him al., 00-555, et in Nos. etc. With Corp. respondents F. Whelan, Philbin, briefs were M. Edward Patrick Mi- Kellogg, chael E. L. K. Glover, Evans, Mark Michael Henk Morgan, Brands, Harralson, R. Charles James G. Andrew Toppins, Roger Gary McBride, Delacourt, G. Scott K. Phil- lips, Bradbury. Sean A. Lev, and Steven G

Solicitor Olson General the cause for the federal argued in 00-587, Nos. and parties, etc., in petitioners respondents Acting Solicitor No. him 00-511. With on the briefs were Acting Underwood, Attorney General Assistant General Deputy Nannes, Wallace, Solicitor General Barbara Mc- Nancy Dowell, O’Sullivan, G. Garrison, Catherine C. and Laurence N. Murray Bourne. David P. filed for briefs re- in 00-511, spondent Sprint etc., Nos. Corporation support and federal petitioner parties opposition petitioners Communications, Inc., Verizon et al. Verrilli, Jr.,

Donald B. WorldCom, cause for argued et Inc., al., in No. and petitioners 00-555 respondents No. 00-511, and for AT&T in No. 00-590 Corp., petitioner and in Nos. him 00-511, etc. With on the briefs respondent Kelley, al. were Jodie L. Inc., et Ian Heath WorldCom, Gershengorn, F. Single III, Thomas O’Neil William IV, Carol Ann McDowell, Robert M. Bischoff, Robert J. and Carpenter, Aamoth. Stephen David Keisler, W. Peter D. B. Kinnaird, III, C. Frederick Beckner and Mark C. Rosen- blum filed briefs for AT&T.

Briefs for in Nos. 00-511, etc., were filed respondents by Popowsky Irwin A. for the National Association State Ramsay James Advocates, Consumer Utility by Bradford and Lawrence G. Malone for the Public Service Commission Lake, T. William John H. Har- of New York et al., by II, wood and Robert B. McKennna for Communica Qwest Inc.† tions International, opinion delivered the of the Court.*

Justice Souter These cases arise under the Telecommunications Act of power 1996. Each is about the of the Federal Communi- regulate relationship cations Commission to between mo- nopolistic companies providing telephone local service companies entering compete local markets to with the incum- among entitled, bents. new entrants are Act, Under things, other telephone to lease elements of the local net- monopolists. from the works incumbent The issues are (1) require utility whether the FCC is authorized state charged commissions to set the rates the incumbents for forward-looking leased elements on a basis untied to the in- (2) require cumbents’ investment, and to com- incumbents request they bine such elements at the entrants’ when lease uphold assumption them to the entrants. We the FCC’s authority both exercise issues.

I The 1982 settling consent decree the Government’s anti- against Telephone trust suit the American Telegraph and (AT&T) Company local-exchange divested AT&T of its car- leaving long-distance riers, equipment AT&T a com- pany, limiting provision the divested carriers to the telephone local service. United States v. American Tele- (DC phone 1982), Telegraph Supp. Co., & 552 F. 131 aff’d sub (1983). Maryland nom. States, v. United 460 U. S. 1001 The nothing, competition decree did however, to increase in the persistently monopolistic local thought markets, which were

† Harisha J. J. Bastiampillai and Morton Posner filed a brief for Telecom, Inc., et al. as amici curiae urging affirmance in Allegiance No. 00-511. * Justice joins Scalia Part III of this opinion. joins Justice Thomas

Parts III and IV. 476 in the telecommunications of natural

to be root monopoly Shelanski, H. Lichtman, & D. See S. industry. Benjamin, (hereinafter (2001) Law and Telecommunications Poliсy Thorne, Federal P. J. al.); Huber, et M. & Benjamin Kellogg, (2d 1999) ed. §2.1.1, 84-85 Law Telecommunications pp. (hereinafter al.); Sidak, Baumol J. Toward Huber et W. & (1994); 7-10 S. Reg- in Local Breyer, Telephony Competition (1982). markets Reform These 291-292, ulation and Its Act of the Telecommunications were addressed by provisions (1996 56, that Act), 104-104, 110 Stat. Act or Pub L. by to eliminate the monopolies enjoyed were intended franchises; was con- local this inheritors of AT&T’s objective toward in itself and an sidered both an end step important in broader the Act’s other boosting competition goals tele- to universal markets and the mandate provide revising et al. 716. service. See phone Benjamin Two for local markets sets of related opening provisions local- First, here. incumbent (cid:127)concern us required Congress serv- carriers to own facilities and share their exchange ices on to be in their terms with new entrants upon agreed 251(c) V). (1994 ed., § markets. Second, 47 U. S. C. Supp. incumbents entrants would knowing prospective services, sometimes for facilities or Con- disagree prices for com- directed the state FCC methods prescribe gress both missions to use in rates that would subject setting incumbents and entrants the risks and incentives 252(d). § market would competitive produce. partic- ular method devised for rates FCC setting network elements for interconnection and lease of charged Act, § under the 252(d)(1),1 and FCC imposed regulations to share these elements, implement statutory duty are the of this which must be 251(c)(3), subjects litigation, understood against background ratemaking public 252(d) Section ratesetting respect for re separately provides 252(d)(2), resale, facilities, § ciprocal compensation for interconnected 252(d)(3). §

477 utilities in the United States and the structure of local made accessible the Act. exchanges

A service have Companies providing telephone traditionally been utilities.2 See Bon- regulated monopolistic J. public (1st 1961) of Public Rates 3-5 bright, Principles ed. Utility (hereinafter I. Barnes, Economics of Public Util- Bonbright); (1942) (hereinafter Barnes). 37-41 ity Regulation At the dawn of modern in order to offset mo- utility regulation, and ensure affordable, stable nopoly power access public to a or services, utility’s enacted rate goods legislatures id., schedules to fix the could See prices utility charge. 170-173; C. of Public Phillips, 111-112, Utilities Regulation g., Smyth (1984) (hereinafter See, e. 5 and n. v. Phillips). Ames, (1898) (statement 169 S. 466, U. 470-476 case); Illinois, Munn v. (1877). 113, 94 U. S. 134 As this be- job came more established complicated, legislatures specialized administrative first local or state, then agencies, federal, set and 173-175; rates. Barnes regulate 115-117. Phillips g., e. Minnesota Rate Cases, 230 See, (1913) 352, U. S. Shreveport (Interstate Cases, Rate Commerce Commission); (1914) U. S. 354-355 between (jurisdictional dispute Commission). ICC and Texas Railroad See T. Mc- generally Craw, (1984). 11-65 Prophets The familiar Regulation mandate in the was Acts to see that enabling rates be “just reasonable” and not Barnes 289. discriminatory. g., See, e. Act of 1920, 1(5) Transportation U. S. C. (1934 ed.). 2Nationalization, the historical policy choice regulation of telephone in many countries,

service other rejected was in the United States. Cohen, The Telephone Problem and the Telephone Road to Regulation in States, the United 1876-1917, (1991) 3 J. of Policy 42,46,55-56, History (hereinafter Cohen); Markets, S. Vogel, Freer More Regulatory Rules: (1996). Reform in Advanced Industrial Countries 26-27 478

All rates were this retail rates subject regulation way: to the and rates wholesale charged directly public charged in involved the or services businesses among providing goods offered the retail Intrastate retail rates were by utility. the with States those regulated by municipalitiеs, wholesale of the National the Gov- generally responsibility ernment, since the transmission or involved transportation was interstate.3 See 143. characteristically Phillips the of classic scheme administrative rate-

Historically, at the federal level called rates to be set setting out by the regulated schedules, tariff utility companies proposed on the model to railroad carriers under Inter applied state Act 1887,24 Commerce Stat. 379. After interested had had notice of and parties a chance com proposals ment, the tariffs would be by controlling accepted (or so as were agency long “reasonable” and rea they “just sonable”) Hale, and “unduly Commis discriminatory.” sions, Rates, Policies, L. 1103, Harv. 1104-1105 Rev. g., e. (1940). ICC, Southern Co. v. See, 433, U. S. Pacific (1911). The States followed this same tariff- generally g., Smyth, supra, e. schedule model. See, Barnes 297-298. at 470-476.

3The first noteworthy federal rate-regulation statute was the Interstate 1887,24 379, Commerce Act of Stat. which was concerned principally railroad rates but generally governed all interstate rates. It was the model for federal subsequent statutes like Federal public-utility Power of 1920,41 Act 1063, 1934,48 1064, Stat. the Communications Act of Stat. 1938, 821, Natural Gas Act of 52 Stat. and the Civil Aeronautics Act 1938, 52 Stat. 973. The Communications Act of 1934 FCC created the was the first statute to address regulation interstate telephone an independent way. substantive regulation Federal the area had previously been undertaken incidentally general interstate carrier under the regulation Interstate Commerce Act. The Act Mann-Elkins 1910, 36 Stat. was the earliest federal statute rates prescribing for interstate and foreign telephone carriers, and telegraph part revisions to Vietor, railroad rates set See ICC. R. Contrived Com (1994) (hereinafter petition: Regulation and Deregulation in America 171 Vietor). way regulated rates were (by as between businesses Government) the National respects, was in some however, regulation different from of rates as between businesses (at level). public and the or local state In wholesale party charging markets, the party charged the rate and the sophisticated enjoying were often presumptively businesses equal bargaining power, expected who negotiate could be “just a and reasonable” rate as between the two of them. Accordingly,in the Federal Power Act 1920,41 1063, Stat. again in the of 1938, Natural Gas Act 52 Con 821, Stat. gress departed purely from regu the scheme of tariff-based acknowledged lation and that contracts between commercial buyers and ratesetting, could be sellers used 16 U. S. C. §824d(d) (Federal Act); §717c(c)(Natural Power 15 U. C.S. Act). Gas Pipe See United Gas Line Co. v. Mobile Gas (1956). Corp., Service 332, 338-339 350 U. S. When commer parties cial did avail agreements, themselves of rate principal regulatory responsibility was not to a con relieve tracting party of rate, an unreasonable FPC v. Sierra Pacific (1956) (“its improvident Co., Power 350 348, U. S. bar gain”), protect against potential but to by discrimination favorable contract between rates allied businesses the det riment of other wholesale customers. See ibid. New Cf. (“The (1947) v. States, York United prin 331 U. S. cipal evil at which the Interstate Commerce Act was aimed manifestations”). was discrimination in its various This up Court once summed matters the wholesale level this way:

“[WJhile may may it be that the Commission not nor- mally impose upon public utility which rate would produce less than a fair return, it does not follow public utility may agree by not itself to a contract affording rate less than a that, fair return or if it does so, improvident bargain. it еntitled is to be relieved its In such concern of circumstances the sole the Commis- sion would seem to whether the rate so low as to affect interest —as it adversely where public might the financial of the to con- utility ability public impair its service, tinue cast other consumers excessive upon Sierra burden, or be unduly discriminatory.” Pacific supra, Co., Power (citation omitted). Pipe supra,

See also United Line Co., Gas at 345. of retail rates at the state and local levels Regulation on the other was, hand, focused more on the demand for and reasonable” rates to the than “just public perils of rate See Indeed, discrimination. Barnes 298-299. regu- lated local markets evolved into of state- telephone arenas sanctioned discrimination engineered public utility commissions themselves the cause service.” “universal Huber al. et also Vietor In 80-85. See 167-185. order hold down service in rural markets charges telephone costs due to lower higher marginal densities population use, lesser volumes of urban and business users were over costs of charged subsidizing premiums marginal their own service. See Huber et al. 84. providing These cross subsidies between not neces- markets were transfers between sarily how- truly independent companies, ever, thanks the attained AT&T largely and position by its satellites. This was known as the “Bell which system,” the mid-20th by had come to century possess overwhelming in all monopoly power nationwide, markets telephone supply- and ing well services as as local-exchange long-distance Vietor 174-175. See equipment. also R. Garnet, Telephone Evolution Enterprise: Bell Horizontal Struc- System’s ture, (1985) 1876-1909, A). 160-163 The pp. (Appendix same market pervasive of Bell that made it presence providers simple to provide cross subsidies in aid of service, universal however, also frustrated efforts conventional to hold retail rates down. See et Huber al. Before 84-85. the Bell sys- tem’s have predominance, regulators played might compet- carriers ing one another against lower rates for the get see Cohen public, 47-50, but the became strategy virtually impossible single company only pro- once a had become the nearly city every country. vider in town and across This rejgulatory thinking led, frustration turn, to new about just rates ultimately and reasonable retail to these cases. regulatory “just

The traditional notion rea at navigating sonable” rate was aimed the straits between utility gouging confiscating utility customers and property. (1944). Hope Co., 591, 603 FPC v. Natural Gas U. S. See Bonbright also Barnes century 289-290; 38. More than a ago, reviewing charged determining courts whether utility sufficiently rates were reasonable avoid unconstitu tional confiscation took as their touchstone the revenue utility would be “fair property return” on certain known usually as a fair “rate base.” The rate of return was set as generated by property rate similar investment at the proceeding, Smyth time rate v. Ames, 169 S.,U. 546, the Court held the rate base must be calculated property being [the utility] as “the fair value of the used public.” pegging convenience of the In the rate base Smyth consciously rejected at “fair value,” the Court primary capital actually standard, alternative invested to provide public good. Id., at 543-546. service large part prevent Court made this choice “excessive capitalization” artificially valuation or fictitious from in flating “‘[t]he public id., the rate base, 544, lest ... be subjected simply to unreasonable rates in order that stock may dividends,’” holders earn (quoting Coving id., at 545 Lexington Turnpike ton & Road v. Co. U. S. Sandford, (1896)).4 578, 596 Smyth proved

But to be a troublesome mandate, Jus- joined by famously Brandéis, tice Holmes, Justice observed 4And the Court had doubt no who make in should the sacrifice “ ‘If situation. a cannot such a and corporation maintain earn highway stockholders, it dividends is a for it which misfortune and them the Constitution does not require by imposing unjust be remedied burdens ” Ames, (citation omitted). Smyth v. S., the upon public.’ 169 at 545 U. 482 years

25 later. Missouri rel. Bell Tele- ex Southwestern phone 276, v. 292 Mo., Co. Public Serv. Comm’n U. S. of (1923) opinion). (dissenting Smyth de- itself had Court irony, mind-numbing complexity scribed, of without required enquiry his- value, into fair as the alternative torical investment:

“[I]n [fair] original value, order to ascertain cost of con- expended permanent improve- struction, the amount ments, the and of and amount market value its bonds compared present original stock, the as with cost probable earning capacity construction, of of the property particular prescribed by statute, under rates required expenses, operating sum meet are given consideration, all to be matters for are such weight may just right We do in each case. say may not garded that there not be other matters to be re- estimating property.” the value of the S., at U. 546-547. Smyth simply up pre bewildered,

To the hands, threw its scribing limiting no one method for of use these numbers declaring but all such facts to be “relevant.”5 Southwestern Telephone (Brandeis, Bell Co., S., 262 U. at 294-298, and n. 6 dissenting). J., customary What is more, checks on calculations of value in other circumstances were hard to utility’s come property; costly rarely for a its facilities changed tagged price hands and so were seldom a a buyer actually pay would accept, id., and seller 292; at West Chesapeake v. Telephone Potomac Baltimore, & Co. of (1935). 662, 672 U. reviewing S. could Neither resort courts utility’s to revenue as an index of fair value, since its reve- One referents value did prove was re possible current placement cost, or reproduction a primitive of the criterion chal version Co., lenged these cases. See McCardle v. Water Indianapolis 272 U. S. 400, 417 (1926); Goddard, The Problem Valuation: The Evolution Cost (1928). of Reproduction Base, as the Rate 41 Harv. L. Rev. 570-571 necessarily subject nues were determined the rates applied very property review, the rate of return to the subject Duquesne Light to valuation. v. Barasch, Co. (1989); Hope 299, 309, U. S. n. 5 Natural supra, Co., Gas at 601. wonder,

Small then, that Justice Brandéis was able to dem- basing Smyth’s galactic onstrate how rates on notion of fair grossly produce value could revenues excessive or insuffi- gauged against capital. cient gave when costs of He example plant (simplified) promised of a million built with $1 equity year. returns on the $90,000 Southwestern Bell Telephone supra, Co., If 304-306. the value were to fall proceeding, $600,000 at the time of a rate with the rate percent, Smyth return on similar investments then at 6 say a confiscatory would rate was not if it returned at least capital. $36,000, of'$54,000 a shortfall from costs of But if plant the value of the to rise to $1,750,000at the were time proceeding, of the comparable rate and the rate of return on percent, constitutionality at 8 investments stood then under Smyth require generating would rates at least $140,000, capital $50,000above costs. upshot Smyth, specter then, was the of utilities bankruptcy by inadequate pay

forced into rates off the capital, drop costs of even when a in value resulted from general imprudent decline, economic investment; while economy, in a prescient robust an investment no more could claim rapacious what equity sеemed a return invested. accordingly Justice replacing Brandéis advocated “fair value” with a capital pru- calculation of rate base on the cost of dently provision public invested assets for the used good although service, and enjoy he did not live to success, against campaign his Smyth Hope came to fruition in FPC v. (1944). Co., Natural Gas 320 U. S. 591 Hope Gas, In Natural position Court this disavowed that the Natural required Gas Act Constitution fair value as sole “just measure aof rate base on which Id., at 601-602. be calculated. rates were to reasonable” Co., 315 U. S. FPC v. Natural Gas Pipeline also See JJ., (1942) concurring). (Black, Murphy, 602-606 Douglas, Power Commission Federal review, the In the matter under cost” “actual the legitimate valued rate base by using had and and practices,” “sound depletion depreciation reflecting the below figure a had value percent so calculated roughly methods fair-value the natural-gas company’s by generated “trended cost” and original “estimated using reproduction 4-5. nn. Gas, S., 596-598, and Natural at U. cost.” Hope enable “Rates which the Commission. The Court upheld maintain its finan to the successfully, company operate in its attract compensate cial capital, integrity, condemned cannot be certainly for the risks assumed vestors a invalid, meager produce only even though they might Id., at 605. rate base.”6 ‘fair value’ return on the so-called Natural Gas did repudiate everything Although Hope “the of still end in since fair value was product said Smyth, federal and S., 320 U. the of process rate-making,” in aftermath of Hope state commissions rates setting Natural Gas the old fair-value abandoned approach largely base on the and turned to of the rate methods calculating Princi Kahn, Economics of basis “cost.” A. Regulations: (1988). and Institutions 40-41 ples confusion, “Cost” was neither nor immune to self-evident as a however; witness the invocation cost” “reproduction 6The in use fair-value survived to the “used and concept degree some rule, utility only qualification prudent-investment ful” that a can recover is prudently capital being invested that “used useful” a For providing public good example, Pennsylvania service. Barasch, (1989), v. S. 299 upheld Duquesne Light rate statute Co. 488 U. provided capital at the time but rendered prudence invested useless by through regulated would not be recoverable unforeseen events rates, Id., just as it would be worthless of market value. terms (“The 311-312, ultimately n. 7 loss to utilities prudent from unsuccessful pure investments a system greater prudent under such than under rule, investment fair approach”). but less than under a value Smyth, see calculating under fair value popular method rejection Federal Power supra, and the Commission’s 5,n. straight-line deriva- original (apparently, “trended cost” invested) in capital originally favor of from the cost of tion supra, Hope Gas, at 596. legitimate Natural cost,” “actual developed agreement on a method general time, over Still, essentially a modern primus pares, it is that was inter say carriers gloss that the incumbent on that method issue to set the rates at here. should have used FCC simple rate not a calculation of worked out is The method capital original “prudently invested” as the cost base presumably assumed, reference Justice Brandéis proceed- rate utility’s sheet at the time of the balance Telephone Co., S., 262 U. at 304-306. ing. Bell Southwestern is, service,” mean “cost of Rather, “cost” came to provide capital the serv- prudently invested used to cost of Utility Lovejoy, Bonbright Public 173;P. & W. Garfield ice. (1964). subject to deduc- This was calсulated Economics 56 working depreciation for and allowances for tions accrued 8-1) (“a (table typical Phillips electric capital,7 282-283 see base”), naturally leading utility utilities minimize to rate (on very depreciation by using slow rates the depreciation lives),8 working assumption long and to maximize useful capital claimed as a distinct rate-base constituent.

7 cash, and accounts receivable inventory, typical constitute Operating of accounts such as payable, current assets. Current liabilities consist Because, rents, taxes, debt. for wages, payable, interest and short-term receivable collected until after liabilities may accounts example, due, needed to current liabilities in capital pay working capital come 1998). Merton, (prelim, R. Finance 427 ed. interim. Z. Bodie & the carriers regulated local-exchange incumbent example, For (an for their assets aver cycle years had an 14.4 average depreciation per against gross plant cost line as investment age depreciation $127 $1,836 line), cycle twice as of 7.4 per roughly long average like years unregulated competitive Weingarten carriers WorldCom. & Stuck, Depreciation, 28 Business Communications Review 63 Rethinking (Oct. 1998). commonly prudent-investment formula,

This called the part temptations rule, addressed the on the utilities’ natural outlays nothing producing to claim return on of value to public. discourage meant, hand, It was one to unnecessary capitalization” investment the “fictitious protect Smyth, feared in S., 543-546, U. and so rate- payers supporting capacity, abandoned, from or excessive destroyed, phantom Kahn, Tardiff, Weisman, assets. & years: Telecommunications Act at three an economic evalua- by implementation tion of its the Federal Communications Policy Commission, 319, 330, Information Economics & (1999) Act). (hereinafter Kahn, n. 27 Telecommunications prudent-investment time, At the same rule was intended give utilities an incentive make smart investments deserving return, a “fair” and thus to mimic in- natural competitive eye (though centives markets9 without an fostering ‍​‌‌‌​‌‌‌​​​​​‌​‌‌‌‌​​‌​​‌‌​​​‌​​​‌​‌​​​​​‌‌‌‌‌‌​‍competition by the actual which such markets are defined). theory, prudent-investment In qualifica- then, the gave ratepayer important protection mitigat- tion ing the tendency regulated competition of a market’s lack of support monopolistic prices. mitigation prudent-investment

But the was little, too practice rule being capacity often no for the match of utili- having ties manipulate all the relevant information to renegotiate rate every base and the rate of return time rate regulatory response was set. The in some markets adoption was commonly “price of a rate-based method called caps,” Telephone United States Assn. v. FCC, 188 F. 3d (CADC 1999), 524 example, setting as, for the of FCC’s charges paid large maximum access local-exchange com- 9In a competitive market, a company may raise simply prices as much it as may need for compensate poor investments (say, plant in a that becomes unproductive) because competitors will then undersell the (1998) company’s goods. Mankiw, See N. Principles of Economics 308-310 (hereinafter Mankiw). Policy re In Rules carriers, panies by interexchange Concerning Carriers, Rates Dominant Rcd. 6786, FCC (1990). 6787, 1

The scheme starts with a rate price-cap generated by formula, conventional cost-of-service it which takes as a benchmark to be at an of decreased some 2-3 average per- cent to reflеct Kahn, year Telecommu- productivity growth, Act 330-332, nications to an if subject upward adjustment to reflect inflation certain unavoidable necessary “exoge- nous costs” on which authorized to recover a company Red., return. at 6787, FCC 5.¶ Although price caps do not eliminate since there are still battles gamesmanship, to be over the offset and allowable fought productivity exog- Telephone supra, Assn., United States costs, enous at 524, do an incentive “to they give companies improve productiv- to the maximum extent ity those that possible,” by entitling offset to outperform productivity resulting keep profits, Red., 6787-6788, FCC Ultimately, ¶¶7-9. goal, rule, under the basic is to in- prudent-investment encourage vestment more productive equipment.

Before the of the 1996 Act, was, passage cap price level, the federal the final in a stage century developing What ratesetting had methodology. changed throughout Smyth v. Ames was the era beginning prevailing opin- base, ion on how to calculate the most useful rate with the between fair-value and cost disagreement advocates turning on whether was invested to the balance capital key right between investors and and with the ratepayers, price-cap scheme a rate-based offset to the ad- simply being utilities’ of the facts vantage superior cost- knowledge employed of-service What is remarkable about this fatemaking. evo- lution of however, just reasonable is what ratesetting, did not feature from change. enduring ratesetting Smyth v. Ames to the institution of was the idea price caps a rate base and then a fair rate calculating allowing of rates range it was a to a identify return on sensible way and rate- reasonable to investors and that would just dis- was the throughout period Equally enduring payers. From variants. rate-based satisfaction with the successive was lesson dissatisfaction, one this possible the constancy that Act, which was drawn in the 1996 regula- by Congress the traditional rate-based methodologies gave tion using the answer and that lay too monopolies great advantage to common all the the from moving away assumption within structure methods, rate-based that monopolistic markets endure. discrete would Act, of the Con- Under provisions local-competition from historical called for different ratemaking gress new objective uprooting to achieve the practice, entirely methods had rate-based traditional monopolies (1996). 104-230, H. No. R. Conf. p. perpetuated. Rep. A backer of the Act in the Senate new goal leading put this way:

“This is in the sense of telling private extraordinary to let what have to in order this is do industry they to economic come beat competitors try your brains out... .

“It is kind of almost I will do every- jump-start.... I business, have let into because we thing you my be a bottleneck; used to we used we be monopoly; used to control everything. much

“Now, this will control says you legislation will have allow for nondiserimina- You anything. access on an basis to network func- tory unbundled net- tions services of the Bell companies operating work at least equal price type, quality, the access Bell affords itself.” [a] operating company (1995) (remarks Breaux Rec. 15572 of Sen. Cong. (La.) 104-104). on Pub. L.

For time, the first a statute Congress ratesetting passed with the aim to balance just interests between sellers but buyers, to markets reorganize by rendering regu- lated utilities’ vulnerable to even monopolies interlopers, if that meant the traditional federal swallowing reluctance to intrude into local markets. The was telephone approach a deliberate, through hybrid scheme with jurisdictional basic, FCC a default for use in setting methodology setting rates when fail carriers but it to state agree, leaving commissions to set the utility actual rates.

While the Act is like its predecessors meth tying to the odology and reasonable” and non objectives “just rates, § 252(d)(1), U. S. it C. is discriminatory radically unlike all statutes that rates be previous set providing “without reference to a rate-of-return or other rate-based 252(d)(l)(A)(i). proceeding,” The Act thus to be appears disavowal of familiar explicit model of public-utility (whether rate in its fair-value or regulation cost-of-service incarnations) still presumably States being applied by many Implementation Competi In re Local for sales, retail see tion in Telecommunications Act FCC 15499, Rcd. of 1996,11 (1996) (First Order), ¶704 in favor of Report novel ratesetting designed give aspiring competitors incentive to enter local every possible retail mar telephone kets, short of confiscating incumbents’ property.

B market, incarnation such a physical a “local ex- is a network change,” terminals like connecting telephones, faxes, and modems to other terminals within a geographical area like From terminal city. network devices, interface wires, feeder called the “local collectively run loop,” are local switches that traffic into common “trunks.” aggregate The local was loop and is traditionally, still made of largely, wire, copper cable also though used, albeit to fiber-optic as the Just markets.10 than long-haul lesser extent far run trunks switches, to local runs from terminals loop tandem, switches, centralized, or the local switches from which oper- now hand but by computer, worked by originally other into traffic switches, directing like much ate railway terminal its destination toward A is sent trunks. signal routed back then far as necessary, so common these ways tele- the intended of switches hierarchy down another a trans- is thus A local exchange or other equipment. phone like radiating communications signals, for network portation (or offices several office” a “central from a root system the like. areas) faxes, and telephones, to individual larger a local exchange owns a that to company It is see why easy carrier,” local (what exchange calls an “incumbent the Act insurmountable an almost 251(h)) would have § 47 S. C. U. the calls within in not only routing advantage competitive in market, this local its control of but, exchange, through call- and long-distance markets terminal the equipment the incum- with well. A newcomer could compete as ing to close without local service coming to bent carrier provide network, the most entire the incumbent’s existing replicating down which would be laying and difficult of costly part thousands the local to the wire, “last of feeder mile” loop, millions) (or houses and of individual terminal points also its could control The incumbent businesses.11 company it manu- with terminals so to connect only local-loop plant (called fees conditions or and could selected, factured or place to con- carriers “access on long-distance seeking charges”) 10 technologies, cable and fixed wireless employ Some lines coaxial loop reported of the total number percent but these constitute less than FCC, Compe Telephone Local lines the United States. local-exchange 2002) (table 5). (Feb. 27, as of tition: Status June exchange in the local 11 A of the users connecting only mininetwork some customers, and, any value correspondingly, would be minimal value with the interconnection exponentially to customers would be increased Arthur, Returns Increasing W. more users to the network. See generally (1994). 1-12 Dependence Economy and Path in the world, nect with its In an network. another unregulated telecommunications carrier would be forced comply these conditions, or it could never reach the customers of a local exchange.

II Act both state and local prohibits regulation service,” “telecommunications impedes provision 253(a),12 § and incumbent carriers to allow com- obligates 251(c). markets, 251(c) to enter their local petitors Section addresses the difficulties of local practical fostering compe- tition three a com- recognizing strategies potential First, the mar- petitor may pursue. competitor entering (a 251(c)(2)) carrier, § ket decide to “requesting” may engage is, facilities-based to build its pure own competition, network to network of in- replace supplement If cumbent. an this course, entrant takes the Act obligates incumbent “interconnect” facilities competitor’s to its own network to whatever extent to allow necessary 251(a) (c)(2). §§ facilities to competitor’s operate. At the other end of the the statute spectrum, permits entrant construction and instead skip simply buy service,” resell “telecommunications which the incumbent 251(b)(1) has to sell at (e)(4). §§ wholesale. duty Be- tween these extremes, an choose to entering may competitor lease certain anof incumbent’s elements,”13 “network which 253(a) (1994 V) ed., § Title 47 U. S. C. Supp. provides: “No State or local statute or or State regulation, legal other or local requirement, may prohibit or have the effect of ability prohibiting any to entity provide any interstate or intrastate telecommunications service.” 13“Network element” defined as “a facility or in equipment used provision aof telecommunications service. Such term also fea includes tures, functions, and capabilities are by provided means of such or facility numbers, equipment, including databases, subscriber signal systems, ing and information sufficient for billing and collection or used transmission, in the or other routing, provision of a telecommunications 153(29). § service.” basis” “on an unbundled to has a the incumbent provide duty reasonable, nondiseriminatory.” that are terms “just, 251(c)(3). § resale, in for wholesale markets engaged

Since companies be cannot created of facilities or interconnection leasing, to for rates rates, without Congress provided addressing or state util- between carriers by be set either contracts by 252(a)-(b). Like fed- §§ other orders. commission rate ity a contracts authorize approved by eral statutes utility g., businesses, e. in rates between regulatory agency setting §717c(c) 824d(d) (Federal Act); 15 U. S. C. § Power U. S. C. (Natural incumbent and Act), the Act entering Gas permits 47 U. S. rate C. carriers agreements, private negotiate faith). 251(c)(1) § 252(a);14 § see also (duty negotiate good such are State commissions any accept utility required not a carrier unless it discriminates a agreement against contract, to the or is otherwise shown to contrary party 252(e)(1) (e)(2)(A). Carriers, §§ interest. public .to case an course, well not in which entering might agree, carrier a has a mediation state statutory option request 252(a)(2). § with commission, But the comes option strings, for to the mediation duties subjects parties specified §251 forth in 252(d), and the standards set pricing 252(a) Section provides: “(a) Agreements through negotiation arrived “(1) Voluntary negotiations interconnection, services,

“Upon or network receiving request title, elements to section 251 of this an incumbent pursuant local ex- change carrier into may negotiate binding agreement and enter telecommunications requesting carrier carriers without regard (b) (c) to the standards set forth in subsections section 251 of this title. The agreement shall include a schedule charges detailed of itemized for interconnection and each service or network element included agreement. The agreement, agree- interconnection including 8,1996, negotiated February ment before State shall be submitted (e) commission under subsection of this section.”

493 252(e)(2)(B). § the FCC’s These interpreted by regulations, are at issue here. regulations

As to the Act that when incumbent and pricing, provides carriers fail to state commissions will set requesting agree, and reasonable” and “just rate for “nondiscriminatory” interconnection or the lease of network elements based on “the cost of element,” ... network which providing “may §252(d)(1). include a reasonable In these profit.”15 setting rates, the state commissions are, however, to that subject limitation unknown to important previously utility regula- tion: the rate must be “determined without reference ato Ibid. rate-of-return or other rate-based In proceeding.” Corp. Bd., AT&T v. Iowa Utilities 366, 525 U. S. 384-385 (1999), this Court the FCC’s upheld jurisdiction impose new on the when States these methodology rates. setting The attack is on the of the today legality logic particular the Commission chose. methodology As the Act six months after its effective date required, the FCC in its implemented local-competition provisions First Order, whieh included as an Report appendix new order, issue. to the regulations Challenges mostly incumbent and state commissions, carriers by local-exchange were consolidated in the United States Court of Appeals FCC, Iowa Utilities Bd. v. Circuit. 120 F. 3d Eighth 753, (1997), aff’d in and rev’d in 366, 525 U. S. part part, FCC, (1999). also 934, See 124 F. v. 3d California (1999) (1997), rev’d in 525 U. S. part, (challenges Implementation Competition In re Local Provisions Telecommunications Act 1996, 11 (1996) Red. 19392 FCC (Second Order)). Report

So far as it bears on where we are the initial de- today, cision Circuit held that had Eighth FCC no au-

15Rates for purchases wholesale of telecommunications services are covered separately, and must be based on the incumbent’s retail rates. 252(d)(3).

494 commissions state to control the methodology

thority could carriers rates the incumbent local-exchange setting 51.505(b)(1) § 47 elements, CFR entrants for network charge supra, FCC, Bd. v. The Iowa Utilities 800. at (1997). the misconstrued also the FCC plain held that Circuit Eighth 251(c)(3) a “combination” set of §of in implementing language §§51.315(b)-(f) most (1997), the important rules, 47 CFR not LEC shall sepa- that “an incumbent of which provided LEC that incumbent network elements rate requested 51.315(b). combines,” 3d, § 120 F. at 813. On currently view the FCC’s hand, other the Court of accepted Appeals facilities Act no threshold ownership that the required and 328-340, and carrier, First Order ¶¶ Report requesting which read “net- 319, §51.319 (1997), Rule CFR upheld carriers work elements” incumbent require broadly, functions, also and but services only provide equipment (e. g., databases), as such billing operations systems support assistance, 51.319(f)(1), § and services directory operator § and like call-waiting vertical features switching 51.319(g), 413. 120 F. D., 263, and Order and caller I. First Report ¶ ¶ 3d, at 808-810. in

This Court affirmed reversed. part larger part Corp. Bd., AT&T Iowa Utilities S., v. at 397. We U. reversed FCC’s jurisdiction upholding, “design commissions, to bind state pricing methodology” ratemaking id., rules, well 385, at as one of the combination FCC’s 315(b), Rule incumbents from currently barring separating when them to en- combined network elements furnishing id., that them in We form, trants a combined at 395. request 319, down Rule also reversed holding striking was its for blanket access to elements network provision inconsistent with the standards “necessary” “impair” 251(d)(2), S., at affirmed U.S.C. 525 U. 392. We broad defi- Circuit, however, in the FCC’s Eighth upholding id., nition of network elements to provided, FCC’s Act no understanding facilities- imposed id., 392-393. case then re- ownership requirement, Id., turned to the Circuit. at 397. Eighth With the FCC’s to establish a general authority pricing secure, the incumbent carriers’ chal- methodology primary on remand went to the lenge method that the Commission chose. There was also renewed over the combi- controversy (Rules 315(c)-(f)) nation rules Circuit had Eighth struck down 315(b), Rule but which this along upon Court no it when reversed the invalidation expressed opinion (2000). of that latter 744, rule. 219 3d F.

As the for method to derive a “just “nondiscriminatory,” and reasonable rate for network elements,” the Act requires the FCC to decide how to value “the cost ... of provid the . . . network element include a ing [which] reason may (as seen) able the FCC is profit,” forbidden although already to allow “reference to a rate-of-return or other rate- 252(d)(1). § based Within the discretion left proceeding,” it after on a “rate-of-return or eliminating any dependence other rate-based a the Commission chose proceeding,” way of “cost” as economic cost,” treating “forward-looking (1997), §51.505 CFR distinct from the his kind of something based cost torically relied a generally rate upon valuing Hope Natural Gas. base after In Rule the FCC de fined the economic cost of an “forward-looking element [as] (1) the sum of the total element incremental cost long-run (2) of the element [TELRIC]; a reasonable [and] allocation common costs,” 51.505(a), § common forward-looking costs “costs incurred being a of elements providing group that “cannot be attributed elements,” individual directly 51.505(c)(1). § Most all, the FCC decided that important the TELRIC “should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration, given location of the existing wire centers.” incumbentfs] 51.505(b)(1). has of an element three components, “The TELRIC cost, appropri- operating expenses, depreciation and Order cost of First Report ate risk-adjusted capital.” 51.505(b)(2)- omitted). §§ (footnote also 47 See CFR (1997). it (3) Assume that A concrete example may help. element; efficient loop cost a most year would operate $1 on that it would take for interest payments capital $10 to build the lowest cost loop carrier would have invest wire centers centered carrier’s existing incumbent upon would be annum); and $100, $9 at 10 (say percent per (an useful for 11-year reasonable loop depreciation would life); element then the annual TELRIC the loop be $20.16 §252(d)(l)’s understood reference Court Appeals the . . network element” “the cost ... . providing

to be and “his- between “forward-looking” ambiguous torical” so that a method cost, ratesetting forward-looking of the would a reasonable presumably implementation af- But statute. Circuit Eighth ambiguity thought Act that, forded no and the to read beyond require leeway on the incre- be “based any forward-looking methodology mental incurs will incur [incumbent] costs that actually its network the unbundled access to providing... specific 3d, the Hence, 219 F. at 751-753. Cir- elements.” Eighth 252(d)(1) § cuit held use of the that foreclosed the TELRIC words, In the the Act as other court read methodology. rates based on the “actual” not “hypo- plainly requiring element,” thetical” “cost the . network ... . . providing Id., and was latter. reasoned TELRIC the clearly 16The actual TELRIC charged leasing an entrant the element rate be would a projec fraction the TELRIC based on a “reasonable figure, (whether a or per-usage tion” the entrant’s use of element flat the basis) entrant, as by the the by aggregate divided total use of the element incumbent, §51.511 competitor other 47 CFR any and leases it. (1997). Report See also First and Order 682. 750-751. The if added, however, Circuit it were Eighth were and TELRIC the claim that in wrong permitted, pre- TELRIC the FCC had effected an scribing unconstitutional not would until rates have taking “ripe” been “resulting Id., determined and 753-754. applied.” The Court of and also, time, second in- Appeals §§51.315(c)-(f) validated 315(c)-(f), Rules 47 CFR (1997), the FCC’s so-called “additional combination” rules, apparently for the same it reason had before, them it rejected when 315(b), struck down Rule the main combination rule. 3d, at F. 758-759. In brief, the rules an incumbent require carrier, upon request compensation, “perform functions to combine” network elements for an necessary entrant, unless is the combination not feasible.” “technically Id., at 759. The Circuit read Eighth language §251(c)(3), with its reference to carri- “allowing] requesting elements,” ers combine ... unambiguously requiring carrier, incumbent, do requesting providing Ibid. all combining. us,

Before the incumbent carriers local-exchange claim error that a Circuit’s Eighth holding “forward-looking (as cost) cost” to the use of “historical” methodology opposed 252(d)(1), consistent with its conclusion that the use of the TELRIC cost forward-looking methodology presents no claim. The “ripe” FCC and on the takings entrants, other seek side, review of the Circuit’s invalidation Eighth of the TELRIC and the additional combination methodology rules. We certiorari, (2001), U. S. and now granted affirm on the issues raised the incumbents, and reverse by on those raised FCC and entrants.

Ill A The incumbent carriers’ first attack the FCC with charges the of the ignoring plain “cost” meaning word as it occurs reasonable 252(d)(1) “the that just § in the of provision the cost based ... shall be ... elements for network rate or other (determined rate-of-return reference without ele- the . . network . of rate-based providing proceeding) in theory incumbents do argue The ment . . . but methodology, forward-looking the statute precludes awith cost of competitor claim that the providing do they the be calculated using future must in the network element means and the element the incumbent’s investment past re- in the statute “cost” contend that it. They providing was in “what define as cost, which they to “historical” fers “the “value,” or as distinct from asset, for a fact capital paid” market.” Brief for on the that would paid open price the technical 00-511, 19. Petitioners No. They say p. ibid., “cost” is expenditure,” “past capital meaning and “embed- “historical” between an they equation suggest id., as “the costs which the FCC defines costs, ded” and that are in the the LEC incurred past incumbent accounts,” 47 CFR in the LEC’s books of recorded incumbent 51.505(d)(1) (1997). to the The boils down argument propo- can network element” that “the sition cost providing in this technical mean, particular only plain language cost an incumbent of context, the furnishing spe- past to be cific network element actually, provided. physically, At the most have battle. incumbents picked uphill im- has clear basic level of common “cost” no such usage, A merchant who is asked about “the cost plication. pro- cur- he sells their reasonably viding goods” may quote rent wholesale not the cost of market particular price, his which have shelves, items he to have on may happens been or lower higher prices. bought shifts from common into

When reference speech realm, technical still have to attack incumbents uphill. with, To even we have dealt with historical costs when begin the cаses never assumed a sense basis, as a have ratesetting

499 of “cost” as as the incumbents seem to claim.17 generous used in base “Cost” as rate under the tradi calculating tional cost-of-service method did not stand for all past capital but at most for those that were while expenditures, prudent, investment itself could be denied when prudent recovery useless, events rendered investment Duquesne unexpected Barasch, Co. v. S., 488 U. at 312. And even when in Light vestment was base, includable in the rate ratemakers wholly costs,” often the utilities’ “embedded their own rejected book-value which estimates, were to maxi typically geared mize the rate base with of statements high past expenditures combined with low rates of working capital, de unduly See, e. Gas, Natural S., 320 U. g., Hope preciation. 597- 598. It also would be mistake “cost” was forget term in value-based and has in contem ratemaking figured state and federal untethered porary to histori ratemaking cal valuation.18

What is is that the incumbents’ equally important plain- meaning argument in which ignores statutory setting the mandate to use “cost” in network elements valuing First, occurs. Act uses “cost” an intermediate term 17Nor is it possible argue that past “cost” would have mean in curred if cost the technical context were economics. See D. Carlton & Perloff, (2d 1994) (hereinafter J. Modern Industrial 50-74 Organization ed. Perloff). Carlton & costs; “Sunk costs” are past unrecoverable practically every other sort of economic “cost” is forward or can be looking, either cost,” historical or forward looking. “Opportunity is “the example, of the value best forgone alternative use resources employed,” id., 56, and as such always forward See Sidak looking. Spulber, & Tragedy of the Telecommons: Government Pricing Unbundled Network Elements Under the 1996, Telecommunications Act of 97 Colum. L. Rev. (1997) (hereinafter 1081,1093 Telecommons) & Sidak Spulber, (“Opportu are nity costs ... definition forward-looking”). 18See, e.g., Exploration Southeast, Mobil Oil Producing & Inc. v. Cos., United Distribution 211, (1991); 498 U. S. Potomac Elec. 224-225 ICC, (CADC Power Co. v. 185, 1984); 744 F. 2d 193-194 Alabama Elec. FERC, (CADC 1982). Coop., Inc. v. 20,27 684 F. 2d Cf. National Assn. of Greeting Service, Card Publishers v. Postal (1983). U. S. rates,” S. C. reasonable U. in the calculation “just Hope Natural Gas and it 252(d)(1), was very point rates to set expressed bodies required regulatory to choose methodology, have discretion these terms ample Second, it would have been S., passing 320 U. at 602. with- to historical cost think tied “cost” strange Congress when the same sentence indication, a more very out specific ato reference any that “cost” also prohibits requires pricing §252(d)(1), or rate-based “rate-of-return other proceeding,” ever been identified with historical cost each of which has Hope Natural Gas since was decided.19 of that without better indication The fact is meaning 252(d)(1), §in as term, than the the word “cost” unadorned v. Com Strickland chameleon,” “a in is generally, accounting Dept. Services, missioner, Maine Human 542, 96 3d F. of (CA1 term, Estes, 1996), R. 546 a “virtually meaningless” 1985). (2d As of ed. Dictionary Accounting Justice Bd., Breyer it in Iowa Utilities words like “cost” “give put commissions broad leeway; they methodological ratesetting to determine a little about the ‘method say par- employed’ 19The based on plain-language incumbents make their own argument 252(d)(1)(B) § context, of that statutory part provides on the which relying They just “may profit.” say a and reasonable rate include a reasonable 252(d)(1)(A) § made in separate provision factoring because is rate, into the as income profit” only “cost” “reasonable be understood may as of cost of an incumbent’s investment. But recovery above the actual noted, profit, has mean “normal” which is “profit” may the FCC also firm, of a including “the total revenue all of the costs required to cover 699, opportunity (citing its costs.” and Order and n. 1705 Report ¶ First (1994)). Pearce, D. Dictionary MIT of That is to Modern Economics say, profit” may a return based on “the “reasonable refer to “normal” in obtaining industry. cost of equity financing” debt and prevailing (and “cost” Report accordingly First and Order 700. This latter sense of ¶ in the profit”) fully incorporated “reasonable FCC’s provisions is adjust the “risk-adjusted capital,” namely, may cost of that “States cost if capital ... or a lower level party higher demonstrates either a warranted, of cost a ‘rate-of-return capital conducting without... ” Id., other 702. proceeding.’ rate based S., rate.” at 423 ticular in U. (opinion concurring part We reach the conclu- dissenting part). accordingly sion Court adopted by Appeals, nothing 252(d)(1) reference to historical investment plainly requires when rates to “cost.” pegging forward-looking

B The incumbents’ alternative is that with- even argument a stern out anchor “the cost... calculating providing . element,” . . network the particular forward-looking the FCC chose is neither with the consistent methodology 252(d)(1) §of nor within the zone of reasonable plain language to deference under A. interpretation subject Chevron U. S. Inc. v. Council, Inc., Natural Resources 467 U. S. Defense (1984). This is so, 843-845 because TELRIC they say, calculates the cost reference to a forward-looking by hypo- thetical, centers, most efficient element at wire existing the actual network element being provided.

1 The short answer to the that TELRIC violates objection is the same as much the answer to the plain language pre- vious for what the call incumbents plain-language argument, the element is the in “hypothetical” element valued simply terms of a of piece incumbent not own. equipment may claim, This like considered, the one is that just plain language bars definition of “cost” untethered to historical invest- ment, and as the term already, “cost” is too explained simply to the incumbents’ protean support argument.

2 claim Similarly, TELRIC exceeds in- reasonable is to noted, terpretative leeway open objection already for responsibility reasonable” rates leaves “just subject discretion. methodology largely Permian Basin (“We Area Cases, (1968) Rate 747, 390 U. S. 790 must re- of the Commission’s the breadth and iterate that complexity reasonable it be demand that every given responsibilities of to formulate methods appropri- regulation opportunity difficulties”). ate for the solution of its intensely practical (“When a 843-845, 866 Chevron, at See supra, generally construction of a statutory to an provi- challenge agency of the wisdom on centers sion, really fairly conceptualized, it a reasonable than whether is rather the agency’s policy, left within a challenge choice by Congress, gap open fail”).20 ar- field three must nevertheless incumbents Breyer challenge propriety does not explicitly While Justice Assn. in Motor Vehicle deference, Chevron he on our relies decision Mfrs. Co., States, Ins. United Inc. v. State Farm Mut. Automobile 463 U. S. 29, 56 (1983), no “rational FCC’s choice of TELRIC bears argue that the post, connection” the Act’s See deregulatory purpose. (opinion State Farm involved re part dissenting part). concurring aof interpretation view of an course” as to the agency’s “changing its statute, S., 42; cases, contrast, by 463 U. involve the FCC’s first these statute, Farm to the State inapposite of a and so interpretatiоn new searching judicial extent that it more review may prescribing read State Farm (Indeed, bemay under the read circumstances that case. conclusion, have some that the FCC would had suggest obverse favoring more to do if had not its course TELRIC explaining changed by it costs, given over Con forward-looking methodologies tethered actual gress’s depart past ratesetting passing clear intent to from statutes Act.) Breyer’s terms, But rules low stressing even Justice own FCC with the wholesale are no means inconsistent prices deregulatory below, competitive purposes policy promoting Act. As we discuss lower lease to be reduces prices expensive unlikely duplicated facilities entry (particularly puts competi- barriers to for and competitors) smaller (but prices prices tors that can afford wholesale not the the higher these incumbents like to in a build own position would their versions charge) expensive sensibly less facilities See n. duplicable. that are infra. infra, Ramsey See also at objection pricing). 515-516 FCC’s (discussing Breyer true, And while it Act “deregula- as Justice that the was says, tory,” in “regulatory” the intended sense of from traditional departing (remarks Breaux), that at supra, ways monopolies, coddled see Sen. that deregulatory character does the FCC to em- necessarily require ploy passive incumbents’ and pricing proposed rules methods deferring contend, first, that method of guments. They calculating wholesale lease rates based on the costs of providing hypo- thetical, most efficient elements simulate the may competi- tion envisioned the Act but does not by Second, induce it. that even if rates based on they ele- argue hypothetical ments could induce in cannot TELRIC competition theory, this, do because it does not the provide depreciation costs that the risk-adjusted capital theory compels. Finally, the incumbents that even if these an- can be say objections swered, TELRIC is and hence com- needlessly, unreasonably, plicated impracticable. (and incumbents’ basic critique Breyer’s) Justice

of TELRIC is that rates for leased ele- by network setting ments on the assumption TELRIC perfect competition, creates incentives perversely against fact. competition See at 548-551. The incumbents that in post, say purport- to set incumbents’ ing wholesale the level prices in a (in would exist market order to perfectly competitive make retail prices TELRIC sets similarly competitive), rates so low will entrants lease and never build net- always work elements. See at 549-550. And even if an en- post, trant would otherwise consider a network element building more (the efficient than the best one then on the market one assumed rate), the TELRIC it would setting likewise be deterred its lower cost prospect building this new element would be operating available immediately to its TELRIC, under competitors; assert, incumbents rate lease incumbent’s element in- would existing cost contrary, data. statutory On provisions the incum- obligating 251(c)(3), § bents to lease their property, and offer their services for resale rates, 251(c)(4), wholesale are consistent with promulgation of a method ratesetting leaving state commissions to do work of setting rates without reliance on historical-cost data provided by incumbents. of the cost21 entrant’s match the marginal stantly drop ante, 550; at for Re- Brief once built. See new element 28-29. etc., 00-555, in Nos. BellSouth et al. pp. spondents be, will not incumbents, the result competi- to the According inca- free TELRIC tion, but a of sort riding, leaving parasitic intendеd of the facilities-based competition stimulating pable by Congress. no- answers to this

We think there are three basically (1) the TELRIC stimulation of unreasonableness: claim not that the relevant markets does assume methodology several and the scheme includes are competitive, perfectly that undermine features inefficiency plausibility (2) no-stimulation the incumbents’ argument; comparison the incumbents as TELRIC with alternatives by proposed stated answered are FCC’s more reasonable plausibly (3) investment alternatives; actual reasons reject date of the Act facilities since the effective competing conclusion. no-stimulation belies the simply argument’s (1) The of the incumbents’ no-stimulation basic assumption As is to fact. we argu- argument contrary explained, ment that in a efficient rests on perfectly assumption market, no one who can lease a TELRIC rate will ever build. But efficient TELRIC does assume a perfectly wholesale to resemble market or one likely perfec- tion time. thus make foreseeable incumbents any same we to the mistake attributed a different setting Bd., Iowa Utilities FCC In itself. we the FCC’s rejected (1997), §51.319 which rule, CFR neeessary-and-impair lease incumbents network element required an cost reduce, however entrant’s might slightly, marginal service, a telecommunications providing compared the service the entrant’s own providing using equivalent “the “Marginal producing goods] cost” is increase in total cost [of id., 272; from also arises unit of See Mankiw see production.” extra 283-288, 312-313; & 51-52. Carlton Perloff S., element. a 525 U. 389-390. “In of world com- perfect in which all carriers are their service at petition, providing cost, Commission’s total increased marginal equating (or cost decreased quality) ‘necessity’ ‘impairment’ reasonable, but it has not might established the existence Id., such an ideal world.” at 390. that, Not but the only FCC has of its accord own allowed for in TELRIC in inefficiency additional design ways the likelihood that will affecting TELRIC com- squelch First, facilities. the Commission has petition qualified ratesetters cal- assumption efficiency by requiring culate cost on the basis of “the location of the incum- existing 51.505(b)(1) (1997). wire centers.” bent[’s] CFR This means that certain network elements, principally local-loop elements, will not be at their most efficient cost priced extent, to the that a shorter configuration could say, loop serve a local if the incumbent’s wire centers exchange were a fit relocated for with the current snugger geography terminal locations.

Second, rates in TELRIC will differ from the practice of a market perfectly to built-in products competitive owing In a adjustments. mar- lags price perfectly competitive ket, retail to the of the prices drop cost instantly marginal most 283-288,312-313. efficient See Mankiw As company. the incumbents out, this would deter market be- point entry cause a entrant would know that even if it could potential a retail at a cost, service lower provide it would marginal lose that it once entered the instantly competitive mar- edge ket and to match adjusted its See Brief competitors price. for 00-555, BellSouth et al. in Nos. Respondents etc., 28- 29. rates, Wholesale TELRIC however, are set state by commissions, arbitrated usually with 3- or by agreements see terms, Brief for 4-year Communica- Respondent Qwest International, tions Inc., Nos. 00-511, etc., 39; p. Reply Brief for Petitioners Worldcom, 6; et Inc., al. Brief for Reply Respondent 3; and n. Sprint Brief for Corp. Peti- Reply that a 11-12; tioner AT&T and no one claims Corp. competi- a TELRIC rate on tor could receive on demand immediately entrаnt who a leased element at the cost of the marginal a more efficient introduces element.

But even if could call a new TELRIC competitor rate more the introduction of a proceeding immediately upon efficient entrant, element competing competitor call; would not to make the know necessarily enough fact of the element’s become would efficiency only greater when reflected in lower retail de- apparent prices drawing mand from incum- away existing competitors (including bent), them to look to their own forcing lowering marginal In costs. take some innovat- it would time for the practice, in entrant to install the new to mar- ing equipment, engage business, lower retail to and attract ‍​‌‌‌​‌‌‌​​​​​‌​‌‌‌‌​​‌​​‌‌​​​‌​​​‌​‌​​​​​‌‌‌‌‌‌​‍keting offering price to steal customer the lim- away enough subscriptions (given ited for local customers opportunity capture untapped service) for telephone competitors register drop demand. it bears that the

Finally, meas- reminding FCC prescribes urement of the TELRIC “based on the use of the most ef- ficient telecommunications available,” technology currently 51.505(b)(1) (1997). 47 CFR to that condition of Owing current a most cost of efficient availability, marginal element that an entrant alone has built and uses would not set a new standard until it became available to com- pricing as an alternative petitors to the incumbent’s corresponding element.22

22The state Michigan commission’s September 1994 order implement ing long-run incremental cost method for leasing local-exchange net elements, work considered, which the FCC and Report see First Order 631, 1508, and n. makes this limitation explicit by more specifying that rates are to be set based on the costs of using elements most efficient technology “currently purchase.” available for Michigan Pub. Serv. Comm’n, Re A Cost, Methodology Determine Run Long Incremental (1994). 7,13 156 P. U. R. 4th reviewing position

As a we of are, Court in no course, precise significance assess economic these other exceptions perfectly functioning to the market that the in enough recog cumbents’ criticism it Instead, assumes. assumption may nize that the incumbents’ well be incorrect. may Inefficiencies provide built into the scheme incentives opportunities competitors to build their own network (such perhaps pricing elements, for reasons unrelated to possibility expansion into data-transmission mar by deploying technologies, post, kets “broadband” cf. at 552 concurring part J., dissenting part), (Breyer, desirability independence from an incumbent’s man elements). agement and maintenance of network In significance event, the may of the incumbents’ mistake of fact by argument here, be indicated best not but the evidence competition actual investment in facilities-based since III-B-2a-(3), effect, went to be TELRIC into discussed Part infr a.23

(2) futility Perhaps sensing unsupported of an theoretical complementary argument attack, the incumbents make the that the might FCC’s choice of TELRIC, whatever be said about it on terms, its own was unreasonable aas matter of law because other methods of determining cost would have job inducing competition. done a better Having of consid- 23 Breyer Justice characterizes these built-in inefficiencies as well as for state-commission as provisions permitted discretion to of costs depreci III-B-2-a-(2), ation and capital, see Part infra, as “coincidences” that have competitive favored considerable by investment sheer luck. See post, at 552. He thus shares the of an efficient assumption market madе by the in argument, incumbents, incumbents their and like the dismisses departures from the theoretical assumption perfectly of a competitive market as inconsistencies rather than pragmatic The recognitions. FCC is, course, of under no obligation to a adopt ratesetting scheme committed perfection to in realizing theory, economic First Report see and Order ¶ 683 a (rejecting pricing premised fully “hypothetical on least-cost most network”). efficient 508 reasons FCC alternatives and the

ered the proffered 51.505(d) (1997); First Re- them, 47 CFR for rejecting gave FCC 630-711, we cannot say and Order ¶¶ port the man- to in TELRIC promote picking acted unreasonably dated competition. alternatives three principal

The incumbents present meth- elements: embedded-cost rates for network setting rule, and Ramsey pricing the efficient component odologies, meth- these that one or another of The arguments pricing.24 it was a basic claim: TELRIC share is to preferable odologies method of rates setting to choose a unreasonable for the FCC costs include, at some additional that fails to least theory, run,25 be- be efficient what would most long beyond a better costs will do such lease cause rates incorporate once is that an The of theory competition26 job inducing Bheyer sys of ear’ formal kind it ‘play a “less proposes Justice Community yet another alter European practices tem” based recent 558; have native, appear do not to advo post, see but the incumbents FCC, Report First such an scheme see ratesetting cated informal 630-671, they argued for this alternative before ¶¶ and Order nor have Breyer’s empha proposal the extent that Justice this Court. And to vary rates to local circum according sizes state commissions’ discretion case, is already of is a feature that particulars stances and the each this into See at 519-520. infra, built TELRIC. run, or avoidable.” In the “all firm’s costs become variable long a Kahn, Act See also Telecommunications Report First and Order 677. (“[A]ll minimized”). In the costs of general, costs are variable and depend a include Variable costs producing good variable fixed costs. much a produced, copper on how is like the make good loop cost costs, rent, rises like which as the made fixed must loop longer; paid event how much is See Carlton & regard produced. without 51-56. long Perloff The run is a timeframe of sufficient duration that company has fixed costs of production. no fixed costs argument necessary that rates are incorporating Indeed, III-C, avoid is taken in Part taking up unconstitutional infra. rely expert literature the incumbents on to advocate fixed-cost rate- 514-515, exclusively on systems, infra, see do so almost setting premise confiscation, thus little unwanted offer averting support greater entrant has its door, foot it will have a incen- operate tive to build and its own more efficient network ele- something if the rates reflect of the ment lease incumbents’ marginal actual and inefficient costs. And once the entrant develops marginal element its lower cost and the retail price drops accordingly, the incumbent will have no choice by building innovate itself but to most efficient ele- ways marginal finding ment or its to reduce cost to retain its market share. generic proposed feature of the incumbents’ alterna- degree words, in other is that some long-run

tives, ineffi- ciency ought through preserved to be rates, lease give order to a more entrant efficient alternative leas- ing. already we course, Of have seen that itself TELRIC degree pricing existing tolerates some inefficient its configuration requirement through wire-center the rate- making development lags just aside, described. This objections generally however, there are at least two any desirability may undercut that such alternatives seem offer over TELRIC. objection

The first turns on the fact that a lease rate that compensates degree existing the lessor for some ineffi- (at run) ciency perspective long from the least of the is sim- ply higher higher a rate, and the difference between a such keeps rate and the TELRIC rate could be the difference that potential competitor entering a from the market. See n. (“[I]n Report First areas, Cf. and Order some infra. providing competing may the most efficient means of service through loops. pre- the use of In such cases, unbundled venting loops discourage access unbundled would either potential competitor entering from area, the market in that thereby denying competi- those consumers the benefits of competitor unnecessarily tion, or cause the construct du- for the incumbents’ argument recovery of fixed costs is better way (as incumbents). to spur competition opposed to compensating resources”). facilities, societal thereby plicative misalloeating for If the bottleneck is TELRIC rate for elements $100 switches) $10, other elements (say, entering competitor own, that can switch at what its more efficient provide to a If the amounts rate can enter market for $107. $7 $110) rate for lease the bottleneck elements were higher (say, of the bottleneck reflect some elements inefficiency $150, cost the incumbent then the with entrant actually only will be Is to risk more out. it better $107 kept keeping out, entrants induce them to less potential compete with facilities lessened incentives to build capital-intensive their own bottleneck It was not unrea- facilities? obviously sonable for the FCC to the latter.27 prefer Breyer bemay right that “firms that share facilities Justice existing (at do share,” not compete respect to the facilities that they post, at 550 future), least in the near but fully point this is consistent with the FCC’s may entrants need to share very some facilities that expensive are elements) other, duplicate (say, loop in order to compete be able to more sensibly duplicable (say, elements switches digital or signal-multiplexing Breyer words, technology). In other no makes accommodation Justice faced, for the practical the FCC difficulty competition as to “un cases, shared” in may, many elements only possible if incumbents simul taneously share with entrants some costly-to-duplicate jointly elements necessary to provide a desired service. Such telecommunications is the (without faced reality hundreds of smaller entrants the resources WorldCom) of a large carrier competitive such as AT&T or seeking gain toeholds markets, in local-exchange FCC, see Local Telephone Competi 30, 4, (Feb. 2002) (485 tion: 2001, Status as of June n. p. 13. firms Breyer carriers). self-identified competitive local-exchange Justice elsewhere recognizes that the Act require “does not the new entrant and incumbent to compete elements, in respect to” the “duplication of [which] would prove unnecessarily expensive,” at 546. It is in post, way this just that the Act allows for may an entrant that have to lease some “unneces sarily expensive” conjunction elements in its own building elements to provide a case, telecommunications service to In consumers. this low prices the elements to be leased become in inducing crucial the com petitor (wholesale to enter and build. Cf. First and Order Report ¶ 630 prices should “appropriate send signals”). general objection

The second turns the incumbents’ attack against on TELRIC the incumbents’ If own alternatives. problem with TELRIC is that an entrant will never build competitors because the instant it builds, other can lease (but efficient) analogous existing less element from an assuming incumbent at rate the same most efficient mar- ginal problem persists cost, then same under incum- bents’ methods. For as soon as an entrant builds more price element, efficient the incumbent will be forced to to match,28and that rate will competi- be available all to other point, things tors. The course, of is that simple. are not this price As we have adjustment said, under TELRIC, is not instantaneous in rates corresponding for leased element to innovating an entrant’s more efficient element; the same presumably would be true under the incumbents’ alternative though they say methods, do not come out and it. get specific

Once we into the details of the alternative methods, other infirmities become that evident undermine reasonably the claim that the preferred FCC could not have methodology, prob- As an TELRIC. for embedded-cost the any part lem with a method that on cost, relies historical say they actually the cost the leasing incumbents incur in pass elements, network it will that the lessees differ- ence between most efficient cost and embedded cost.29 See Report Any First and Order 705. such cost difference is inefficiency, by poor management whether caused result- ing higher operating poor costs strategies investment

28That is if say, the entrant could offer telecommunications service at a price, lower retail competitors the including incumbent would have to match that price by costs, into looking ways marginal reduce their the incumbents’ recalibrated would costs form the basis newof lease rates. 29 In theory, cost, embedded cost could be than lower efficient see Brief incumbents, for Respondent Parties n. (though Federal the under standably, tack); do not avail of themselves this which case goal of efficient competition would be set back for the different reason of too entry. much market depreciation. ele- capital If leased have inflated according the in- priced costs, to embedded

ments were competitors in pass these inefficiencies cumbents could extent defeat elements, and to that wholesale need of their forcing on all car- competitive purpose efficient choices upshot would or entrants. whether incumbents riers pay. Id., have to higher prices would retail consumers ¶¶ 655 and 705. inefficiency objections other than are, course,

There ratemaking relies on embedded costs method data, with allegedly in incumbents’ book-cost reflected manipulation presents. if in- Even possibilities this operating elements at have and are leased cumbents built temptation economically would remain to costs, efficient per- ratemaking and so overstate book costs to commissions price-cap petuate problems to the that led intractable supra, innovation. See at 486-487. argument Act itself forbids

There is even an rejected this and while methods, the FCC embedded-cost reading Report statute, absolutistic First Order say statutory language 704,30it seems that the safe to places heavy presumption against аny a method resem bling the model of rate- traditional embedded-cost-of-service setting.31 very proposing least, At the an embedded-cost

30 ‘(determined “We a parenthetical, find that the without reference to rate-of-return or other rate-based does not further define the proceeding),’ considered, may of costs that be but a of type specifies type pro rather ceeding may employed not be determine the cost of interconnection (foot and unbundled network elements.” First and Order Report ¶704 omitted). note 31The parenthetical provision that “cost” for must ratemaking purposes be without reference to “determined a rate-of-return or other rate-based 252(d)(l)(A)(i), § 47 proceeding,” U. C. was in version of S. the Senate the Act, 652, Sess., but not in the House version. Cong., S. 104th 1st 251(d)(6)(A) (1995) (“[T]he (A) (i) . . . on the charge shall be based cost (determined without reference to a rate-of-return or pro other rate-based element...”). ceeding) of the unbundled Both the providing Senate and House bills language contained additional that was not enacted to the ef- alternative is a counterintuitive to show way selecting TELRIC was unreasonable.

Other incumbents was the FCC unreasonable to say pick TELRIC over a method of called ratesetting commonly (ECPR). the efficient rule See Brief for component pricing International, Inc., Communications Respondent Qwest 00-511, etc., Nos. at 40-41. ECPR would base rate for the a leased element on its efficient most incremental long-run TELRIC) cost like the the (presumably, something plus cost to the incumbent when the entrant opportunity leasing feet “rate of return regulation” would “eliminated” or prescribing 652, 301(a)(3) (1995) Sess., § its “abolition.” S. 104th 1st Cong., provided: “Rate of Return Eliminated— Regulation “(A) (1) In price flexibility required instituting under paragraph Commission and the States shall establish alternative forms of regulation for Tier telecommunications carriers that do of regulation not include of rate return such carrier .. ..” earned 248(b) 1555,104th (1995) Sess., § H. 1st Cong., R. stated: law, other of “Notwithstanding provision to the extent carrier that a complied Commission, has with sections and 244 of this part, respect communications, rates for interstate or foreign and State com- missions, with communications, to rates for respect intrastate shall not rate-of-return require regulation.”

The Commission inferred from of express the omission prohibitions that Congress intended to forbid “type proceeding” a method. This was reasonable inference light practice the common setting rates by incorporating wholesale contracts retail rates set in state rate-of- FERC, see, g., e. 60, Boston Edison Co. v. return proceedings, 233 F. 3d (CA1 2000), n. 1 only though Congress not the one: exam- may, for ple, have balked at limiting state at such a regulation specificity. level of Breyer’s Less plausible is Justice interpretation lan- statutory guage, “reflecting] Congress’ perfect desire to obtain not but prices results,” 559; post, speedy he provision concludes that “specifies methods, that States need not use formal relying upon instead bargaining ibid. Section 252(d)(1), and yardstick competition,” however, specifies how a state should commission set rates when incumbent en- an and an 252(a)(2); then, to bargain, trant fail reach a it seems strange, read statutory prohibition affirmatively as urging bargaining regula- more tory flexibility, than rather as firing warning shot state commissions clear steer practices perceived entrenched to perpetuate incumbent monopolies.

the element telecommunications serv provides competing Bd., it. See Iowa Utilities S., ice 525 U. at 426 using J., in in part); concurring part dissenting (Breyer, & D. J. Sidak Spulber, Deregulatory Regula Takings (1997); Contract 284-285 First and Order 708. tory ¶ Report is cost the retail revenue loss suf opportunity pegged fered the incumbent when entrant the serv by provides Ibid. ice its stead to its former customers.

The FCC ECPR because its calculation rejected oppor- cost relied on retail tunity existing prices monopolistic markets, which bore no relation to efficient local-exchange “We is cost. conclude that ECPR marginal improper method for of interconnection and unbundled prices setting network elements because the retail existing prices would be used to incremental costs compute opportunity under Moreover, ECPR are not cost-based. does ECPR mechanism for com- provide towards moving prices Id., levels; it takes petitive simply 709. prices given.” In effect, cost, it adjustment because opportunity turns on retail embedded pre-existing prices by generated costs, would on the same inefficiencies and be pass vulnera- ble to the same information asymmetries ratemaking aas embedded-cost scheme.32 straightforwárd

The third of alternative category methodologies proposed focuses on costs over an intermediate where term some fixed costs are unavoidable, as run. TELRIC’s opposed long supra run). See n. (defining The fundamental long intuition this method of underlying is that com- ratesetting petition favored actually incumbents rate re- allowing 32ECPR advocates have since responded that the FCC was wrong to assume a static tether to ECPR, retail uncompetitive because prices, prop erly employed, would dynamically readjust the opportunity-cost factor as retail prices drop. Spulber, Sidak & Telecommons But 1097-1098. this would not cure the distortions by passing caused any difference between price retail and most efficient cost back to the incumbents as a lease premium.

covery efficiently of certain fixed costs incurred the inter- mediate term. commonly proposed

The most variant of fixed-cost recov- ery ratesetting “Ramsey pricing.” is See Iowa Utilities supra, Bd., at 426-427 concurring J., part (Breyer, dissenting part). Ramsey pricing originally was theo- discriminatory rized as method of taxation of commodities generate discouragement revenue with minimal of desired consumption. Ramsey, A Theory Contribution to the (1927). Taxation, underlying 47,58-59 37 Econ. J. prin- The ciple goods priced should according be taxed or prices higher demand: taxes or goods should be toas for relatively which demand is Optimal Train, inelastic. K. Regulation: Theory Monopoly The Economic Natural 122- (1991). applied As local-exchange to the wholesale mar- Ramsey pricing recovery ket, would allow rate of certain costs incurred marginal incumbent above cost, costs providing associated with an unbundled network element that are fixed and unavoidable over the intermediate run, typically 4-year or3- term a agree- rate arbitration specific ment. recovery mechanism through for whole- spread sale lease rates would be to such costs across the different elements according to be leased to the demand particular for each Report element. First and Order 696. B. Vogelsang, Cf. Mitchell I.& Pricing: Telecommunications (1991). Theory and Thus, Practice 43-61 when demand among loop high for compared entrants elements is demand for higher switch proportion elements, of fixed costs would premium be added as a loop-element to the lease rate than to the switch lease rate. very

But appears this feature to be a drawback when used as a setting method of rates for the wholesale market in unbundled network elements. Because the elements which among highest demand costly entrants will be are the bottleneck duplication elements, likely of which is neither nor high desired, lease rates for these elements would be entry, earlier likely as our deter market rates most went elements for bottleneck example if the rate showed: kept competitor out. would $110, from $100 $107 is what the has said: This FCC methodology re- that

“[W]e that allocation conclude an in inverse exclusively allocating costs on common lies sensitivity for various net- proportion of demand to the may con- used. We services not be work elements and unreasonably limit could clude that such allocation exchange entry markets allo- into local extent of prices raising of, cating thus to, more costs and inputs, for which the demand most critical bottleneck relatively an allocation of tends to be inelastic. Such objec- pro-competitive these undermine costs would Report 696 Act.” First and tives of the 1996 Order (footnote omitted).

(3) day, theory aside, At the claim that TELRIC the end of the matter of it but is unreasonable as a law because simulates produce competition does founders facilities-based presented showing figures fact. The that entrants have they billion have invested new facilities to tune of $55 2000), passage (through since the of the Act see Association Competition Services, for Local Local Telecommunications (Feb. 2,2001); Policy Economy Hearing & the New 4 on H. R. Energy 1542before House Commerce, Committee on (2001)(statement Henry, p. 107-24, Ser. No. 50 of James H. LLP); Managing Capital, Partner, Greenfield Hill General Epps, see also M. Glover & Is the D. Telecommunications (2000) Working?, Act of 1996 52 1013, Admin. L. Rev. 1015 ($30 1999). through billion invested The in- FCC’s statistics dicate pure partial substantial resort to facilities-based competition among entry strategies: the three 30, as of June percent 2001, 33 using were facilities; entrants their own percent reselling 23 percent were services; and were leas- (26 network elements of entrants ing percent leasing loops without percent FCC, See switching; switching). Local Status as June Competition: 30,2001, Telephone p. (Feb. 2002) (tables 3-4). do incumbents not con- tradict these but the invest- figures, merely speculate ment has not been as much as it could have been under other note that ratemaking investment approaches, has they more shifted to nonfacilities recently We, of entry options. course, have no idea whether a different forward-looking scheme would have even pricing generated competi- greater tive investment than billion that the entrants claim, $55 but it suffices scheme boast say can regulatory such substantial over a competitive capital 4-year spending is not described as an unreasonable period easily way pro- mote investment facilities.33 competitive

b The incumbents’ second for reason an TELRIC calling of unreasonable exercise the FCC’s discretion is regulatory of to supposed this incapacity methodology provide and allowance for depreciation costs to induce enough capital rational on the own terms. competition This chal- theory’s must be assessed lenge utilities’ against background for preference extended customary schedules in depreciation (so to as bases), rate ratemaking preserve 8, see n. high we have supra; noted already consequence utili- ties’ the “book” value approach, or embedded cоsts of capital presented to traditional bodies often bore ratemaking Breyer’s Nor, matter, for that Justice does the evidence support assertion that will TELRIC stifle incumbents’ . . “incentive . either Post, innovate invest” new elements. at 551. As Justice Breyer notes, himself incumbents have invested “over $100 billion” dur Post, ing the same period. at 552. The figure affirms the commonsense conclusion that so long TELRIC brings about some competition, incumbents will continue have incentives to invest and to improve their services to hold on to their existing customer base. capital.. See value of to the economic resemblance

little Property Records, Reports on RBOCs’ Audit FCC Releases 1999) (FCC, Feb. Report 99-3, 1999 WL No. CC (“[B]ook by approximately bil- may $5 be overstated costs (We early “[b]y lion”); know that now et al. 116 Huber library ac- vast System accumulated a had the Bell 1980s, belonged alongside dime-store novels counting books that widely By 1987,it was esti- works of fiction. ... and other telephone company investments book value of mated that the dollars”). by TELRIC billion value exceeded market $25 by basing on the problem its valuation avoid this seeks to fig- elements; when rates are price most efficient market hypothetical instead of element ured reference gets no unfair ad- element, the incumbent incumbent’s actual depreciation vantage rates in the traditional from favorable sense. compe- according incumbents, will be fatal

This, to the argument will result in con- tition. Their TELRIC cheaper, stantly changing more effi- rates based on ever technology; will to write off cient the incumbents be unable anticipate piece technology rapidly enough to each new gadget portending a new and lower rate. an even newer They say, they with sunk in less efficient stuck, will be costs plant equipment, with their investment unrecoverable through depreciation, unrecognized and their increased risk uncompensated.34 e., i book values underdepreciation, incumbents also contend assets, in excess of the economic value of is another reason for increasing 00-511, depreciation under Brief for Petitioners in No. costs TELRIC. described, pp. 4-5. This is As we have under- argument unpersuasive. (to which of continuation the Govern depreciation today, extent its 38-39) was under disputes, ment Brief Federal Parties Respondent for themselves, largely upon by taken the incumbents not forced them regulators, public- as a the rate base inflated under the keep means supra, know, 485-487,499. model of For all we utility See regulation. yet seeking low rates of may depreciation incumbent carriers model, as state retail-rate still under even proceedings conducted argument, upon fundamentally however, rests false premise, depreciation that the TELRIC rules limit the capital may ratesetting costs that recognize. commissions prescribes In percentage fact, TELRIC itself no fixed rate risk-adjusted capital recognizes as particular costs and no useful as a calculating depreciation life basis for costs. On contrary, the FCC committed considerable discretion to state commissions on these matters.

“Based on the current record, we conclude that the currently authorized rate return the federal or starting point state level is a reasonable for TELRIC calculations, and incumbent LECs bear the burden of demonstrating specificity business risks they providing face in unbundled network elements justify and interconnection services would a different risk-adjusted capital depreciation cost of . rate. . . may adjust capital party States cоst if a demon- higher strates to a state commission that either a or a capital lower level of cost of warranted, is without that conducting commission a ‘rate-of-return or other rate proceeding.’ risk-adjusted based note that the We cost capital need not be uniform for all elements. in- We tend to appropriate re-examine the issue of the risk- adjusted capital ongoing particularly cost of basis, light experiences of the state commissions’ in address- ing specific Report this issue First situations.” Order 702. capital

The order thus treated then-current costs and rates depreciation starting points, adjusted mere up- to be ward if the incumbents demonstrate the need. That is, they high depreciation seek rates here factor today to into the wholesale prices they may they for the charge same to provide elements use retail short, services. In already have from incumbents benefited under- depreciation in rates, the calculation of retail no reason to there allow them further recovery through wholesale rates.

520 the Commission rates, leased element specifically

calculating of allowances for costs favorable capital more permits under traditional allowed than were depreciation generally ratemaking practice. rates of fallback existing incumbents’ position, are not even reasonable and costs of

depreciation capital rates, As to is depreciation starting points, unpersuasive. a threat there it is well to start how serious by asking be of obsolescence commensurately may galloping requiring does not support The answer rates. depreciation rising makes least up incumbents. The local-loop plant will have pro- 48 of the incumbents elements percent (“As . 818 of. . . . . vide, id., 378, [l]ocal see n. 1995 loop ¶ of in billion total plant $109 plant comprises approximately of network service, which ... plant”), represents percent like and while of certain other elements the technology in tech- switches has recent evolved years, loop very rapidly has no twisted- further than copper nology generally gone cable in the of decades. wire and past couple pair fiber-optic (less 10, n. than 1 of tele- See percent local-exchange supra fiber). lines other than phone technologies copper employ We have of no of obsoles- been informed imminently specter cent a radical revision of reason- currently loops requiring able This is because FCC depreciation.35 significant as a found matter rates of general federally prescribed are depreciation States many fairly up counterparts to date with the state of telecommunications tech- current as to different elements. First See nologies Report Order 702. Breyer Justice of technologies, makes much of the new availability conduits,

specifically, post, wireless and electrical see use fixed 549; local-exchange negli but use markets technology of wireless (36,000 Nation, gible at in the less than 0.02 present percent lines entire lines, 30, FCC, of June total Local Status as Telephone Competition: (table (Feb. 2002) 5)), FCC and the has not use reported telecommunications whatsoever electrical conduits to local provide service. capital, risk-adjusted competition

As for costs fact local-exchange has been slow to materialize in retail markets (as percent of June 30, retained a 2001, incumbents local-exchange share of the Telephone markets, FCC, Local (Feb. (table 27,2002) Competition: 30, Status as of June 1)), assumption and whether the adequate FCC’s about risk adjustment hypothetical was on competition, based actual say it percent fair to seems that the rate of 11.25 mentioned by Report 702, First FCC, is Order a “reasonable point” starting equity for return on calculations based on significant competition the current lack of local-exchange, markets.

A basic weakness of the incumbents’ attack, indeed, is tendency argue highly general its terms, whereas TELRIC rates are calculated the basis of individual ele- plenty ments. TELRIC rates leave of room for differences depreciation appropriate in the risk-adjusted capi- rates and depending tal spe- costs technology on the nature and of the (as priced cific element to loops, between switches and for example). For assumption matter, even the blanket aon TELRIC purchase price valuation the estimated a most necessarily efficient element will be lower than the actual costs current suspect. is elements The New York example, Public Commission, Service for used the cost expensive fiber-optic more cable as the basis for its TELRIC loop notwithstanding rates, fixed competitors the fact that argued cheaper copper-wire that the loop was more efficient for voice communications and should have been the under- lying loop valuation for Lodging rates. See 2 Material for Respondents Worldcom, et Inc., al. (Opinion 655-657 No. 97- Apr. (Opinion effective 1,1997 Setting and Order Rates for Elements)). Group First light of Network In many of the different TELRIC rates to be calculated state commis- country, sions across the see Brief Worldcom, Petitioners (“millions”), Inc., et p. al. in No. 00-555, the Commis- is reason- aof “starting point” sion’s general prescription able enough.

c TELRIC is accusation that as to incumbents’ Finally, at least as a criticism too to be telling practical, complicated can be leveled at traditional methodologies ratemaking ad “One potential the alternatives important proffered. is relative however its of the T[E]LRIC vantage approach, costs than estimate reflecting ease of calculation. Rather if difficult task even [in network —a the present [incumbent] data —it possible generate reliable cumbents] provided which field’ based on a estimates approach, ‘green T[E]LRIC 182 from of a network scratch.” assumes construction App. and Telecommunications of the National Comments (Reply 1996)). To the ex Information Administration (May relied tent that the traditional model generally public-utility costs, on embedded similar sorts of complexity reckoning much to information, were exacerbated of by asymmetry supra, 486-487, 499. And what the utilities’ benefit. See at we see rate from the record that TELRIC proceed suggests are with incum affairs, ings surprisingly smooth-running bents and two conflicting typically presenting competitors and economic models state testimony, supported by expert on some commissioners rates based customarily assigning from from one model and others its counterpart. predictions e.g., Worldcom, for See, Material Respondents Lodging In re: (Fla. Inc., 146-147, Comm’n, et al. 367-368 Pub. Serv. Determination basic local cost telecommunications of pursuant service, 364-025, Statutes, Section Florida is id., (N. 7, 1999); 589-598, sued Jan. 701-704 Pub. Y. Serv. supra). Comm’n, 97-2, bottom, No. At battles Opinion scheme, are bound to be experts part any ratesetting alternative FCC was reasonable TELRIC over prefer fixed-cost schemes that for home-field advantages preserve the incumbents.

‡ ^{[*] [*]} say passage We cannot whether will of time show competition prompted illusion, TELRIC to be an but appears policy TELRIC be a reasonable and that now, Chevron, is all that S., counts. See 467 U. The in 866. cumbents have failed to show that TELRIC unreason largely they trap terms, able on its own because fall into mischaracterizing departures assump the FCC’s from the (the perfectly competitive tion of market wire-center limi regulatory development lags, tation, or the refusal to costs) prescribe high depreciation capital ‍​‌‌‌​‌‌‌​​​​​‌​‌‌‌‌​​‌​​‌‌​​​‌​​​‌​‌​​​​​‌‌‌‌‌‌​‍as inconsisten pragmatic cies rather plan. than features of the TELRIC they Nor have shown it was unreasonable for the FCC pick presented over alternative methods, TELRIC evi figures dence to rebut the to the entrants’ level of com petitive local-exchange investment In short, markets. ifi carry showing incumbents have failed to their burden of unreasonableness to defeat the deference due the Commis Eighth We judgment sion. therefore reverse the Circuit’s insofar as it invalidated setting TELRIC as a method for rates under the Act.

C The incumbents’ claim of inadequacy TELRIC’s inherent depreciation capital to deal with counterpart costs has its argument. They a apply in further seek the rule of con- saying stitutional in ought avoidance that “cost” to be con- by strued reference to historical in order to avoid investment a question, serious constitutional whether methodology a actually so divorced from investment will made lead to a (or Fourteenth) taking property of in violation of the Fifth Eighth Amendment. any Circuit did not think such se- question rious offing, was in the 219 3d, 753-754, F. and neither do we. outset,

At the it is well to understand that the incum- present portent bent carriers do not of a constitutional 524 ratemaking way cases.

taking that is usual claim in the particular, argue any rate They not actual TELRIC do confiscatory,” threatening unjust is, is “so as to Light Duquesne Co., 488 integrity.” incumbent’s “financial carriers have S., 307, Indeed, 312. incumbent U. presented which rates, instance of TELRIC even us with an approved and reviewed are to be set or state commissions courts, first in the federal district U. S. C. instance 252(e)(4) (e)(6). §§ despite this, And the fact that some and place already using apparently put have rates in States Report accompa- TELRIC. See First Order 631 (“A already employ, nying or have number of states footnotes cost] plans [long-run utilize, some form of incremental methodology approach setting prices in their for unbun- elements”). dled network given significant,

This want of rate to be reviewed is challenge taking that this never considered a Court has ratesetting methodology being presented a without confiscatory. specific alleged g., See, rate to be e. orders Du (denial Light quesne supra, Co., at 303-304 million $3.5 utilities); million increases to rate bases of $15.4 electric (Nebraska Smyth Ames, S., v. at 470-476 U. carrier-rate alleged taking). tariff schedule Granted, effect strictly utility Court has never held that a have must rates adoption hand before it can claim that the of new method setting necessarily produce rates will an unconstitutional taking, implication but that has been the of much the Court (“The Hope has said. See Co., Natural at 602 S., Gas U. employed [just fact that the method to reach and reasonable rates] may important”); contain infirmities is not... Natural (“The Pipeline Co., S., Gas 315 U. at 586 Constitution does rate-making any single not bind bodies to the for service of formulas”); Angeles mula or combination Los Elec. Gas & (1933) Corp. Cal, v. Railroad Comm’n 289 U. S. (“Mindful of its distinctive function in the enforcement of rights, by constitutional the refused Court has to be bound

525 artificial rulé or formula which conditions changed might then, the is rule that upset”). Undeniably, general any ques- tion about the of is raised constitutionality ratesetting by rates, methods, and this that means of constru- policy a statute to avoid constitutional where ing questions possible is out of when statutes presumptively place construing pre- methods. scribing

The incumbents action is this one the rare ones say outside the rule placed general too by signs, strong ignore, will occur if the takings TELRIC interpretation 252(d)(1) § First, is allowed. at the level of they compare, (as the entire network in- element-by-element), opposed balance-sheet indications of historical investment dustry local markets estimate of telephone corresponding a TELRIC evaluation of the cost to build newa and efficient of local national serv- system universal exchanges providing ice. Brief for Petitioners 00-511, No. 10-11, n. 6. As an estimated billion for such a against $180 new system, incumbents value “total juxtapose plant” representing on the balance for sheet 1999 industry billion. roughly $342 They and unreasonable difference argue huge is will TELRIC proof result necessarily confiscatory Ibid, rates. 1999 FCC, Statistics of (citing Communications 2000) (table 51 32)). Common Carriers 2.9, (Aug. line no. however, comparison, because numbers spurious assumed the incumbents are by On one clearly wrong. side, the billion is to be $180 based on supposed constructing a barebones universal-service telephone network, so it fails cover elements associated with more advanced tele- communications services that are incumbents required 251(c)(3). under 47 provide lease U. S. by C. See Applica- tion Bell Atlantic New York Authorization under 271 Section Act, Communications Red. 3953, FCC (CADC (1999), aff’d, 2000). ¶ 3dF. See also In re Serv., Federal-State Joint Bd. on Universal 14 FCC Red. (1999) 20432, 41, and n. 125 that the universal- (explaining 526 not be ...

service model determining [for] “appropriate may elements”). We know network do not for unbundled prices be, should the efficient how much replacement figure higher is too billion low. but we can assume reasonably $180 “balance sheet” the other of the On side comparison, above, As number is misstated. patently explained cal- rates under the model would be traditional public-utility service) (whether culated on a rate base fair value or cost to deductions for accrued See subject depreciation. Phillips 310-315. The net investment after is depreciation plant billion, FCC, of Commu- billion but Statistics $342 $166 (table line Carriers, 2.9, 50), nications at 51 no. Common less the incumbents would amount than TELRIC figure like us to And even after we increase the bil- assume. $166 ($22 billion) lion current liabilities on the amount of net by ibid, (line line a sheet, 13), balance no. 64 minus no. (and estimate of the allow- rough generous) working-capital service, ance under cost of the rate base would then be $188 billion, still a far from the billion incumbents cry $342 tout, and less than above the incumbents’ bil- $180 percent lion universal-service What num- TELRIC the best figure. bers be we are in no may position say: point only the numbers thrown out the incumbents are by being no evidence that rates TELRIC lease would be confiscatory, unseen. sight

The incumbent carriers’ second at nonrate constitu- try tional focuses reliance on interests litigation allegedly jeop- ardized an intentional switch in methodolo- ratesetting where we held as usual gies. They rely Duquesne, a would be ratesetting methodology normally judged only by the “overall of the orders,”36 rate but went further impact

36The upheld Court a Pennsylvania barring statute rate recovery capital prudently power plants invested canceled because the “overall orders,” impact of the rate which allowed returns on equity common 16 percent and overall 11 to returns of was not рercent, “constitution id., (“‘It S., 312; ally objectionable.” also U. at see at 314 is not We remarked that dicta. “a State’s decision to arbitrarily switch back and forth in a between which methodologies way investors to bear the risk of bad investments required some times while them the benefit of invest- denying good ments others would serious raise constitutional ques- S., tions.” 488 U. at 315.37 In other words, there may distinct from taking challenge plain-vanilla objection action38 if a arbitrary capricious agency ratemaking body were to make in method- opportunistic changes ratesetting to minimize return on ologies just investment in a capital utility enterprise.

In itself, there was no need to Duquesne decide whether there be to the might rate-order exception requirement for a claim of rates, and there is no reason here taking by decide whether the of constitutional avoidance should policy in invoked order to a rate-order claim. anticipate taking The reason in is the same each case: the incumbent carriers here are like in the electric utilities in just Duquesne failing evidence that the decision to present TELRIC any adopt ”) theory, impact but the FPC v. of the rate order which (quoting counts’ Co., (1944)). Hope Natural Gas U. Du S. 602 The utilities quesne, like the incumbents here, argument... “[n]o made that... reduced jeopardize rates the financial integrity companies, by the either leaving them operating capital by insufficient impeding their ability raise capital.” S., future 488 U. they 312. Nor did show that allowed rates were “inadequate compensate current equity holders for the risk as sociated with their investments under a modified prudent investment Ibid. scheme.” Scalia, joined Justice by Justice White and O’Connor, Justice concurred, “all and noted that prudently incurred investment may well have to be counted” to determine “whether government’s action is Id., confiscatory.” at 317. 38 make the incumbents additional argument it arbitrary was or capricious reject costs, for FCC to historical Brief for Petitioners 00-511, 44-49, in No. but this simply is restatement of argument 252(d)(1) that the FCC unreasonable in interpreting was foreclose use of historical addressed, cost which ratesetting, already we have see III-B-2, Part supra. with a confisca- arbitrary, opportunistic, or undertaken was very to the con- is much tory purpose. we do know What methodologies, trary. was no “switch” all, there First leasing elements network market since wholesale was no Act. There something brand new the 1996 under op- predecessor methods, much less an replacement of extent that And to the portunistic switch “back and forth.” expectation argue was at least an incumbents that there historically would cost-of-service method that some anchored promise ever made. no was rates, lease such set wholesale (“[CJontrary to Report assertions First and Order guar- not regulation does not and should [incumbents], some guaran- recovery of their embedded costs. Such antee full FCC] [the or the states the assurances that tee would exceed supra, provided past”). Duquesne, at 815. have Cf. Any paying he could had to realize that investor attention rely indefinitely ratemaking but on traditional methods simply rely against bar would have to the constitutional confiscatory rates.39

IV A competing by the The effort Government the carriers Eighth to overturn the of the additional Circuit’s invalidation 39 fact, early In than hospitable taking the FCC’s order is more claims relief any Duquesne: may court would be under “Incumbent LECs seek in they from if methodology, provide specific the Commission’s pricing them, the as will formation to show that pricing methodology, applied FCC, result rates.” First and Order 739. confiscatory Report ¶ words, in other consider to TELRIC in willing to a advance challenge order, beyond of a rate but criticism challenger go needs general tendency, of a method’s and to show with information” that “specific Additionally, rate as has ac confiscatory is bound to result. the FCC smallest, the most knowledged, local-exchange rural incumbent carriers unduly from of rates likely imposition to suffer low immediately C. expressly are from rules under 47 U. S. exempt pricing the TELRIC 706, §252(f)(1), see First and other rural incumbents Report and Order may by obtain from the to their state commis applying rules exemptions 252(f)(2). sions under

529 §§51.315(c)-(f) rules, combination (1997), CFR draws the incumbents’ threshold that the is barred objection challenge waiver, since the 1999 to review the 1997 invali- petition 315(b) dation of Rule did not extend to the Circuit’s Eighth rules, simultaneous invalidation of the four Rules companion 315(cMf), 813, 819, at 3d, F. 39.40 The n. incumbents sua must, course, of that the Court of acknowledge Appeals sponte 315(c)-(f)41 invited on the status of Rules briefing Iowa remand after this Court’s 315(b), reinstatement of Rule Bd., Utilities S., 525 U. 395, struck them specifically rationale, down on its 3d, albeit 219 F. at 758-759. again, But the incumbent carriers Circuit argue Eighth exceeded of this it Court’s mandate when revisited scope its earlier of so that this unchallenged portion holding, 315(c)-(f) Court should decline to reach of validity Rules To do so, would the sort of stra- today. they say, encourage Party Communist tegic, litigation piecemeal disapproved United States Subversive Bd., Activities Control v. of (1961): U. S. 30-31

“The demands of of due only but orderly procedure as the means procedure achieving justice according law that when a case is here review require brought of administrative action, all the of the rulings agency which the seeks reversal, and which upon are then party available to him, be we Otherwise would be presented. promoting ‘sporting theory’ justice, poten- tial cost substantial time. To expenditures agency allow counsel to withhold in this Court and save for later error would tend to stage procedural foist upon 40AT&T did not raise the issue in the petition relevant for certiorari Bd., it Corp. Cert. in AT&T Iowa claims. See Pet. for v. Utilities O. T. 1998, 97-826, 9-10,13. No. pp. 41 FCC, Iowa Utilities Bd. v. See Order 96-3321, (CA8, No. etc. June (“The 10,1999), pp. 2-3 not, briefs should also address whether or in light decision, of the Supreme Court’s this court should take further action 315(c) (f)”). respect to ... — 530 been have decisions which could constitutional

the Court been invoked earlier.” had those errors avoided Party our consider- blocks do not think Communist We 315(c)-(f). by the raised The issue there was of Rules ation pursue trip to on this Court petitioner’s failure an earlier agency Litigation of the objection action. procedural the Court’s only have procedural point would not obviated constitutionality Congress of Act of to review need years of got have five but could saved here, when the case during the Court litigation time “the Board and which steadily [had] [the] Appeals more reconsidered each twice all that growing Id., 31-32, After record . . . n. 8. .” procedural sought point. petitioner review time, Nothing Address- like that about cases. can be said these years of efforts ing now not “make waste” of the issue would by Appeals, id., 32, 8,n. would FCC or the Court ruling pointless, constitutional and threaten to leave a not “long- isolated, the Court’s attention not to an would direct in- procedural by agency, to the ibid., but stale” error continu- general meant to have validation FCC rules litigation ing applicability. There is no indication of tactics appeal rules, which the failure time to behind last these court, were reexamined on at the behest of the remand competing or the Government carriers. Any “pressed upon by passed a federal issue below” (1992)(in court, Williams, 41 United States v. 504 U. S. omitted), quotation subject to this Court’s ternal marks questions broad discretion over it to take on cer- chooses 315(c)-(f). good tiorari, and there are reasons look at Rules Appeals significant passed Court of on a issue, one placed Virginia in a state of Inc. flux, Bankshares, see v. (1991)(citations omitted), Sandberg, 501 U. 1083, 1099, S. n. split between these cases US West Communica (CA9 1999), Intelenet, Inc., tions v. MFS F. 3d 1112, 1121 rules), (affirming denied, identical state-commission cert. (2000). rejected accordingly U. S. the incumbents’ We of waiver when it in to the claim raised they peti- opposition we See Stevens certiorari, tion for it reject again today. (1991). v. Treasury, U. S. Department of B found four Circuit additional combination Eighth rules odds with the of the final sentence of plain language 47 U. S. 251(c)(3), §C. which we more quote fully: local incumbent carrier has ...

“[E]ach exchange “[t]he telecommuni- duty provide, requesting cations carrier for the of a telecommunications provision service, to network access elements nondiseriminatory on an unbundled basis at feasible any technically point rates, terms, and conditions that are reasonable, just, An .... incumbent local nondiseriminatory ex- carrier shall such change unbundled network provide elements in a manner allows carriers requesting to combine such elements in order such tele- provide communications service.” and “combination” are related

“Bundling” but distinct con- is about lease cepts. To Bundling net- pricing. provide work “on element an unbundled basis” is to ele- lease the ment, described, however to a carrier aat stated requesting Bd., Iowa Utilities to that price element. specific supra, at 394. The FCC’s regulations advance a identify certain number elements for §51.319 47 CFR separate pricing, (1997), but the do not limit the regulations elements subject rates. A specific element separately need be priced the simplest possible function, configuration equipment and a unbundled element predesignated com- might actually items that prise could considered elements separate them- selves. For “if the states example, incumbent LECs require elements provision subloop [which constitute a together local incumbent loop], LECs must still a local provision loop because when so combined element requested, as a single, in this element local proceed- we single identify loops The “combination” and Order ¶295. First ing.” Report hand, refers 315(b) (f), other Rules on the provided — within an of elements mechanical connection to a physical car- or the connection of a network, competitive incumbent’s “in a manner incumbent’s network rier’s element with offer the telecommu- carrier to that would allow requesting Id., 294, n. 620. nications service.” ¶ understood as combination rules are best

The additional unbun- to ensure that provide meant statutory duty A rate for result. dled gets separate elements a practical if re- is not much an incumbent an unbundled element good in with others the element combination fuses to lease except if the incum- of; have no need or carriers competing combined the leased elements bents refuse to allow what And this just with own competitor’s equipment. devised its combination was before the FCC happening were Incumbents, to the rules. FCC’s findings, according their access to technicians give competitors’ refusing re Im- connections. In to make physical plants necessary Local Provisions plementation Competition 3696, 3910, 15 Telecommunications Act FCC Red. (Third (1999) Order), review Report petitions FCC, Telecom v. sub nom. United States Assn. pending (CADC). 00-1015, Nos. etc. rules,

The additional combination issued under challenged 251(c)(3), § include two that are substantive and two that are the latter no procedural, having significance independent 315(c) here. Rule an incumbent requires “perform functions to combine ele- unbundled network necessary ments manner, in even if those elements are not ordi- network, combined” in the incumbent’s own so narily long as the combination is feasible” and “[w]ould “[technically other carriers to obtain access ability impair unbundled network to interconnect” with elements 315(d) companion The incumbent’s network. Rule likewise requires combining the incumbent to do the between the requesting network elements it and a leases carrier’s own long technically elements, so as feasible.42 challenged alternatively The rules are as inconsistent with statutory plain language interpreta- and as unreasonable plain question language tions. The is the sentence that “[a]n exchange incumbent local provide carrier shall un- such request- bundled network elements a manner that allows ing provide carriers to combine such elements in order to 251(c)(3). § such telecommunications service.” 47 U. C.S. Eighth unambiguously excusing Circuit read this as in- any obligation provided cumbents from to combine elements, ruling ring, 3d, F. at 759. The has a familiar for this is Appeals the same reason that the Court of invalidated these 315(b), along being rules Rule inconsistent 251(c)(3) plain obligation with a limit on incumbents’ under provide to an elements “on unbundled basis.” 120 F. 3d, at 813. language plain.

But the is not that Of it is course, true literally that the statute would not be an by violated incum- provided bent that requesting so elements that a carrier could them, combine and thereafter on its sat hands while any combining plain was done. But whether it is that the right question a incumbents have to is a sit context as grammar. Congress much as If had treated incumbents equals, probably plain entrants enough as it would be that obligations stopped furnishing incumbents’ at an element proceeds Act, that could be combined. however, on the understanding monopolists contending that incumbent (“Additional 251(c) § unequal, competitors are obligations cf. carriers”), exchange of incumbent local and within the actual statutory confines it is not obligating self-evident that in 315(e)-(f), Under Rules an incumbent that denies a requested combi nation has the prove burden to technical or to infeasibility show how the combination would impede others’ access. a to combine furnish, to negated duty

incumbents Congress but furnish, to with the obligation not inconsistent that is to takes a stretch get it Thus, mentioned. not expressly statutory right silence statutory from permissive for a to combine requesting refuse of the incumbents part combination, First to make the carrier, that is unable say, that it be unaware ¶294, or even and Order may Report a telecom- to combine certain elements to provide needs in- Id., 293. are And these only munications service. rules in combination obligate which the additional stances in the to the clarification the incumbents FCC’s according First and Order. Report is certainly that

The conclusion language open in Iowa if not our Utili- with, by, holding harmony required 315(b). rule, that Bd., In reinstating ties Rule dealing elements “on an that we furnishing argument rejected 251(c)(3), § must mean sepa- basis," unbundled “physically 251(c)(3) “§ noted rated,” S., 525 U. and expressly network elements on whether leased may is ambiguous id., We must 395. relied on ambiguity separated,” no incumbent has holding statutory sepa- right in the them rate elements when a asks lease competitor own combined form its net- incumbеnt employed Ibid. That would odd work. make very partner holding 251(c)(3) with a that an plainly empowers ambiguous ruling elements even when to combine incumbent carriers refuse read the lan- carriers cannot. We requesting accordingly 251(c)(3) §of who do work should guage leaving open combination, and under Chevron S. A. Inc. v. Natural U. Council, (1984), 837 Inc., Resources U. S. that Defense the can leaves rules intact unless the incumbents FCC’s show them to be unreasonable. 315(cMf)

For the decision survive Chevron whether Rules two, sure, Iowa Bd. to less immedi- step is, Utilities 315(b) ate since that in case we found Rule reasonable help, exist- because it incumbents from prevented dismantling to combinations atS., ing sabotage U. competitors, we whereas here deal not with but with up splitting joining think, We nonetheless, the together. additional com- bination rules reflect reasonable statute, of the reading meant to remove barriers to practical into competitive entry markets while serious interference local-exchange avoiding network incumbent operations. At the to outset, it is well repeat the duties imposed under the rules are the bur- subject limiting restrictions dens on the incumbents. An placed the obligation part of an incumbent to combine elements for an entrant under 315(c) (d) Rules arises when the entrant only unable to do (“If itself. First and Order job Report ¶ carrier is únable to combine the elements, the incumbent so”). must do When incumbent does have an obligation, the rules specify duty the functions “perform necessary to combine,” not necessarily actual combi- complete §§51.315(c)-(d) (1997). nation. 47 CFR And the entrant must “a reasonable cost-based fee” for pay whatever incumbent does. Brief for Petitioner Parties Federal id., Nos. 00-587, etc., 34. See also n. p. 10, 34, 14. The force of the is limited further objections FCC’s rules of the implementation conditions that statutory the incumbents’ arises if the combina- duty only requested tion does not discriminate other carriers against by impeding their access, and if the combination is “techni- only requested 251(c)(3). feasible,” § cally As the latter restriction, Commission the view “decline[d] some adopt proffered by incumbents parties must combine network elements feasible manner any technically First requested.” Report and Order 296. concern was that such a rule “could affect the potentially reliability the incum- security bent’s network, and the of other carriers ability to obtain interconnection, and use unbundled request elements.” Ibid. the re- to are claim

Thus, the wrong incumbents minimal limits “technical feasibility” places only striction to First and Order combine, since the to Report on the duty feasible” does it that what is “technically makes clear id., 199, or reasonable,” mean what is “economically merely sense, in an what is engineering possible simply practical id., to is The limitation meant 196-198. preserve see ¶¶ id., ¶296, and a 622, n. “network security,” reliability in- if it is feasible impedes combination not technically for the “to retain ability responsibility cumbent carrier’s network,” own control, and its management, performance id., ¶ 203. a con- feasibility,”

This of “technical sense demanding control the the incumbent’s ability per- dition protecting we said network, accord what formance of its own is in with in Iowa Bd. Utilities There, for we reinstated example, in rule43 because Commission’s choose” “pick part terms to all elements on network provide matching duty feasible,” when it was “not comers did not arise technically 51.809(b)(2). feasible” S., § 396. If “technically 525 U. meant what is it limita- would have been no merely possible, tion at all.

The two rules each have additional features substantive 251(c)(3). are consistent Rule purposes 315(c), what to the extent it raises a to combine duty combined,” is “ordinarily neatly facially complements Bd., id., Iowa Utilities similar Rule 315(b), upheld combined net- incumbents currently forbidding separate work elements the entrant them in a com- when requests If rule, latter were the an incumbent bined form. only 43“An unreasonable delay incumbent LEC shall make available without any inter any telecommunications carrier individual requesting service, connection, arrangement or network element contained to which it that is a state commission agreement party approved by Act, rates, terms, and condi pursuant upon section 252 of the same (1997). §51.809(a) provided tions as those CFR agreement.” well be insist, within its to for on might rights example, pro- a and a switch ain combined form a viding when naive loop entrant asked while them, later to refusing combine just a them with network interface which device, is also ordi- switch, combined with the and the narily which loop is to set a necessary telecommunications link. But up under 315(c), Rule when the entrant later requires element it time, missed the first the incumbent’s obligation is to 51.315(c) § functions 47 CFR “perform necessary,” (1997), for combination of what the entrant cannot com- bine First alone, ¶294, and Order not and would Report have needed to combine if it had known to enough request the elements in a combined form in the first together place. id., (“[I]ncumbent[s] Cf. work must with new entrants the elements the new will identify entrants need to offer a service in the the new particular manner entrants intend”). course,

Of it is not this 315(c), Rule aspect requiring the combination of what is ordinarily combined, that draws (or 563) the incumbents’ see post, Justice Breyer’s, objection; attack, focus their principal they rather, additional 315(c), that Rule incumbents com- requirement bine unbundled network elements if “even those elements are not combined ordinarily incumbentfs] network.” 51.315(c) (1997). § CFR To build our ex- upon previous this would ample, incumbent seemingly com- require bine the switch, and interface loop, combined in (ordinarily network) its with a second and network interface loop (pro- vided the incumbent as unbundled separate element), so that the carrier competitive could for a second-line charge connection, as for a fax or modem. See Brief for Petitioners Worldcom, Inc., et al. 00-555, No. at 48 (providing example).

But this 315(c) provision Rule is the statu- justified by tory requirement 251(c)(3). access.” “nondiscriminatory As we said, have the FCC has interpreted rule obli- is unable the carrier “[i]f the incumbent combine gating Order ¶294. First combine the elements.” Report com- could make no that the incumbent There dispute entrant; is it contested nor more than the efficiently bination itself the combination would the incumbent provide served otherwise it the combination wanted if a customer Order ¶481. Third See a business Report purpose. the incumbent unreasonable, then, to It seems require hardly to a will entitled for which combination, make the it true would otherwise, an entrant fee; enjoy reasonable the bare pro- access” notwithstanding “nondiscriminatory it network elements of the vision on an unbundled basis to a service. needs provide how rule is to see this 315(d),

As it is hard any to Rule § a 251(c)(2), statutory reasonable than which imposes less in- The rule interconnect. to simply requires duty to combine the to functions necessary cumbent perform it with elements owned by unbundled elements provides feasible manner.” carrier “in technically requesting an element- to be more than it Essentially, nothing appears “to incumbents’ to-element version of the pro- statutory duty vide, . . . for the facilities and of equipment any requesting carrier’s carrier, interconnection with the loсal exchange 251(c)(2). network,” §in sum,

In what are rules an incumbent we have that say the functions shall, payment, “perform necessary,” 51.315(c) (d) §§ (1997), CFR to combine network elements and in- a with the carrier equal footing put competing combine, cumbent when carrier is unable to the requesting First and it Order when would not Report place incumbent a at in its own net- disadvantage operating and when work, it would not other carriers place competing 51.315(c)(2) (1997). 47 CFR competitive disadvantage, This of is consistent the Act’s duty competition goals nondiscrimination, and it sensible way imposing reach the result the statute requires.

[*] ^{[*] [*]} The 1996 Act to local- sought bring competition markets, exchange incumbent local- part by requiring carriers to lease of elements their exchange networks rates that would new when attract entrants it would be more efficient to lease than build resell. Whether the FCC the best to set these rates is the stuff of debate picked way for economists and versed in the regulators technology telecommunications and microeconomic The pricing theory. is to ask whether the Commission job made choices judges within in de- reasonably statutory pale possibility how what and items must be leased and ciding set way rates for them. The FCC’s leasing additional pricing combination rules survive that scrutiny. of the Court is reversed in judgment Appeals part

and affirmed in and the cases are remanded for part, further consistent with this proceedings opinion.

It is so ordered. Justice O’Connor took no in the consideration or part decision of these cases.

Justice Breyer, with whom Justice Scalia as to joins Part VI, concurring part dissenting part.

I with the that agree the majority Telecommunications Act (Act of 1996 or Act), § Telecommunications 47 S. 251 U. C. (1994 et V), ed. and not seq. doés a historical Supp. require cost that, I also system. time, at the pricing agree present no of the incumbent firms’ taking violation property the I Fifth Amendment has however, occurred. disagree, with the Court’s conclusion that the and un- specific pricing rules at issue here are bundling authorized the Act. by

I The of the primary Telecommunications is to goal Act and reduce “promote in both local competition regulation” 540 Preamble, markets. telecommunications

and long-distance 1 104-458, H. Conf. No. 56; p. see also R. Rep. 110 Stat. incumbent (1996). effort, Act of that the requires As part to make certain “elements” firms telecommunications local to new seeking local available competitors their systems 251(c)(3) (1994 ed., § local markets. U. S. C. to enter those V). cannot agree If the incumbents competitors Supp. entrant, a new can that an incumbent charge on the price §252. The the will determine regu- local price. regulators 252(d) the element’s “cost.” will lated depend upon price Bd., 525 U. S. v. Iowa Utilities (1)(A). In AT&T Corp. the Federal the Act authorizes this held (1999), Court Commission) (FCC to set Commission Communications rules for those prices. determining to the Commission’s the Court review

These cases require version of rules a rules. Those create “start-from-scratch” In- what the calls a “Total Element Commission Long-Run (TELRIC). Tardiff, & Kahn, cremental Cost” See system three Act at Weisman, Telecommunications years: its the Federal economic evaluation of implementation Commission, Info. Econ. & Communications Policy (1999) (hereinafter Kahn) the FCC’s system to (referring Slate”). In re- essence, as “TELRIC-Blank Commission a local to determine cost quires regulators supplying entrant, incumbent network “element” to a new particular it has cost that incumbent at what by looking sup- at what it element nor will ply past, by looking cost that incumbent that element in the future. supply would cost Rather, look must to what it regulator hypothetical that element perfectly supply efficient firm future, firm were assuming hypothetical build new, from scratch efficient com- essentially perfectly munications network. The concession the incum- only actual is the bent’s network presumption presently wire centers —which hold the existing switching equipment for a local area —will remain in their current locations. Competition Implementation In re Local Provisions See of in the Telecommunications Act 1996,11 FCC Rcd. (hereinafter (1996) Order) 15848-15849, ¶685 (describing as “based TELRIC on costs assume wire centers ‍​‌‌‌​‌‌‌​​​​​‌​‌‌‌‌​​‌​​‌‌​​​‌​​​‌​‌​​​​​‌‌‌‌‌‌​‍at the will be incumbent LEC’s current wire center placed locations, but that the reconstructed local network will em the most efficient foreseeable ploy reasonably technology requirements”). capacity I

An will under- example help explain system stand it. an incumbent local Imagine telephone company’s center, downtown from major say, switching Chicago, which cables and wires run or conduits through poles along other electronic switching subsidiary equipment, equip- ment, and to end-user such as tele- eventually equipment, handsets, or modems, fax machines located phone computer in office A residences. new buildings private competitor, law to use whom the entitles an “element” of the incumbent “element,” firm’s asks for such use of system, say, single five-block this access system, portion thereby obtaining to 20 downtown office the Commission’s Under buildings. TELRIC, “cost” incumbent’s which “rates” must (upon based) be the real resources equals Chicago incumbent must “element” five-block spend provide demanded, but the resources that a hypothetical perfectly new efficient would were that re- supplier spend supplier entire downtown other than building Chicago system, local center, wire from This scratch. latter figure, course, different from incumbent’s might very actual costs. As a Court, determine, we must other reviewing among “ ” ‘abuse(d]’ whether the Commission has its statu

things, “ ” ‘discretion’ torily to create rules. delegated implementing Motor States, Vehicle Assn. United Inc. State v. Mfrs. Co., Farm Mut. Automobile Ins. (1983) 29, 41 463 U. S. (quot 706(2)(A)). Administrative Act, Procedure 5 U. C. In ing S. so, we must doing assume that intended to Congress grant 542 to the sub- broad leeway respect

the legal Commission Overton Preserve rules, Citizens of the stantive content Hope FPC Volpe, 401 U. S. Park, Inc. v. v. 402, (1971); 416 Co., Natural Gas (1944), 602 591, S. particularly 320 U. one, namely, technical matter since the subject highly knowledge. expert where the possesses ratemaking, agency Council, Inc. Natural Resources U.S. A. Chevron v. Defense Inc., 467 U. S. (1984). 837, 843-844 bounded, It is is not unlimited.

Nonetheless, leeway of the statute that authority grants by scope example, connec- to show a “rational need for the and agency the statute’s purposes. between tion” regulations Farm, State whether, We must 463 at 56. determine S.,U. matter, on technical subject the leeway given experts despite id., 43; limits. See exceed these legal regulations agency supra, Park, Overton Act, 416; Procedure Administrative aside 706(2)(A) to be set 5 action § U. C. agency S. (requiring otherwise discretion, if an abuse “arbitrary, capricious, law”). I have come And, not in accordance with reluctantly, the in- do. After to the conclusion that considering they I can- cumbents’ Commission’s responses, objections statutory find that “rational connection” between pur- law demands. pose implementing regulation supra, Farm, State at 56.

II relation Because the critical concerns legal problem of the to the statute’s Commission’s purpose, regulations I outset, must ask at the is that what rele- purpose? shall set vant statutory provision says only agency (for “elements”) “based on . . 47 U. S. “rate[s]” . cost.” C. 252(d)(1). § At first the word to mind blush “cost” calls Act, traditional See Natural 15 cost-based Gas ratesetting. §717c; §§4a, 5, U. C. Act of 52 1938, S. Natural Gas Stat. (1994 824; Act, ed., § Interstate Commerce 49 10701 U. S. C. 1302(c) V); 1958, Federal Act of Aviation 49 U. S. C. Supp. ante, at 478 (1976 II) ed., 1980); see also Supp. (repealed traditional A. (discussing J. ratesetting); Daniel- Bonbright, Kamerschen, & sen, D. of Public Principles Rates Utility In re Im- (2d 1988) (hereinafter 109-110, ed. Bonbright); plementation Sections the Cable Television Consumer Competition Protection and Regulation, Act 1992: Rate (1994) (Commission FCC Red. 4555, ¶ rules refer- cost” as traditional basis “for ring util- “[original public valuation”). ity

An in traditional will agency seek to engaged ratemaking consumers low protect end the mandating prices result. so, In the will sometimes to mimic doing agency try that it believes prices firm (hypothetically) regulated (often a would have set had it been legal an un- monopoly) firm in a structured regulated See competitively industry. ante, at 486; economists have Bonbright declared (“[M]any that. . . the that would result without prices but regulation under or perfect would be the pure ‘ideal’ competition 1 A. Kahn, Economics of prices”); Regulation: Principles (1988) (hereinafter Institutions Economics of Regulation) (“The traditional criteria of rates legal proper public utility have borne always resemblance the criteria strong market competitive long-run And the equilibrium”). Commission’s are at regulations least consistent arguably with an effort to find that agency the end prices replicate results theoretically See perfect Order competition. 679, 738. ¶¶

But that regulatory objective low, competition- — not the prices the relevant mimicking statu- objective — is here. tory provision Telecommunications Act is not a statute ratemaking better It is a de- seeking regulation. statute It that, assumes regulatory seeking competition. modern local telecommunications given markets technology, now for several firms may prove large enough compete of some provision services — but not all serv- necessarily ices — without serious economic waste. It finds the competi- tive an but indirect process more effective way bring regulation competition and objectives of about the common products, efficient namely, prices, and more better alike, low production it authorizes the Commission But methods. procedural help that promulgate achieve that will rules competition regulation in local goal for substitution of —the economically fea- is transformation markets —where rationale). The Act (accepting ante, this sible. See at 539 promulgate rules does not authorize Commission regulated to a com- would from a hinder the transition directly petitive marketplace those rules or not —whether way. prices along the mandate lower “element” me that together, convince considerations, Five taken statutory goal just given description I have of the says objective its First, accurate the Act itself one. competition regulation. Preamble, 110 is to substitute (stating goal “promote com- Stat. 56 that the of the Act is to long- petition regulation” and reduce in both local markets); distance telecommunications see also H. R. Conf. Rep. ante, at 489. 104-458, 1; No. history Congress suggests

Second, the would Act’s century’s thought goal have a reasonable The 20th one. history primarily one of of telecommunications markets is regulation. justified regulation experts on the For decades ground providers “natural telecommunications were monopolists,” e., i markets would not telecommunications support ante, more than one firm of size. at efficient See develop- beginning technological 1970’s, 475-476. in But change expert opinion by undermining ments to a led monopoly” Long-distance the “natural telecom- rationale. newly capable supporting munications markets seemed competing significant several firms without economic waste. Competition: Regulation Vietor, See R. and De- Contrived (1994). regulation opinion began in America 185-190 And change similarly respect to in In the case local markets. of local change markets, however, was marked hesita- lingering uncertainty. tion and Kellogg, Huber, P. M. & See (2d Thorne, Federal Law 53,86-87 J. Telecommunications ed. 1999) (hereinafter Huber); Huber, P. M. & J. Thorne, Kellogg, Network Geodesic II: 1993 on in Report .Competition (1992). That is 2.1-2.5 Telephone Industry because local telecommunications had service demanded long expensive investment, fixed streets to ca- example, up digging lay ante, bles or wires overhead at See 489- stringing poles. 491. And whether, which, or the extent a new competitor or avoid, could that kind of investment without replicate, sig- resources remained unclear. nificantly See Huber wasting 34, Thus, at the 206. time wrote the new Act, Congress seemed to technological nonwasteful development permit to some of local competition respect service; aspects but other respect incumbent local telecom- aspects munications continue “natural provider might possess Id., at 206-207. Amd these monopoly” circum- advantages. made it stances reasonable for to secure local Congress try insofar as that would eco- competition competition prove e., feasible, i. where nomically would not competition prove seriously wasteful. See Order 1. See also U. S. C. 271(c)(1)(B) §§271(c)(1)(A), that some local mar- (recognizing firm). kets will not more than one support Third, the Act’s structure a con- indicate language gressional effort to secure that end. The Act very dis- mantles artificial barriers to new in local mar- legal entry permitting kets, new firms to if thereby enter they wish. ante, § 253(a); see and n. But Act 12. recognizes simple permission may prove perhaps sufficient — because the incumbent will retain a “natural form monopoly” of control over certain elements of service. It necessary promote on to new consequently three goes entry ways. ante, See First, 491-492. it to “in- incumbents requires (at terconnect” with new entrants a determined the price us), before regulations a new entrant’s thereby allowing small set of subscribers to connect with the incumbent firm’s 251(c)(2). § customer likely larger base. it Second, requires at whole- to new entrants to sell retail services incumbents thereby allowing newly entering firms automati- rates, sale 251(c)(4). § retailing they so desire. cally compete if to provide new entrants “ac- requires to incumbents Third, it connecting telephone lines say, elements,” cess network to unbundled switching centers, “on or offices with homes §251(c)(3). requirement permits a new This third basis.” (or selectively replicating substi- compete entrant to without tuting) to offer the all the the incumbent uses elements question. service in

Suppose, example, of certain the incumbent’s control switching equipment put existing would cables, lines, or disadvantage dupli- because at an economic new entrant unnecessarily prove ex- cation those “elements” would pensive. require the new entrant The new Act does not compete respect elements, to and incumbent to those permits say, duplication. through the Act Rather, wasteful respect compete offer, to, entrant new to to (and by obtaining using) related service therefore “access” while those “elements” find- network, incumbent’s ing necessary on its own other elements the service. regulator, promote It is if a railroad anxious railroad competition City City A B between aware that it but prove duplicate bridge would wasteful to railroad certain bridge’s Mississippi River, across ordered the owner competitors. bridge sharing to share the with new duplication hard-to-duplicate re- would avoid wasteful of the namely, bridge. at the time it But same would source— facilitate

competition remaining aspects in the of the A-to-B why says railroad service. I That, the Act assume, the “elements” that must be shared are for which ac- those “necessary” respect pro- cess is and in to which “failure “impair” ability vide access” would entrant of the new 251(d)(2). provide “to services it offer.” seeks (Commission See Iowa Bd., S., 525 U. at 392 must Utilities give ‘necessary’ ‘impair’ require- “substance to the id., ments”); J., cf. at 416-417 in concurring part (Breyer, and in that the and “im- part) (stating dissenting “necessary” to, is to access provision’s pair” object require thereby of, force those elements of an incumbent’s sharing system to a that would prove, significant degree, economically wasteful to duplicate).

To more the matter that a commu- put concretely, imagine nications firm —a new entrant —wishes voice, to sell potential data, text, entertainment, or other pictures, communications services, with the incumbent. That perhaps competition firm must decide how its service will reach a customer inside (1) a house or office. firm own Should the run its new cable (2) into the house? run wires through already-existing (3) wires, conduit? communicate without electricity say, by (4) or wireless or satellite? or use the one-way two-way incumbent’s of twisted service wires pair telephone copper If the already new entrant place? claims that potential all but the last of these are possibilities impractical far too wires is far expensive using existing telephone —that (in terms of real resources than the alter- cheaper expended) natives —then the new entrant the incum- claiming bent’s wires are kind of it must have which “bridge” And it access. ask to make its may new regulator entry feasible incumbent it to use that requiring permit “element” at a reasonable price.

Fourth, the Commission has described the Act’s goals of nonwasteful promotion The including competition. pre- amble to the Commission’s describes price regulations their based aim as statutorily “giv[ing] appropriate signals producers consumers ensuring] entry efficient and utilization of the telecommunications infrastructure.” added). Order ¶630 Commission also (emphasis says that “the entrants prices for these ele- potential pay ments should reflect economic costs order forward-looking Id., levels of investment and encourage entry.” efficient added). (emphasis ¶672 And it adds that “Congress spe- input prices be based should cifically determined competition in retail foster this would because costs ¶ id., 1. Id., 710; also market.” see at oral this view confirmed Fifth, General the Solicitor question should the rates argument that when he said to into “encourage come new entrants to be set order to the Arg. enter 60, to “allow them of Oral market,” Tr. the “encourage them competitive rates,” ibid., and to market technologies,” develop id., 61. to new competition in- local market then, seeks new statute, support competition without as markets can that sofar local ratesetting read relevant And we must the serious waste. goal that provision including critical word “cost”—with the — mind. Ill incumbents, and Verizon, The Commission’s other critics— lodged with experts published has whose articles Verizon the Commission grants the statute that the Court—concede “cost[s].” They authority that to define also concede broad every system e.g., ratesetting Cf., Missouri has flaws. Telephone ex rel. v. Public Serv. Southwestern Bell Co. (1923) (Brandeis, J., 262Mo., Comm’n U. S. 311-312 joined (criticizing “reproduction dissenting) Holmes, J., systems difficulty cost” because de of the administrative (criti costs); termining Regulation Economics 109-111 cizing systems cost” of their “historical because failure incentives). provide proper argue, the

Nonetheless, critics Commission cannot law- fully system statutory purpose choose a that thwarts a basic offering any advantage. significant compensating without They purpose furthering compe- take the relevant local They tition supra. where II, feasible. Part add See (1) purpose they discourage will rates further that new if using firms from or incumbent’s facilities “elements” significantly economically it expensive, speak- when less (2) ing, buy for the if elsewhere, entrant build or they encourage new firms to use the incumbent’s facilities significantly expensive, economically when it is less speak- ing, They point do prices entrant so. out that approximately reflect actual incumbent’s actual (or “element”) supplying additional costs services demanded will to doing things. come close both these See (prices Kahn 330 set at sup- “incremental cost,” cost of plying give challengers an added will “increment,” “proper target at only which shoot” if that cost reflects society actually “the cost they will if pur- incur they chase more” resources it that would save if less); purchase Knieps, Access, Interconnection and Network (2000); 23 Ford. Int’l L. J. 90 also Spulber, see J. Sidak & D. (1998) Deregulatory Takings Regulatory and the Contract (arguing component that a pric- market-determined efficient (M-ECPR) ing objectives rule satisfies these and that the M-ECPR-system). has the prices FCC misunderstood But Commission’s, like the hypothetical based on the costs that a building “most efficient” firm hypothetically would incur if largely scratch, from Order would do neither. Indeed, they exactly opposite, creating would do the incentives that objective. hinder rather than further the statute’s basic why, given system, First, ask, the critics such a would buy new entrant ever build or a new element? After all, ratesetting system the Commission’s the sets incumbent’s compulsory leasing rarely at a rate level that would exceed price building the of buying or elsewhere. That is because ratesetting system the Commission’s chooses as its basis hypothetical the provid- cost of the most efficient method ing e., the relevant entering service—i. the cost a house through the use of electrical using or of conduits wireless (if (based cheaper general), in it applies and then those costs wireless) say, hypothetical they on, were the cost of if (the wires). system place in pair Why twisted then would the new entrant use an conduit, electrical or a wireless system, by when, enter a house definition, the Commis- twisted its lease the incumbent pair will sion require or not the or lower —whether wires price equivalent fact, more, in provide have to incumbent will spend rules further discourage independent twisted wires? The penalty upon or special by assessing building buying have to for that entrant will so, that does new entrant entrant will insist upon newer new that soon another worry at a element of that very incumbent’s equivalent sharing based subsequent lower still price regulation-determined technological developments. in instances will tend to creatе

The Commission’s system the incumbent’s actual future (1) of maintain- cost which (2) wires) exceed the new a set of will an element ing (say, or elsewhere (say, entrant’s cost of building buying through conduits) turn, will which, or wires in wireless electrical hypothetical exceed) (3) (or “best prac- future even equal will, in what the decide tice” cost (namely, general, experts (or cases, where In case related such a cheapest). or tend to actual technological improvements, predicted, un- entrant will differences), offset various cost the new the incumbent’s facilities leasing share economically result, And that than elsewhere. rather buying building circumstances, undermines the assumed It wasteful. itself claims the Act goal majority efficiency ante, 509-510, seeks to achieve. 539. Cf. (e. g.,

Nor is the of facilities the wire pairs) “sharing” this embodies consistent with the result competition That firms that the Act was written to is because promote. in that share facilities do compete respect existing share, the facilities that more than several they grain owned who auction their a jointly grain single producers Iowa auction services. Cf. market in compete respect Bd., Utilities S., J., at 429 in U. concurring (Breyer, (“It unshared, and not in in the part part) dissenting shared, the of com- the portions enterprise meaningful rules a would Yet that combine petition likely emerge”). incentive to share with a broad definition of strong monetary “network element,” (1997); §§ see CFR Order 51.319(fMg) ¶413, will tend to of entire produce sharing widespread incumbent under systems result supervision regulatory —a from different market very that the statute competitive seeks to Bd., create. Iowa See Utilities at 386-387 supra, the Commission’s of broad definition “network ele (affirming ment”). At least, those rules are inconsistent with the own Commission’s view that will sometimes “serve they as a transitional until could arrangement fledgling competitors base a customer of develop construction complete their own networks.” In re the Local Implementation Provisions Competition Telecommunications Act 1996, (1999) (Third 3696, 3700, FCC Rcd. 6¶ Report Order). rules, would those Why, given pricing “fledg ever on their own? ling try competitors” fly Second, what incentive would the Commission’s rules leave the incumbents either innovate to invest in new “element?” The rules seem to the incumbent will say share with benefits competitors suc- cost-reducing cessful while innovation, incumbent bear the leaving costs of most unsuccessful investments on its own. But see at 552. infra, would investment not then Why stagnate? See, e. Jorde, Sidak, Teece, & g., Innovation, Investment, and (“It (2000) 17 Yale J. 1, 8 Unbundling, makes no Reg. economic sense for the to invest in [incumbent] technologies lower its own so costs, marginal long competitors can achieve the identical cost fiat”); savings by regulatory & Sidak Spulber, Managed Competition Deregulation Industries, (1998) (“If Network 15 Yale J. 124-125 Reg. aof return to facilities deprived after has capital been capital sunk investments, irreversible or if faced with reduced returns made, to investments already ra- any economically tional will eliminate or reduce similar in- company capital in the future”); vestments AT&T Scoffs at Armstrong, Possi- ble Common Carrier Status, Telecommunications Reports, 552 (Chief AT&T, which here of 9, 1998 Executive Officer

Nov. 206, cited in Huber the Commission’s regulations), supports if (“‘No dollars ... will invest billions of n. 611 company nor who not invested capital, have penny competitors ride on a free risk, an ounce of can come get taken along ”). and risks of others’ the investments Com- is to enforce the I that no likely recognize regulator slows investment literally mission’s rules so strictly Indeed, showing cites to a trickle. majority figures new firms have invested $30 in the several years pаst ante, at markets. See billion in local communications $60 this investment know how much of rep- 516. We do not incumbent’s for facilities, broadband, resents which say, know no do we historical network offers substitute. Nor what is whether this number small large compared FCC, have been. Cf. Statistics of Communications might (table 2.7); FCC, 51 Communi- Common Carriers Statistics of (table 2.7); FCC, cations 42 Common Carriers Statistics (table FCC, 29 2.7); Carriers Sta- Communications Common (table 2.7) (in- Carriers tistics Communications Common amounts investment over the same cumbents’ similar period cf. Commu- billion); FCC, over 2000/2001 Statistics $100 (table 2.9) (total nications Common Carriers depreciated ante, billion); investment at plus capital $220 working equals (new entrants’ entrants’ market share provided 33%). the incen- own facilities alone Regardless, given to have been tives, this investment would seem independent rules, because of from made the “start scratch” despite no more than show that best, them. At such statistics do have, least some of I describe below the coincidences happily alike, for the come to See Commission and pass. public infra, 554, 556, 560-561. as well.

The critics mention several other problems They will ex- the Commission’s say, regulations example, e., of “stranded costs”—i. need for a acerbate the problem reasonable, now its but incumbent to recover once-regulated technologically outdated, historical Párt investment. See They regulations nearly III-C, ante. add make will provisions redundant the statute’s for “element” set rates 252(a)(1). through negotiation. See 47 U. S. all, C. After given regulations, much Commission’s how is there to negotiate regulations about? The entitle the new entrant price equal price any to, to a or than, lower to which agree. rational incumbent could See Brief for United States Technologies, in Mathias v. Inc., Worldcom O. 2001, T. (“[A]s p. practical 00-878, 18, No. n. 5 matter” carriers have negotiate). little incentive regulations

Nor, in the any view, critics’ do the possess offsetting advantages. They lack that ease of administra- tion that led Justices Holmes and Brandéis to favor use (for ratesetting purposes) of an incumbent’s historic costs despite inaccuracy. their economic See Bell Southwestern Telephone Co.,262 S.,U. at 292-296 (dissenting opinion); see ante, hypothetical also at 481-488. The nature of the Com- system experts mission’s means that must estimate how imaginary systems firms would rebuild their from scratch— example, they (hypothetically) whether, for would receive permission dig up unsightly telephone streets, to maintain poles, pole say, or to share their costs with users, other they operators cable must then estimate what would —and (hypothetical) turn out to be most “efficient” such future speculative circumstances. The enterprise, nature of this say, experts, asking critics will lead to a battle of each a commission to favor what can amount to little more than a guess. (describing See Kahn 333, 334, n. 36, three mod- regulatory proceedings, els introduced in one of re- which expenses by regulation all duced actual 27%because railroad brought efficiency had similar gains, another of which as- including sumed that all electricity producers, utilities, systems would rebuild entire from scratch time, at the same the third which Hampshire’s assumed New tele- system administratively communications was efficient most 25%). but then reduced expenses its actual administrative greater than seem far difficulties administrative These an actual difficulty likely in an effort determine involved future) Affi- likely See (past costs. or actual incumbent’s Willig, R. Comments Baumol, Ordover, & W. davits of J. Implemen- Corp., In Matter 96-98: CC Docket AT&T Competition the Telecommuni- Provisions in of Lоcal tation (TELRIC’s 1996),App. (May 16, Act of cations sizing, accept architecture, simply “do not estimates technology, operating of the incumbents “as decisions” costs). Assumptions calculating” are inevitable. bases for resulting random mean a somewhat uncertainties And prob- incentive that can exacerbate the sort of rate either problems by previously or alleviate those lems mentioned (describ- regulatory ante, a See coincidence. kind assig[n] “customarily rates ing state how commissioners predictions others from from one model and based on some counterpart”). its

IV poten serious, III The criticisms in Part are described the Com tially severing relation between rational regulations statutory provision’s the basic mission’s purposes. Farm, S., Hence, the Com State 463 U. 56. responses responses important. Do those re mission’s are edges, sug criticisms, duce the force of the blunt their gest major responses. offsetting found virtues? I have six convincing. But none of them is points only

First, the FCC out that rates include not will reflecting charge hypothetical a “most-efficient-firm” costs depreciation charge charge but also a that can reconcile —a say, a equipment, investment, firm’s initial historic the which over value, current diminishes time. equipment’s ¶686 designed (“[Pjroperly depreciation See Order sched- expected ules should account for value declines the capital goods”). example, If, incumbent’s reason- historically, actually investment, able measured came experts predict million, but a “most-efficient- $50 FCC future cost of mil- firm-building-from-scratch” replication $30 lion, could incumbent depreciation charge permit And, the otherwise million. $20 recoup missing theory, a state commission structure might potentially complex both to so as depreciation of historic charge recovery permit investment and also offset of the invest- many improper ment incentives described in Part II, supra.

This however, does not reflect what response, Com- mission’s Those actually regulations say. regulations say about of reasonable nothing permitting recovery historic nor investment about to offset varying charge perverse investment incentives. Rather, they indicate the strongly state They clearly commissions to use opposite. require current rates depreciation right Commission’s alongside new and different “most-efficient-firm-building-from-scratch” Order 702. do See create an charges. They exception from “current” rates. But to take of that ex- advantage “incumbent LECs” have to bear the “burden of ception risks business demonstrating specificity face in network unbundled they providing elements and services interconnection would a different . . de- . justify Ibid. preciation rate.” Unless is to swallow exception rule, the term “business risks” must refer to some spe- cial situation —not to the circumstance in which a ordinary new entrant asks to share an “element” at simply rates under determined Commission “most-efficient-firm” rules. event, In that is how 24 state commissions have read the See 1998 Biennial Review —Review language. Regulatory Depreciation Incumbent Local Ex- Requirements for Carriers, (1999). change 242, FCC Red. And ¶69 FCC nowhere to the explicitly Hence the says contrary. FCC rules as written do depreciation to the respond critics’ claims in the case, nor do ordinary otherwise they transform its “most-efficient-firm-building-from-scratch” sys- tem into a that reflects historic costs. system can that a points out state commission Second, the FCC adjust- theory, an profit In such adjust permissible rates. improper incen- many of the investment offset ment сould deprecia- supra. But, like the II, tives described Part say nothing regulations about regulations, profit tion they depreciation regulations, Indeed, like the the matter. say regulations opposite. suggest relevant FCC currently at the rate return “the authorized federal ¶702 starting point.” Order or level is a reasonable state added). exception, They, available (emphasis too, add successfully the burden “bear “incumbent LEC’s” demonstrating specificity risks that that the business they providing elements face in unbundled network risk- justify a would different interconnection services capital.” exception, like the adjusted But cost of Ibid. this exception, respond depreciation critics’ claims cannot to the ordinary in the case similar reasons. for to offer more adds not have “time” The FCC that it did guidance,” Reply Brief for Federal Parties than “tentative ¶ may 702, profits high, be too Order 11-12, now capi- ways their may that the incumbents find other lower ¶ costs, id., additions, 687. concede the however, tal These point “profit” critics’ basic written do not rules as —that provide Rather, an answer claims. considered to Part Ill’s response they upon claims, as a no more those must rest hope regulatory significantly, than for a coincidence. Most they hope that current market mean that current conditions profit magically rates somehow offset the adverse effects regulations, supra. of the III, Commission’sother Part see Reply 9, See Affidavit of Hausman submitted with 8, J. n. Reply Association, Comments States United Telcom (FCC 1996), May App. Docket CC No. 96-98 filed (testifying profit rates critics that would have double investment). triple to secure Lehr, Cf. G. Hubbard & W. Capital Recovery Pricing: Response Issues TELRIC 1996), Jerry (July App. 216, Professor 221 18, A. Hausman for FCC that defenders Hausman overstates (arguing need for but “if that ... are change, stating any adjustments modest”). ... such would be required And the adjustments on its relies belief that that has majority been realized. hope Ante, at 521 that in of the fact (stating light “competi- tion in materialize,” fact has been slow to “it seems fair to “ ”). rate a say” the current is ‘reasonable starting point’ course, Of one must with the FCC’s time sympathize prob- lem. But statute did not the FCC so require quickly so Rather, create statute seems complex system. set, foresee rates FCC inor by regulations primarily detail, but by U. S. C. negotiations among parties, § 252(a)(1), if not state commissions. See Iowa Utilities Bd., 412-420 S., J., U. part concurring (Breyer, dissenting part).

Third, the Commission the reasonableness supports its the claim that practicality system “a number states” it have used as have several successfully, European nations. I Order As to domestic can 681. experience, find no evidence that, to the of the prior promulgation here, rules issue had State successfully implemented FCC’s version TELRIC. It hardly surprising since then several States have tried to it. Nor is it apply that their has surprising implementation criticisms produced similar to e. made MCI Telecommuni- See, those g., here. Northwest, Inc., cations v. GTE Corp. 41 F. 1157, 2d Supp. (Ore. 1999) n. 1168-1169, and with the (discussing problems TELRIC). FCC’s

And the nation” of the claim part Commission’s “foreign rests a 1997 only upon European Community referring paper a “best current practice” future approach See goal. Commission of Communities, European Recommendation on Interconnection in a liberalised telecommunications mar- C(97) (Oct. ket, 3148, 3.3,3.5 §§ 15,1997), http://europa.eu.int/ 2002). ISPO/infosoc/telecompolicy/en/r3148-en.htm (Apr. Indeed, Britain’s that, FCC has said counterpart inefficiency, oc- showing incumbent’s the of a absence capacity should additions expenditures on current tual of Telecommuni- starting point.” See Office “as the used (Oftel), prices and Indicative to Bandwidth: Access catiоns 2000), http://wAvw.oftel.gov.uk/ (May ¶9 principles pricing 2002). (Apr. 17, publications/broadband/llu/llu0500.htm may European system, it the fact, I understand In as roughly The relevant practice follows: in to work as turn out competition, agency, seeking encour- European regulatory provide ages in order to firms to local markets new enter com- picture, entertainment, or other voice, text, data, new agency nor- Commission, Like munications service. firm authority that incumbent mally to insist has the pair use its g., permit it a new entrant to “unbundle,” e. switching to the inside center running from wires twisted authority prices. But in to set It has the of a house. also required, authority, nor is it exercising it has neither ratesetting Rather, it likely rely upon, method. to one encourage among parties may negotiation in order to prevent prices enough in- agreed-upon low to reach enough encourage blocking entry high but to cumbent from entry methods, such as use firm to other the new consider economically electricity conduits, cables, new where or regulator, agreement in reached, If no feasible. can be take determining price, formulas, can use modified it proper depreciation cost, or can historical account of and yardstick prices European as a in other nations look set help produce competition. system, my “play in it This formal ear” less kind pro- The Act view, us is what the statute before intended. brings price negotiation among parties, it vides for regulators necessary deadlocks, where it state break variety ratesetting permits of different the States to use a approaches, experience appro- looking in other States mysterious priate, proper prices. in order to determine “(determined statutory parenthetical phrase without ref- erence to a rate-of-return other rate-based proceeding),” 252(d)(1), makes sense from this of view. It reflects point desire to obtain not but re- Congress’ perfect prices speedy It sults. States need use specifies methods, formal instead relying upon yardstick bargaining competition. supra, Utilities, See Iowa at 424-425 (Breyer, J., con- (de- cf. curring Order part dissenting part); how the New York Commission scribing “se[t] prices basis”). a I case-by-case however, that the recognize, FCC has this in favor of rejected com- approach extraordinarily standards, national which we review to plex ratesetting only further, determine whether will or serve as obstacles they to, the that the statute seeks. competitive marketplace

Fourth, the FCC adds that its base seeks to rates system on the a costs “most efficient firm” hypothetical hypotheti- would incur were it from scratch.” cally And such “building a in view, its will “simulate” or system, “best to replicat[e], the extent the conditions aof possible, market.” competitive id., 679; Order see however, also This ¶738. response, does not do more than describe that of the feature very sys- which tem the critics focus their upon attack. supra,

As I said, have such an previously objective consistent with an perhaps statute ordinary ratesetting that seeks low But the before only prices. us—that problem of a lack of “rational connection” between the regulations and the out the fact that the Telecommuni- grows statute — cations Act is not a statute typical regulatory regula- asking tors seek low simply prices, perhaps by trying replicate of a those hypothetical Rather, market. this competitive statute, statute is a and it asks deregulatory regulators create that will induce new prices See apрropriate entry. supra. II, Part That so, we assume, being may purely sake, that the argument’s FCC rules could successfully “rep- licate” the efficient, toward which prices perfectly perfectly would markets tend. But see Kahn 326-327 competitive that such are never achieved actual (stating prices any Destroy, market); or How Would A. Whom Gods Kahn, (2001) actual (stating firm in an that a Deregulate 4 Not to light of its investment would determine efficient market scratch). system system, hypothetical built from not a actual strong in- produce the successful, would those if Still, rules, sharing, strong disincentives to demand centives they would independently, Part II describes—for build to or price equal “sharing” or “interconnection” a create of inde- with the creation price associated than lower sys- thereby They tend toward pendent would facilities. supplant, not price setting regulatory would in which tem congenial competition. institutional promote, And however dramatically might system, find such it differs regulators system bring about. See from the that the statute seeks supra. Bd., S., 525 U. at 387-392 II, Iowa Utilities Part Cf. (setting granting new entrants aside rules Commission element). any existing virtually power to access to obtain that is claim that much of the criticism At least underlies response supra. And the III, set forth Part Commission’s system competitive of its the conditions a that simulates respond does not that basic criticism. market says simply regulations Fifth, its are Commission suggestive, leaving depart. Reply Brief for States free to Federal but conclusive answer to Parties 11-12. short response “sugges- this the Commission considered a is that approach rejected (refusing to tive” it. See Order setting “requirements,” but forth, characterize rules as ” “ approach ‘preferred outcomes,’ latter “would because the explicit arbitration, to establish national standards for fail parties’ provide guidance to the and would fail to sufficient negotiations”). options in (but Commission) majority points

Sixth, out not the likely any given set of that local commissions are to leave period “regulatory rates effect And for some of time. this lag” problem. will solve ante, at I do not See 505-506. problem understand how it could solve the main —that new entrants lease more incumbent “ele- leading costly ment” where or could building buying independently prove less Nor, 548-550. costly. See new en- supra, any given trant’s to obtain a am I cer- legal right decision, regulator’s tain that will But, prove event, lags significant. differ, will cir- lags time, and depending upon regulator, cumstance, near random element thereby introducing not, ameliorate otherwise might, might system’s adverse effects. sum,

In neither the Commission’s nor the re- majority’s are sponses convincing.

V have Judges long recognized difficulty reviewing the substance of technical highly agency decisionmaking. (CADC 1976) v. EPA, 1, 541 F. 2d Compare Ethyl Corp. (en banc) (“[T]he (Bazelon, J.,C. best concurring) way courts to unreasonable ... guard administrative de- against cisions is not . . . themselves scrutinize the technical . merits . . establish a to] [but decision-making process (internal that assures a reasoned decision” marks quotation omitted)), id., at 69 (Leventhal, J., concurring) (stating must assure, substantive judges review, “conform- ance to standards and statutory requirements rationality,” “whatever technical acquiring background necessary”). This Court has the limitations the law emphasized imposes to insist upon judges’ authority upon special agency proce- dures. Vermont Yankee Nuclear Power v. Natural Corp. Council, Inc., Resources 435 U. S. 543-548 Defense (1978). But has also it made clear that nonetheless judges must review for substance rationality deci- agency sions, technical Farm, decisions. including State S.,U. at 56. That review requires undertake dif- the agencies ficult task of technical into matters translating language can judges understand technical re- preparing of the sponses But, sort found here. challenges despite the review difficulty, is generalist both judges important, impor- great of agency are often decisions technical because agen- law the forbids general public because tance to the expertise, wrest themselves technical in the name of cies, public control. free of That expert technical areas.

Agencies are, course, of judges,” when re- why Judge wrote that “the Leventhal substantive, act “must rationality decisions, viewing agree. I Ethyl Corp., at 69. And 2d, 541F. with restraint.” any substan- judges may from But, added, not “abstain he agree. again In these And I Id., tive review.” 68. They strong. suggest that the the critics’ claims are cases, together original pricing with “forced leas- rule, its FCC’s (finding supra, at ing” Bd., 388-392 Iowa Utilities twin, see unlawful), bring not the original leasing about, would rule demands, competitive marketplace but a statute by widespread marketplace highly regulated characterized technological change sharing of with innovation and facilities regulation through decisionmaking reflecting mandarin decisionmaking based on inter- rather than decentralized freely competitive market And the Com- action forces. unsatisfactory. majority replies The nonethe- mission’s are pricing less rules reasonable. As finds Commission’s supportable. regulatory theory, might that conclusion deregulatory But this it is not. these statute, under Under circumstances, from, it would amount abstention indeed agree I of, review, abdication “rational basis” were the record here be- demonstrates “rational connection” statutory upon regulations purpose tween which law supra, insists. State Farm, 56; at Administrative Procedure §7Q6(2)(A); supra, Act, Farm, U. S. C. see also at 43 State (“[W]e may supply agency’s reasoned basis ac- agency given”). Judge tion that the itself has not As Leven- properly put yes, thal Ethyl “Restraint, it, abdication, no.” Corp., supra, pages Court, course, 69. with 65 analysis, responsi- reviewing careful does not abdicate its bility; agree but for I the reasons stated here cannot its substantive I affirm conclusion. would Consequently, Circuit’s ‍​‌‌‌​‌‌‌​​​​​‌​‌‌‌‌​​‌​​‌‌​​​‌​​​‌​‌​​​​​‌‌‌‌‌‌​‍determination that are Eighth regulations unlawful.

VI I with the about one further issue. disagree majority legal The statute an incumbent imposes upon to ... for the

“duty a telecommu- provide provision service, nications access network nondiscriminatory elements on an unbundled basis ... in a manner that carriers combine such allows requesting elements order such telecommunications service.” provide 251(c)(3) added). 47 U. S. C. (emphasis FCC, to this has said that re- pointing provision, (upon incumbents must themselves quest) combine, other among elements that are things, ordinarily combined. Rules 51.315(c)-(f) (1997). 315(cMf), §§ 47 CFR How, the incum- ask, bents can a statute that car- of the requesting speaks riers elements combining grant FCC insist authority they, incumbents, combine the elements? Bd.,

In Iowa Utilities the Court found for a authority somewhat similar rule —a rule that forbids incumbents uncombine elements found ordinarily But, combination. ante, as the 534-535, majority recognizes, different rule rests a rationale absent here. If an upon incumbent takes elements that it apart ordinarily it keeps together, normally discriminating against carriers. requesting And the forbids statutory provision discrimination. But here the incumbent simply elements it keeps apart ordi- in the absence of narily keeps apart a new entrant’s demand. How does that discriminate? And if it does not discrimi- nate, where this does statutory provision au- FCC give to forbid it? thority

I cannot find the And I statutory authority. consequently would affirm the lower court on the point. reasons,

For these I dissent.

Case Details

Case Name: Verizon Communications Inc. v. Federal Communications Commission

Court Name: Supreme Court of the United States

Date Published: May 13, 2002

Citation: 535 U.S. 467

Docket Number: 00-511

Court Abbreviation: SCOTUS