The opinion
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 7, 2002 Decided May 24, 2002
No. 00-1012
United States Telecom Association, et al.,
Petitioners
v.
Federal Communications Commission and
United States of America,
Respondents
Bell Atlantic Telephone Companies, et al.,
Intervenors
Consolidated with
01-1075, 01-1102, 01-1103
---------
No. 00-1015
United States Telecom Association, et al.,
Petitioners
v.
Federal Communications Commission and
United States of America,
Respondents
AT&T Corporation, et al.,
Intervenors
Consolidated with
00-1025
On Petitions for Review of Orders of the
Federal Communications Commission
Michael K. Kellogg argued the cause for petitioners and
supporting intervenors in 00-1012 & 00-1015. With him on
the briefs in 00-1012 were Mark L. Evans, Sean A. Lev,
James D. Ellis, Paul K. Mancini, Roger K. Toppins, Gary L.
Phillips, Lawrence E. Sarjeant, Linda L. Kent, Keith Town-
send, John W. Hunter, Julie E. Rones, William P. Barr,
Michael E. Glover, Edward H. Shakin, John P. Frantz,
Richard M. Sbaratta, and James G. Harralson. With him on
the briefs in 00-1015 were Mark L. Evans, Sean A. Lev,
David L. Schwarz, Lawrence E. Sarjeant, Linda L. Kent,
Keith Townsend, John W. Hunter, Julie E. Rones, Sharon J.
Devine, Robert B. McKenna, William T. Lake, John H.
Harwood II, Jonathan J. Frankel, James D. Ellis, Paul K.
Mancini, Roger K. Toppins, Gary L. Phillips, Michael E.
Glover, Edward H. Shakin, William P. Barr, John P. Frantz,
Jonathan B. Banks, Richard M. Sbaratta, and James G.
Harralson. Donna M. Epps entered an appearance in
00-1012. Daniel L. Poole and William R. Richardson, Jr.
entered appearances in 00-1015.
Laurence N. Bourne, Counsel, Federal Communications
Commission, argued the cause for respondents in 00-1012.
With him on the brief in 00-1012 were Charles A. James,
Assistant Attorney General, Daniel M. Armstrong, Associate
General Counsel, John E. Ingle, Deputy Associate General
Counsel, James M. Carr, Counsel, Catherine G. O'Sullivan
and Nancy C. Garrison, Attorneys, U.S. Department of Jus-
tice. Lisa S. Gelb, Counsel, Federal Communications Commis-
sion entered an appearance in 00-1012.
Richard K. Welch, Counsel, Federal Communications
Commission, argued the cause for respondents in 00-1015.
With him on the briefs in 00-1015 were Charles A. James,
Assistant Attorney General, Daniel M. Armstrong, Associate
General Counsel, John E. Ingle, Deputy Associate General
Counsel, Laurence N. Bourne and James M. Carr, Counsel,
Catherine G. O'Sullivan and Nancy C. Garrison, Attorneys,
U.S. Department of Justice. Lisa S. Gelb, Counsel, Federal
Communications Commission, entered an appearance in
00-1015.
Jonathan Jacob Nadler argued the cause for intervenors
AT&T Corp., et al. in 00-1012. With him on the brief in
00-1012 were David W. Carpenter, Peter D. Keisler, James
P. Young, Mark C. Rosenblum, Lawrence J. Lafaro, Richard
H. Rubin, Donald B. Verrilli, Jr., Maureen F. Del Duca,
Michael B. DeSanctis, Thomas F. O'Neil III, William Single,
IV, Theresa K. Gaugler, Charles C. Hunter, Catherine M.
Hannan, Albert H. Kramer, Robert McDowell, Jay C. Keith-
ley and H. Richard Juhnke. John J. Heitmann, Jonathan
E. Canis and Roy E. Hoffinger entered appearances in
00-1012.
David W. Carpenter argued the cause for intervenors
AT&T, Corp., et al. in 00-1015. With him on the brief in
00-1015 were Peter D. Keisler, James P. Young, C. Frederick
Beckner III, Mark C. Rosenblum, Lawrence J. Lafaro, Rich-
ard H. Rubin, Donald B. Verrilli, Jr., Maureen F. Del Duca,
Michael B. DeSanctis, Thomas F. O'Neil III, William Single,
IV, Rodney Joyce, Christy C. Kunin, Russell I. Zuckerman,
Francis D.R. Coleman, Richard E. Heatter, Marilyn H. Ash,
Douglas G. Bonner, Albert H. Kramer, Charles C. Hunter
and Catherine M. Hannan. Roy E. Hoffinger, Lawrence G.
Acker, John J. Heitmann and Jonathan E. Canis entered
appearances.
Before: Edwards and Randolph, Circuit Judges, and
Williams, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
Williams.
Williams, Senior Circuit Judge: Petitioners in these two
cases--certain incumbent local exchange carriers ("ILECs")
and the U.S. Telecom Association, representing approximate-
ly 1200 such carriers--seek review of two rulemaking orders
of the Federal Communications Commission. One order
requires ILECs to lease a variety of "unbundled network
elements" ("UNEs") to competitive local exchange carriers
("CLECs"), and the other unbundles a portion of the spec-
trum of local copper loops so that CLECs can offer competi-
tive Digital Subscriber Line ("DSL") internet access. We
grant both petitions, and remand both rules to the Commis-
sion.
I. Background
Congress passed the Telecommunications Act of 1996, Pub.
L. 104-104, 110 Stat. 56, codified at 47 U.S.C. s 151 et seq.
(the "1996 Act" or the "Act"), to "promote competition and
reduce regulation in order to secure lower prices and higher
quality services for American telecommunications consumers
and encourage the rapid deployment of new telecommunica-
tions technologies." 1996 Act, preamble. In pursuit of that
goal, s 251 of the Act requires that ILECs "unbundle" their
network elements--that is, provide them on an individual
basis to competitive providers on terms prescribed by the
Commission. 47 U.S.C. s 251(c)(3). To guide the Commis-
sion in deciding which network elements are to be unbundled,
the Act goes on to specify:
(2) Access standards
In determining what network elements should be made
available for purposes of subsection (c)(3) of this section,
the Commission shall consider, at a minimum, whether--
(A) access to such network elements as are proprietary
in nature is necessary; and
(B) the failure to provide access to such network ele-
ments would impair the ability of the telecommunica-
tions carrier seeking access to provide the services that it
seeks to offer.
47 U.S.C. s 251(d)(2) (emphasis added).
In its first effort at implementation, Implementation of the
Local Competition Provisions in the Telecommunications
Act of 1996, First Report and Order, CC Docket No. 96-98,
11 FCC Rcd 15499 (1996) ("First Local Competition Order"),
the Commission gave this section the following reading:
The term "impair" means "to make or cause to become
worse; diminish in value." We believe, generally, that
an entrant's ability to offer a telecommunications service
is "diminished in value" if the quality of the service the
entrant can offer, absent access to the requested ele-
ment, declines and/or the cost of providing the service
rises. We believe we must consider this standard by
evaluating whether a carrier could offer a service using
other unbundled elements within an incumbent LEC's
network.
Id. at 15643, p 285 (emphasis added). In AT&T Corp. v. Iowa
Utilities Board, 525 U.S. 366 (1999), the Supreme Court
found the Commission's view far too broad, saying that under
such a standard it was "hard to imagine when the incumbent's
failure to give access to the element would not constitute an
'impairment.' " Id. at 389. It specifically criticized the Com-
mission's having "blind[ed] itself to the availability of ele-
ments outside the incumbent's network," including self-
provisioning and leasing from other providers. Id. It criti-
cized the Commission's view that "any increase" in the com-
petitor's cost (resulting from lack of access to an incumbent's
element) would be an "impairment." Id. at 389-90 (emphasis
in original). Summarizing the overall picture, it said that if
"Congress had wanted to give blanket access to incumbents'
networks," it "would simply have said (as the Commission in
effect has) that whatever requested element can be provided
must be provided." Id. at 390.
In Iowa Utilities Board, the Supreme Court also addressed
the Act's provisions on rates for UNEs, reversing the Eighth
Circuit's holding that the Commission had no authority to set
such rates. Id. at 377-86. It accordingly returned the
remaining rate issues to the Eighth Circuit, which on remand
invalidated the Commission's rate-setting principle, known by
the acronym TELRIC (for "total element long-run incremen-
tal cost"). See Iowa Utilities Board v. FCC, 219 F.3d 744
(8th Cir. 2000). The Supreme Court reversed, upholding the
TELRIC principle. Verizon Communications, Inc. v. FCC,
No. 00-511, 2002 WL 970643 (May 13, 2002).
Following the Supreme Court's remand on the "impair-
ment" standard, the Commission again tackled that issue in
the rulemakings now on review. In what we will call the
"Local Competition Order," Implementation of the Local
Competition Provisions of the Telecommunications Act of
1996, Third Report and Order and Fourth Further Notice of
Proposed Rulemaking, 15 FCC Rcd 3696 (1999), it revised its
definition of "impair" so as to require unbundling if, "taking
into consideration the availability of alternative elements out-
side the incumbent's network, including self-provisioning by a
requesting carrier or acquiring an alternative from a third-
party supplier, lack of access to that element materially
diminishes a requesting carrier's ability to provide the ser-
vices it seeks to offer." Local Competition Order, 15 FCC
Rcd at 3725, p 51 (emphasis added); 47 C.F.R. s 51.317(b)(1).
In weighing the availability of alternative network elements,
the Commission noted that it would examine five factors--
cost, effect on timeliness of entry, quality, ubiquity, and
impact on network operations. Local Competition Order, 15
FCC Rcd at 3731, p 65, 3734-45, p p 71-100; 47 C.F.R.
s 51.317(b)(2). Finally, it said that beyond looking simply to
"impairment," it would consider five factors that it believed
would further the Act's goals, namely whether unbundling
would lead to "rapid introduction of competition in all mar-
kets," promote "facilities-based competition, investment, and
innovation," reduce regulatory obligations, promote certainty
in the market, and be administratively practical. 15 FCC
Rcd at 3745-50, p p 101-16; 47 C.F.R. s 51.317(b)(3).
Of particular importance to this case, the Commission
decided to make its unbundling requirements (except for two
elements) applicable uniformly to all elements in every geo-
graphic or customer market. We return in detail to this issue
after a survey of the elements unbundled by the Local
Competition Order:
. Local loops, defined as "all features, functions and
capabilities of the transmission facilities, including
dark fiber and attached electronics (except those used
for the provision of advanced services, such as
DSLAMs [DSL Access Multiplexers]) owned by the
incumbent LEC, between an incumbent LEC's cen-
tral office and the loop demarcation point at the
customer premises." 15 FCC Rcd at 3772, p 167; 47
C.F.R. s 51.319(a)(1). The Commission also required
that incumbent LECs "condition" loops so as to allow
CLECs to offer advanced services. 15 FCC Rcd at
3775, p 172; 47 C.F.R. s 51.319(a)(3). Conditioning,
for these purposes, means removing devices such as
bridge taps, low-pass filters, range extenders, etc.,
that improve voice transmission but may decrease a
loop's advanced services capabilities. Id.
. Subloops, i.e., those "portions of the loop that can be
accessed at terminals in the incumbent's outside
plant." 15 FCC Rcd at 3789, p 206; 47 C.F.R.
s 51.319(a)(2). Points of access might include the
pole near the customer's premises, the network inter-
face device ("NID"), and the feeder distribution inter-
face (where the trunk line from the central office
interfaces with the distribution line to the subscrib-
ers). 15 FCC Rcd at 3789-90, p 206.
. Network Interface Devices, which include all "fea-
tures, functions, and capabilities of the facilities used
to connect the loop distribution plant to the customer
premises wiring, regardless of the particular design
of the NID mechanism." Id. at 3801, p 233; 47
C.F.R. s 51.319(b). This broad definition is intended
to make the unbundling requirement "flexible and
technology-neutral," so as to apply to any new NID
technologies that may develop. 15 FCC Rcd at 3801,
p 234.
. Circuit switching, defined as the "basic function of
connecting lines and trunks," including "all the fea-
tures, functions and capabilities of the switch." Id. at
3805, p 244; 47 C.F.R. s 51.319(c). The Commission
made one narrow exception to circuit switch unbun-
dling, which we discuss below.
. Packet switching under some circumstances. Packet
switches perform "the function of routing individual
data units based on address or other routing informa-
tion contained in the units." 15 FCC Rcd at 3833,
p 302; 47 C.F.R. s 51.319(c)(4). The Commission for
the most part denied unbundling for packet switch-
ing, requiring it only where the ILEC has used
digital loop carrier systems, placing a DSLAM at a
remote terminal and refusing to allow the competitor
to collocate its own DSLAM at that remote terminal.
15 FCC Rcd at 3838, p 313. That is, if the loop is
such that a remote DSLAM is necessary to provide
DSL service at all, and the ILEC has denied the
CLEC the right to collocate a DSLAM remotely,
then unbundling the packet switching (i.e., the
ILEC's own DSLAM) would be the only way to allow
the CLEC to provide DSL service.
. Dedicated transport, defined as "facilities dedicated
to a particular customer or carrier that provide tele-
communications between wire centers owned by in-
cumbent LECs or requesting telecommunications
carriers, or between switches owned by incumbent
LECs or requesting telecommunications carriers."
Id. at 3842, p 322; 47 C.F.R. s 51.319(d)(1)(i). The
Commission expanded this traditional definition so as
to include all high-capacity transmission facilities of
specified types and "such higher capacities as evolve
over time," 15 FCC Rcd at 3843, p 323, as well as
dark fiber, id. at 3843-46, p p 325-30; 47 C.F.R.
s 51.319(d)(1)(ii).
. Shared transport, defined as "transmission facilities
shared by more than one carrier, including the incum-
bent LEC, between end office switches, between end
office switches and tandem switches, and between
tandem switches in the incumbent LEC's network."
15 FCC Rcd at 3862, p 370; 47 C.F.R.
s 51.319(d)(1)(iii).
. Signaling networks and call-related databases. Sig-
naling networks include signaling transfer points, to
which each local switch must be connected. 15 FCC
Rcd at 3868, p 384; 47 C.F.R. s 51.319(e). Call-
related databases are "used in signaling networks for
billing and collection or the transmission, routing, or
other provision of telecommunications service." 15
FCC Rcd at 3875, p 403. The databases specifically
unbundled include the calling name database, the 911
database, the toll free calling database, and several
others. Id.
. Operations support systems. These are the "func-
tions supported by an incumbent LEC's databases
and information," including "pre-ordering, ordering,
provisioning, repair and maintenance, and billing."
15 FCC Rcd at 3884, p 425; 47 C.F.R. s 51.319(g).
So far as we understand, this list is narrower than that
which the Court reversed in Iowa Utilities Board only in its
exclusion of some circuit switches, as well as of operator
services and directory assistance. See 15 FCC Rcd at 3822-
31, p p 276-98, 3890-92, p p 438-42. In other areas, the Com-
mission's list has actually been expanded, now including high-
capacity loops, id. at 3777, p 176, 3780, p 184, dark fiber, id. at
3785, p 196, 3843-46, p p 325-30, subloops, id. at 3788-89,
p p 202-05, and packet switches in a few circumstances, id. at
3832-35, p p 300-06.
In what we call the "Line Sharing Order," In the Matters
of Deployment of Wireline Services Offering Advanced Tele-
communications Capability and Implementation of the Local
Competition Provisions of the Telecommunications Act of
1996, Third Report and Order in CC Docket No. 98-147 and
Fourth Report and Order in CC Docket No. 96-98, 14 FCC
Rcd 20912 (1999), the Commission refined unbundling further.
Copper loops have a range of spectrum in which the transmis-
sion of information is possible. Analog telephone service uses
only the lower frequencies of that spectrum (typically 300 to
3400 hz), leaving higher frequencies unused. Recent techno-
logical development allows the provision of DSL high-speed
internet access over the high-frequency (i.e., 20,000+ hz)
spectrum.1 By fitting the loop with splitters (which split
apart voice and digital signals) and DSLAMs (Digital Sub-
scriber Line Access Multiplexers) (which send voice traffic to
the circuit-switched telephone network and data traffic to the
packet-switched data network), local carriers can provide both
__________
1 There are numerous types of DSL technology: ADSL (asym-
metric DSL, in which upstream transmissions are much slower than
downstream), HDSL (high-speed DSL), UDSL (universal DSL),
VDSL (very-high-speed DSL), and RADSL (rate-adaptive DSL).
See Line Sharing Order, 14 FCC Rcd at 20915 n.5. The Commis-
sion here and elsewhere refers to these technologies collectively as
"xDSL," the "x" serving as a generic identifier. In the interests of
judicial economy, we shall simply use "DSL" as the generic term.
plain old telephone service and DSL internet access at the
same time.
In the "Line Sharing Order" the Commission decided that
the high frequency portion of copper loop spectrum should be
unbundled as to those loops on which ILECs are currently
providing telephone service. The Commission defined the
"high frequency" portion as simply any frequency "above the
voiceband on a copper loop facility used to carry analog
circuit-switched voiceband transmissions." Line Sharing Or-
der, 14 FCC Rcd at 20926, p 26; 47 C.F.R. s 51.319(h)(1).
Such unbundling means, of course, that CLECs and ILECs
would share the same copper loop to provide two different
services at once. See, e.g., 14 FCC Rcd at 20923, p 17. The
Commission clarified that the unbundling obligation extends
to only one competitor per line. Id. at 20948, p 47.
The Commission also required ILECs to condition loops,
that is, to remove loading coils, bridge taps, and other voice-
band transmission enhancing equipment that tends to inter-
fere with DSL service. Id. at 20917; 20952-54, p p 81-87; 47
C.F.R. s 51.319(h)(5). An ILEC can escape this obligation
by demonstrating that conditioning would significantly de-
grade analog voice service. The Commission explicitly recog-
nized that such a showing would be practically impossible for
loops under 18,000 feet. 14 FCC Rcd at 20954, p 86.
II. The Local Competition Order
We note at the outset the extraordinary complexity of the
Commission's task. Congress sought to foster competition in
the telephone industry, and plainly believed that merely
removing affirmative legal obstructions would not do the job.
It thus charged the Commission with identifying those net-
work elements whose lack would "impair" would-be competi-
tors' ability to enter the market, yet gave no detail as to
either the kind or degree of impairment that would qualify.
We review the two orders with this in mind.
A. Unvarying Scope
As to almost every element, the Commission chose to adopt
a uniform national rule, mandating the element's unbundling
in every geographic market and customer class, without
regard to the state of competitive impairment in any particu-
lar market. As a result, UNEs will be available to CLECs in
many markets where there is no reasonable basis for thinking
that competition is suffering from any impairment of a sort
that might have the object of Congress's concern.
One reason for such market-specific variations in competi-
tive impairment is the cross-subsidization often ordered by
state regulatory commissions, typically in the name of univer-
sal service. This usually brings about undercharges for some
subscribers (usually rural and/or residential) and overcharges
for the others (usually urban and/or business). Petitioners'
opening brief in the Local Competition Order case cites
testimony of a former FCC Chairman for the proposition that
40% of telephone service is charged below cost, Petitioners'
Br. at 35 & n.16, and the Commission and its supporting
intervenors do not demur. See also, e.g., Robert W. Crandall
& Thomas W. Hazlett, Telecommunications Policy Reform in
the United States and Canada, at 18, Working Paper 00-9,
AEI-Brookings Joint Center for Regulatory Studies (Dec.
2000) (chart showing that in many American cities, businesses
are charged substantially more than residences for single
lines); see also generally Robert W. Crandall & Leonard
Waverman, Who Pays for Universal Service? When Subsi-
dies Become Transparent (2000).
Competitors will presumably not be drawn to markets
where customers are already charged below cost, unless
either (1) the availability of UNEs priced well below the
ILECs' historic cost makes such a strategy promising, or (2)
provision of service may, by virtue of economies of scale and
scope, enable a CLEC to sell complementary services (such
as long distance or enhanced services) at prices high enough
to cover incomplete recovery of costs in basic service. The
Commission never explicitly addresses by what criteria want
of unbundling can be said to impair competition in such
markets, where, given the ILECs' regulatory hobbling, any
competition will be wholly artificial. And, although it offers
an explanation as to why it is desirable as a general matter
that CLECs should have "ubiquitous" unimpaired access to
network elements, see Local Competition Order, 15 FCC Rcd
at 3744, p p 97-98, it never explains why the record supports a
finding of material impairment where the element in ques-
tion--though not literally ubiquitous--is significantly de-
ployed on a competitive basis in those markets where there is
no reason to suppose that rates are artificially low, compare
id. at 3847, p 335 (finding that 47 of the top 50 areas have 3 or
more competitors providing interoffice transport), with id. at
3849, p 340 (finding absence of requisite ubiquity for such
transport).
But it is in the other segments of the markets, where
presumably ILECs must charge above cost (at least above
average costs allocated in conventional regulatory fashion) in
order to offset their losses in the subsidized markets, that the
gap in the Commission's reasoning is greatest. In finding
that the CLECs' lack of access to each of the many elements
"materially diminish[ed]" their ability to provide service, the
Commission nowhere appears to have considered the advan-
tage CLECs enjoy in being free of any duty to provide
underpriced service to rural and/or residential customers and
thus of any need to make up the difference elsewhere. As a
matter of pure language, perhaps, one might regard as an
"impairment" any cost disadvantage that the CLECs suffer in
markets where ILECs are hampered by regulatory redistrib-
ution, even if the disadvantage is fully offset by the exigencies
faced by ILECs. But the Commission has never explained
why such a view makes sense. Indeed, pointing to evidence
of considerable investment by CLECs in facilities for service
in what are evidently the relatively overcharged markets, see,
e.g., Petitioners' Br. at 16 (noting that as of 1999, CLECs had
deployed transport facilities in all of the top 50 markets), the
petitioners argue that there has been little or no real net
impairment. The Commission responds with an expression of
doubt whether these "data accurately reflects [sic] the extent
to which alternatives are actually available to competitors."
Local Competition Order, 15 FCC Rcd at 3849, p 341. But
because the Commission has loftily abstracted away all specif-
ic markets, and because its concept of impairing cost-
differentials is so broad (an issue discussed below), we have
no way of assessing the real meaning of that conclusion.
We now turn to the reasons offered by the Commission for
adopting an undifferentiated national rule for each element
(with narrow exceptions). Having found legal authority to
adopt such a rule, it said that it would help achieve the goals
of the Act, to wit: (1) rapid introduction of competition, (2)
promotion of facilities-based competition, investment and in-
novation, (3) certainty in the marketplace, (4) administrative
practicality and (5) reduced regulation. See Local Competi-
tion Order, 15 FCC Rcd at 3754-62, p p 124-143; see also 47
C.F.R. s 51.317(b)(3) (identifying same five factors as guiding
Commission decision whether to unbundle a network ele-
ment).
We first address the third and fourth justifications, both of
which seemingly turn on how clear any non-universal rule can
be. The Commission appears simply to assume that any such
rule would be unpredictable and hard to apply. Yet the
Commission itself, in regard to circuit switches, chose a
partial rule, denying unbundling for local circuit switches
serving customers with four or more lines in the highest-
density zone in any of the top 50 Metropolitan Statistical
Areas ("MSAs"). See Local Competition Order, 15 FCC Rcd
at 3823-31, p p 278-99. The Commission's order has no ex-
planation of why comparable differentiation was not available
for other elements.
As to reduced regulation, the Commission says that a
national list "will result immediately in reduced regulation."
Id. at 3762, p 143. It does not elaborate on this counterintui-
tive proposition. It goes on to say that a national list is
consistent with "the deregulatory goals of the Act":
Reduced regulation will occur as we remove elements
from the list as requesting carriers are no longer im-
paired without access to those elements, and it otherwise
does not further the goals of the Act to continue requir-
ing incumbent LECs to unbundle them.
Id. We understand that elimination of an entire universal
mandate at one whack will achieve more deregulation than
removal of a partial mandate. But imposition of a national
mandate does not itself entail national elimination, and in any
event we cannot see how imposition and then retraction of a
national mandate is more deregulatory, overall, than imposi-
tion and retraction of a partial one.
This leaves the more substantive justifications--the ideas
that universal rules would promote the goals of the Act by
leading to rapid introduction of competition, Local Competi-
tion Order, 15 FCC Rcd at 3754-57, p p 125-33, and to
promotion of facilities-based competition, investment, and in-
novation, id. at 3757-60, p p 134-39. Using certain defini-
tions, the first point--more rapid introduction of competi-
tion--indeed follows automatically. If competition performed
with ubiquitously provided ILEC facilities counts, the more
unbundling there is, the more competition. The Commission,
here in unison with the ILEC petitioners, evidently assumes
that the Commission-imposed prices are highly attractive to
CLECs; on that assumption, universal rules encompassing as
many elements as possible would indeed generate a rapid
spread of "competition."
But the Commission never makes the argument in quite so
stark a form, unwilling to embrace the idea that such com-
pletely synthetic competition would fulfill Congress's pur-
poses. Thus it turns to the argument that universal rules
promote investment and facilities-based competition.
The Commission says that "adoption of a national list" will
"facilitate the deployment" of competitive facilities. Id. at
3757, p 134. There are plainly two sides to the effects on
investment of ubiquitously available UNEs at Commission-
mandated prices. On one side, the more widespread the
availability of elements that can be more efficiently provided
by the incumbent (presumably because of economies of scale
and scope--an issue to which we'll return), the quicker com-
petitors will set about providing the other elements and
offering of complete competitive service, including long dis-
tance service. Compare Iowa Utilities Board, 525 U.S. at
416-17 (Breyer, J., concurring in part and dissenting in part),
cited at Respondent's Br. 32-33. Further, access to UNEs
may enable a CLEC to enter the market gradually, building a
customer base up to the level where its own investment would
be profitable.
On the other side, the petitioners argued before the Com-
mission that mandatory unbundling at Commission-mandated
prices reduces the incentives for innovation and investment in
facilities. Their reasoning, of course, is that a regulated price
below true cost will reduce or eliminate the incentive for an
ILEC to invest in innovation (because it will have to share the
rewards with CLECs), and also for a CLEC to innovate
(because it can get the element cheaper as a UNE). Indeed,
many prices that seem to equate to cost have this effect.
Some innovations pan out, others do not. If parties who have
not shared the risks are able to come in as equal partners on
the successes, and avoid payment for the losers, the incentive
to invest plainly declines.2 See Iowa Utilities Board, 525
__________
2 The Commission's standard for deciding that a network ele-
ment should be unbundled--whether lack of access to it "materially
diminishes" the requesting carrier's "ability" to provide the ser-
vices in question--implicitly builds in a relation to the prices at
which CLECs get access to UNEs. (The Commission is rarely
clear on precisely what costs are being compared, but in saying that
lack of access to unbundled elements would cause a material
increase in cost it often uses terms implying that the comparison is
to the Commission-mandated price of unbundled elements, i.e., at
present TELRIC. See, e.g., 15 FCC Rcd at 3815, p 263; id. at
3864, p 375.) Lack of access would not diminish the requester's
ability at all if it could secure the function more cheaply on its own.
Thus, the closer the Commission's pricing principle is to the low end
of what it may lawfully set, the greater the probability that lack of
access would cause "material diminution." As a result low UNE
prices would not only have the direct effect mentioned in the text,
but would inherently tend to expand the sphere of these effects. As
the "price squeeze" jurisprudence shows, even prices that are set
within the band of what is lawfully permissible may have perverse
effects, and the Commission may be obligated to consider them.
Cf. FPC v. Conway Corp., 426 U.S. 271, 278-79 (1976); Sprint
U.S. at 428-29 (Breyer, J., concurring in part and dissenting
in part); cf. FPC v. Hope Natural Gas Co., 320 U.S. 591, 647-
53 (1944) (Jackson, J., dissenting) (discussing supply implica-
tions of cost-based regulation of natural gas production). In
any event, the Commission's own assumption that universal
access to virtually all network elements would prove attrac-
tive (leading to rapid introduction of "competition") suggests
that such a disincentive effect cannot be discounted a priori.
The Commission's only response is to point to evidence that
both CLECs and ILECs have built facilities since passage of
the 1996 Act (the same evidence invoked by the ILECs to
show the existence of many markets where unbundling is
unneeded), despite the Act's obviously having created a pros-
pect of unbundling. Local Competition Order, 15 FCC Rcd
at 3758-59, p p 135-38. But the existence of investment of a
specified level tells us little or nothing about incentive effects.
The question is how such investment compares with what
would have occurred in the absence of the prospect of unbun-
dling, compare Sugar Cane Growers Cooperative of Florida v.
Veneman, No. 01-5335, 2002 Westlaw ----, slip op. at 7 (D.C.
Cir. May 10, 2002); Competitive Enterprise Institute v.
NHTSA, 956 F.2d 321, 325 (D.C. Cir. 1992), an issue on which
the record appears silent. Although we can't expect the
Commission to offer a precise assessment of disincentive
effects (a lack of multiple regression analyses is not ipso facto
arbitrary and capricious), we can expect at least some con-
frontation of the issue and some effort to make reasonable
trade-offs.
In the end, then, the entire argument about expanding
competition and investment boils down to the Commission's
expression of its belief that in this area more unbundling is
better. But Congress did not authorize so open-ended a
judgment. It made "impairment" the touchstone. The Com-
mission argues that s 251(d)(2), directing it to consider neces-
sity and impairment "at a minimum," clearly allows it to
consider other elements. We assume in favor of the Commis-
sion that that is so. But to the extent that the Commission
orders access to UNEs in circumstances where there is little
or no reason to think that its absence will genuinely impair
__________
Communications Co. L.P. v. FCC, 274 F.3d 549, 555 (D.C. Cir.
2001).
competition that might otherwise occur, we believe it must
point to something a bit more concrete than its belief in the
beneficence of the widest unbundling possible.
Besides the analysis described above, the Commission ad-
dressed the question whether Iowa Utilities Board precluded
its adoption of universal rules for each network element. It
concluded that nothing in that opinion would require it "to
determine, on a localized state-by-state or market-by-market
basis which unbundled elements are to be made available."
Local Competition Order, 15 FCC Rcd at 3753, p 122. We
certainly agree that the Court's brief passage reversing the
Commission on the impairment issue contained little detail as
to the "right" way for the Commission to go about its work.
But the Court's point that if "Congress had wanted to give
blanket access to incumbents' networks," it "would simply
have said (as the Commission in effect has) that whatever
requested element can be provided must be provided," Iowa
Utilities Board, 525 U.S. at 390, suggests that the Court read
the statute as requiring a more nuanced concept of impair-
ment than is reflected in findings such as the Commission's--
detached from any specific markets or market categories.
B. Kinds of Cost Disparities
Petitioners complain that the Commission myopically fo-
cused on "cost differences," thereby skewing its inquiry to
produce the maximum unbundling.
Of course any cognizable competitive "impairment" would
necessarily be traceable to some kind of disparity in cost.
Indeed, the ILECs argued before the Commission and the
Supreme Court that Congress intended that the impairment
standard embody the criteria of the "essential facilities"
doctrine, see Iowa Utilities Board, 525 U.S. at 388, which
itself turns on concepts of cost. The doctrine's basic idea is
that where one firm controls some facility (such as a bridge)
that is essential for competition in a broader market, and it
would make no economic sense for competitors to duplicate
the facility, and certain other criteria are satisfied, see gener-
ally Phillip E. Areeda & Herbert Hovenkamp, 3A Antitrust
Law p p 771-73 (1996), the owner may be compelled to share
the facility with its competitors. The classic case where
competitor duplication would make no economic sense is
where average costs are declining throughout the range of
the relevant market. See Areeda & Hovenkamp, supra, at
p 771c; see also 2 Alfred E. Kahn, The Economics of Regula-
tion: Principles and Institutions 119 (1989). In such a case,
duplication, even by the most efficient competitors imagin-
able, would only lead to higher unit costs for all firms, and
thus for customers. See Areeda & Hovenkamp, supra, at
p 771c; 2 Kahn, supra, at 122; see also generally Iowa
Utilities Board, 525 U.S. at 416-17, 427-31 (Breyer, J.,
concurring in part and dissenting in part).3 Thus the Su-
preme Court in Verizon observed that "entrants may need to
share some facilities that are very expensive to duplicate (say,
loop elements) in order to be able to compete in other, more
sensibly duplicable elements (say, digital switches or signal-
multiplexing technology)." Verizon, slip op. at 38 n.27 (em-
phasis added). See also id. at 39 n.27 (characterizing the
elements with respect to which new entrants and incumbents
are not required to compete (i.e., the elements to be unbun-
dled) as those " 'the duplication of [which] would prove unnec-
essarily expensive' ") (quoting Justice Breyer, post, at 8,
dissenting).
Petitioners' position here is fundamentally that the Com-
mission relied on cost disparities that, far from being any
indication that competitive supply would be wasteful, are
simply disparities faced by virtually any new entrant in any
sector of the economy, no matter how competitive the sector.
See Petitioners' Br. at 28. Indeed, the Commission's order
does reflect an open-ended notion of what kinds of cost
disparity are relevant.
For example, in the discussion of local switching, the
Commission notes that there are economies of scale in
switches, Local Competition Order, 15 FCC Rcd at 3812-13,
p 259, and that it is cheaper to buy a 20,000-line switch than
four increments of 5000 lines each, id. at 3813, p 260. The
Commission refers explicitly to a CLEC's probable inability
to enjoy scale economies comparable to ILECs' "particularly
in the early stages of entry." Id. at 3814, p 261 (emphasis
__________
3 Compare William J. Baumol, On the Proper Cost Tests for
Natural Monopoly in a Multiproduct Industry, 67 Amer. Econ.
Rev. 809 (1977) (proposing concept of "subadditivity" for ascertain-
ment of natural monopoly), and William W. Sharkey, The Theory
of Natural Monopoly (1982) (further development of subadditivity).
added). But average unit costs are necessarily higher at the
outset for any new entrant into virtually any business. The
Commission has in no way focused on the presence of econo-
mies of scale "over the entire extent of the market." 2 Kahn,
supra, at 119 (emphasis added). Without a link to this sort of
cost disparity, there is no particular reason to think that the
element is one for which multiple, competitive supply is
unsuitable. See generally id. at 119-26.
The Commission of course has recognized that marketplace
changes and increases in competition may justify later reduc-
tions in unbundling mandates. See, e.g., Local Competition
Order, 15 FCC Rcd at 3704, p 15. But this acknowledgement
doesn't respond to the analytical problem. To rely on cost
disparities that are universal as between new entrants and
incumbents in any industry is to invoke a concept too broad,
even in support of an initial mandate, to be reasonably linked
to the purpose of the Act's unbundling provisions.
Each unbundling of an element imposes costs of its own,
spreading the disincentive to invest in innovation and creating
complex issues of managing shared facilities. See Iowa Utili-
ties Board, 525 U.S. at 428-29 (Breyer, J., concurring in part
and dissenting in part). At the same time--the plus that the
Commission focuses on single-mindedly--a broad mandate
can facilitate competition by eliminating the need for separate
construction of facilities where such construction would be
wasteful. Id. at 416-17. Justice Breyer concluded that
fulfillment of the Act's purposes therefore called for "balance"
between these competing concerns. Id. at 429-30. A cost
disparity approach that links "impairment" to universal char-
acteristics, rather than ones linked (in some degree) to natu-
ral monopoly, can hardly be said to strike such a balance.
The Local Competition Order reflects little Commission effort
to pin "impairment" to cost differentials based on characteris-
tics that would make genuinely competitive provision of an
element's function wasteful.
Petitioners here do not explicitly attack the Commission for
its refusal to incorporate the essential facilities doctrine, and
we do not intend to suggest that the Act requires use of that
doctrine's criteria.4 But what we do say is that cost compari-
__________
4 We note that scholars have raised very serious questions
about the wisdom of the essential facilities doctrine as a justification
sons of the sort made by the Commission, largely devoid of
any interest in whether the cost characteristics of an "ele-
ment" render it at all unsuitable for competitive supply, seem
unlikely either to achieve the balance called for explicitly by
Justice Breyer or implicitly by the Court as a whole in its
disparagement of the Commission's readiness to find "any"
cost disparity reason enough to order unbundling. The Com-
mission's addition of a materiality notion, see Local Competi-
tion Order, 15 FCC Rcd at 3725, p 51 (finding impairment in
any case where lack of access to an element "materially"
diminishes ability to provide services), submits to the Court's
ruling in a nominally quantitative sense (though the reality of
such acquiescence cannot be measured and may be belied by
the virtual identity of the old and new orders). More impor-
tant, adding the adjective "material" contributes nothing of
any analytical or qualitative character that would fulfill the
Court's demand for a standard "rationally related to the goals
of the Act." Iowa Utilities Board, 525 U.S. at 388.
Because the Commission's concept of "impairing" cost dis-
parities is so broad and unrooted in any analysis of the
competing values at stake in implementation of the Act, we
cannot uphold even the two non-universal mandates adopted
by the Commission (for circuit switches and packet switches).
Petitioners also attack the rules on specific elements.
Some of these attacks parallel the universality and cost-
disparity issues already discussed. Petitioners' critique as to
advanced services equipment coalesces with the issues they
raise about the Line Sharing Order (see below). This leaves
two issues, neither of which we need address here. First,
petitioners attack the Commission's requirements of certain
information disclosure and "loop conditioning." After re-
mand, these issues may well be moot, and if they recur will do
__________
for judicial mandates of competitor access, and accompanying judi-
cial price setting. See, e.g., Areeda & Hovenkamp, supra, at
p 771c. But a doctrine that is inadequate for that purpose may
nonetheless offer useful concepts for agency guidance when Con-
gress has directed an agency to provide competitor access in a
specific industry.
so in a different context. Second, petitioners argue that the
"enhanced extended link" condition to the exception to the
switch unbundling mandate is in reality a mandate to combine
otherwise uncombined network elements, and is therefore
invalid. The Supreme Court appears to have definitely re-
moved the basis of this claim, holding that the Commission
has authority to require such combinations, affirmatively--
that is, not merely as a condition to an unbundling exception.
See Verizon, slip op. at 58-68. If any comparable claim
somehow survives, it too can be raised in the remand pro-
ceedings.
III. The Line Sharing Order
Petitioners primarily attack the Line Sharing Order on the
ground that the Commission, in ordering unbundling of the
high frequency spectrum of copper loop so as to enable
CLECs to provide DSL services, completely failed to consider
the relevance of competition in broadband services coming
from cable (and to a lesser extent satellite). We agree.
The Commission's own findings (in a series of reports
under s 706 of the 1996 Act) repeatedly confirm both the
robust competition, and the dominance of cable, in the broad-
band market. The first s 706 report found that "[n]umerous
companies in virtually all segments of the communications
industry are starting to deploy, or plan to deploy in the near
future, broadband to the consumer market," including "cable
television companies, incumbent LECs, some utilities, and
'wireless cable' companies." In the Matter of Inquiry Con-
cerning the Deployment of Advanced Telecommunications
Capability to All Americans in a Reasonable and Timely
Fashion, and Possible Steps to Accelerate Such Deployment
Pursuant to Section 706 of the Telecommunications Act of
1996, 14 FCC Rcd 2398, 2404 p 12 (1999). The Commission
also noted that the "most popular offering of broadband to
residential consumers is via 'cable modems'...." id. at 2426,
p 54, that "no competitor has a large embedded base of
paying residential consumers," id. at 2423, p 48, and that the
"record does not indicate that the consumer market is inher-
ently a natural monopoly," id. The most recent s 706 Report
(not in the record of this case) is consistent: As of the end of
June 2001, cable companies had 54% of extant high-speed
lines, almost double the 28% share of asymmetric DSL.
Third Report Pursuant to s 706, 2002 FCC LEXIS 655, at
p p 44, 48 (Feb. 6, 2002). Even in the Local Competition
Order on review in this case, the Commission said, "Competi-
tive LECs and cable companies appear to be leading the
incumbent LECs in their deployment of advanced services."
15 FCC Rcd at 3835, p 307.
Relying on the Commission's repeated findings, petitioners
argue that it is "antithetical to the 1996 Act's language and
deregulatory objectives" to mandate unbundling in a market
that "already has intense facilities-based competition." DSL
Petitioners' Br. at 3. They note the Supreme Court's obser-
vation that a proper "impairment" standard should be limited
by the "goals of the Act." Id. at 23 (quoting Iowa Utilities
Board, 525 U.S. at 388).
The Commission's response to this argument is to say that
it was "merely adhering" to the letter of the statute: Thus it
quotes the instruction of s 251(d)(2)(B) that it consider
whether "failure to provide access to such network elements
would impair the ability of the telecommunications carrier
seeking access to provide the services that it seeks to offer."
DSL Respondent's Br. at 20, quoting 47 U.S.C. s 251(d)(2)(B)
(emphasis added by Respondent). On this theory the Com-
mission believes it was justified in focusing solely on DSL
because that is what "CLECs seek to offer when they request
line sharing." Id. at 21. The Commission thus appears to
acknowledge that it adopted the Line Sharing Order with
indifference to petitioners' contentions about the state of
competition in the market.
The Commission's inference from s 251(d)(2)(B)'s allusion
to the services the requester "seeks to offer" strikes us as
quite unreasonable. See Chevron U.S.A. Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984).
As Justice Breyer's separate opinion carefully explained,
mandatory unbundling comes at a cost, including disincen-
tives to research and development by both ILECs and
CLECs and the tangled management inherent in shared use
of a common resource. Iowa Utilities Board, 525 U.S. at
428-29. And, as we said before, the Court's opinion in Iowa
Utilities Board, though less explicit than Justice Breyer on
the need for balance, plainly recognized that unbundling is
not an unqualified good--thus its observation that the Com-
mission must "apply some limiting standard, rationally relat-
ed to the goals of the Act," id. at 388, and its point that the
Commission "cannot, consistent with the statute, blind itself
to the availability of elements outside the incumbent's net-
work," id. at 389. In sum, nothing in the Act appears a
license to the Commission to inflict on the economy the sort
of costs noted by Justice Breyer under conditions where it
had no reason to think doing so would bring on a significant
enhancement of competition. The Commission's naked disre-
gard of the competitive context risks exactly that result.
Accordingly, the Line Sharing Order must be vacated and
remanded. Obviously any order unbundling the high fre-
quency portion of the loop should also not be tainted by the
sort of error identified in our discussion of the Local Compe-
tition Order and identified by petitioners here as well.
Petitioners also claim that the Commission without expla-
nation reversed a prior decision that a portion of the spec-
trum of a loop cannot qualify as a "network element." The
Commission urges that any language suggesting such a view
is explicable as simply reflecting a judgment on technical
feasibility, which it here reversed on the basis of a reexamina-
tion of the facts. Line Sharing Order, 14 FCC Rcd at 20942-
43, p 63. We think the Commission's view is convincing.
Finally, petitioners attack the Commission's pricing rule,
which limited an ILEC's charges for access to the high
frequency portion of the loop to the value the ILEC "allocat-
ed to [asymmetric] DSL services when it established its
interstate retail rates for those services," even where this rule
would reduce the charges below the level derived from the
Commission's general UNE pricing principles. Line Sharing
Order, 14 FCC Rcd at 20975-76, p 139. As in the case of the
element-specific claims raised in the Local Competition Order
case, we think the possible mootness, and certainty that any
recurrence will be in a different context, warrant deferring
the issue to another day.
* * *
We grant the petitions for review, and remand both the
Line Sharing Order and the Local Competition Order to the
Commission for further consideration in accordance with the
principles outlined above.
So ordered.