Appendix — At&T Corp. v. Iowa Utilities Bd.

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sVvererme Vout, U.S.

(2) 92 826 NOV 17 1997

In THE

Supreme Court of the United States

OCTOBER TERM, 1997

AT&T Corp., et al.,

. Petitioners,

IowA UTILITIES BOARD, et al.,

Respondents.

AT&T Corp., et al.,

. Petitioners,

CALIFORNIA, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Eighth Circuit

PETITIONERS’ APPENDIX

MARK C. ROSENBLUM DAVID W. CARPENTER *

Roy E. HOFFINGER PETER D. KEISLER

295 North Maple Avenue SIDLEY & AUSTIN

Basking Ridge, NJ 07920 One First National Plaza

(908) 221-3539 Chicago, IL 60603

(312) 853-7237

Counsel for AT&T Corp.

[ Additional Counsel Listed on Inside Cover]

* Counsel of Record

WILSON - Eras PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

DANA FRIX

SWIDLER & BERLIN, CHARTERED

3000 K Street, N.W.

Suite 300

Washington, DC 20007

(202) 424-7500

Counsel for ACC Corp.

CHARLES H. HELEIN

ROBERT M. MCDOWELL

HARISHA J. BASTIAMPILLAI

HELIN & ASSOCIATES, P.C.

8180 Greensboro Drive

Suite 700

McLean, Virginia 22102

(703) 714-1300

Counsel for America’s Carriers

Telecommunications

Association

GENEVIEVE MORELLI

1140 Connecticut Avenue, N.W.

Suite 220

Washington, DC 20036

ROBERT J. AAMOTH

EDWARD A. YORKGITIS, JR.

KELLEY DrYE & WARREN LLP

1200 19th Street, N.W.

Suite 500

Washington, DC 20036

(202) 955-9600

Counsel for Competitive

Telecommunications

Association

JAMES M. SMITH

Vice-President-Law and

Public Policy

3000 K Street, N.W.

Suite 300

Washington, DC 20007

DANA FRIX

RUSSELL M. BLAU

SwImDLeR & BERLIN, CHARTERED

3000 K Street, N.W.

Suite 300

Washington, DC 20007

(202) 424-7500

Counsel for Excel

Telecommunications, Inc.

JAMES R. JACKSON, JR.

GENERAL COMMUNICATIONS, INC.

2550 Denali Street

Suite 1000

Anchorage, AK 99503

(907) 265-5545

Counsel for General

Communications, Inc.

DANIEL L. BRENNER

NEAL M. GOLDBERG

DAVID L. NICOLL

1724 Massachusetts Ave., N.W.

Washington, DC 20036

(202) 775-3664

Counsel for National Cable

Television Association

LEON M. KESTENBAUM

JaY C. KEITHLEY

H. RICHARD JUHNKE

1850 M Street, N.W.

1lth Floor

Washington, DC 20036

(202) 828-7437

Counsel for Sprint Corporation

CHARLES C. HUNTER

CATHERINE M. HANNAN

HUNTER COMMUNICATIONS LAW

Group, P.C.

1620 I Street, N.W.

Suite 701

Washington, DC 20006

(202) 293-2500

Counsel for Telecommunications

Resellers Association

CATHERINE R. SLOAN

RICHARD L. FRUCHTERMAN, III

RICHARD S. WHITT

1120 Connecticut Avenue, N.W.

Suite 400

Washington, DC 20036

(202) 776-1550

Counsel for WorldCom, Inc.

TABLE OF CONTENTS

APPENDIX A: Page

Opinion, Jowa Utilities Board, et al. v. FCC, et al.,

No. 96-3321, Court of Appeals for the Eighth Cir-

cuit (filed July 18, 1997) la-67a

APPENDIX B:

Order, Jowa Utilities Board, et al. v. FCC, et al.,

No. 96-3321, Court of Appeals for the Eighth Cir-

CU SN BR, BG. BRIG P. wchtebtncanteretinhinchintettienehntione: 68a

APPENDIX C:

Order on Petition for Rehearing, lowa Utilities

Board, et al. v. FCC, et al., No. 96-3321, Court of

Appeals for the Eighth Circuit (filed Oct. 14, 1997)

(as amended on Oct. 23, 1997) -..2...2........--cccceeeeeeeee 69a-72a

APPENDIX D:

Opinion & Order, California, et al. v. FCC, et al.,

No. 96-3519, Court of Appeals for the Eighth Cir-

fF PF § & |) eee 73a-9la

APPENDIX E:

Additional parties to the proceeding not already

listed in Appendix A and D 00002... 92a

APPENDIX F:

Statutory Provisions Involved .......................... 93a-130a

APPENDIX G:

Excerpts from In the Matter of Implementation of

Local Competition Provisions of the Telecommuni-

cations Act of 1996, First Report and Order, CC

Docket No. 96-98 (Aug. 8, 1996) :

TJ 1-137 santasegnamnenintsovenesnpepeupusedeusnimantetitiand 131a-224a

T 265-270 spnampuveiennpnensanenendnemesespasitvens 225a-228a

APPENDIX A

TABLE OF CONTENTS—Continued ie

UNITED STATES COURT OF APPEALS

SU SOOGOT canna cane ceneesnennneneremenne pane FOR THE EIGHTH CIRCUIT

ns aida

GH TORTOT cscacecccneeccccesosensesensssereerenssssonsssemecess —

FT 12SQC-1BLB _...-.----nnencnenenneenecnnenrnreennenncsnnnenns ros >

Appendix ) : nnn 9a-33 No. 96-3321

APPENDIX H:

peer ee ane tt Sommuted. Iowa UTitities Boar,

cations Act of 1996, Second Report and Order, CC Petitioner,

_ -gnnaalegael .838a-345a e BELL ATLANTIC CORPORATION; BELLSOUTH CORPORA-

pone te B Rule 5 1 ii TION; PaciFic TeLesis Group; SBC COMMUNICATIONS,

° are 7 otal .348a-353a INC.; MARYLAND PuBLic Service CoMMIssion; US

West, Inc.; US TELEPHONE ASSOCIATION; ARKANSAS

Pustic Service COMMISSION; ALLTEL TELEPHONE

SERVICES CORPORATION; AMERITECH CORPORATION;

OREGON PusLic UtiLity CoMMISSION; NoRTH STATE

TELEPHONE COMPANY; WESTERN ALLIANCE; INDE-

PENDENT TELEPHONE AND ‘TELECOMMUNICATIONS

ALLIANCE; ROSEVILLE TELEPHONE COMPANY; CoNn-

CORD TELEPHONE COMPANY; Rock HILL TELEPHONE

COMPANY; PuBLic UTILITIES COMMISSION OF THE

STATE OF HAWAII; AMERICAN PusBLic CoMMUNICA-

TIONS CouNcIL, INc.; ICG TeLtecom Group, INc.;

MINNESOTA PuBLic UTILITIES COMMISSION; SOUTHERN

New ENGLAND TELEPHONE COMPANY; THE Ap Hoc

COALITION OF TELECOMMUNICATIONS MANUFACTURING

CoMPANIeS; PAciFic TELECOM, INC.; MINNESOTA IN-

DEPENDENT COALITION; KENTUCKY PUBLIC SERVICE

COMMISSION; KANSAS CORPORATION COMMISSION: Pub-

Lic SERVICE COMMISSION OF THE STATE OF WYOMING;

Ruope ISLAND PuBLIC UTILitres COMMISSION: PUBLIC

SeRvICE COMMISSION OF WISCONSIN; STATE OF TEXAS:

ALABAMA PuBLic Service COMMISSION: CITIZENS

TELEPHONE COMPANY OF KECKSBURG; NEw MEXICO

_ ——— ae

STATE CORPORATION COMMISSION; PUBLIC SERVICE

COMMISSION OF THE STATE OF MONTANA; GTE

SERVICE CORPORATION; UTAH DEPARTMENT OF Com-

MERCE, Division OF PuBLic UTILITIES; PUBLIC SERV-

ice COMMISSION OF UTAH; PuBLic SERVICE COM-

MISSION OF THE STATE OF SOUTH CAROLINA;

TENNESSEE REGULATORY AUTHORITY; AGING FORUM,

Inc., Domnc Business AS NATIONAL SILVER HAIRED

Concress; U.S. COALITION ON AGING; COLLEGE FOR

Livinc; Councit OF StLveR HAIRED LEGISLATURES;

MissouR! ALLIANCE OF AREA AGENCIES ON AGING;

MISSOURI ASSOCIATION FOR THE DeaAF; Missouri

CoUNCIL OF THE BLIND; PRESIDENTS’ CLUB FOR TELE-

COMMUNICATIONS JUSTICE; PARAQUAD, RURAL ADvo-

CATES FOR INDEPENDENT LIVING; SERVICES FOR INDE-

PENDENT LIviING; PuBLic UTILITIES COMMISSION OF

THE STATE OF COLORADO; DEPARTMENT OF PUBLIC

UTILITIES OF THE COMMONWEALTH OF MASSACHU-

SETTS; OKLAHOMA CORPORATION COMMISSION; PUBLIC

SERVICE COMMISSION OF THE STATE OF CONNECTICUT,

DEPARTMENT OF PusBLic Utitity ConTRoL; NEw

YorK TELEPHONE COMPANY; NeW ENGLAND TELE-

PHONE AND TELEGRAPH COMPANY,

Intervenors on Appeal,

Vv.

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents,

Af&T Corp.: COMPETITIVE TELECOMMUNICATIONS As-

SOCIATION; MFS COMMUNICATIONS COMPANY, INC.;

ArrtoucH COMMUNICATIONS, INC.; NEXTLINK COM-

MUNICATIONS, L.L.C.; Sprint Spectrum, L.P.; Na-

TIONAL CABLE TELEVISION AssocIATION, INC.; MCI

TELPCOMMUNICATIONS CORPORATION; SPRINT CORP.;

Cox COMMUNICATIONS, INC.; VANGUARD CELLULAR

SysTEMS, INC.; WESTERN WIRELESS CORPORATION;

AMERICAN COMMUNICATIONS SERVICES, INC.; KMC

TeLecom, INc.; THE COMPETITION Po.icy INSTITUTE;

ASSOCIATION FOR LOCAL TELECOMMUNICATIONS SER-

VICES; CELLULAR TELECOMMUNICATIONS INDUSTRY

AssociaTion; GST TeLecom, Inc.; ACC Corp.; Gen-

ERAL COMMUNICATION, INC.; TELECOMMUNICATIONS

RESELLERS ASSOCIATION; CONSUMER FEDERATION OF

AMERICA; AD Hoc TELECOMMUNICATIONS Users Com-

MITTEE; INFORMATION TECHNOLOGY INDUSTRY COUN-

CIL; AMERICA’S CARRIERS TELECOMMUNICATION Asso-

CIATION; JONES INTERCABLE, INC.; TELECOMMUNICA-

TIONS, INC.; TELEPORT COMMUNICATIONS Group, INC.:

RURAL TELECOMMUNICATIONS GROUP; ALLIED Asso-

CIATED PARTNERS; GELD INFORMATION SYSTEMS:

PRONET, INC.; WINSTAR COMMUNICATIONS, Inc.; U.S.

ONE COMMUNICATIONS SERVICES; COMCAST CoRPORA-

TION; FRONTIER CORPORATION; ANAHEIM, CALIFORNIA

PuBLic Utitities DEPARTMENT; City oF LONG BEACH,

CALIFORNIA; CITY OF MANASSAS, VIRGINIA: CABLE &

WIRELESS, INC.; NATIONAL ASSOCIATION OF STATE

Utitity CONSUMER ADVOCATES; TIME WARNER Com-

MUNICATIONS HOLDINGS, INC.; PERSONAL COMMUNICA-

TIONS INDUSTRY ASSOCIATION; ExceL TELECOMMUNI-

CATIONS, INC.; PAGING NETWORK, INC.; NEXTWAVE

TELECOM, INc.; SMALL CABLE BUSINESS ASSOCIATION:

Woripcom, INc.; METROCALL, INC.; Texas OFFICE

OF PuBLic Utitity CouNseL,

Intervenors on Appeal,

CONSUMERS’ Utitity CouNseEL Division, Grorcia Gov-

ERNOR’S OFFICE OF CONSUMER AFFAIRS; HONORABLE

Joun D. DinGELL; HONORABLE W_J. (Bitty) Tauzin;

HONORABLE RICK BOUCHER; HONORABLE DENNIS

HASTERT,

Amici on Behalf of Petitioner,

HONORABLE THOMAS J. BLILEY, JR.; HONORABLE ERNEST

F. HoLLINnGs; HONORABLE TED STEVENS, HONORABLE

DANteL K. INouye; HONORABLE TRENT Lott; HONOR-

ABLE Epwarp J. MARKEY,

Amici on Behalf of Respondent.

ition to the above caption, the Parties for Docket

” ee 96-3406, 96-3410, 96-3414, 96-3416, 96-

3418, 96-3424, 96-3430, 96-3436, 96-3444, 96-3450,

96-3453, 96-3460, 96-3507, 96-3519, 96-3520, 96-

3603. 96-3608, 96-3696, 96-3708, 96-3709, 96-3756,

96-3901, 96-3906, 96-3982, are listed in Appendix E

On Petition for Review of an Order of the

Federal Communications Commission

Submitted: January 17, 1997

Filed: July 18, 1997

Before BOWMAN, WOLLMAN and HANSEN, Circuit

Judges.

HANSEN, Circuit Judge.

When Alexander Graham Bell, after spilling sulfuric

acid on himself, first transmitted the words, “Mr. Watson,

come here; I want you,” across a rudimentary phone line

in 1876,’ he could not have possibly imagined that his

invention would explode into the current technologically-

advanced, multi-billion dollar telecommunications industry.

1 George P. Oslin, The Story of Telecommunications, 219 (Mercer

University Press 1992).

<A A

Nor could he have foreseen the amount of legislation,

regulation, and litigation that his invention would generate.

I. Background

One hundred twenty years after Bell’s discovery, Con-

gress passed the Telecommunications Act of 1996° (the

Act), which was designed, in part, to erode the mono-

polistic nature of the local telephone service industry by

obligating the current providers of local phone service

(known as “incumbent local exchange carriers” or “in-

cumbent LECs”) to facilitate the entry of competing com-

panies into local telephone service markets across the

country. Specifically, the Act forces an incumbent LEC

(1) to permit a requesting new entrant in the incumbent

LEC’s local market to interconnect with the incumbent

LEC’s existing local network and thereby use the incum-

bent LEC’s network to compete with the incumbent LEC

in providing telephone services (interconnection); (2) to

provide its competing telecommunications carriers with

access to individual elements of the incumbent LEC’s own

network on an unbundled basis (unbundled access); and

(3) to sell to its competing telecommunications carriers,

at wholesale rates, any telecommunications service that

the incumbent LEC provides to its customers at retail

rates, in order to allow the competing carriers to resell the

services (resale). 47 U.S.C.A. § 251(c)(2)-(4) (West

Supp. 1997).* A company seeking to enter the local tele-

phone service market may request an incumbent LEC to

provide it with any one or any combination of these three

* Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat.

56 (to be codified as amended in scattered sections of Title 47,

United States Code).

* We refer to these duties as “the local competition provisions.”

* All references in this opinion to sections and subsections of the

Telecommunications Act of 1996 in West’s United States Code

Annotated (U.S.C.A.) are to the 1997 supplement.

services. Through these three duties, and the Act in

general, Congress sought “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

telecommunications technologies.” Telecommunications

Act of 1996, Pub. L. No. 104-104, purpose statement, 110

Stat. 56, 56 (1996).

The Act also establishes a system of negotiations and

arbitrations in order to facilitate voluntary agreements be-

tween incumbent LECs and competing carriers to imple-

ment the Act's substantive requirements. When a compet:

ing carrier asks an incumbent LEC to provide intercon-

nection, unbundled access, or resale, both the incumbent

LEC and the competing carrier have a duty to negotiate

in good faith the terms and conditions of an agree-

ment that accomplishes the Act's goals. 47 U.S.C.A.

$§ 251(c)(1), 252(a)(1). If the parties fail to reach

an agreement through voluntary negotiation, either party

may petition the respective state utility commission to arbi-

trate and resolve any open issues. I/d. § 252(b). The

final agreement, whether accomplished through negotiation

or arbitration, must be approved by the state commission.

Id. § 252(e)(1).

Several sections of the Act also direct the FCC to

participate in the Act's implementation. See, e.g., id.

$§ 251(b)(2), (d)(1), (e), 252(e)(5). On August 8,

1996, the FCC issued its First Report and Order.® This

document contains the Agency's findings and rules”® per-

taining to the local competition provisions of the Act.

5 First Report and Order, Implementation of the Local Competi-

tion Provisions in the Telecommunications Act of 1996, CC Docket

No. 96-98 (Aug. 8, 1996) [hereinafter First Report and Order].

®The FCC’s rules are contained in Appendix B of the First

Report and Order and now are codified in scattered sections of

Title 4/, Code of Federal Regulations.

Soon after the FCC released its First Report and Order,

many petitioners, consisting largely of incumbent LECs

and state utility commissions from across the country, filed

motions to stay the First Report and Order in whole or in

part. Although most of the petitioners requested the court

to stay the entire First Report and Order, their specific

attacks focused primarily on the FCC's rules regarding the

prices that the incumbent LECs could charge their new

competitors for interconnection, unbundled access, and

resale, as well as on the rules regarding the prices for the

transport and termination of local telecommunications traf-

fic.’ The petitioners argued that the FCC exceeded its

jurisdiction in establishing prices for what is essentially

local intrastate telecommunications service and that the

pricing rules violate the terms of the Act. After the cases

were consolidated in this circuit, we decided to stay tem-

porarily, pending our final review, the operation and effect

of the pricing provisions and the “pick and choose” rule

found in the First Report and Order. Jowa Utilities Bd.

v. FCC, 109 F.3d 418 (8th Cir.), motion to vacate stay

denied, 117 S. Ct. 429 (1996); see id. at 423 (explaining

“pick and choose” rule in greater detail).

In their main briefs and oral arguments, the petitioners

now renew and refine their attacks against the Agency's

pricing rules, and they also widen the scope of their chal-

lenge to the First Report and Order and assail additional

FCC rules, particularly the agency’s non-price regulations

pertaining to the incumbent LEC’s unbundling obligations.

? Transport and termination of telecommunications is the process

whereby a call that is initiated by a customer of one telecommuni-

cations carrier is routed to a customer of a different telecommuni-

cations carrier and completed by that carrier, The telecommunica-

tions carrier that “terminates” or completes the call to its customer

typically charges the other telecommunications carrier for the cost

of terminating the call. The Act imposes a duty on all local ex-

change carriers (incumbents and new entrants) to establish recipro-

cal compensation arrangements for such transport and termination

of phone calls. See id. § 251(b) (5).

Our review of the extensive arguments in this case has

confirmed our initial belief that the FCC exceeded its

jurisdiction in promulgating the pricing rules regarding

local telephone service. We also remain convinced that

FCC’s “pick and choose” rule would frustrate the Act's

design to make privately negotiated agreements the pre-

ferred route to local telephone competition. Our conclu-

sions regarding the additional challenged policies and rules

in the FCC’s First Report and Order are contained

throughout the remainder of this opinion.

Il. Analysis

United States Court of Appeals have been granted ex-

clusive statutory jurisdiction to review the FCC’s final or-

ders pursuant to 28 U.S.C. § 2342(1) (1994) and 47

U.S.C. § 402(a) (1994). We must defer to administra-

tive agency interpretations only if they are consistent with

the plain meaning of a statute or are reasonable construc-

tions of ambiguous statutes. See Chevron U.S.A. Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837,

842-45 (1984). Thus, we are empowered to overturn an

agency interpretation when the interpretation conflicts with

the plain meaning of a statute, see id. at 842-43, when

the interpretation is an unreasonable construction of an

ambiguous statute, see id. at 844-45, or when an agency

acted arbitrarily or capriciously in adopting its interpreta-

tion. See 5 U.S.C. § 706 (1994): Chevron, 467 U.S. at

844. In this case, we emphasize at the be,inning that our

review does not encompass any determination regarding

the wisdom or prudence of the policies Congress set forth

in the Act, those considerations being the Constitutionally-

assigned prerogatives of the Legisaltive Brarch of our

national government.

A. The FCC’s Pricing Rules

All of the petitioners vehemently challenge the FCC's

pricing rules. Their primary target is the FCC’s mandate

A ee a

Se te 5 cl a er a ee iia

in nae ed

that state commissions employ the “total element long-run

incremental cost” (TELRIC) method to calculate the

costs that an incumbent LEC incurs in making its facili-

ties available to competitors. See 47 C.F.R. §§ 51.503,

51.505 (1996). After applying the TELRIC method and

arriving at a cost figure, the state commissions, according

to the FCC’s rules, must then determine the price that an

incumbent LEC may charge its competitors, based on the

TELRIC-driven cost figure. The petitioners also chal-

lenge the FCC’s proxy rates, which, under the provisions

of the First Report and Order, are to be used by the

State commissions if they do not use the TELRIC

method to calculate costs. See id. §§ 51.503(b)(2),

51.513, 51.705(a)(2), 51.707. The incumbent LECs

assert that these proxy rates also do not accurately reflect

their costs and are artificially low. The petitioners also

challenge several other FCC regulations pertaining to the

prices that the incumbent LECs are permitted to charge

for fulfilling their new duties under the Act. See id.

$§ 51.601-51.611, 51.701-51.717.

The petitioners’ first line of attack against the FCC's

pricing rules is their claim that the FCC has no jurisdiction

to promulgate these rules. They argue that the Act plainly

directs state commissions, not the FCC, to set the prices

that an incumbent LEC may charge an incoming competi-

tor for interconnection, unbundled access, and resale, and

also to determine the prices for the transport and termina-

tion of calls, when the state commissions conduct arbitra-

5’ Many of the incumbent LECs complain that the TELRIC method

does not incorporate their “historical” or “embedded” costs (costs

that «| incumbent LEC incurred in the past to build its local

netwc.k and has not yet fully recovered under state regulations)

into the cost figure that forms the basis for determining the rates

that the incumbent LECs may charge. See id. § 51.505(d)(1). The

incumbent LECs argue that the TELRIC method underestimates

their costs to provide interconnection and unbundled access and

results in prices that are too low, effectively requiring them to

subsidize their new local service competitors.

10a

tions under the Act.” The petitioners also assert that sec-

tion 2(b) of the Communications Act of 1934, 47 U.S.C.

§ 152(b) (1994), denies the FCC jurisdiction to deter-

mine these rates because the rates involve local intrastate

communications service. The FCC and its supporting

intervenors, however, contend that the Act clearly grants

the FCC the power to issue pricing rules regarding local

telephone service and that section 2(b) does not prevent

the Commission from having jurisdiction to issue the pric-

ing rules at issue here. They do not claim that the FCC's

pricing authority is exclusive; instead, they argue that the

Act establishes shared or parallel jurisdiction between the

states and the FCC under which the FCC is to issue gen-

eral rules governing the ratemaking procedures, while the

state commissions are left to establish the actual prices by

applying the FCC’s mandates. After carefully reading the

language of the Act and fully considering and reviewing

all of the arguments, we conclude that the FCC exceeded

its jurisdiction in promulgating the pricing rules.

1. The Plain Language of Sections 251 and 252

The petitioners point to the language contained in sub-

sections 252(c)(2) and 252(d) to support their claim

that the Act directly grants the state commissions the

authority to determine the rates involved in implementing

the local competition provisions of the Act. Indeed, sub-

section 252(c)(2) requires a state commission to “estab-

® The FCC's rules and regulations have direct effect only in the

context of the state-run arbitrations, because an incumbent LEC

is not bound by the Act’s substantive standards in conducting volun-

tary negotiations. See 47 U.S.C.A. § 252(a)(1), (e)(2). While

we have no way of quantifying the indirect effect the existence of

these new rules had or may have on the positions taken by the

incumbent LECs and their new competitors during the negotiation

phase, we believe the mutual knowledge that a state commission

would be required to abide by these rules during the arbitration

phase (absent our stay) had or would have some impact on the

negotiations.

lla

lish any rates for interconnection, services, or network

elements according to subsection (d) of this section.”

Meanwhile, subsection 252(d), entitled “Pricing stand-

ards,” lists the requirements that the state commissions

must meet in making their determinations of the appro-

priate rates for interconnection, unbundled access, resale,

and transport and termination of traffic. 47 U.S.C.A.

§ 252(d)(1)-(3). These statutory provisions undeniably

authorize the state commissions to determine the prices an

incumbent LEC may charge for fulfilling its duties under

the Act.

The FCC and its supporters do not contest the fact that

state commissions have the responsibility to set prices

under the Act. Instead, they claim that subsection

251(d)(1) gives the FCC parallel authority to issue regu-

lations governing the rate-making methods by which state

commissions establish the prices that incumbent LECs

may charge their new competitors for connecting with and

piggy-backing on the LECs’ networks. They claim that

subsection 252(c)(1) requires the state commissions to

follow these FCC mandates when they determine the actual

prices. The FCC also believes that several general rule-

making provisions of the Communications Act of 1934,

namely subsections 154(i), 201(b), and 303(r), provide

it with additional authority to promulgate its pricing rules.

See 47 U.S.C. §§ 154(i), 201(b), 303(r) (1994).

Despite the FCC’s contentions, we are not convinced

that these provisions supply the FCC with the authority

to issue regulations governing the pricing of the local intra-

state telecommunication services that the incumbent LECs

are now legally obligated to provide to their new competi-

tors. Subsection 251(d)(1) provides that “[wlithin 6

months after February 8, 1996, the Commission shall

complete all actions necessary to establish regulations to

implement the requirements of this section.” 47 U.S.C.A.

$ 251(d)(1). The FCC believes this provision supplies

12a

the Agency with overarching plenary authority to regulate

all aspects of section 251 and reasons that because subsec-

tion 251(c) requires rates for interconnection, unbundled

access, and collocation to be “just, reasonable, and non-

discriminatory,” id. § 251(c)(2)(d), (c)(3), (c) (6), the

FCC has the power to regulate these rates and any other

rates mentioned in section 251. We are not persuaded by

the FCC's interpretation. We believe that subsection

251(d)(1) operates primarily as a time constraint, direct-

ing the Commission to complete expeditiously its rulemak-

ing regarding only the areas in section 251 where Congress

expressly called for the FCC's involvement.” Nowhere

in section 251 is the FCC authorized specifically to issue

rules governing the rates for interconnection, unbundled

access, and resale, and the transport and termination of

telecommunications traffic.

The Commission's reliance on general rulemaking pro-

visions that predate the Telecommunications Act of 1996

also fares no better. While subsection 201(b) does grant

the FCC jurisdiction over charges regarding communica-

tions services, those services are expressly limited to inter-

state or foreign communications services by subsection

201(a). See 47 U.S.C. § 201. Consequently, subsection

201(b) does not provide the Commission with the author-

ity to regulate the rates of local intrastate phone service

and neither do subsections 154(i) or 303(r). Both of

these subsections merely supply the FCC with ancillary

authority to issue regulations that may be necessary to

fulfill its primary directives contained elsewhere in the stat-

ute. Neither subsection confers additional substantive

authority on the FCC. See id. §§ 154(i), 303(r); see

1° Such areas are limited to subsections 251(b)(2) (number porta-

bility), 251(c)(4)(B) (prevention of discriminatory conditions on

resale), 251(d)(2) (unbundled network elements), 251(e) (number-

ing administration), 251(g) (continued enforcement of exchange

access), and 251(h)(2) (treatment ef comparable carriers as

incumbents).

13a

also California v. FCC, 905 F.2d 1217, 1241 n.35 (9th

Cir. 1990) (explaining that Title I of the Communications

Act of 1934, in which section 154(i) is contained, con-

fers only ancillary authority to the FCC). Thus, we con-

clude that none of the statutory provisions relied on by

the FCC supply it with jurisdiction over the pricing of

local telephone service.”

The absence of any direct FCC pricing authority over

local telephone service is fatal to the Agency’s theory that

the Act requires the state commissions to share such

local pricing authority with the FCC. While subsection

252(c)(1) does require the state commissions to ensure

that their resolutions of arbitrated disputes comply with

both section 251 and with the FCC's regulations made

pursuant to section 251, as explained above, no provi-

sion in section 251 authorizes the FCC to regulate the

rates of local phone service.’ Moreover, the absence of

any reference whatsoever to the FCC in the sections of

the Act that directly authorize the state commissions to

establish prices confirms to us that Congress did not

envision the FCC’s participation in determining the prices

that the incumbent LECs will be able to charge for open-

ing their networks to new entrants. Subsection 252(c) (2)

commands state commissions to “establish any rates for

interconnection, services, or network elements” and it

requires them to follow only the standards in subsec-

1! At oral argument, counsel for one of the intervenors in sup-

port of the FCC for the first time argued that section 401 of the

Act, 47 U.S.C.A. § 160 (West Supp. 1997), implies that the Com-

mission has jurisdiction to issue its pricing rules. We decline to

address this argument since it was not raised in the parties’ open-

ing briefs. See Stephenson v. Davenport Community Sch. Dist.,

110 F.3d 1303, 1306-07 n.3 (8th Cir. 1997).

'2 We recognize that the Act does create such a division of labor

between the state commissions and the FCC with respect to those

areas where section 251 specifically calls for the Commission's par-

ticipation. See supra note 10 and accompanying text.

14a

tion (d). 47 U.S.C.A. § 252(c)(2). In turn, subsection

252(d) refers exclusively to the determinations by state

commissions of the just and reasonable rates, and it pro-

vides statutory standards for the state commissions to

follow when setting the rates, thus negating any need

for additional FCC-mandated ratemaking standards or

guidelines.” See id. § 252(d).

Additionally, the FCC’s reference to the Cable Act“

as an example of a system of parallel federal and state

jurisdiction over an industry's rates only bolsters our

view that no such shared scheme regarding the power

to set prices was intended by the Congress in the Telecom-

munications Act of 1996. In sharp contrast to the Tele-

communications Act, several provisions of the Cable Act

explicitly grant the Commission the authority to regulate

the rates of cable companies and explicitly require state

authorities to follow the Commission's ratemaking rules.

See 47 U.S.C. § 543(a)(2)-(3), (b) (1994). The Cable

Act simply and forcefully demonstrates that the Congress

is capable of clearly expressing its desire to grant the

FCC authority over local rates when it wishes to do so.

The Telecommunications Act contains no such articula-

tion with respect to the local competition provisions. Con-

sequently, we conclude that the Act plainly grants the

state commissions, not the FCC, the authority to deter-

mine the rates involved in the implementation of the local

competition provisions of the Act.”

13 Moreover, the provisions of subsection 252(d) expressly state

that the states are setting the rates “for the purposes of” subsec-

tions 251(c)(2) (interconnection duty), 251(c)(3) (unbundling

duty), 251(c)(4) (resale duty), and 251(b)(5) (reciprocal com-

pensation duty).

14 Cable Television Consumer Protection and Competition Act

of 1992, Pub. L. 102-385, 106 Stat. 1460 (codified as amended in

scattered sections of 47 U.S.C.).

5 Our determination that the FCC's belief that it has jurisdiction

to issue local pricing rules conflicts with the plain meaning of the

Act negates any deference owed to the Commission's interpretation

15a

2. Section 2(b) and the Impossibility Exception

Any ambiguity regarding the FCC’s vacuum of author-

ity over local telecommunications pricing under the Act

is resolved by the operation of section 2(b) of the Com-

munications Act of 1934, 47 U.S.C. § 152(b). Section

2(b) provides that “nothing in this chapter shall be con-

strued to apply or to give the [FCC] jurisdiction with

respect to . . . charges, classifications, practices, services,

facilities, or regulations for or in connection with intra-

state communications service.” /d. We believe that the

prices that incumbent local exchange carriers may charge

their new competitors for interconnection, unbundled ac-

cess, and resale—the services and facilities that will enable

the competitors to provide competing /ocal telecommuni-

cations service—as well as the rates for the transport

and termination of telecommunication traffic qualify as

“charges . . . for or in connection with intrastate com-

munications service.”"* Jd. In Louisiana Pub. Serv.

Comm'n v. FCC, 476 U.S. 355, 370 (1986), the Supreme

Court explained that section 2(b) “fences off” intrastate

matters from FCC regulation. The FCC and its support-

ing intervenors attempt to slip through the fence by argu-

and obligates us to vacate the FCC’s pricing ruels. See Chevron, 467

U.S. at 842-43 (“If the intent of Congress is clear, that is the end

of the matter; for the court, as well as the agency, must give effect

to the unambiguously expressed intent of Congress.”); see also

Mississippi Power & Light Co. v. Moore, 487 U.S. 354, 382 (1988)

(Sealia, J., concurring) (“[I]}n defining agency jurisdiction Con-

gress sometimes speaks in plain terms, in which case the agency

has no discretion.”)

16 The FCC itself both acknowledges that the Telecommunications

Act of 1996 deals predominantly with local intrastate markets and

recognizes that the obligations of incumbent LECs to provide inter-

connection, unbundled access, and resale are deisgned to increase

competition in local telecommunications markets. (FCC Br. at 1-3,

5.) The intrastate character of the requirements contained in

sections 251 and 252 is discussed further infra.

16a

ing that this case qualifies as an exception to the opera-

tion of section 2(b).

The Supreme Court emphasized that section 2(b) con-

stitutes an explicit congressional denial of power to the

FCC and suggested that Congress could override section

2(b)’s command only by unambiguously granting the

FCC authority over intrastate telecommunications matters

or by directly modifying section 2(b). Louisiana, 476

U.S. at 377. The only other gate through the 2(b) fence

is the “impossibility” exception, which has evolved out of

the Court’s opinion in Louisiana. This quite narrow

exception provides that the FCC may preempt state regu-

lation of intrastate telecommunications matters only when

(1) it is impossible to separate the interstate and intra-

State components of the FCC regulation and (2) the state

regulation would negate the FCC's lawful authority over

interstate communication. See, e.g., id. at 375-76 n.4;

California v. FCC, 39 F.3d 919, 931 (9th Cir. 1994),

cert. denied, 115 S. Ct. 1427 (1995); NARUC v. FCC,

880 F.2d 422, 429 (D.C. Cir. 1989). The FCC and

its supporting intervenors assert that the terms of the

Act supply the Commission with a direct grant of intra-

State pricing authority sufficient to overcome the opera-

tion of section 2(b). Alternatively, they argue that the

impossibility exception removes section 2(b) as a barrier

to the FCC's pricing rules. We are not convinced by

the respondents’ arguments here, and we believe that the

1996 Act, when coupled with section 2(b), mandates

that the states have the exclusive authority to establish the

prices regarding the local competition provisions of the

Act.

As explained earlier, the FCC argues that Congress

unambiguously granted it intrastate pricing authority

through the relationship between subsections 251(d)(1)

(directing the Commission to establish regulations to im-

plement the requirements of section 251 by August 8,

17a

1996) and 251i(c) (periodically mentioning that the

incumbent LECs’ rates must be just and reasonable ).

We have now rejected this interpretation as being incon-

sistent with the plain meaning of the Act, and we have

concluded exactly the opposite—that the Act directly and

straightforwardly assigns to the states the authority to set

the prices regarding the local competition provisions of

the Act in subsections 252(c)(2) and 252(d). Conse-

quently, the FCC's interpretation of the Act does not

demonstrate an unambiguous grant of intrastate authority

to the FCC required either to jump over or pass through

section 2(b)’s fence. See Louisiana, 476 US. at 376-77

n.5 (explaining that section 2(b) also operates as a rule

of statutory construction, commanding that nothing in the

Act be construed to extend FCC jurisdiction to intrastate

telecommunications ).

Congress is fully capable of opening the gate in the

2(b) fence in order to grant the FCC intrastate ratemak-

ing authority when it wishes to do so. Once again, provi-

sions of the Cable Act illustrate this point. One such

Provision reads, “The Commission shall, by regulation,

ensure that the rates for the basic service tier are reason-

able.” 47 U.S.C. § 543(b)(1). Moreover, section 276

of the Telecommunications Act itself directly requires the

FCC to establish a compensation plan regarding both

intrastate and interstate pay phone calls. 47 U.S.C.A.

§ 276(b); Illinois Pub. Telecomm. Ass'n y. FCC, No. 96-

1394, 1997 WL 358160, at *5 (D.C. Cir. July 1, 1997).

The FCC's roundabout construction in its effort to claim

intrastate pricing authority under section 251 of the

Telecommunications Act is notably strained in stark com-

parison to the direct grant of such authority contained

in both the Cable Act and in section 276 of the Telecom-

munications Act, thus providing more indications that

Congress intended to reserve for the states the retained

authority to set the prices regarding the local competition

provisions contained in section 251 of the Telecommuni-

18a

cations Act of 1996. Additionally, certain nonpricing

provisions of the Telecommunications Act provide the

FCC with much more direct and unambiguous grants of

intrastate authority than the FCC's strained reading of

subsections 251(d) and 251(c). For instance, subsection

251(b)(2) burdens LECs with “[t}he duty to provide

. . » number portability in accordance with requirements

prescribed by the Commission.” 47 U.S.C.A. § 251(b)(2)

(West Supp. 1997). In contrast, no provision of the Act

unambiguously requires rates for the local competition

provisions to comply with FCC-prescribed requirements,

no provision unambiguously directs the FCC to issue

such pricing regulations, and there is no straightforward

and unambiguous modification of section 2(b) in the

Act.” Consequently, section 2(b) remains a barrier to

the validity of these FCC pricing rules.

Faced with the absence of such an unambiguous grant

of intrastate pricing authority to the FCC, the Commission

and its supporting intervenors resort to arguing that sec-

tion 2(b) is easily overcome whenever a federal statute’s

terms unambiguously apply to intrastate telecommunica-

tion matters, because they believe the FCC has plenary

authority to implement all such federal statutory require-

ments. They believe that the Louisiana decision supports

their proposition that section 2(b) prevents only the

FCC's ancillary jurisdiction from extending into intrastate

areas, but that it does not limit the federal Commission's

primary jurisdiction, which, they argue, presumably ex-

tends as far as the reach of a federal communications

statute. We do not believe that section 2(b) is limited

in this manner, nor do we think the Supreme Court's de-

—

'TIn fact, provisions that expressly exempted the local competi-

tion provisions of the Act from the operation of section 2(b) were

included in the earlier versions of both the House and Senate bills,

but the Conference Committee deleted them from the final version

of the Act. See S. 652, 104th Cong. § 101(c)(2) (1995); H.R. 1555,

104th Cong. § 101(e)(1) (1995).

19a

cision in Louisiana stands for such a far-reaching propo-

sition.

Although the Court's decision in Louisiana focused on

whether section 220(b) of the Communications Act of

1934 itself applied to intrastate telecommunication mat-

ters, it did so only because section 220 undeniably directed

the FCC to administer the depreciation calculations re-

quired by the statute. See 47 U.S.C. § 220(b) (1994)

(repeatedly referring to “the Commission”): see also

Louisiana, 476 U.S. at 366-68. In other words, we

believe that the Louisiana decision indicates that in order

to qualify for the “unambiguous” exception to section

2(b), a statute must both unambiguously apply to intra-

state telecommunication matters and unambiguously direct

the FCC to implement its provisions. In Louisiana, sec-

tion 220(b) clearly passed the second prong but failed

to meet the first prong. In the present case, we have the

opposite situation: the pricing provisions of sections 25]

and 252 clearly apply to intrastate telecommunication serv-

ice, but they do not unambiguously call for the FCC's

participation in setting the rates. To the contrary, the

Act specifically calls for the state commissions, not the

FCC, to determine the rates for interconnection, unbun-

dled access, resale, and transport and termination of traf-

fic. See 47 U.S.C.A. § 252(c)(2), (d). Consequently,

we reject the FCC's contention that its rulemaking au-

thority is coextensive with the reach of every provision

of a federal statue involving telecommunications. Sec-

tion 2(b) is not a limit on Congress's ability to legislate

in the area of intrastate telecommunications: it is, how-

ever, a limit on the FCC's ability to regulate in the area

of intrastate telecommunications. Thus, a federal stat-

ute’s mere application to intrastate telecommunication mat-

ters is insufficient to confer intrastate jurisdiction upon the

FCC; the statute must also directly grant the FCC such

20a

intrastate authority in order to overcome the operation of

section 2(b).”

The respondents’ last chance to breach the section 2(b)

fence lies with the “impossibility” exception to section

2(b). As mentioned above, the impossibility exception

allows an FCC regulation to preempt a state regulation

when it is impossible to separate the interstate and intra-

state components of the asserted FCC regulation and the

state regulation would negate the FCC’s authority over

interstate communication. See, e.g., Louisiana, 476 U.S.

at 375-76 n.4; California v. FCC, 75 F.3d 1350, 1359

(9th Cir.), cert. denied, 116 S. Ct. 1841 (1996);

NARUC, 880 F.2d at 429.

We believe that this exception does not apply to the

circumstances of this case and thus does not give the

FCC the authority to dictate pricing regulations govern-

ing the local competition provisions of the Act. First, tele-

communication ratemaking traditionally has been capable

of being separated into its interstate and intrastate com-

ponents. In fact, other statutory provisions predating the

1996 Act require such separation to occur and command

a joint board of federal and state regulators to execute

the separations process. 47 U.S.C. §§ 221(c), 410(c)

(1994); see also NARUC, 880 F.2d at 425.

Second, and more importantly, the FCC has not demon-

strated that the states’ authority to establish the rates in

connection with the local competition provisions of the

Act would negate any valid authority the Commission

has over interstate communications or impede any of its

* The FCC and its supporting intervenors assert that the provi-

sions granting the Commission general rulemaking authority (47

U.S.C. $8 154(i), 201(b), 303(r)) provide the FCC with plenary

authority that is coextensive with the reach of all federal telecom-

munications law. For the reasons we previously found these sections

to be inadequate to supply the Commission with the direct authority -

to issue the local pricing rules, we find them inadequate to provide

the FCC with such sweeping authority here.

2la

interstate regulatory goals. See California, 75 F.3d at

1359 (burden on FCC to demonstrate negation). The

impossibility exception is premised on a preemption anal-

ysis, and “(t]he critical question in any pre-emption analy-

sis is always whetlier Congress intended that federal reg-

ulation supersede state law.” Louisiana, 476 U.S. at 369,

Consequently, our inquiry returns to the language of the

Act. As illustrated above, the terms of the Act clearly

indicate that Congress did not intend for the FCC to issue

any pricing rules, let alone preempt state pricing rules

regarding the local competition provisions of the Act.

See 47 U.S.C.A. § 252(c)(2), (d). Because the Act

clearly grants the states the authority to set the rates for

interconnection, unbundled access, resale, and transport

and termination of traffic, the FCC has no valid pricing

authority over these areas of new localized competition

for the states to negate. “An agency may not act at all,

let alone preempt state authority, in an area where Con-

gress has explicitly denied it jurisdiction.” NARUC, 880

F.2d at 428. The fact that there are specific statutory

provisions that expressly indicate that the states have the

authority to determine the rates for these local telecom-

munications services distinguishes this case from all of the

cases that invoke the impossibility exception to allow the

FCC to preempt state regulations. See, e.g., California

v. FCC, 39 F.3d 919 (9th Cir. 1994); California vy.

FCC, 4 F.3d 1505 (9th Cir. 1993); Public Utility

Comm'n of Texas v. FCC, 886 F.2d 1325 (D.C. Cir.

1989). Because none of the courts invoking the impossi-

bility exception had the assistance of a federal statute

that specifically determined who had jurisdiction over the

telecommunications area at issue, those courts had to

Although the FCC claims it is merely secking a joint role with

the states in the ratemaking process under the Act, by requiring

state commissions to employ the TELRIC methodology and its other

assorted pricing mechanisms, the FCC is seeking to preempt any

state pricing regulation that would employ a different methodology.

22a

resort to analyzing the interstate/intrastate character of

the telecommunications services, as required by sections

151 and 152 of the Communications Act, in order to

make such a determination. Here, however, subsections

252(c)(2) and 252(d) clearly assign jurisdiction over

the rates for the local competition provisions of the Act

to the state commissions, thus avoiding the need to ana-

lyze the interstate/inirastate character of these services.

Even a traditional analysis of the interstate /intrastate

quality of the local competition provisions of the Act

reveals that these functions (i.e., interconnection, unbun-

dled access, resale, and transport and termination of

traffic) are fundamentally intrastate in character; thus the

FCC’s traditional jurisdiction over interstate communica-

tions will not be negated by the states’ regulation of the

rates for these services. The Act primarily focuses on

facilitating competition in /ocal telephone service markets

by imposing several new duties (interconnection, unbun-

dled access, and resale—the local competition provisions)

on incumbent local exchange carriers. 47 U.S.C.A.

§ 251(c). Allowing competing telecommunications car-

riers to have direct access to an incumbent local exchange

carrier’s established network in order to enable the new

carrier to provide competing general local telephone serv-

ices is an intrastate activity even though the local network

thus invaded is sometimes used to originate or complete

interstate calls.” Contrary to the respondents’ contentions,

2° We note that the FCC's jurisdiction over the access charges

that LECs collect from interexchange carriers (IXCs) for terminat-

ing the IXCs’ interstate toll calls on the LECs’ networks does not

imply that the Commission also has jurisdiction over the rates that

incumbent LECs may charge competing local exchanye carriers for

interconnection with or unbundled access to the incumbent LECs’

networks. Interconnection and unbundled access are distinct from

exchange access because interconection and unbundled access pro-

vide a requesting carrier with a direct hookup to and extensive use

of an incumbent LEC’s local network that enables a requesting

carrier to provide local exchange services, while exchange access

23a

section 2(b) does not prevent the FCC from having

jurisdiction only over matters that are purely intrastate.

The Supreme Court rejected such a position in its decision

in Louisiana:

[W]e cannot accept respondents’ argument that

§ 152(b) does not control because the plant involved

in this case is used interchangeably to provide both

interstate and intrastate service, and that even if

§ 152(b) does reserve to the state commissions

some authority over “certain aspects” of intrastate

communication, it should be “confined to intrastate

matters which are ‘separable from and do not sub-

stantially affect’ interstate communication.”

476 U.S. at 373 (citation omitted). Moreover, we re-

iterate that the text of section 2(b) itself indicates that the

FCC does not have jurisdicion over matters “in connec-

tion with” intrastate service. 47 U.S.C. § 152(b). Con-

sequently, the fact that the local competition provisions

of the Act may have a tangential impact on interstate

services is not sufficient to overcome the operation of

section 2(b) and does not alter the fundamentally intra-

state nature of the Act’s local competition provisions. We

..0te that the Act’s clear grant of ratemaking authority to

the state commissions is entirely consistent with the states’

historical role in telecommunications regulation given the

intrastate quality of the local competition provisions of

the Act. Because the impossibility exception does not

apply in this case, section 2(b) remains a Louisiana-built

fence that is hog tight, horse high, and bull strong, pre-

venting the FCC from intruding on the state’s intrastate

turf.

Having concluded that the FCC lacks jurisdiction to

issue the pricing rules, we vacate the FCC’s pricing

is a service that LECs offer to interexchange carriers without pro-

viding the interexchange carriers with such direct and pervasive

access to the LECs’ networks and without enabling the IXCs to

provide local telephone service themselves through the use of the

LECs’ networks.

24a

rules * on that ground alone and choose not to review

these rules on their merits.

B. The FCC’s “Pick and Choose” Rule

The petitioners next assert that the FCC’s so-called

“pick and choose” rule, 47 C.F.R. § 51.809, is an un-

reasonable interpretation of subsection 252(i). Subsec-

tion 252(i) provides:

A local exchange carrier shall make available any

interconnection, service, or network element provided

under an agreement approved under this section to

which it is a party to any other requesting telecom-

munications carrier upon the same terms and condi-

tions as those provided in the agreement.

47 U.S.C.A. § 252(i). With its “pick and choose” rule,

the FCC interpreted this section of the Act to allow re-

questing carriers to “pick and choose” among individual

provisions of other interconnection agreements that have

previously been negotiated between an incumbent LEC

and other requesting carriers without being required to ac-

_ #*! The pricing rules refer to 47 C.F.R. §§ 51.501-51.515 (inclusive,

except for section 51.515(b) which we found to be a legitimate in-

terim rate for interstate access charges, see Competitive Telecomm.

Ass'n. v. FCC, No. 96-3604, 1997 WL 352284, (8th Cir. June 27,

1997) ), 51.601-51.611 (inclusive), 51.701-51.717 (inclusive).

Because Congress expressly amended section 2(b) to preclude

state regulation of entry of and rates charged by Commercial Mobile

Radio Service (CMRS) providers, see 47 U.S.C. §§$ 152(b) (ex-

empting the provisions of section 332), 332(¢)(3) (A), and because

section 332(c)(1)(B) gives the FCC the authority to order LECs

to interconnect with CMRS carriers, we believe that the Commission

has the authority to issue the rules of special concern to the CMRS

providers, i.e., 47 C.F.R. §§ 51.701, 51.703, 51.709(b), 51.711(a) (1),

51.715(d), and 51.717, but only as these provisions apply to CMRS

providers, Thus, rules 51.701, 51.703, 51.709(b), 51.711(a) (1),

51.715(d), and 51.717 remain in full force and effect with respect

to the CMRS providers, and our order of vacation does not apply

to them in the CMRS context.

25a

cept the terms and conditions of the agreements in their

entirety. The petitioners argue that such a rule is unduly

burdensome on incumbent LECs and that it will thwart

negotiations because it allows a later entrant to select

the favorable terms of a prior approved agreement without

being bound by the corresponding tradeoffs that were

made in exchange for the favorable provisions sought by

the new entrant. The petitioners assert that subsection

252(i) allows requesting carriers the option to select

the terms and conditions of prior agreements only as a

whole, not in a piecemeal fashion.

Contrary to the FCC’s belief that subsection 252(i)

plainly mandates its approach, we think that the language

of subsection 252(i) in isolation does not clearly reveal

Congress’s intent on this issue.** Consequently, we “must

look to the structure and language of the statute as a

whole” to determine if the FCC's interpretation of this

ambiguous provision is a reasonable one. National R.R.

Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407,

417 (1992). Our analysis leads us to conclude that the

FCC's rule conflicts with the Act’s design to promote

negotiated binding agreements.

The structure of the Act reveals the Congress’s prefer-

ence for voluntarily negotiated interconnection agreements

between incumbent LECs and their competitors over

arbitrated agreements. Voluntary negotiation is the first

method listed under section 252, and the Act indicates

* We acknowledge that the words “any interconnection, service,

or network element” could indicate that the FCC’s approach was

intended by Congress. However, these words do not forecolse the

possibility that an entrant’s selection of an individual provision of

a prior agreement would require it to accept the terms of the

entire agreement. In this context, the quoted words could simply

indicate that an incumbent LEC would not be able to shield an

individual aspect of a prior agreement from the reach of a subse-

quent entrant who is willing to accept the terms of the entire

agreement.

26a

that the parties may begin negotiations as soon as an

entrant submits a request to an incumbent LEC. 47

U.S.C.A. § 252(a)(1). Meanwhile, the parties’ ability

to request the arbitration of an agreement is confined to

the period from the 135th to the 160th day after the

requesting carrier submits its request to the incumbent

LEC. Id. §252(b)(1). These provisions reveal that

the Act establishes a preference for incumbent LECs and

requesting Carriers to reach agreements independently and

that the Act establishes state-run arbitrations to act as a

backstop or impasse-resolving mechanism for failed

negotiations.

The FCC's “pick and choose” rule, however, would

thwart the negotiation process and preclude the attainment

of binding negotiated agreements. During a negotiation, an

incumbent LEC would be very reluctant to make a con-

cession On one term in exchange for a benefit on another

term when faced with the prospect that a subsequent com-

neting carrier will be able to receive the concession without

having to grant the incumbent the corresponding benefit.

In this manner the FCC’s rule would discourage the give-

and-take process that is essential to successful negotiations

Moreover, negotiated agreements will, in reality, not be

binding, because, according to the FCC, an entrant who is

an original party to an agrecment may unilaterally in-

corporate more advantageous provisions contained in sub-

sequent agreements negotiated by other carriers. See

First Report and Order, 4 1316. This result conflicts with

the Act’s requirement that agreements be “binding,” 47

U.S.C.A. § 252(a)(1), and is an additional impediment to

Subsequent negotions, because an incumbent LEC will be

even more hesitant to make concessions in subsequent

negotiations when it knows that such concessions would

be available to all of the competing carriers with which

it previously had agreements.

In response to these arguments, the FCC points to the

waiver provision of the “pick and choose” rule, First Re-

27a

port and Order, § 51.809(b), and asserts that incumbent

LECs will not be so deterred from making concessions be-

cause the waiver provision prevents an entrant from adopt-

ing the provisions of a previous agreement when an in-

cumbent LEC can persuade a state commission that such

adoption would be economically burdensome or tech-

nically infeasible. We do not believe, however, that the in-

cumbent LECs can take solace in the waiver provision.

With the burden of proof placed on the incumbent LECs,

receiving an actual waiver would be an uphill battle that

would likely be a rare occurrence. We remain convinced

that even in light of the possibility that an exemption

could be granted, the incumbent LECs’ ability and will-

ingness to negotiate would be severely stifled by the FCC’s

“pick and choose” rule.

We also find little merit to the Commission's assertion

that the alternative interpretation of subsection 252(i), re-

quiring entrants to accept the terms and conditions of prior

agreements in their entirety, would cause incumbent LECs

to include unrelated onerous terms in their agreements in

order to discourage subsequent entrants from adopting

those agreements. We believe that the incumbent LECs

have as much interest in avoiding the costs of prolonged

negotiations or arbitrations as do the requesting carriers,

which gives the incumbent LECs an incentive to negotiate

initial agreements that would be acceptable to a wide

range of later requesting carriers.

We conclude that the FCC’s interpretation conflicts with

the Act’s design to promote negotiated agreements. Thus,

we find the FCC’s “pick and choose” rule to be an unrea-

sonable construction of the Act and vacate it for the fore-

going reasons.

C. Rural Exemptions-Rule 51.405

A few petitioners take issue with the Commission's rule

that establishes additional standards that the state com-

missions are to follow in determining whether rural and

28a

small LECs are entitled to exemptions from or suspensions

or modifications of the duties imposed on incumbent LECs

generally under the Act. The Commission's rule, 47

C.F.R. § 51.405, purports to implement subsection 251 (f),

which governs exemptions, suspensions, and modifications.

The rule allocates the burden of proof to the small or rural

LECs seeking exemptions or modifications and embellishes

the standard of proof to require the small or rural LECs to

demonstrate that their compliance with the Act's local

competition provisions would cause them to suffer an

“undue economic burden beyond the economic burden that

is typically associated with efficient competitive entry.” 47

C.F.R. §51.405(c). The petitioners attack the FCC's

rule on both jurisdictional and substantive grounds. After

carefully reviewing all of the pertinent arguments, we con-

clude that the FCC exceeded its jurisdiction in promulgat-

ing rule 51.405,

The plain mearing of subsection 251(f)(1) (govern-

ing exemptions) and 251(f)(2) (governing suspensions

and modifications) indicates that the State Commissions

have the exclusive authority to make these determinations,

and nothing in either of these provisions, or in the Act

generally, provides the FCC with the power to prescribe

the governing standards for such determinations. Sub-

section 251(f)(1)(B) explicitly provides, “The State com-

mission shall conduct an inquiry for the purpose of de-

termining whether to terminate the exemption under sub-

paragraph (A).” Repeated and exclusive references to

such state commission determinations are contained

throughout subsection 251 (f ). In contrast, there is no in-

diction that state commissions must follow FCC standards

in conducting these inquiries, The only reference to the

Commission is contained in subsection 251(f)(1)(B)

which provides, “Upon termination of the exemption, a

State commission shall establish an implementation

schedule for compliance with the request that is consistent

in time and manner with Commission regulations.” The

29a

FCC asserts that this sentence supplies it with the authority

to promulgate rule 51.405. By its very terms, however,

this sentence requires the implementation schedule to com-

ply with the FCC's regulations only after a state commission

has independently determined to terminate a rural LEC’s

exemption. This reference does not empower the FCC to

establish standards that states must follow in determining

in the first place whether an exemption should continue or

end; it merely indicates that after a state commission de-

cides to terminate an exemption, the rural carrier must

comply with the regulations that the Commission is speci-

cally authorized to promulgate under section 251.”

The FCC responds by once again arguing that subsec-

tion 251(d)(1) of the Act avthorizes it to promulgate

regulations implementing all of the requirements contained

in section 251 generally and that its broad rulemaking

powers contained in subsections 154(i), 201(b), and

303(r) also provide it with the authority to issue rule

51.405. For the same reasons that we previously found

these provisions to be insufficient to supply the FCC with

jurisdiction to issue the pricing rules, we find them to be

insufficient to empower the Commission to promulgate

standards governing state commission determinations

of exemptions and modifications. Moreover, the legisla-

tive history reveals thai the Congress rejected both a Senate

bill and a House bill that gave the FCC concurrent juris-

diction with state commissions to administer the exemp-

tion and waiver provisions. See S, Rep. No. 104-23, 1995

WL 142161 at *206-07 (§ 251(i)(3)) (1995): HLR.

1555, 104th Cong. § 242(e) (1995). It would be unrea-

sonable to infer from subsection 251(d) or the other gen-

* To reiterate, the FCC is specifically authorized to issue regula-

tions under subsections 251(b)(2) (number portability), 251(c)

(4) (B) (limitations on resale), 261(d)(2) (unbundled network ele-

ments), 251(e) (numbering administration), 251(g) (continued

enforcement of exchange access), and 251(h)(2) (treatment of

comparable carriers as incumbents).

30a

eral rulemaking provisions cited by the FCC that Con-

Bress intended to put the Commission—the agency it de-

cided to exclude from the exemption process—in a posi-

tion to dictate the substantive standards governing the

exemption process.

Finally, we believe that section 2(b) bars the FCC from

having jurisdiction to issue rule 51.405 as well. The FCC's

LECs'’ duties to implement the local competition provisions

no straightforward or unambiguous grant of authority to

the FCC with respect to these determinations that would be

sufficient to overcome the section 2(b) fence. Therefore,

we vacate rule 51.405 on the ground that the FCC ex-

ceeded its jurisdiction in promulgating this rule, and we de-

cline to address the arguments attacking it on substantive

grounds.

D. FCC Authority Under Section 208

In the discussion section of its First Report and Order,

the FCC claims that its general authority to hear com-

plaints under 47 U.S.C. § 208 empowers it to review

agreements approved by state commissions under the Act

and to enforce the terms of such agreements as well as the

actual provisions contained in sections 251 and 252. See

First Report and Order, 44 121-128. The Commission's

Perception of its authority under section 208 is unten-

3la

able, however, in light of the language and structure of the

Act and by the operation of section 2(b).

the FCC under 28 U.S.C. § 2342(1) and 47 U.S.C.

§ 402(a). The fact that the FCC asserts its section 208

i commentary section of its First Report and

Order as opposed to stating its position as a rule is im-

material to our determination of ripeness. See Office of

Communication of United Church of Christ v. FCC, 826

F.2d 101, 105 (D.C. Cir. 1987) (concluding that

“whether an agency decision is labelled a ‘Rule’ or a

‘Policy Statement’ is of no consequence to the ripeness of

the decision for review”). Instead, we focus on whether

the agency's action is final, which requires us to determine

if “the agency has completed its decisionmaking process.”

Franklin v. Massachusetts, 505 U.S. 788, 797 (1992).

In paragraphs 127 and 128, the FCC definitively states

that its authority to hear complaints under section 208 ex-

tends to disputes over the implementation of the require-

ments of sections 251 and 252. This statement and the

contrary conclusions of several of the petitioners present us

with conflicting interpretations of the statutory scheme’s

allocation of jurisdiction. This is a legal question that is

ripe for our review.

The language and design of the Act indicate that the

FCC’s authority under section 208 does not enable the

Commission to review state commission determinations or

to enforce the terms of interconnection agreements under

the Act. Instead, subsection 252(e)(6) directly provides

32a

for federal district court review of state commission de-

terminations when parties wish to challenge such deter-

minations. 47 U.S.C.A. § 252(e)(6). The FCC re-

sponds by arguing that federal court review under sub-

section 252(e¢)(6) is not the exclusive remedy for a party

aggrieved by state commission decisions under the Act

and that such a party has the option of also filing a section

208 complaint with the FCC. Although the terms of sub-

section 252(e)(6) do not explicitly state that federal dis-

trict court review is a party's “exclusive” remedy, courts

traditionally presume that such special statutory review

procedures are intended to be the exclusive means of

review. See Defenders of Wildlife v. Administrator, EPA,

882 F.2d 1294, 1299 (8th Cir. 1989); City of Rochester

v. Bond, 603 F.2d 927, 931 (D.C. Cir. 1979). We afford

subsection 252(¢)(6) our traditional presumption and

conclude that it is the exclusive means to attain review of

state commission determinations under the Act. Addition-

ally, the complete absence of any reference to section 208

in the Act bolsters our conclusion that Congress did not

intend to allow the FCC to review the decisions of state

commissions.

We also believe that state commissions retain the pri-

mary authority to enforce the substantive terms of the

agreements made pursuant to sections 251 and 252. Sub-

section 252(e)(1) of the Act explicitly requires all agree-

ments under the Act to be submitted for state commission

approval. 47 U.S.C.A. § 252(e)(1) (West Supp. 1997).

We believe that the state commissions’ plenary authority to

accept or reject these agreements necessarily carries with

it the authority to enforce the provisions of agreements

that the state commissions have approved. Moreover, the

State commissions’ enforcement power extends to ensuring

that parties comply with the regulations that the FCC is

specifically authorized to issue under the Act, because

the Act empowers state commissions to reject arbitrated

agreements on the basis that they violate the FCC’s regula-

tions. See id. at § 252(e)(2)(B). Again, we believe that

33a

the power to approve or reject these agreements based on

the FCC's requirements includes the power to enforce

those requirements.” Significantly, nothing in the Act

even suggests that the FCC has the authority to enforce

the terms of negotiated or arbitrated agreements or the

general provisions of sections 251 and 252. The only grant

of any review or enforcement authority to the FCC is con-

tained in subsection 252(e¢)(5), and this provision author-

izes the FCC to act only if a state commission fails to ful-

fill its duties under the Act. The FCC’s expansive view

of its authority under section 208 is thus contradicted

by the language, structure, and design of the Act.

The FCC’s inerpretation of its authority under section

208 also cannot survive the operation of section 2(b). As

explained earlier, the obligations imposed by sections

251 and 252 fundamentally involve local intrastate tele-

communications matters Consequently, the state commis-

sion determinations that the FCC seeks to review and the

agreements that it seeks to enforce also fundamentally deal

with intrastate telecommunications matters. To reiterate,

section 2(b) prevents the FCC from having jurisdiction

over “charges, classifications, practices, services, facilities,

or regulations for or in connection with intrastate com-

munication service. . . .” 47 U.S.C. § 152(b). Allowing

the FCC either to review state commission determinations

regarding agreements implementing sections 251 and 252

or to enforce the terms of such agreements effectively

would provide the FCC with jurisdiction over intrastate

communication services in contravention of section 2(b).

More specifically, such review or enforcement authority

would enable the FCC to review and redetermine state

commission determinations of the just and reasonable rates

that incumbent LECs can charge their competitors for

interconnection, unbundled access, and resale—rates that

** We believe that the enforcement decisions of state commissions

would also be subject to federal district court review under sub-

section 252(e) (6).

34a

we previously decided were off limits to the FCC. We

refuse to undermine our earlier decisions by interpreting

the Act and section 208 as authorizing the FCC to review

state commission determinations and to enforce state-

approved agreements. We conclude that the language and

structure of the Act combined with the operation of sec-

tion 2(b) indicate that the provision of federal district

court review contained in subsection 252(e)(6) is the ex-

clusive means of obtaining review of state commission de-

terminations under the Act and that state commissions

are vested with the power to enforce the terms of the

agreements they approve.

E. Rule 51.303-Review of Preexisting Agreements

Some petitions challenge the FCC’s conclusion that

subsection 252(a)(1) requires preexisting interconnection

agreements that were negotiated before the enactment of

the Telecommunications Act of 1996, including agree-

ments between neighboring noncompeting LECs, to be

submitted for state commission approval. See First Report

and Order, 44 165, 166, 169; 47 C.F.R. § 51.303 (stat-

ing FCC's interpretation of subsection 252(a)(1)).

While clearly requiring new agreements negotiated under

the terms of the Act to be submitted for state commission

approval, the last sentence of subsection 252(a)(1) reads,

“The agreement, including any interconnection agreement

negotiated before February 8, 1996, shall be submitted to

the State commission under subsection (e) of this section.”

47 U.S.C.A. § 252(a)(1). The petitioners objecting to

the FCC’s interpretation of this provision claim initially

that the Commission does not have jurisdiction to de-

termine which agreements must be submitted for approval

under the Act; alternatively, they attack the Commission’s

determination on its merits, arguing that the FCC’s rule

violates the terms of the Act. Our review of the arguments

leads us to conclude that the FCC exceeded its jurisdiction

in promulgating rule 51.303.

35a

Once again, section 2(b), 47 U.S.C. § 152(b), pre-

vents the FCC from issuing regulations involving tele-

communication matters that are fundamentally intrastate

in character. As we explained above, the duties imposed

by sections 251 and 252 and the agreements fulfilling

those duties almost exclusively involve local intrastate

telecommunication services. Consequently, section 2(b)

forecloses the ability of the Commission to determine

which interconnection agreements must be submitted for

state commission approval.” Moreover, section 252 es-

tablishes the procedures and standards that state com-

missions must follow when approving and arbitrating

agreements under the Act. Nothing in this section can be

read to authorize the FCC to issue regulations regarding

which interconnection agreements must be submitted for

State approval. The FCC claims that subsection 252

(d)(2)(B) (ii) implies that the Commission has the power

to regulate generally under section 252 because this sub-

section “withdraws” authority from the FCC to regulate

the costs associated with the transport and termination of

calls; the FCC argues that there would be no need to with-

draw this authority unless the FCC had such general

authority to begin with. We are not persuaded that this

subsection’s denial (not withdrawal) of power to the

FCC to determine the costs of transporting and terminat-

ing calls implies that the Commission has the authority

to determine which intrastate interconnection agreements

must be submitted for state approval under subsection

25 We are cognizant of the fact that interconnection agreements

negotiated prior to the enactment of the Telecommunications Act

of 1996 may not necessarily share the same fundamental intra-

state character as the agreements negotiated specifically under sec-

tion 251 of the Act. This possibility does not circumvent the opera-

tion of section 2(b), however, because we are focusing on the

FCC's authority to determine which agreements must be submitted

for state commission approval in order to effectuate the local com-

petition provisions in section 251. We believe that this determina-

tion qualifies as a “classification[],” “practice[],” or “regulation| }

for or in connection with intrastate communication service” which

is beyond the FCC’s jurisdiction. 47 U.S.C. § 152(b).

36a

252(a)(1). This grasp for some sort of statutorily-

based jurisdiction over these interconnection agreements

does not qualify as the straightforward grant of intra-

state authority that is necessary to penetrate the section

2(b) fence.

We also are not convinced by the FCC’s familiar re-

frain that its general rulemaking authority under 47

U.S.C. §§ 201(b), 303(r), and 154(i) provides it with

jurisdiction to regulate in this area. For the reasons €X-

plained above, these general rulemaking provisions do not

grant the Commission rulemaking authority beyond what

is necessary to fulfill its obligations with regard to tra-

ditional interstate and foreign communications. Addition-

ally, none of these provisions supply the FCC with a suf-

ficiently unambiguous grant of intrastate authority to

overcome the operation of section 2(b). Consequently, we

vacate Rule 51.303 and its accompanying policy state-

ments on the ground that the Commission did not have

jurisdiction to issue this regulation.”

F. § 251(d)(3) and State Compliance With FCC Rules

In the commentary portion of the First Report and

Order, the FCC asserts that “the Commission’s regula-

tions under section 251 are binding on the states, even

with respect to intrastate matters.” First Report and

Order, € 101. With this statement, as well as several

others, the FCC purports to preempt any state policy that

conflicts with an FCC regulation promulgated pursuant

to section 251. See id. at 44 101-103, 180. The peti-

tioners argue that the FCC’s position is untenable in light

of subsection 251(d)<3) and the structure of the Act. We

agree.

26 We emphasize that our conclusion that the FCC exceeded its

jurisdiction in promulgating Rule 51.303 in no way reflects any

view of the merits of the Commission’s interpretation of subsection

252(a) (1), and we leave the determination of whether and which

preexisting interconnection agreements must be submitted for state

commission approval to the state commissions.

37a

Subsection 251(d)(3), entitled “Preservation of State

access regulations,” provides the following:

In prescribing and enforcing regulations to im-

plement the requirements of this section, the Com-

mission shall not preclude the enforcement of any

regulation, order, or policy of a State commission

that—

(A) establishes access and _ inter-connection

obligations of local exchange carriers;

(B) is consistent with the requirements of this

section; and

tion of the requirements of this section and the

purposes of this part.

47 US.C.A. § 251(d)(3). Initially, we note that the

FCC's authority to prescribe and enforce regulations to

implement the requirements of section 251 is confined to

the six areas in this section where Congress expressly

called for the FCC’s participation. See supra note 10 and

accompanying text. Subsection 251(d)(3) further con-

strains the FCC’s authority. Even when the FCC issues

rules pursuant to its valid rulemaking authority under

section 251, subsection 251(d)(3) prevents the FCC

from preempting a state commission order that establishes

access and interconnection obligations so long as the

state commission order (i) is consistent with the require-

ments of section 251 and (ii) does not substantially pre-

vent the implementation of the requirements of section

251 and the purposes of Part II, which consists of sec-

tions 251 through 261. This provision does not require all

State commission orders to be consistent with all of the

FCC's regulations promulgated under section 251. The

FCC attempts to read such a requirement into this sub-

section by asserting that a state policy that is inconsistent

with an FCC regulation is necessarily also inconsistent with

the terms of section 251 and substantially prevents the im-

38a

plementation of section 251. See First Report and Order,

«¢ 102-103. The FCC’s conflation of the requirements

of section 251 with its own regulations is unwarranted and

illogical. It is entirely possible for a state interconnection

or access regulation, order, or policy to vary from a spe-

cific FCC regulation and yet be consistent with the over-

arching terms of section 251 and not substantially prevent

the implementation of section 251 or Part I. In this cir-

cumstance, subsection 251(d)(3) would prevent the FCC

from preempting such a state rule, even though it dif-

fered from an FCC regulation.

The FCC asserts that other provisions of the Act justify

its belief that state interconnection and access rules must

be consistent with the Commission's regulations under

section 251. The FCC claims that section 253 and sub-

sections 252(c)(1) and 261(c) indicate that state com-

missions are bound by the FCC's regulations. While sub-

section 253(d) does empower the Commission to preempt

some state policies, those state policies are limited to those

that violate the terms of subsections 253(a) or 253(b).

47 US.C.A. § 253(d). Neither subsection 253(a) nor

253(b) requires state policies to conform to any Commis-

sion regulations, 253(a) merely requires state policies not

to prohibit “the ability of any entity to provide any inter-

state or intrastate telecommunications service,” and 253

(b) allows states to impose additional telecommunications

requirments as long as they are competitively neutral and

consistent with the universal service obligations of section

254. Id. § 253(a), (b). Meanwhile, subsection 252(c)

(1) does require state commissions to ensure that arbi-

trated agreements comply with the Commission’s regula-

tions made pursuant to section 251, but by its very terms

this provision confines the states only when they are ful-

filling their roles as arbitrators of agreements pursuant to

the federal Telecommunications Act of 1996. This pro-

vision does not apply to state statutes or regulations that

are independent from the Telecommunications Act of

39a

1996. Many states enacted legislation designed to open up

local telephone markets to competition prior to the 1996

federal Act, see lowa Utilities Bd., 109 F.3d at 427 n.7,

and subsection 251(d)(3) was designed to preserve such

work of the states.

Finally, the FCC claims that subsection 261(c) pro-

vides support for its conclusion that the state regulations

must be consistent with the Commission’s rules on inter-

connection and access promulgated under section 251.

While subsection 261(c) does require some state rules to

be consistent with “the Commission’s regulations to im-

plement this part,” we believe that this provision applies

only to those additional state requirements that are not

promulgated pursuant to section 251 or any other section

in Part II of the Act. See 47 U.S.C.A. § 261(c). Because

subsection 251(d)(3) specifically governs state rules that

“establish[] access and interconnection obligations of local

exchange carriers,” which is the heart of the subject mat-

ter of section 251, and subsection 261(b) governs state

rules that are issued to “fulfill{] the requirements of this

part,” we conclude that the additional state requirements

referenced in subsection 261(c) refer to separate state

rules that do not directly pertain to the matters found in

sections 251 through 261 (Part II) of the Act. Conse-

quently, this provision does not apply to the state rules

pertaining to interconnection and access obligations that

the Commission believes it has the power to preempt

under its section 251 authority, and thus, it does not sup-

port the FCC’s view that such state rules must conform

to the Commission’s regulations.

The FCC’s blanket statement that state rules must be

consistent with the Commission’s regulations promulgated

pursuant to section 251 is not supportable in light of sub-

section 251(d)(3).” With subsection 251(d)(3), Con-

27 We leave for another day any determination of whether a

specific state access or interconnection regulation is inconsistent

40a

intended to preserve the states’ traditional authority

agree cr local cathe markets and meant to shield

state access and interconnection orders from FCC pre-

emption so long as the state rules are consistent with the

requirements of section 251 and do not substantially pre-

vent the implementation of section 251 or the purposes of

Part II]. We conclude that the FCC’s belief that merely

an inconsistency between a state rule and a Commission

regulation under section 251 is sufficient for the FCC to

preempt the state rule, is an unreasonable interpretation

of the statute in light of subsection 251(d) (3) and the

structure of the Act. See Chevron, 467 U.S. at 844-45

(standard of review).

G. The FCC’s Unbundling Rules

The FCC issued many rules purporting to implement

the incumbent LECs’ duties to provide unbundled access

to the incumbent LECs’ network under subsection 251

(c)(3). The petitioners challenge these rules on multiple

grounds ranging from assertions that particular rules vio-

late the terms of the Aci to claims that these rules alto-

gether effect an unconstitutional taking of the incumbent

LECs’ property. We address these challenges to the

FCC’s unbundling rules one by one.

with section 251 or substantially prevents the implementation of

section 251 or Part II of the Act.

28 Our decision rejecting the FCC’s board preemption of all state

regulations that conflict with the FCC’s rules under section 251

does not render the FCC’s rules meaningless, however. The FCC’s

rules under section 251 will be in force where there are no compar-

able state rules on access and interconnection obligations, or where

such state rules conflict with the substantive provisions of section

251 or substantially prevent their implementation.

4la

1. The Unbundling Rules in Light of the Terms of

the Act

a. OSS, Operator Services, and Vertical Switch-

ing Features

Many of the petitioners claim that the FCC’s decision

to require incumbent LECs to provide competitors with

unbundled access to operational support systems (OSS),

47 C.F.R. § 51.319(f), operator services and directory

assistance, Id. § 51.319(g), and vertical switching fea-

tures such as caller I.D., call forwarding, and call waiting,

First Report and Order, 44 263, 413, unduly expands the

incumbent LECs’ unbundling obligations beyond the stat-

utory requirements. After reviewing the relevant provi-

sions of the Act, we believe that the FCC reasonably

concluded that these features qualify as network elements

that are subject to the unbundling requirements of the

Act.

Subsection 251(c)(3) imposes a duty on incumbent

LECs to provide competing carriers with “access to net-

work elements on an unbundled basis... .” 47 U.S.C.A.

§ 251(c)(3). In turn, the Act provides the following

definition of “network element”:

The term “network element” means a facility or

equipment used in the provision of a telecommunica-

tions service. Such term also includes features, func-

tions, and capabilities that are provided by means of

such facility or equipment, including subscriber num-

bers, databases, signaling systems, and information

sufficient for billing and collection or used in the

transmission, routing, or other provision of a tele-

communications service,

Id. § 153(29). The petitioners suggest that the first sen-

tence of this definition limits a “network element” to only

the physical parts of an incumbent LEC’s network that are

directly involved in transmitting telephone calls from one

point to another. They also contend that the second sen-

42a

tence’s apparent expansion of the definition is actually

confined by the fact that the additional “features, func-

tions and capabilities” are limited to those “that are pro-

vided by means of such facility or equipment.” Further-

more, the petitioners suggest that the Conference

Committee’s deletion of the term “services” from the un-

bundling provision contained in an earlier House bill in-

dicates that any aspect of telecommunications that can be

characterized as a “service” is not a network element

subject to unbundling. See H.R. 1555, 104th Cong.

§ 242(a)(2) (1995).

Applying their narrow interpretation of the definition

of “network element,” the petitioners assert that opera-

tional support systems, which are software systems and

accompanying databases that are necessary to process

orders, handle billing, and provide maintenance and re-

pair capabilities to phone customers, are not physical

components of an incumbent LEC’s network that are

directly involved in transmitting a phone call from one

person to another and thus do not qualify as “network

elements.” The petitioners reject operator services and

directory assistance as well as call waiting, caller 1.D.,

and call forwarding as network elements for the same

reasons and for the additional reason that these features

are “services” that were not intended to be subject to the

unbundling requirements. We reject the petitioners’ nar-

row interpretation of the Act's definition of “network ele-

ment” and believe that all of these provisions qualify as

network elements under the Act.

Initially, the Act’s definition of network elements is not

limited to only the physical components of a network

that are directly used to transmit a phone call from point

A to point B. The Act specifically provides that “[t}he

term ‘network element’ means a facility or equipment

used in the provision of a telecommunications service.”

47 U.S.C.A. § 153(29). Significantly, the Act defines

“telecommunications service” as meaning “the offering of

telecommunications for a fee directly to the public.” /d.

43a

§ 153(46). Given this definition, the offering of tele-

communications services encompasses more than just the

physical components directly involved in the transmission

of a phone call and includes the technology and infor-

mation used to facilitate ordering, billing, and main-

tenance of phone service—the functions of operational

support systems. Such functions are necessary to provide

telecommunications “for a fee directly to the public.” Jd.

We believe that the FCC’s determination that the term

network element” includes all of the facilities and equip-

ment that are used in the overall commercial offering of

telecommunicatioiis is a reasonable conclusion and en-

titled to deference. See Chevron, 467 U.S. at 844.

Additionally, the second sentence of subsection 153

(29) substantially broadens the definition of “network

element,” and its explicit reference to “databases, signaling

systems, and information sufficient for billing and collec-

tion clearly indicates that operational support systems

qualify as network elements under the Act. We are not

persuaded that operational support systems are excluded

from the definition of network elements merely because

the referenced “features, functions, and capabilities” are

limited to those “that are provided by means of such

facility or equipment.” Id. § 153(29). Above, we dem-

onstrated that “facilities or equipment” used in the pro-

vision of a telecommunication service encompasses a

broad range of telecommunications technology and de-

vices, including operational support systems, so the

status of these systems as network elements is not de-

pendent on the terms of the definition’s second sentence.

Nevertheless, we believe that operational support systems

alternatively qualify as network elements under the terms

os the definition’s second sentence, because the informa-

: and databases of these systems constitute features,

unctions, and capabilities that are provided through the

use of software and hardware that is used in the com-

mercial offering of telecommunication services to the

public. Moreover, even though the definition limits the

44a

general terms “features, functions, and capabilities” to

those “that are provided by means of such facility or

equipment,” the definition definitively declares that sub-

scriber numbers, databases, signaling systems, and infor-

mation sufficient for billing and collection qualify as such

features, functions, and capabilities, and thus are network

elements under the Act. Operational Support Systems

consist of databases and information relevant to ordering

and billing; thus, they qualify as network elements under

this definition as well.

Our agreement with the FCC’s determination that the

Act broadly defines the term “network element” leads us

also to agree with the Commission’s conclusion that oper-

ator services, directory assistance, caller I.D., call for-

warding, and call waiting are network elements that are

subject to unbundling. We believe that operator services

and directory assistance qualify as features, functions, or

capabilities that are provided by facilities and equipment

that are used in the provision of telecommunication ser-

vices. The commercial offering of phone services to the

public and the specific transmission of phone calls be-

tween locations implicates the use of operator services

and directory assistance. Likewise, caller 1.D., call wait-

ing, and call forwarding are vertical “features” that are

provided through the switching hardware and software

that are also used to transmit calls across phone lines.

Thus, they qualify as network elements as well.

The petitioners argue that these features are actually

finished services and that the legislative history and struc-

ture of the Act suggest that “services” were not meant to

be unbundled but rather sold to the requesting carrier for

resale under subsection 251(c)(4). While we address

this argument in greater detail in a subsequent section of

this opinion, with respect to these particular features, we

disagree with the petitioners’ interpretation of the Act.

Simply because these capabilities can be labeled as “ser-

vices” does not convince us that they were not intended

45a

to be unbundled as network elements. While subsection

251(c)(4) does provide for the resale of telecommunica-

tions services, it does not establish resale as the exclusive

means through which a carrier may gain access

s abamation would sliow the incumbent LECs to evade

subsection 251(c)(3). We believe that in some circum-

stances a competing carrier may have the option of gain-

ing access to features of an incumbent LEC’s network

through either unbundling or resale. Regarding the fea-

tures presently at issue, as explained above, these aspects

of telecommunications satisfy the definition of “network

element, consequently, they are subject to the unbun-

dling requirements of subsection 251(c)(3).™

b. Definition of “Technically Feasible”-Rule 51.5

Subsections 251(c)(2) and 251(c)(3) direct inter-

connection ond wabundied erent to nec “at omer 4

*° Even though the parties seem to

agree that operator servi

directory assistance, caller I.D., call forwarding, and call Salinas

also be “ : ”

wy classified as “services,” we make no ruling on this particular

46a

considered in determining if a point of interconnec-

ea unbundled access is technically feasible, the costs

of such interconnection or unbundled access will be taken

into account when determining the just and reasonable

rates, terms, and conditions for these services. See 47

U.S.C.A. §§ 251(c)(2), (3). Under the Act, an incum-

bent LEC will recoup the costs involved in providing

interconnection and unbundled access from the competing

carriers making these requests. Consequently, we con-

clude that the FCCs definition of “technically feasible

will not unduly burden the incumbent LECs, and we up-

hold the Commission’s definition.

c. Technically Feasible and the Presumption for

Unbundling

itioners also challenge the FCC's general

wane on it proposes be used in determining what

network elements must be unbundled. One such standard

is the FCC’s belief that incumbent LECs presumably must

provide unbundled access to “all network elements for

which it is technically feasible to provide access on an

unbundled basis.” First Report and Order, ¢ 278. A find-

ing that it is technically feasible to unbundle a particular

element creates a presumption that the element must be

unbundled according to the FCC. See id., 4281; 47

C.F.R. § 51.317. Although we just upheld the Commis-

sion’s definition of the term “technically feasible, we

reject the Commission's use of this term to determine

what elements must be unbundled. As mentioned above,

subsection 251(c)(3) places a duty on incumbent LECs

to provide “access to network elements on an unbundled

basis at any technically feasible point.” By its very terms,

this provision only indicates where unbundled access may

occur, not which elements must be unbundled. Subsec-

tion 251(d)(2) establishes the standards to determine

which elements must be unbundled, and this subsection

makes no reference to technical feasibility. We think that

the FCC’s interpretation that an element for which un-

47a

bundling is technically feasible must presumably be un-

bundled is contrary to the plain meaning of the Act and

cannot stand. See Chevron, 467 U.S. at 842-43.”

d. The “Necessary” and “Impair” Standards

While subsection 251(d)(2) does not mention tech-

nical feasibility as a relevant factor in determining what

network elements should be unbundled, it does require

the Commission to consider whether access to a network

element that is proprietary in nature is “necessary” and

whether the failure to provide access to a network ele-

ment would “impair the ability of the telecommuncations

carrier seeking access to provide the services that it seeks

to offer.” 47 U.S.C.A. § 251(d)(2)(A), (B). The peti-

tioners argue that the FCC’s view of these standards is

so broad that it essentially reads these requirements out

of the statute. We disagree and believe the Commission

reasonably interpreted these standards.

Several petitioners assert that the FCC unreasonably

decided that the “necessary” and “impairment” standards

in subsection 251(d)(2) do not require an evaluation of

whether a requesting carrier could obtain the desired

elements from an alternative source. See First Report

and Order, 4 283. The petitioners believe that if a re-

questing carrier could obtain access to an element from a

source other than an incumbent LEC, then that element

is not “necessary,” nor would the incumbent LEC’s fail-

ure to provide access to such an element “impair” the

ability of the requesting carrier to provide telecommunica-

tions service. Despite the petitioners’ arguments to the

contrary, we think the FCC reasonably determined that

the “necessary” and “impairment” standards in subsection

251(d)(2) do not require an inquiry into whether a com-

8° We vacate only the portion of 47 C.F.R. § 51.317 and the por-

tions of paragraphs 278 and 281 of the FCC’s First Report and

Order that create the presumption that a network element must be

unbundled if it is technically feasible to do so.

48a

ther

peting carrier could obtain the element from ano

source. Subsection 251(c) (3) requires incumbent LBC

to provide competing carriers with fairly generous =

bundled access to their network elements in we he

expedite the arrival of competition in local — Z

makets. Allowing incumbent LECs to evade - a =

bundling duties whenever a network element cou we

tained elsewhere would eviscerate unbundled access

a means of entry and delay competition, because many

network elements could theoretically be duplicated even-

tually. The Act, however, provides for unbundled —

to incumbent LECs’ network elements as a way to ar p-

start competition in the local telecommunications indus-

try. Thus, we do not think the Commission erred in re-

jecting the proposal that an clement need not be dn:

bundled if a carrier could obtain access to it from ano

source.

i at the FCC’s actual interpretations of

Phy tmedins so “impairment” standards are reason-

able. Under subsection 251(d)(2)(A), the oe

determined that an element proprietary in nature wou

be “necessary” if a requesting carrier's ae

would be “significantly impaired or thwarted’ viregn dl it.

First Report and Order, 4282. The petitioners claim

that this articulation is too broad and that necessary

should be read narrowly to mean “indispensable m4

“absolutely required.” They also argue that the FC $

expansive interpretation will result in competing =

having such broad access to incumbent LECs networks

that the incentive to innovate will be drastically reduced.

We are not persuaded by the petitioners arguments.

ile i contexts the petitioners’ narrow defini-

on & soe may be accurate, courts have at times

interpreted this term more liberally to mean “convenient,

or useful.” See M’Culloch v. Maryland, 17 U.S. 316, 413

(1819). On one occasion the Supreme Court specifically

rejected reading the term “necessary” to mean “indispen-

49a

sable,” “essential,” or “vital” because such a reading

would have been too rigid for a word that should “be

harmonized with its context.” Armour & Co. v. Wantock,

323 U.S. 126, 129-30 (1944). In light of this Act’s pur-

pose of promoting competition in local telephone markets,

we believe that the FCC’s interpretation of “necessary” is

a reasonable one and entitled to deference. See Chevron,

467 U.S. at 84%. An overly strict reading of the word

“necessary,” as the petitioners propose, would unduly re-

strict the unbundling duty of incumbent LECs and hinder

the development of competition in the local telecommuni-

cations industry. Although the Commission’s definition

is broader than the petitioners’, it is not toothless. A

requesting carrier must demonstrate that without access

to a particular proprietary element its ability to compete

would be “significantly impaired or thwarted.” First

Report and Order. 4 282. Moreover, under the Commis-

sions rules, an incumbent LEC will not be forced to pro-

vide unbundled access to a proprietary network element

if the requesting carrier could offer the same service

through the use of the incumbent LEC’s nonproprietary

network elements.” See 47 C.F.R. § 51.317(b). These

5! The Commission's use of the word “impaired” in defining what

proprietary elements are necessary does not inappropriately con-

flate the “necessary” standard of subsection 251(d)(2)(A), appli-

cable to proprietary elements, with the “impairment” standard of

subsection 251(d)(2)(B), applicable to network elements in gen-

eral, The requirement that a new entrant must demonstrate that

its “ability to compete would be significantly impaired or thwarted”

without access to proprietary elements, First Report and Order,

282 (emphasis added), is a higher standard to meet than the

FCC’s standard for nonproprietary elements, which merely requires

a showing that denial of unbundled access to such elements would

decrease the quality or increase the cost of the service sought to be

offered by the requesting carrier, See First Report and Order,

" 285.

% This limitation on a requesting carrier’s ability to gain un-

bundled access to an incumbent LEC’s proprietary elements also

serves to distinguish the “necessary” standard from the impair-

ment standard as discussed in the previous footnote.

50a

restrictions on the FCC’s definition of “necessary” also

persuade us that innovations will continue to occur under

the FCC’s rules. We agree with the Commission's belief

that the procompetitive effects of unbundling under the

Commission’s rules could spur enough innovation to off-

set any potential reduction in innovation that the un-

bundling standard might cause. Consequently, we uphold

the FCC’s interpretation of the “necessary” standard.

For similar reasons we also uphold the Commission’s

articulation of the “impairment” standard under subsec-

tion 251(d)(2)(B). The Commission determined that

a requesting carrier’s ability to provide a particular serv-

ice will be impaired “if the quality of the service the

entrant can offer, absent access to the requested element,

declines and/or the cost of providing the service rises.

First Report and Order, § 285. The petitioners offer a

more restrictive definition that would require competing

carriers to demonstrate that their technical capability to

provide a service would be diminished without unbundled

access to a particular element. While the petitioners

alternative may be plausible, dictionaries consistently de-

fine the word “impair” to mean “to make worse” or “to

diminish in . . . value.” See, e.g., Webster's Third New

International Dictionary 1131 (1986); Webster's New

World Dictionary 703 (2d ed. 1970). If the quality of

the service declines or the cost of providing the service

rises as a result of a requesting carrier’s inability to gain

access to a network element, then the requesting carrier's

ability to provide the service has been made worse. The

FCC’s interpretation of the “impairment” standard is rea-

sonable, and we give it deference. See Chevron, 467 U.S.

44.

_ e. Superior Quality-Rules 51.305(a) (4),

51.311 (c)

Another source of disagreement between the petition-

ers and the FCC arises over the Agency’s decision to re-

quire incumbent LECs to provide interconnection, un-

Sla

bundled network elements, and access to such elements at

levels of quality that are superior to those levels at which

the incumbent LECs provide these services to themselves,

if requested to do so by competing carriers. See 47 C.F.R.

§§ 51.305(a)(4), 51.311(c). Here, we believe that the

FCC violated the plain terms of the Act when it issued

these rules.

Subsection 251(c)(2)(C) ‘requires incumbent LECs to

provide interconnection “that is at least equal in quality

to that provided by the local exchange carrier to itself.

..” Plainly, the Act does not require incuribent LECs

to provide its competitors with superior quality intercon-

nection. Likewise, subsection 251(c)(3) does not man-

date that requesting carriers receive superior quality ac-

cess to network elements upon demand. The FCC argues

that the terms “at least equal in quality” permit the pro-

vision of superior quality interconnection; it believes that

the nondiscrimination requirements in both subsections

251(c)(2) and 251(c)(3) require incumbent LECs to

provide superior quality interconnection and network ele-

ments when requested; and it asserts that the provision

of superior quality interconnection and network elements

will not unduly burden the incumbent LECs, because the

requesting carriers will have to pay for these services. We

are not convinced by the Commission’s justifications for

these rules.

While the phrase “at least equal in quality” leaves open

the possibility that incumbent LECs may agree to provide

interconnection that is superior in quality when the Parties

are negotiating agreements under the Act, this phrase man-

dates only that the quality be equal—not superior. In

other words, it establishes a floor below which the quality

of the interconnection may not go. Because the Commis-

sion’s rule requires superior quality interconnection when

requested, see 47 C.F.R. § 51.305(a)(4), the rule is not

supported by the Act’s language. We also agree with the

petitioners’ view that subsection 251(c) (3) implicitly re-

52a

quires unbundled access only to an incumbent LEC’s

existing network—not to a yet unbuilt superior one. Ad-

ditionally, the nondiscrimination requirements contained

in these subsections of the Act do not justify these FCC

rules. The fact that interconnection and unbundled ac-

cess must be provided on rates, terms, and conditions that

are nondiscriminatory merely prevents an incumbent LEC

from arbitrarily treating some of its competing carriers

differently than others; it does not mandate that incum-

bent LECs cater to every desire of every requesting

carrier. Finally, the fact that incumbent LECs may be

compensated for the additional cost involved in providing

superior quality interconnection and unbundled access

does not alter the plain meaning of the statute, which, as

we have shown, does not impose such a burden on the

incumbent LECs. Therefore, we conclude that sections

51.305(a)(4) and 51.311(c) cannot stand in light of the

plain terms of the Act.”

f. Combination of Network Elements

We also believe that the FCC’s rule requiring incum-

bent LECs, rather than the requesting carriers, to recom-

bine network elements that are purchased by the request-

ing carriers on an unbundled basis, 47 C.F.R. § 51.315

(c)-(f), cannot be squared with the terms of subsection

251(c)(3). The last sentence of subsection 251(c) (3)

reads, “An incumbent local exchange carrier shall pro-

vide such unbundled network elements in a manner that

allows requesting carriers to combine such elements in

33 Although we strike down the Commission’s rules requiring in-

cumbent LECs to alter substantially their networks in order to

provide superior quality interconnection and unbundled access, we

endorse the Commission’s statement that “the obligations imposed

by sections 251(c)(2) and 251(c)(3) include modifications to in-

cumbent LEC facilities to the extent necessary to accommodate

interconnection or access to network elements.” First Report and

Order, 198. The petitioners themselves appear to acknowledge

that the Act requires some modification of their facilities. (See

Reply Br. of Regional Bell Companies and GTE at 40.)

53a

order to provide such telecommunications service.” 47

U.S.C.A. § 251(c)(3) (emphasis added). This sentence

unambiguously indicates that requesting carriers will com-

bine the unbundled elements themselves. While the Act

requires incumbent LECs to provide elements in a man-

ner that enables the competing carriers to combine them,

unlike the Commission, we do not believe that this lan-

guage can be read to levy a duty on the incumbent LECs

to do the actual combining of elements. The FCC and its

Supporting intervenors argue that be ause the incumbent

LECs maintain control over their networks it is necessary

to force them to combine the network elements, and they

believe that the incumbent LECs would prefer to do the

combining themselves to prevent the competing carriers

from interfering with their networks. Despite the Com-

mission’ arguments, the plain meaning of the Act indi-

cates that the requesting carriers will combine the un-

bundled elements themselves; the Act does not require

the incumbent LECs to do ail of the work. Moreover,

the fact that the incumbent LECs object to this rule indi-

cates to us that they would rather allow entrants access

to their networks than have to rebundle the unbundled

elements for them. Consequently, we vacate rule 51.315

(c)-(f) as well as the affiliated discussion sections.

g. Obtaining Finished Services Throu :

bundled Access alien

The petitioners next engage in a broad-based

the bulk of the FCC’s paeadiien rules by cele hat

the Commission’s conclusion that the requesting carriers

rad obtain the were 4 provide finished telecommunica-

services entirely by uiring access -

bundled elements of an hesmbuih’ Liat Ale -

lates the terms and structure of the Act. See First Report

and Order, 4 328-341 (stating the Commission’s posi-

tion). The petitioners contend that while subsection

251(c)(3) allows new entrants access to an incumbent

LEC’s network elements on an unbundled basis, it does

54a

not enable new entrants to provide telecommunications

services to the public entirely by acquiring all of the nec-

essary elements on an unbundled basis from an incum-

bent LEC. The petitioners assert that a competing carrier

should own or control some of its own local exchange

facilities before it can purchase and use unbundled ele-

ments from an incumbent LEC to provide a telecommu-

nications service. The petitioners argue that subsection

251(c)(4) makes resale the exclusive means to offer

finished telecommunications services for competing car-

riers that do not own or control any portion of a tele-

communications network. Furthermore, the petitioners

point out that under subsection 251(c)(4) a competing

carrier may purchase the right to resell a telecommunica-

tions service from an incumbent LEC only at wholesale

rates. Under subsection 252(d)(1), however, a compet-

ing carrier may obtain unbundled access to an incumbent

LEC’s network elements at a less expensive cost-based

rate. The petitioners then argue that by allowing a com-

peting carrier to obtain the ability to provide finished

telecommunications services entirely through unbundled

access at the less expensive cost-based rate, the FCC

enables competing carriers to circumvent the more expen-

sive wholesale rates that the Act requires for telecommu-

nications services, and thereby nullifies the terms of sub-

section 251(c)(4). Additionally, the petitioners claim

that by being able to obtain the ability to provide services

at cost under subsection 251(c)(3), competing carriers

will be able to capture many of the incumbent LEC’s

customers to whom the incumbent LECs are expected to

charge high prices for certain services to offset the low

prices incumbent LECs are required to charge other cus-

tomers in order to promote universal service. The peti-

tioners claim that the competing carriers will simply offer

the same services to these particular customers at lower

rates and capture a significant share of the market

(“cherry-picking”) without achieving any true gain in

efficiency or technology. Finally, the petitioners contend

55a

that the FCC’s view of subsection 251(c)(3) allows car-

riers to circumvent the Act’s restriction on joint market-

ing of local and long-distance services contained in sub-

section 271(e)(1). This is because subsection 271 (e) (1)

prohibits a carrier’s joint marketing only of local service

obtained under subsection 251(c)(4) (resale) with the

carrier's ability to provide long-distance service. 47

US.C.A. § 271(e)(1). It does not apply to local service

that a competing carrier achieves under subsection

251(c)(3) (unbundled access). Despite the petitioners’

extensive arguments to the contrary, we believe that the

FCC’s determination that a competing carrier may obtain

the ability to provide telecommunications services entirely

through an incumbent LEC’s unbundled network elements

is reasonable, especially in light of our decisions regarding

the validity of other specific FCC rules.

Initially, we believe that the plain language of subsec-

tion 251(c)(3) indicates that a requesting carrier may

achieve the capability to provide telecommunications ser-

vices completely through access to the unbundled ele-

ments of an incumbent LEC’s network. Nothing in this

subsection requires a competing carrier to own or con-

trol some portion of a telecommunications network before

being able to purchase unbundled elements. To the con-

trary, this subsection imposes a duty on incumbent LECs

to provide unbundled access “to any requesting telecom-

munications carrier for the provision of a telecommunica-

tions service.” 47 U.S.C.A. § 251(c)(3) (emphasis

added). The petitioners contend that the terms of subsec-

tion 251(c)(3) only allow a requesting carrier access to

unbundled elements and that a carrier who obtains an

entire network is getting more than elements on an un-

bundled basis. The additional terms of this subsection,

however, expressly contemplate that competing carriers

will use these elements to provide finished services. The

last sentence of this subsection reads, “An incumbent

local exchange carrier shall provide such unbundled net-

work elements in a manner that allows requesting carriers

56a

to combine such elements in order to provide such tele-

communications service.” Id. Our previous ruling finding

that this language does not require an incumbent LEC

to combine the elements for a requesting carrier estab-

lishes that requesting carriers will in fact be receiving

the elements on an unbundled basis. We now decide

merely that under subsection 251(c)(3) a requesting car-

rier is entitled to gain access to all of the unbundled ele-

ments that, when combined by the requesting carrier, are

sufficient to enable the requesting carrier to provide tele-

communications services.

We do not believe that this interpretation of subsection

251(c)(3) will cause all requesting carriers to select un-

bundled access over resale as their preferred route to enter

the local telecommunications market. Although a com-

peting carrier may obtain the capability of providing local

telephone service at cost-based rates under unbundled

access as opposed to wholesale rates under resale, un-

bundled access has several disadvantages that preserve

resale as a meaningful alternative. Carriers entering the

local telecommunications markets by purchasing unbun-

dled network elements face greater risks than those car-

riers that resell an incumbent LEC’s services. A reseller

can more easily match its supply with its demand because

it can purchase telephone services from incumbent LECs

on a unit-by-unit basis. Consequently, a reseller is able to

purchase only as many services (or as much thereof) as

it needs to satisfy its customer demand. Again provid-

ing services through unbundled access, however, must

make an up-front investment that is large enough to pay

for the cost of acquiring access to all of the unbundled

elements of an incumbent LEC’s network that are neces-

sary to provide local telecommunications services without

knowing whether consumer demand will be sufficient to

cover such expenditures. Moreover, our decision requiring

the requesting carriers to combine the elements themselves

increases the costs and risks associated with unbundled

57a

access as a method of entering the local telecommunica-

tions industry and simultaneously makes resale a distinct

and attractive option. With resale, a competing carrier

can avoid expending valuable time and resources recom-

bining unbundled network elements.

Given the disadvantages of completely relying on un-

bundled access as a means to provide local telecommuni-

cations services, we believe that many new entrant carriers

will choose to resell such services under subsection

251(c)(4). Consequently, we do not believe that incum-

bent LECs will lose all of the customers to whom they

charge higher prices in order to fulfill their current uni-

versal service obligations. The increased risk and the

additional cost of recombining the unbundled elements will

hinder the ability of competing carriers to undercut these

prices and lure these customers away from the incumbent

LECs."* Nor do we believe that subsection 271(¢)(1)’s

limitation on the joint marketing of local services with

long-distance services will be meaningless. Given the

downsides of entering the local telecommunications market

through unbundled access, we agree with the Commission's

conclusion that some long-distance carriers will choose to

enter local exchange markets through the resale provisions,

subject to the joint marketing restriction, rather than

assume the risks and burdens associated with unbundled

access. We conclude that the Commission's belief that

competing carriers may obtain the ability to provide fin-

Y To the extent that some incumbent LEC customers decide to

switch to competing carriers, we believe this result is entirely con-

sistent with the Act’s purpose to promote competition in local

phone markets. Additionally, section 254 of the Act, entitled “Uni-

versal Service,” reveals Congress’s intent to overhaul the current

system of support for universal service, which is based on the in-

cumbent LECs’ supracompetitive prices for certain service. See

47 U.S.C.A. § 254. In fact, the FCC has recently issued its plan

to reform the universal service support system. See Report and

Order, Federal-State Joint Board on Universal Service. CC Docket

No. 96-45 (May 8, 1997). '

58a

ished telecommunications services entirely through the

unbundled access provisions in subsection 251(c)(3) is

consistent with the plain meaning and structure of the Act.

2. The Unbundling Rules and the Purpose of the

Act

Several of the petitioners vi.zuely argue that the FCC's

unbundling rules in combination provide competing car-

riers with such extensive access to the incumbent LEC’s

networks that they will thwart the Act’s principal purpose,

which, according to the petitioners, is to promote facilities-

based competition and innovation in telecommunications

technology. The petitioners claim that under these rules,

competing carriers will have no incentive to construct

their own facilities because they will be able to earn

substantial profits by relying entirely on the incumbent

LECs’ networks to provide services to their customers.

They also assert that neither the competing carriers nor

the incumbent LECs will attempt to innovate their tech-

nology because the Commission’s supposedly broad un-

bundling rules force a carrier to share such advances in

technology with its competitors. We reject these claims

and believe that the Commission’s rules that we have

found to be consistent with the terms of the Act are also

consistent with the purpose of the Act.

Initially we note that the petitioners’ arguments are

generally based on the assumption that the FCC’s unbun-

dling rules would operate in conjunction with the Commis-

sion’s proposed pricing rules. The petitioners have argued

that the Commission's pricing rules would result in rates

that are unreasonably low, making it inexpensive and thus

highly profitable for competing carriers to provide local

telecommunications services exclusively through the use of

an incumbent LEC’s network. In these circumstances, the

petitioners argue, competing carriers would have no incen-

tive to build their own network facilities. We have, how-

ever, vacated the FCC’s pricing rules and determined that

59a

the Act requires state commissions to set the rates that

competing carriers must pay for access to incumbent

LECs’ networks. Since we do not know what the state-

access to incumbent LECs’ networks and have no incen-

tive to build their own is merely speculative at best.”

Even if the states establish “inexpensive” rates, we do

not think that the Commission’s unbundling rules would

violate the Act’s purpose, because, after study, we do not

believe that the Act’s exclusive goal is facilities-based com-

petition. While Congress may have envisioned facilities-

based competition in local telephone markets to occur

down the road, Congress clearly included measures in the

Act, such as the interconnection, unbundled access, and

resale provisions, in order to expedite the introduction of

pervasive competition into the local telecommunications

industry. See H.R. Rep. No. 104-204, 1995 WL 442504

at *202-03, 494 (1995) (explaining importance of resale

provision for the early development of competition and

rane Cet Co lenel competion penetstons “essate the

transi to a more competitive gw *

recognized Aad rgrem mye y-heapenr poo ated bees

involved in the construction of a complete local stand-

beside telecommunications network are substantial barriers

to entry, and thus required incumbent LECs to allow com-

peting carriers to use their networks in order to hasten

the influence of competitive forces in the local

business. The Commission’s unbundling rules facilitate the

competing carriers’ access to these networks and thus pro-

mote the Act's additional purpose—the expeditious intro-

duction of competition into local phone markets.

%° We recognize that the Act requires interconnection and net-

work element charges to be based on cost, but we note that the Act

also indicates that these rates “may include a reasonable profit”

for the incumbent LECs. 47 U.S.C.A. § 252(d) (1).

60a

At the same time, we do not believe that the unbundling

rules will hinder the development of facilities-based com-

petition or impede innovation in telecommunications. Ini-

tially, we note that we have already vacated, on alternative

grounds, several of the unbundling rules that the petition-

ers claim violate the purpose of the Act. See 47 C.F.R.

$$ 51.305(a)(4) (interconnection superior in quality),

51.311(c) (network elements superior in quality), 51.315

(combination duty on incumbent LECs). Consequently,

the degree and ease of access that competing carriers may

have to incumbent LECs’ networks is not as extensive as

envisioned by the petitioners and far less than the amount

of control that a carrier would have over its own network.

We have upheld the remaining unbundling rules as reason-

able constructions of the Act, because, as we have shown,

the Act itself calls for the rapid introduction of competi-

tion into local phone markets by requiring incumbent

LECs to make their networks available to their competing

carriers. Even in light of the unbundling rules, we believe

that competing carriers will continue to have incentives

to build their own networks. Once a new entrant has

established itself and acquired a sufficient customer base

to justify investments in its own facilities, a carrier that

develops its own network gains independence from incum-

bent LECs and has more flexibility to modify its network

elements to offer innovative services. Additionally, as we

stated earlier, we believe that the competitive environment

that these unbundling rules create will result in more

technological innovation than what occurs in the current

monopolistic local telecommunications markets. We be-

lieve that the increased incentive to innovate resulting

from the need of a carrier to differentiate its services and

products from its competitors’ in a competitive market will

override any theoretical decreased incentive to innovate

resulting from the duty of a carrier to allow its competi-

tors access to its network elements. We thus conclude

that the Commission’s unbundling rules do not subvert the

Act’s purposes.

6la

3. The Unbundling Rules in Light of the Intellectual

Property Rights of Third Parties

Several petitioners claim that the FCC’s unbundling

rules as a whole infringe on the intellectual property rights

of third parties * who license their technology to incum-

bent LECs for use in the LECs’ networks. In particular,

the petitioners claims that by allowing requesting carriers

“exclusive use” of an incumbent LEC’s unbundled net-

work element for a limited period of, time, see id.,

§ 51.309, the FCC’s rules could potentially result in viola-

tions of license agreements between incumbent LECs and

third party manufacturers of software and other telecom-

munications technology. Additionally, the petitioners

argue that such a result would constitute a taking of the

third party’s intellectual property without just compensa-

tion in violation of the Fifth Amendment. While we are

skeptical of the merits of such claims,”’ we believe that the

speculative nature of these arguments indicates that neither

the intervenor nor the petitioners presently have standing

to raise these claims.

In order to have standing to bring a claim, a party must,

among other things, have suffered an injury in fact which

the Supreme Court describes as “an invasion of a legally

protected interest which is (a) concrete and particular-

ized, and (b) actual or imminent, not conjectural or hypo-

thetical.” Lujan v. Defenders of Wildlife, 504 U.S. 555,

560 (1992) (internal quotations, citations, and footnote

omitted). With respect to this claim, neither the inter-

venor nor the petitioners have demonstrated that the

FCC’s unbundling rules will, in fact, enable requesting

36 One group of such third parties, the Ad Hoc Coalition of Tele-

communications Manufacturing Companies, asserts this claim on its

own behalf as an intervenor in this case.

We note that the Act itself expressly contemplates that re-

questing carriers will have access to network elements that are

proprietary in nature. 47 U.S.C.A. § 261(d) (2) (A).

62a

carriers to have direct access to the copyrights, patents,

or trade secrets of these manufacturers. Presently, we do

not have before us the specific unbundling duties con-

tained in a particular negotiated agreement or a state

arbitration decision that would be necessary to be able to

determine if such infringements or takings were immi-

nently likely to occur. Instead, we merely have the

hypotheses of the intervenor and the petitioners, but

“falssertions of potential future injury do not satisfy the

injury in fact test.” Sierra Club v. Robertson, 28 F.3d

753, 758 (8th Cir. 1994).

Moreover, to the extent that the petitioners seek to

assert the rights of other copyright, patent, or trade secret

owners, we do not believe that the circumstances of this

case warrant an exception to the general rule that prevents

“litigants from asserting the rights or legal interests of

others in order to obtain relief from injury to themselves.”

Oehrleins v. Hennepin County, 1997 WL 304451, at *3

(8th Cir. June 9, 1997) (quoting Warth v. Seldin, 422

U.S. 490, 509 (1975)). Before a litigant will be allowed

to assert a claim on behalf of a third party, the litigant

must show, among other things, that the third party is un-

able to protect its own interests. See Powers v. Ohio,

499 U.S. 400, 411 (1991); United States v. Metropolitan

St. Louis Sewer Dist., 952 F.2d 1040, 1043 (8th Cir.

1992). The petitioners have not claimed, nor do we have

reason to believe, that these third-party manufacturers of

telecommunications technology are or will be unable to

protect their intellectual property or constitutional rights.

Thus, we conclude that the petitioners do not presently

have standing to raise these claims.

4. The Unbundling Rules in Light of the Fifth

Amendment's Takings Clause

The petitioners’ final attack on the Commission’s un-

bundling rules is their argument that the rules in generc!

provide competing carriers with such extensive access and

63a

use of the incumbent LECs’ networks that they effect un-

constitutional takings of the incumbent LECs’ property.

The petitioners then argue that we should reject the FCC’s

overly broad interpretation of the Act’s unbundling duties

in order to avoid such constitutional infirmities.

Once again, we note that we have already vacated sev-

eral of the unbundling rules that constitute a significant

portion of this particular complaint. Thus, we are skep-

tical that the remaining FCC unbundling rules will effect

an actual taking. Nevertheless, because many of the rate-

making procedures have been held in abeyance in antici-

pation of our decision and given the fact that we have

vacated many of the FCC’s pricing rules in this opinion,

we cannot, as of yet, determine whether the incumbent

LECs are receiving or will receive just compensation for

providing competing carriers with access to their networks.

Therefore, we believe that this claim in not ripe for re-

view. When a state or the federal government provides an

adequate procedure for obtaining compensation, a tak-

ings claim is not ripe for review until the litigant has used

the procedure and has been denied just compensation.

See Williamson County Reg'l Planning Comm'n v. Ham-

ilton Bank, 473 U.S. 172, 195 (1985); McKenzie v. City

of White Hall, 112 F.3d 313, 317 (8th Cir. 1997). Un-

der the Act, if an incumbent LEC and a requesting car-

rier fail to negotiate the rates for unbundled access on

their own, a state commission will determine the amount

of compensation that the requesting carrier must pay to

the incumbent LEC for such access in an arbitration pro-

ceeding. See 47 U.S.C.A. § 252(c)(2). Because the

petitioners have not demonstrated that they have par-

ticipated in such state arbitration proceedings and have

been denied just compensation, we find that their takings

claim is not ripe for review. We note that such a claim

could be presented to a federal district court under the

review provisions of subsection 252(e) (6).

64a

Having found that the takings claim on its merits is not

ripe, there is no justification for withholding the traditional

deference that we afford to reasonable agency interpreta-

tions of statutes. See Chevron, 467 U.S. at 844. Conse-

quently, we stand by our earlier determinations upholding

several of the Commission’s unbundling rules in light of

the Act’s terms, and we also find that the Commission's

rules and policies regarding the incumbent LECs’ duty to

provide for physical collocation of equipment to be con-

sistent with the Act’s terms contained in subsection 251

(c)(6). See 47 C.F.R. § 51.323(f); First Report and

Order, 4 585 (requiring, among other things, incumbent

LECs to take account of projected demand for collocation

of equipment when planning renovations or new con-

structions) .**

H. The Scope of Incumbent LECs’ Resale Obligations-

Rule 51.613

One petitioner objects to the FCC’s determination that

discounted and promotional offerings are “telecommuni-

cation service[s]” that are subject to the resale require-

ment of subsection 251(c)(4) and that promotional prices

lasting more than 90 days qualify as “retail rates,” subject

to a wholesale discount. See 47 C.F.R. § 51.613(a)(2);

First Report and Order, 44 948-50. The petitioner claims

that the FCC’s pronouncements violate the terms of the

Act because subsection 251(c)(4) requires only “tele-

communications service[s]” to be offered for resale, and

the petitioner asserts that promotional and discount pro-

grams are not “telecommunications service[s]” but rather

mere marketing tools. The petitioner also points out that

the Act requires only telecommunications services that

38 In sum, we uphold all of the Commission’s unbundling regula-

tions except for rules 51.305(a) (4), 51.311(c), 51.315(c)-(f), and

51.317, 1 278, 281 (only to the extent that these provisions create

a presumption that a network element must be unbundled if it is

technically feasible to do so) ; we vacate these listed provisions,

65a

are offered at retail rates to be offered for resale and

argues that by definition, promotional offerings are not

offered at retail rates and thus should not be subject to

the resale obligation. Finally, the petitioner contends that

the FCC’s determination that promotional prices that

last more than 90 days qualify as “retail rates” but those

that last 90 days or less are not “retail rates” is arbitrary

and capricious and beyond the Commission’s jurisdiction.

Despite the petitioner’s arguments to the contrary, we

believe that the FCC has jurisdiction to issue these par-

ticular rules and that its determinations are reasonable

interpretations of the Act. Although we have already held

that the Commission does not have jurisdiction to issue

rules governing the specific rate determinations for the

local competition provisions of the Act, which include

the resale obligation under subsection 251(c)(4), we have

recognized that subsection 251(c)(4)(B) authorizes the

Commission to issue regulations regarding the incumbent

LECs’ duty not to prohibit, or impose unreasonable limi-

tations on, the resale of telecommunications services. See

supra note 10 and accompanying text. While we vacated

the Commission’s pricing rules that dictated the specific

methodology for state commissions to use in determining

the actual wholesale rates, see 47 C.F.R. §§ 51.601-

51.611, the FCC’s determination in section 51.613 merely

defines the overall scope of the incumbent LECs’ resale

obligation by indicating that telecommunications services

offered at special promotional rates that last for more than

90 days will be subject to resale at a wholesale discount.

This rule is a valid exercise of the Commission’s authority

under subsection 251(c)(4)(B) because it restricts the

ability of incumbent LECs to circumvent their resale ob-

ligations under the Act simply by offering their services to

their subscribers at perpetual “promotional” rates. More-

over, the Commission’s determination that promotional

rates that are effective for more than 90 days qualify

as “retail rates” is a reasonable interpretation of the

66a

Act’s terms and was not made arbitrarily or caprici-

ously. The Commission evaluated the option of draw-

ing the line at 120 days but rationally decided that “ex-

cluding promotions that are offered for as long as four

months may unreasonably hamper the efforts of new com-

petitors that seek to enter local markets through resale.”

First Report and Order, € 950. Additionally, the Com-

mission's inclusion of promotional rates that endure beyond

90 days in the category of “retail rates” deserves our def-

erence, because the Act does not define the term “retail

rates.” See Chevron, 467 U.S. at 843-44 (requiring con-

trolling weight to be given to agency regulations that fill

gaps left by Congress). Finally, we find that the peti-

tioner’s argument that promotional programs are not

“telecommunications service[s]” but rather marketing tools

misses the point. The fact remains that the subject matters

underlying the promotional programs and the promotional

rates are telecommunications services which the FCC rea-

sonably concluded must be made available for resale. We

thus "phold section 51.613 as a valid regulation.

III. Conclusion

We decline the petitioners’ request to vacate the FCC’s

entire First Report and Order and limit our rejection of

FCC rules only to those that we have specifically over-

turned in this opinion.*® We believe that the provisions

of the Commission’s First Report and Order are severable

39 In total, we vacate the following provisions; 47 C.F.R. §§ 51.303,

51.305(a) (4), 51.311(c), 51.315(c)-(f), 51.317 (vacated only to the

extent this rule establishes a presumption that a network element

must be unbundled if it is technically feasible to do so), 51.405,

51.501-51.515 (inclusive, except for 51.515(t)), 51.601-51.611 (in-

clusive), 51.701-51.717 (inclusive, except for 651.701, 651.703,

51.709(b), 51.711(a) (1), 51.715(d), and 51.717, but only as they

apply to CMRS providers), 51.809; First Report and Order, {ff 101-

103, 121-128, 180. We also vacate the proxy range for line ports

used in the delivery of basic residential and business exchange ser-

vices established in the FCC’s Order on Reconsideration, date Sep-

tember 27, 1996.

67a

and that the Commission intended them to be so. See

Davis County Solid Waste Mgmt. v. EPA, 108 F.3d 1454,

1459 (D.C. Cir. 1997) (severability depends on issuing

agency’s intent).

As an aside, and while we do not pretend to possess the

Rosetta stone that reveals the true meaning of every por-

tion of this Act, we hope that our review of the FCC’s

First Report and Order in light of the Act's provisions

offers some guidance to the participants in the telecom-

munications industry as they continue its evolution into

the competitive marketplace Congress intended.

Upon the filing of this opinion and order, the provisions

of our stay order are deemed expired.

The pending motion of the intervenors in support of the

FCC to strike a claim allegedly raised for the first time

in the reply brief of the Regional Bell Companies and

GTE or, in the alternative, for leave to file a surreply is

denied as moot because we did not adopt the argument

advanced.

A true copy.

Attest:

Clerk, U.S. Court of Appeals, Eighth Circuit.

68a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Nos. 96-3321/3406/3410/3414/3416/3418/3424

96-3430/ 3436/3444, 3450/3453 / 3460, 3507

96-3519/3520,/3603 / 3604/3608, 3696/3708

96-3709,/3756/3901/3906/3982

Iowa Utiitres Boarp, et al,

‘ Petitioners,

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents.

Petitions for Review of an Order of the

Federal Communications Commission

Petitioners’ motions for immediate issuance of the man-

date are granted, and the clerk of the court is directed to

issue the court's mandate forthwith.

The motions to enforce the court’s mandate are being

treated separately from the motions to issue the mandate.

The motions to enforce the mandate remain under active

consideration and disposition.

October 14, 1997

Order entered at the direction of the Court:

Michael E. Gans

Clerk

U.S. Court of Appeals

Eighth Circuit

69a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Nos. 96-3321/3406/3410/3414/3416/3418/3424

96-3430/3436/3444/3450/3453/3460/3507

96-3519/3520/3603 /3604/3608/3696/3708

96-3709/3756/3901 /3906/3982

Iowa UTILITIES BoarD, et al,

’. Petitioners,

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents.

Petitions for Review of an Order of the

Federal Communications Commission

Filed: October 14, 1997

Before BOWMAN, WOLLMAN, and HANSEN. Circuit

Judges.

Order on Petitions for Rehearing

(as amended on October 23, 1997)

1. The petitions for rehearing filed by AT&T -

tion, MCI Tolssenebesiontioat rota berg oe

Carriers Telecommunications Association, Cable & Wire-

less, WorldCom, Inc., Competitive Telecommunications

Association, Sprint Corporation, Telecommunications Re-

70a

sellers Association, Frontier Corporation, Competition

Policy Institute, Association for Local Telecommunication

Services, Winstar Communications, Inc., Nextlink Com-

munications, LLC, US One Communications, ICG Tele-

com Group, Inc., ACSI, and the National Cable Televi-

sion Association, Inc. are denied. The petitions for re-

hearing filed by GTE Entities, SBC Communications Inc.,

BellSouth Corporation, US WEST, Inc., Bell Atlantic

Corporation, the Mid-Sized LECs, and Ameritech Cor-

poration are granted.

2. Upon rehearing the Court strikes Part I1(G)(1)(f)

of the opinion issued July 18, 1997, reported at 120 F.3d

753, 813 (8th Cir. 1997), and substitutes in lieu thereof

the following Part II(G) (1) (f):

“f Combination of Network Elements

We also believe that the FCC’s rule requiring incum-

bent LECs, rather than the requesting carriers, to recom-

bine network elements that are purchased by the request-

ing carriers on an unbundled basis, 47 C.F.R. § 51.315

(c)-(f), cannot be squared with the terms of subsection

251(c)(3). The last sentence of subsection 251(c)(3)

reads, “An incumbent local exchange carrier shall provide

such unbundled network elements in a manner that allows

requesting carriers to combine such elements in order to

provide such telecommunications service.” 47 U.S.C.A.

§ 251(c)(3) (emphasis added). This sentence unam-

biguously indicates that requesting carriers will combine

the unbundled elements themselves. While the Act re-

quires incumbent LECs to provide elements in a manner

that enables the competing carriers to combine them, un-

like the Commission, we do not believe that this language

can be read to levy a duty on the incumbent LECs to do

the actual combining of elements. The FCC and its sup-

porting intervenors argue that because the incumbent

LECs maintain control over their networks it is necessary

Tila

to force them to combine the network elements, and they

believe that the incumbent LECs would prefer to do the

combining themselves to prevent the competing carriers

from interfering with their networks. Despite the Com-

mission's arguments, the plain meaning of the Act indi-

cates that the requesting carriers will combine the un-

bundled elements themselves; the Act does not require the

incumbent LECs to do all of the work. Moreover, the

fact that the incumbent LECs object to this rule indicates

to us that they would rather allow entrants access to their

networks than have to rebundle the unbundled elements

for them.

; Section 251(c)(3) requires an incumbent LEC to pro-

vide access to the elements of its network only on an un-

bundled (as opposed to a combined) basis. Stated

another way, § 251(c)(3) does not permit a new entrant

to purchase the incumbent LEC’s assembled platform(s)

of combined network elements (or any lesser existing com-

bination of two or more elements) in order to offer com-

petitive telecommunications services. To permit such an

acquisition of already combined elements at cost based

rates for unbundled access would obliterate the careful

distinctions Congress has drawn in subsections 251 (c) (3)

and (4) between access to unbundled network elements

on the one hand and the purchase at wholesale rates of

an incumbent’s telecommunications retail services for re-

sale on the other. Accordingly, the Commission’s rule, 47

C.F.R. § 51.315(b), which prohibits an incumbent LEC

from Separating network elements that it may currently

combine, is contrary to § 251(c)(3) because the rule

would permit the new entrant access to the incumbent

LEC’s network elements on a bundled rath

bundled basis. rather than an un-

Consequently, we vacate rule 51.315(b)-(f ‘el

the affiliated discussion sections.” dorebescetean

72a

3. Footnotes 38 and 39 of the opinion filed July 18,

1997, are amended as follows: The citations to rule

51.315(c)-(f) are amended to read “§1.315(b)-(f).

Order Entered at the Direction of the Court:

s/ Michael E. Gans

Clerk

U.S. Court of Appeals

Eighth Circuit.

73a

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 96-3519

THE PEOPLE OF THE STATE OF CALIFORNIA; THE PUBLIC

UTILITIES COMMISSION OF THE STATE OF CALIFORNIA,

Petitioners,

BELL ATLANTIC CORPORATION; BELLSOUTH CORPORA-

TION; PaciFic TeLesis Group; SBC COMMUNICATIONS,

INC.; MARYLAND PuBLic Service Commission; US

West, INc.; US TELEPHONE ASSOCIATION; ARKANSAS

PuBLic Service COMMISSION; ALLTEL TELEPHONE

SERVICES CORPORATION; AMERITECT CORPORATION;

OREGON PuBLic Utitiry CoMMISSION; NoRTH STATE

TELEPHONE COMPANY; WESTERN ALLIANCE; INDE-

PENDENT TELEPHONE AND TELECOMMUNICATIONS AL-

LIANCE; ROSEVILLE TELEPHONE COMPANY; CONCORD

TELEPHONE COMPANY; Rock HiLt TELEPHONE Com-

PANY; PusBLic UTiLitres COMMISSION OF THE STATE

OF HAWAl; AMERICAN PuBLIC COMMUNICATIONS

CounciL, Inc.; ICG Tetecom Group, INc.; MINNE-

SOTA PuBLic UTILITIES COMMISSION; SOUTHERN NEw

ENGLAND TELEPHONE COMPANY; THE Ap Hoc Coat-

TION OF TELECOMMUNICATIONS MANUFACTURING

COMPANIES; PaciFic TELECOM, INC.; MINNESOTA

INDEPENDENT COALITION; KENTUCKY PUBLIC SERVICE

COMMISSION; KANSAS CORPORATION COMMISSION: PuR-

Lic SERVICE COMMISSION OF THE STATE OF WYOMING:

Ruope IsLAND PuBLic UTiLities CoMMISSsION; PUBLIC

SERVICE COMMISSION OF WISCONSIN; STATE OF TEXAS:

74a

ALABAMA PuBLic SERVICE COMMISSION; CITIZENS

TELEPHONE COMPANY OF KECKSBURG; NEW MEXICO

STaTE CORPORATION COMMISSION; PUBLIC SERVICE

COMMISSION OF THE STATE OF MONTANA; GTE SERV-

Ice CORPORATION; UTAH DEPARTMENT OF COM-

MERCE, Division OF PuBLic UTiLiTies; PuBLIC SERV-

ice COMMISSION OF UTAH; PuBLIc SERVICE COMMIS-

SION OF THE STATE OF SOUTH CAROLINA; TENNESSEE

REGULATORY AUTHORITY; AGING ForUM, INC., DOING

BUSINESS AS NATIONAL SILVER HarreD ConGress; U.S.

COALITION ON AGING; COLLEGE FOR LIVING; COUNCIL

OF SILVER HAIRED LEGISLATURES; MissoURI ALLIANCE

OF AREA AGENCIES ON AGING; MISSOURI ASSOCIATION

FOR THE DEAF; Missourt COUNCIL OF THE BLIND;

PRESIDENTS’ CLUB FOR TELECOMMUNICATIONS Jus-

TICE; PARAQUAD, RURAL ADVOCATES FOR INDEPENDENT

LivinG; SERVICES FOR INDEPENDENT LIVING; PUBLIC

Uritities COMMISSION OF THE STATE OF COLORADO;

DEPARTMENT OF PUBLIC UTILITIES OF THE COMMON-

WEALTH OF MASSACHUSETTS; OKLAHOMA CORPORATION

COMMISSION; PuBLIC SERVICE COMMISSION OF THE

STATE OF CONNECTICUT, DEPARTMENT OF PUBLIC

Utitiry ContrRoL; New YorRK TELEPHONE COMPANY;

New ENGLAND TELEPHONE AND TELEGRAPH COM-

PANY, Intervenors on Appeal,

Vv.

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents,

AT&T Corp.; COMPETITIVE TELECOMMUNICATIONS ASSO-

CIATION; MFS COMMUNICATIONS COMPANY, INC.; AIR-

TOUCH COMMUNICATIONS, INC.; NEXTLINK COMMUNI-

CATIONS, L.L.C.; Sprint SpecTruM, L.P.; NATIONAL

CABLE TELEVISION ASSOCIATION, INcC.; MCI TeELECOoM-

75a

MUNICATIONS CORPORATION; SPRINT CorP.; Cox Com-

MUNICATIONS, INC.; VANGUARD CELLULAR SYSTEMS,

INC.; WESTERN Wirt vess CORPORATION; AMERICAN

COMMUNICATIONS *ervices, INC.; KMC TELECOM,

INc.; THE COMPET.."0N PoLicy INSTITUTE; ASSOCIA-

TION FOR LOCAL TELECOMMUNICATIONS SERVICES;

CELLULAR TELECOMMUNICATIONS INDUSTRY ASSOCIA-

TION; GST TeLecom, Inc.; ACC Corp.; GENERAL

COMMUNICATION, INC.; TELECOMMUNICATION RE-

SELLERS ASSOCIATION; CONSUMER FEDERATION OF

AMERICA; AD Hoc TELECOMMUNICATIONS Users Com-

MITTEE; INFORMATION TECHNOLOGY INDUSTRY COUN-

CIL; AMERICA’S CARRIERS TELECOMMUNICATION ASSO-

CIATION; JONES INTERCABLE, INC.; TELECOMMUNICA-

TIONS, INC.; TELEPORT COMMUNICATIONS GROUP,

INc.; RURAL TELECOMMUNICATIONS GROUP: ALLIED

ASSOCIATED PARTNERS; GELD INFORMATION SYSTEMS;

PRONET, INC.; WINSTAR COMMUNICATIONS, INC.; U.S.

ONE COMMUNICATIONS SERVICES; COMCAST CORPORA-

TION; FRONTIER CORPORATION; ANAHEIM, CALIFORNIA

PusLic UrtTiLities DEPARTMENT; CITY OF LONG

BeacH, CALIFORNIA; CITY OF MANASSAS, VIRGINIA;

CaBLe & Wireess, INC.; NATIONAL ASSOCIATION OF

StaTe Utitiry CONSUMER ADVOCATES; TIME WARNER

COMMUNICATIONS HOLDINGS, INC.; PERSONAL Com-

MUNICATIONS INDUSTRY ASSOCIATION; ExceL TELE-

COMMUNICATIONS, INC.; WORLDCOM, INC., PAGING

Network, INc.; NEXTWAVE TELECOM, INC.; SMALL

CABLE BUSINESS ASSOCIATION; METROCALL, INC.:

Texas OFFICE OF PuBLIC UtiLity COUNSEL,

Intervenors on Appeal,

CONSUMERS’ UtiLity Counset Division, Georaia Gov-

ERNOR’S OFFICE OF CONSUMER AFFAIRS: HONORABLE

Joun D. DinGeLt_; HonoraBLe W.J. (BILLy) TAUZIN;

76a

HONORABLE RICK BOUCHER; HONORABLE DENNIS

HASTERT,

Amici on Behalf of Petitioner,

HONORABLE THOMAS J. BLILEY, Jr.; HONORABLE ERNEST

F. HoLLInGs; HONORABLE TED STEVENS; HONORABLE

DanieL K. INouyE; HONORABLE TRENT Lott; HONoR-

ABLE EDWARD J. MARKEY,

Amici on Behalf of Respondent.

No. 96-4080

Be_t ATLANTIC-DELAWARE, INC.; BELL ATLANTIC-

MARYLAND, INC.; BELL ATLANTIC-NEW JERSEY, INC.;

BELL ATLANTIC-PENNSYLVANIA, INC.; BELL ATLANTIC-

VirGIniA, INc.; BELL ATLANTIC-WASHINGTON, D.C.,

INc.; BELL ATLANTIC-WEST VIRGINIA, INC.,

Petitioners,

MARYLAND PuBLic SERVICE COMMISSION; SBC CoMMu-

NICATIONS, INC.; NEW YORK TELEPHONE COMPANY;

New ENGLAND TELEPHONE AND TELEGRAPH COoM-

PANY; US TELEPHONE ASSOCIATION; GTE SERVICE

CORPORATION; US West, INC.; BELLSOUTH CORPORA-

TION; BELLSOUTH TELECOMMUNICATIONS, INC.; AMERI-

TECT CORPORATION,

Intervenors on Appeal,

Vv.

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents,

T7a

SPRINT CorpP.; COMPETITIVE TELECOMMUNICATIONS

ASSOCIATION; TELECOMMUNICATIONS RESELLERS ASSO-

CIATION; AT&T Corp.; NATIONAL CABLE TELEVISION

AssociaTIONn, Inc.; GST TeLecom, Inc.; MFS Com-

MUNICATIONS COMPANY, INC.; KMC TELEcoM, INC.;

ACC Corp.; WINSTAR COMMUNICATIONS, INC.; MCI

TELECOMMUNICATIONS CORPORATION; AMERICA’S CAR-

RIERS TELECOMMUNICATION ASSOCIATION; JONES COM-

MUNICATIONS, INC.; AIRTOUCH COMMUNICATIONS, INC.;

Cox COMMUNICATIONS, INC.,

Intervenors on Appeal.

No. 96-4082

PaciFic TELESIS Group,

Petitioner,

MARYLAND PuBLic Service ComMMission; SBC ComMMvu-

NICATIONS, INC.; NEW YORK TELEPHONE COMPANY;

New ENGLAND TELEPHONE AND TELEGRAPH COM-

PANY; US TELEPHONE ASSOCIATION; GTE SERVICE

CORPORATION; US West, INC.; BELLSOUTH CoRPORA-

TION; BELLSOUTH TELECOMMUNICATIONS, INC.; AMER-

ITECH CORPORATION,

Intervenors on Appeal,

Vv.

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents,

SPRINT CorpP.; COMPETITIVE TELECOMMUNICATIONS

ASSOCIATION; TELECOMMUNICATIONS RESELLERS Asso-

CIATION; AT&T Corp.; NATIONAL CABLE TELEVISION

AssociaTION, Inc.; GST TeLecom, INc.; MFS Com-

MUNICATIONS COMPANY, INC.; KMC TELEcom, INc.:

ACC Corp.; WINSTAR COMMUNICATIONS, INC.; MCI

78a

TELECOMMUNICATIONS CORPORATION; AMERICA’S CAR-

RIERS TELECOMMUNICATION ASSOCIATION; JONES COM-

MUNICATIONS, INC.; AIRTOUCH COMMUNICATIONS, INC.;

Cox COMMUNICATIONS, INC.,

Intervenors on Appeal.

No. 96-4083

SBC COMMUNICATIONS, INC.,

Petitioner,

MARYLAND PuBLic SERVICE COMMISSION; NEW YORK

TELEPHONE COMPANY; NEW ENGLAND TELEPHONE

AND TELEGRAPH COMPANY; US TELEPHONE ASSOCIA-

TION; GTE Sprvice CorRPORATION; US West, INC.;

BELLSOUTH CORPORATION; BELLSOUTH TELECOMMU-

NICATIONS, INC.; AMERITECH CORPORATION,

Intervenors on Appeal,

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents,

SPRINT Corp.; COMPETITIVE TELECOMMUNICATIONS

ASSOCIATION; TELECOMMUNICATIONS RESELLERS ASSO-

CIATION; AT&T Corp.; NATIONAL CABLE TELEVISION

AssociATION, INc.; GST TELECOM, INc.; MFS Com-

MUNICATIONS COMPANY, INC.; KMC TELeEcom, INC.;

ACC Corp.; WINSTAR COMMUNICATIONS, INC.; MCI

TELECOMMUNICATIONS CORPORATION; AMERICA’S CAR-

RIERS TELECOMMUNICATION ASSOCIATION; JONES COoM-

MUNICATIONS, INC.; AIRTOUCH COMMUNICATIONS, INC.;

Cox COMMUNICATIONS, INC.,

Intervenors on Appeal.

79a

On Petitions for Review of an Order of the

Federal Communications Commission

Submitted: April 16, 1997

Filed: August 22, 1997

Before BOWMAN, WOLLMAN, and HANSEN, Circuit

Judges.

HANSEN, Circuit Judge.

Before us are the petitions of the California Public Utili-

ties Commission and various providers of local telecommu-

nications services seeking review of certain rules issued by

the Federal Communications Commission (FCC or Com-

mission) pursuant to the Telecommunications Act of

1996." The petitioners and the intervenors supporting

them (collectively “petitioners”) argue that the FCC ex-

ceeded its jurisdiction in part in issuing dialing parity rules

that encompass some purely intrastate telecommunications

services, and they assert that one of the Commission’s rules

on numbering administration violates the terms of the Act.

Consistent with our decision in the related case, Jowa Utils.

Bd. v. FCC, No. 96-3321 and consolidated cases, 1997

WL 403401 (8th Cir. July 18, 1997), we vacate the

FCC’s dialing parity rules in part, concluding that the

FCC exceeded the scope of its jurisdiction. We find that

the petitioners’ challenge to the FCC’s numbering admin-

istration rule, however, is not ripe for review.

1 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat.

56 (codified as amended in scattered sections of Title 47, United

States Code).

80a

One of Congress’s goals in passing the Telecommunica-

tions Act of 1996 was to open the local telephone markets

to competition. See Telecommunications Act of 1996,

Pub. L. No. 104-104, purpose statement, 110 Stat. 56

(1996). To accomplish this objective, the Act imposes

several duties on the current providers of local telecom-

munications service (known as “incumbent local exchange

carriers” or “incumbent LECs”) including the duties to

provide competing carriers with interconnection and un-

bundled access to the incumbents LECs’ networks and to

allow competing carriers to resell any telecommunications

service that the incumbent LECs provide to their subscrib-

ers on a retail basis. 47 U.S.C.A. § 251(c)(2)-(4) (West

Supp. 1997).* The FCC issued numerous rules in its First

Report and Order * purporting to implement these as well

as other provisions of the Act. In our earlier decision in

lowa Utils. Bd., we reviewed many of the Commission’s

regulations contained in its First Report and Order and

held, in part, that the FCC exceeded its authority in prom-

ulgating rules governing the prices that incumbent LECs

may charge competing carriers for interconnection, un-

bundled access, and resale of services. See Iowa Utils. Bd.

1997 WL 403401, at *9.

In the present case, the petitioners challenge several

portions of the Commission’s Second Report and Order,*

which contains additional FCC comments and regulations

2 All references in this opinion to sections and subsections of the

Telecommunications Act of 1996 in West’s United States Code

Annotated (U.S.C.A.) are to the 1997 supplement.

8 First Report and Order, Implementation of the Local Competi-

tion Provisions in the Telecommunications Act of 1996, CC Docket

No. 96-98 (Aug. 8, 1996).

*Second Report and Order, Implementation of the Local Com-

petition Provisions of the Telecommunications Act of 1996, CC

Docket No. 96-98 (Aug. 8, 1996) [hereinafter Second Report and

Order].

8la

regarding provisions of the Telecommunications Act of

1996 that were not addressed in the First Report and

Order. In particular, the petitioners challenge the FCC’s

rules implementing the Act’s requirement that all local

exchange carriers provide dialing parity to competing

providers of local and long-distance service. See 47

U.S.C.A. § 251(b)(3) (statutory dialing parity require-

ment); 47 C.F.R. §§ 51.205-51.215 (1996) (FCC dial-

ing parity rules). Additionally, the petitioners challenge

the FCC’s rule, 47 C.F.R. § 52.17, implementing the Act's

mandate that the costs of creating telecommunications

numbering administration arrangements be shared by all

telecommunications carriers on a competitively neutral

basis. See 47 U.S.C.A. § 251(e)(2) (statutory numbering

administration requirement).

We have jurisdiction to review final orders of the FCC

pursuant to 28 U.S.C. § 2342(1) (1994) and 47 U.S.C.

§ 402(a) (1994). Courts of appeals may set aside agency

rules that (1) conflict with the plain meaning of a statute,

(2) are unreasonable interpretations of ambiguous stat-

utes, or (3) are the product of arbitrary or capricious

action by the agency. See Chevron U.S.A. Inc. v. Natural

a Defense Council, Inc., 467 U.S. 837, 842-45

A. Dialing Parity Rules

_ The petitioners argue that the FCC exceeded its juris-

diction in promulgating its dialing parity rules, 47 C.F.R.

$§ 51.205-51.215. Dialing parity is a technological capa-

bility that enables a telephone customer to route a call

over the network of the customer’s preselected carrier

without having to dial an access code of extra digits. See

47 US.C.A. § 153(15). The petitioners claim that the

FCC did not have authority to issue these dialing parity

rules to the extent that the rules involve intraLATA tele-

82a

communications. The petitioners rely heavily on section

2(b) of the Communications Act of 1934, 47 USC.

§ 152(b) (1994), to support their jurisdictional attack on

the FCC’s dialing parity rules. Section 2(b) provides that

“nothing in this chapter shall be construed to apply or to

give the [FCC] jurisdiction with respect to... charges,

classifications, practices, services, facilities, or regulations

for or in connection with intrastate communications serv-

ice. Id. The petitioners assert that even though the Com-

mission’s dialing parity rules are not phrased explicitly in

terms of “intrastate” or “interstate,” but rather use the

terms “intraLATA,” “interLATA,” “local,” and “toll” to

describe the telecommunications they regulate, 47 C.F.R.

$§ 51.205-51.215, the intraLATA aspects of the rules

overwhelmingly pertain to intrastate communications serv-

ice and are thus beyond the scope of the FCC’s authority.

Given the importance of the terminology in this case, we

find it necessary initially to explain our understanding of

the “LATA” concept and the difference between “local”

and “toll” calls.

The acronym “LATA” stands for “local access and

transport area,” 47 U.S.C.A. § 153(25), and was initially

adopted by the district court administering the 1982 con-

sent decree that broke up AT&T. See United States v.

Western Elec. Co., 569 F. Supp. 990, 993-94 (D.D.C.

1983). The consent decree divided the former Bell terri-

tory into geographic units known as “LATAs.” /d. The

1982 consent decree limited LECs’ transportation of tele-

communications to traffic between points within a LATA,

i.e., “intraLATA” traffic, while traffic between telephones

located in two different LATAs, i.e. “interLATA” traffic,

was allotted to long-distance carriers such as AT&T, MCI,

and Sprint. The boundaries of LATAs generally center

around cities or other identifiable communities of interest;

in some instances, one LATA encompasses an entire state.

The United States is currently divided into 192 LATAs,

and for the most part, LATAs do not cross state lines.

83a

(See Joint Br. of Intervenors in Support of the FCC at

9.) We are told that approximately 98% of all intra-

LATA calls are intrastate in nature. (Bell Atlantic Br.

at 14.)

IntraLATA calls can be either “local” or “toll” calls,

but interLATA calls are exclusively “toll” calls. Calls that

remain within a caller’s immediate local calling area (a

smaller geographic area within a LATA) are intraLATA

local calls and are currently made without incurring any

additional charge beyond the flat monthly rate that one

pays for local phone service. Calls that are completed

outside of a caller’s local calling area are “toll” calls and

a separate charge or “toll” is incurred for making these

calls. See 47 U.S.C.A. § 153(48). A single LATA can

and frequently does encompass more than one immediate

local calling area. Thus “intraLATA” is not synonymous

with “local.” A call that is completed outside of the

caller’s immediate local calling area but within the same

LATA is an intraLATA toll call, while a call that is com-

pleted outside of both the caller's immediate local calling

area and his or her LATA is an interLATA toll call.

The FCC argues that because the rules refer to

“LATAs” and because “LATAs” do not necessarily cor-

respond to state boundaries, section 2(b), which removes

intrastate communication services from the FCC’s reach,

is not relevant to the issue of the Commission’s authority

over dialing parity. Contrary to the FCC’s assertion, how-

ever, the different nomenclature used in the FCC’s dialing

parity rul

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