Opposition Brief — At&T Corp. v. Iowa Utilities Bd.

rr 7 la

7

Nos. 97-826, 97-829, 97-830 and 97

IN THE

Supreme Court of the United States

October Term, 1997

AT&T Corp.. et ai.,

Petitioners,

v.

IOWA UTILITIES BOARD, et al.,

Respondents,

AT&T Corp.., ef al.,

Petitioners,

v.

CALIFORNIA, ef ai.,

Respondents.

AND RELATED PETITIONS

On Petitions for Writ of Certiorari to the United States

Court of Appeals for the Eighth Circuit

BRIEF IN OPPOSITION

WILLIAM P. BARR PAUL T. CAPPUCCIO

WARD W. WUESTE Counsel of Record

M. EDWARD WHELAN STEVEN G. BRADBURY

GTE SERVICE CORPORATION PATRICK F. PHILBIN

1850 M. Street, N.W. KIRKLAND & ELLIS

Washington, D.C. 20036 655 Fifteenth Street, N.W.

(202) 463-5200 Washington, D.C. 20005

(202) 879-5000

Counsel for Respondent GTE Entities*

December 18, 1997

a a aT aE

*The respondent GTE Entities are listed on inside cover.

This Brief in Opposition is filed on behalf of the following

GTE Entities as respondents:

GTE Service Corporation

GTE Alaska Incorporated

GTE Arkansas Incorporated

GTE California Incorporated

GTE Florida Incorporated

GTE Midwest Incorporated

GTE South Incorporated

GTE Southwest Incorporated

GTE North Incorporated

GTE Northwest Incorporated

GTE Hawaiian Telephone Company Incorporated

GTE West Coast Incorporated

Contel of Minnesota, Inc.

Contel of the South, Inc.

QUESTIONS PRESENTED

Did the Court of Appeals err in concluding that the plain

terms of the Telecommunications Act of 1996 leave

provisions of the Act to state public utility commissions,

rather than the FCC?

Did the Court of Appeals err by interpreting 47 U.S.C.

§ 251(c\3), which requires incumbent telephone

companies to provide network elements to requesting

carriers “in a manner that allows requesting carriers to

combine such elements,” as requiring requesting carriers,

rather than incumbents, to undertake the burden of

combining elements in order to provide telephone service?

Did the Court of Appeals err in vacating the FCC’s rule

implementing 47 U.S.C. § 252(i), which provides that an

incumbent telephone company must “make available any

interconnection, service, or network element provided

under an agreement . . . to which it is a party to any other

requesting telecommunications carrier upon the same

terms and conditions as those provided in the agreement,”

where the FCC’s rule would have allowed requesting

carriers to pick and choose individual terms from other

agre-ments without accepting all of the trade-offs that had

produced those terms?

RULE 29.6 STATEMENT

Pursuant to Supreme Court Rule 29.6, the GTE Entities advise

the Court that each of the GTE Entities listed inside the front

cover of this brief is a subsidiary of GTE Corporation. In

addition, GTE Corporation has the following subsidiaries or

affiliates that have outstanding securities in the hands of the

public:

BC TELECOM, Inc.

BBN Corporation

Cable-Axion Digitel Inc.

Cable-Axion Quebec Inc.

Caribbean Reservation Center, C. por A.

Communications Telefonicas, C. por A.

Conagro Telecommunications, S.A.

CTI Compania de Telefonos del Interior S.A.

CTI North Compania de Telefonos del Interior S.A.

Digital Courier International Inc.

GTE California Incorporated

GTE Directories Corporation Ltd.

GTE Florida Incorporated

GTE Hawaiian Telephone Company Incorporated

GTE Leasing Corporation

GTE Midwest Incorporated

GTE Mobilnet of Florence, Alabama Incorporated

GTE Mobilnet of Jacksonville Incorporated

GTE Mobilnet of Jacksonville II Incorporated

GTE Mobilnet of Wilmington Incorporated

GTE Mobilnet of Wilmington II Incorporated

GTE North Incorporated

GTE Northwest Incorporated

GTE South Incorporated

GTE Southwest Incorporated

GTE Yellow Pages Hungary Kft

RULE 29.6 STATEMENT

(continued)

La Compagnie de Telephone Anglo-Canadienne/Anglo-

Canadian Telephone Company

MTX Italia

Parque Industrial ITABO, S.A.

Quebec-Telephone

Radiowealth, Inc.

The Micronesian Telecommunications Corporation

Zona France Las Americas

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ............... 60000005 i

RULE 29.6 STATEMENT 2.0... cece ccc cccccecvcces ii

TABLE OF AUTHORITIES ............6605000005- vi

PED. POVodeSSes Fab see hee scbideccdevsices l

A. Regulation Prior to the Telecommunications Act of

Pas FCT I COE S Fe ESET ie ive disc cecce l

B. Introduction of Competition By the States and The

Telecommunications Act of 1996 ................. 2

C. The FCC’s First Report and Order ................ 5

D. Review in the Eighth Circuit..................... 8

REASONS FOR DENYING THE WRIT ............. 12

EOS Pt oe et ee eee Pee 12

1. The Eighth Circuit’s Ruling that the FCC Lacks

Jurisdiction To Impose Its Pricing Theories on the

States Was Plainly Correct And in Any Event

iv

A. The Eighth Circuit Correctly Determined That

the Plain Terms of the Act Assign the States the

Task of Implementing the Pricing Terms of the

RED cocicuctbineddaviessevisadecseneeeares

B. The Eighth Circuit’s Decision Does Not Create

Any Circuit Conflict Concerning the Application

CCAR FE 6 6 ccs bo cdssn bab aenbwane <6.

C. The Eighth Circuit’s Ruling Implementing the

Balance of Authority Specified By Congress in

No Way Impedes the Implementation of the

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ll. The Eighth Circuit’s Holding that Incumbent LECs

Cannot Be Required to Provide Unbundled Elements

Already Preassembled Into Platforms Was Plainly

Correct, and in Any Event Involves Only Settled

Principles of Statutory Construction ..............

lll. The Eighth Circuit’s Decision to Vacate the “Pick and

Choose” Rule Correctly Implements the Terms of the

Act and Does Not Merit Review in this Court ......

ee th 6 PPOwrTiprr Terry Trievit Tit eee

TABLE OF AUTHORITIES

Cases

Gregory v. Ashcroft,

501 U.S. 452 (1991) 2... cece ee

lowa Utilities Board v. FCC,

109 F.3d 418 (8th Cir. 1996) .............

Louisiana Pub. Serv. Comm'n v. FCC,

476 U.S. 355 (1986) «0... ce ees

Morales v. Trans World Airlines, Inc.,

504 U.S. 374 (1992) ...... 0c cece eee eeee

National R.R. Passenger Corp. v. Boston &

Maine Corp.,

503 U.S. 407 (1992) 2.0... cece eeeveeee

SEC v. Chenery Corp.,

332 U.S. 194 (1947) 2... . cc cece eee eee

Statutes and Regulations

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PU ION oon ois iccceddcnases:

TABLE OF AUTHORITIES

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TABLE OF AUTHORITIES

(continued)

Page

oe EP a ee Pee eT ee 7

Miscellaneous

H.R. Rep. No. 204, 104th Cong., Ist Sess. .............. 7

Joint Explanatory Statement of the Committee

of the Conference,

H.R. Conf. Rep. No. 458, 104th Cong.,

i Te eo ew adbeenceeeeeas 3

Reed Hundt, Chairman, FCC,

remarks to the Chamber of Commerce,

Washington, D.C. (May 29, 1997) ............... 24

STATEMENT

In their petitions, the FCC and the long-distance

companies attempt to paint the States as guardians of

monopolies designed to deprive American consumers of the

benefits of affordable telephone service. That claim is a gross

distortion, and correcting it makes it even clearer why, as the

Eighth Circuit held, Congress expressly assigned jurisdiction

over the pricing provisions of the Telecommunications Act of

1996 to the States, not the FCC.

A. Regulation Prior to the Telecommunications Act of

1996.

For decades prior to the passage of the

Telecommunications Act of 1996, the provision of local

telephone service was regulated by the States as a natural

monopoly. The capital investment required to build a

telephone network connecting every home and business in a

given area was so vast that it made sense economically for only

one company to construct and operate such a local exchange

network. As a result, state public utility commissions regulated

local telephone companies (“local exchange carriers” or

“LECs”) through a system of exclusive franchises.

Through the prior exclusive franchise system, the States

and the LECs built and extended to all Americans the finest

local telecommunications network in the world at affordable

rates. The provision of basic service to all who desire it at

affordable rates is known as “universal service.” The exclusive

franchise system was key to the success of universal service in

two ways. First, it enabled the States to encourage LECs to

make the enormous investment needed to construct and

upgrade first-rate networks and to extend them to all

Americans, however remote their location. Second, it was the

central pillar of an elaborate system of intercustomer subsidies

that has kept rates for basic residential service extremely low.

l

2

For example, under the rates typically approved by State

utility commissions, most everyday residential customers pay

well below the full cost “f providing them with basic service,

and business custom. .. pay well in excess of cost. Thus,

among other intercustomer subsidies, businesses subsidize the

local residential telephone service of most American citizens.

This background is relevant because now that local

telephone service has been opened up to plenary competition,

this subsidy system (and the low-cost residential universal

service that it guarantees) is not sustainable in its current form.

If new entrants are allowed to “cherry pick” high-revenue, low-

cost business customers without paying their fair share of the

costs of subsidizing low-cost service to all residents who desire

it, the subsidy system, and the affordable universal service that

it supports, will collapse. Congress knew this, and therefore

(as we explain below), in the Telecommunications Act of 1996

placed the power to establish just and reasonable prices for

services and facilities that a competitor purchases from the

incumbent LEC in the hands of the State nublic utility

commissions, who not only have traditionally regulated in this

area, and thus have expertise in determining individual LECs’

costs, but who also are in a much better position to ensure that

competition is introduced in a manner that will preserve, not

destroy, universal service.

B. Introduction of Competition By the States and The

Telecommunications Act of 1996.

To read the petitions of the FCC and the long-distance

companies, one would think that Congress, in the 1996 Act,

dragged the States into the new world of competition. That

impression is false.

The reality is that many States were well ahead of

Congress in opening the markets for local telephone service to

competition. By the early 1990s, advancing technology

(particularly advances in wireless communication and the

3

pervasive presence of cable television wiring in almost every

home in many areas) had made the possibility of competition

in local telephony a reality. Acting on these advances, many

States began in the early 1990s, before Congress, to open up

the markets for local telephone service to competition.' In the

1996 Act, Congress essentially codified at the national level the

trend that was already well underway in the States -- rejecting

the view that local service continued to be a natural monopoly.

Indeed, the 1996 Act provides what Congress

characterized as a “pro-competitive, de-regulatory” framework

for opening to competition both the loca! and long-distance

markets for telephone service. Joint Explanatory Statement of

the Committee of the Conference, H.R. Conf. Rep. No. 458,

104th Cong., 2d Sess. 113 (1996) (emphasis added). With

respect to local telephone service, the Act seeks to promote a

rapid transition to competition in part by imposing three duties

on incumbent LECs. First, the Act requires an incumbent LEC

to allow other carriers to interconnect with its network so that

the new entrants can connect calls from their own customers to

customers served by the incumbent LEC’s network. See

§ 251(c)(2). Second, the Act requires an incumbent LEC to

offer for resale at wholesale rates any telecommunications

service that the LEC provides to retail customers. See

§ 251(c\(4). Third, the Act requires an incumbent LEC to allow

competitors to purchase on an “unbundled basis” individual

pieces, or “elements,” of the LEC’s network (such as the

switch or the wire to a customer’s house), so that the new

entrants may “combine such elements in order to provide . . .

telecommunications service.” See § 251(c)(3).

To implement these provisions while at the same time

preserving the Act’s stated goal of “reduc[ing] regulation,”

' See, e.g., Notice of Proposed Rulemaking, CC Docket No. 96-98, 61

Fed. Reg. 18311, 18314 (Apr. 25, 1996) (noting that by 1996, nineteen

States had already begun to open local service to competition).

4

Pub. L. No. 104-104 Preamble (1996), Congress crafted a

system that relied on private negotiations between incumbent

LECs and other carriers, backed up by binding arbitrations

conducted by state public utility commissions. Thus, an

incumbent LEC has a duty under the Act to “negotiate in good

faith” to reach agreements allowing competitors to use its

network, see § 251(c)(1), and agreements reached by such

private negotiations are explicitly freed from many of the

specific requirements of the Act, see § 252(a). If the parties

fail to reach a private agreement, the Act calls upon state utility

commissions to resolve open issues in binding arbitrations.

See § 252(b).

In particular, the Act expressly assigns the States the role

of determining, in arvitrations, the prices for interconnection,

network elements, and wholesale services. Thus, the Act

provides that in arbitrations, “a State commission shall .

establish any rates for interconnection, services, or network

elements according to subsection (d)” of section 252.

§ 252(c\(2) (emphasis added). Section 252(d), which is

entitled “PRICING STANDARDS,” then spells out the

standards state commissions must follow in establishing those

rates. With respect to interconnection and network elements,

section 252(d)(1) provides that “[d]eterminations by a State

commission of the just and reasonable rate . . . shall be . . .

based on the cost . . . of providing the interconnection or

network element . . . and . . . may include a reasonable profit.”

§ 252(d\(1) (emphasis added). With respect to services,

section 252(d)(3) provides that “a State commission shall

determine wholesale rates on the basis of retail rates . . .

excluding the portion thereof attributable to any . . . costs that

will be avoided by the local exchange carrier” by selling at

wholesale rather than retail. § 252(d)(3) (emphasis added).

The Act also gives some role to the FCC in implementing

local competition, albeit not jurisdiction over prices. For

example, § 251(e) authorizes the FCC to designate an entity “to

5

administer telecommunications numbering and to make such

numbers available on an equitable basis.” See also § 251(b)\(2)

(giving the FCC a role in defining duties to implement number

portability); § 251(b)(4) (access to rights of way).

To ensure that the Act would be implemented swiftly,

Congress imposed strict deadlines on the state commissions

and the FCC. With respect to the state commissions, section

252(b) requires a state commission to conclude arbitrations

“not later than 9 months after” a competing carrier first

requests interconnection, network elements or services.

§ 252(b)(4)(c). With respect to the FCC, § 251(d) directed the

FCC to complete all necessary actions to issue regulations

implementing its tasks under section 251 “[w}ithin 6 months

after the date of enactment” of the Act. § 251(d)(1).

C. The FCC’s First Report and Order.

The process established by Congress for introducing local

competition got underway immediately after passage of the Act

in February 1996. Private negotiations started promptly and

under timetables set in the Act, state commissions soon began

arbitrating agreements. In short, as the Court of Appeals later

explained in entering a stay of the FCC’s pricing rules, “[t}he

Act’s system of private negotiation backed by state-run

arbitration was operating without the input from the FCC” to

speed the transition to competition and had “initially proved to

be successful.” Jowa Utilities Board v. FCC, 109 F.3d 418,

427-28 (8th Cir. 1996).

On August 8, 1996, however, the FCC announced its First

Report and Order and threatened to derail that process

entirely. While purporting to implement the de-regulatory

mandates of the Act, the FCC instead produced a mammoth

700-page Report and Order that replaced the process Congress

PO anny me jo CC Docket No. 96-98 (Aug ne

6

envisioned for fostering competition -- a system of private

negotiations backed by localized state arbitrations -- with an

exhaustive national code purporting to dictate virtually every

aspect of the terms the States were to impose in arbitrations.

In particular, the FCC set specific so-called “proxy prices”

to be used in the ongoing arbitrations. The FCC declared that

the States must use these proxy prices unless they first

completed cost studies based on a pricing methodology

described for the first time in the FCC's order. See First Report

and Order § 619 (App. 1a).

In addition, the FCC claimed plenary authority to dictate

to the States exactly what costs they could and could not

consider in setting rates. First, the First Report and Order

prohibited States from even considering the actual historical

costs of constructing an incumbent LEC’s network. Instead,

the FCC commanded that all States must set prices based only

on forward-looking costs -- specifically on what the FCC

termed total element long-run incremental cost (“TELRIC”).

See First Report and Order {¥ 705-06 (Pet. App. 250a-252a).

Second, the FCC even prohibited States from considering a

LEC’s own forward-looking costs -- i.e., the prospective costs

an incumbent LEC would actually incur in operating its own

network. Instead, the FCC purported to require all States to set

prices based on a nonexistent hypothetical network that used

only the most efficient technology available. See id 4 685

(App. 8a). Third, even as to the FCC’s hypothetical forward-

looking costs, the First Report and Order sharply limited the

joint and common costs that a LEC could recover, see id 4 696

(App. 8a-9a), effectively ensuring that a LEC would not be

able to recover most of its joint and common costs.

The FCC also promulgated a series of rules radically

expanding the unbundling obligation imposed by the Act. The

FCC concluded that a new entrant could provide service solely

through the purchase of all the elements of an incumbent’s

network. See First Report and Order | 328-334 (Pet. App.

7

242a-246a). At the same time, the agency ruled that an entrant

could obtain these elements already pre-assembled into a

finished package of local service -- the entrant would not have

to do any “combining” of elements whatsoever. See 47 C.F.R.

§ 51.315(b), (c) (Pet. App. 294a).

This so-called “sham unbundling” rule (together with the

hypothetical TELRIC pricing rules) threatened to undermine

the system of universal service that Congress was so careful to

preserve during the transition to competition. In setting the

statutory standard for the price of wholesale services, Congress

was careful to require new entrants to contribute towards the

subsidization of residential universal service by requiring State

commissions to set wholesale prices at the LEC’s retail rates

(which, for high-revenue customers, include a margin that

contributes to universal service) minus only those costs that the

LEC will avoid by selling at retail instead of wholesale.’ By

allowing competitors to purchase all of the network elements

necessary to provide local service already combined into the

local service and not unbundled, the FCC effectively gave

behemoth companies like AT&T and MCI a blueprint for

undermining universal service and pocketing for themselves,

call its purchase a purchase of local service -- in which case it

would be required to contribute toward the subsidization of

universal service through the L!C’s wholesale rates -- or it

could relabel that same purchase as one for all of the

incumbents’ network elements already combined together -- in

which case the competitor could purchase the same service for

* Indeed, Congress explicitly recognized that such a pricing standard was

necessary to protect existing subsidies in the LEC’s rates. See, eg, H.R.

Rep. No. 204, 104th Cong., Ist Sess., pt. 1, at 72 (“The [resale] rate should

reflect whether, and to what extent, the local dialtone service is subsidized

by other services ... .”).

a fraction of the wholesale cost of the service* and avoid

making any contribution to universal service.°

D. Review in the Eighth Circuit.

Numerous parties filed petitions for review of the FCC’s

First Report and Order and the cases were consolidated in the

United States Court of Appeals for the Eighth Circuit. The

States of lowa, Florida, Louisiana, and South Dakota, as well

as GTE and other telephone companies, immediately sought a

stay, at a minimum, of the FCC’s pricing rules. After

convening a special oral argument, the Court of Appeals stayed

the FCC’s pricing rules and expressly found that the States and

other movants were likely to prevail on their claim that under

the plain terms of the Act the FCC lacked jurisdiction to

promulgate rules implementing the pricing terms of the Act.

See lowa Utilities Board v. FCC, 109 F.3d 418, 423-25 (8th

Cir. 1996). The Court also found that the FCC’s pricing rules

would cause both the parties seeking the stay and the process

set up by Congress for implementing the Act immediate and

irreparable harm. Jd. at 425-26.

At the merits stage, the parties re-briefed the issues of

statutory construction that had been raised on the motions for

* AT&T's president touted to analysts that buying elements provides

“another way to resell” service, but at a discount of “52 percent,” as

opposed to the statutory resale discounts which have been set in the range

of 15-25 percent. See Transcript, “AT&T Investment Community Meeting”

(March 3, 1997).

* While section 254(f) of the Act plainly commands that “every

telecommunications carrier that provides intrastate telecommunications

services shall contribute, on an equitable and nondiscriminatory basis . .

to the preservation and advancement of universal service,” 47 USC.

§ 254(f), the FCC made it clear that under its plan for implementing the

pricing terms of the Act, in the critical period of transition to competition,

new entrants would be allowed to purchase network elements at prices that

failed to reflect universal service costs lon before States had established

new mechanisms for spreading the burden of universal service.

9

stay, and addressed additional issues as well. After considering

several hundred pages “f briefs and hearing three hours of oral

argument, the Eighth “ ircuit adhered to its initial conclusion

that the plain terms of the Act denied the FCC any authority

over implementing the pricing provisions of the Act. The

Court also vacated several further provisions of the FCC’s

rules. Three of the Court’s decisions are most relevant to the

questions raised in the petitions for certiorari.

First, applying standard principles of construction, the

Court turned to the text of the Act to determine whether

Congress had given the FCC authority to promulgate rules

concerning the pricing terms for the local competition

provisions. The Court found that section 252(c)(2) expressly

directs state commissions, not the FCC, to establish rates in

arbitrations conducted between new entrants and incumbents.

Moreover, section 252(d) spells out the standards the state

commissions are to apply. Examining the Act as a whole, the

court concluded that “the Act plainly grants the state

commissions, not the FCC, the authority to determine the rates

involved in the implementation of the local competition

provisions of the Act.” Pet. App. 14a.

Alternatively, the Court explained that even if the text of

section 252 were not clear, any ambiguity was resolved by

section 2(b) of the Communications Act, which provides that

“nothing in this chapter shall be construed to apply or to give

the [FCC] jurisdiction with respect to . . . charges,

classifications, practi: 2s, services, facilities, or regulations for

or in connection with intrastate communications service.” 47

U.S.C. § 152(b). The Court noted that the rates incumbents

could charge for opening their networks to competing

providers of local exchange service were charges “for or in

connection with intrastate communications service” and

reasoned that under settled law, the restriction of section 2(b)

barring the FCC from authority over such matters could only

be overcome by a straightforward and unambiguous command

10

from Congress. See Pet. App. 1 5a-19a (citing Louisiana Pub. ~

Serv. Comm'n v. FCC, 476 U.S. 355 (1986)). But far from

providing any unambiguous grant of authority to the FCC, the

1996 Act straightforwardly assigned the task of implementing

the pricing standards of the Act to the States. The rule of

section 2(b) thus confirmed the Court’s construction of the

plain terms of section 252.

Second, the Court addressed the scope of incumbent LECs’

unbundling duties under the Act. GTE and other incumbents

had argued that new entrants should not be permitted to

provide local service wholly through the use of unbundled

elements. Given that the FCC and most States had interpreted

the pricing standards for unbundled elements and for services

in a way that excluded historical, subsidy and other relevant

costs, and thus made it substantially cheaper to buy all the

elements of the network from end to end rather than to buy

services at wholesale, GTE argued that it made no sense to

allow entrants effectively to obtain the incumbent’s own

service for resale through the fiction of labeling their purchase

as one of unbundled elements.

Rejecting the full scope of GTE’s position, the Eighth

Circuit ruled that entrants could provide service solely by

purchasing all network elements. In other words, they could

buy the entire network from end to end as elements and provide

service solely over the incumbent's facilities. The Court

emphasized, however, that it was critical to its analysis that

under the terms of section 251(c)(3), new entrants would have

to shoulder the burden of combining elements themselves. As

the Court explained, the costs and risks that new entrants

would have to bear in combining elements would ensure that

the purchase of network elements and the purchase of finished

service would remain separate methods of entry. The Court

thus vacated a series of FCC rules requiring incumbent LECs

to undertake the task of combining elements at new entrants’

request. In its initial opinion, however, the Court without

11

comment left in place one rule, 47 C.F.R. § 51.315(b), that

required incumbent LECs to provide entrants with elements

already pre-assembled into a fully functioning package if the

elements were already connected in the LEC’s own network.

In a petition for rehearing, GTE and other parties pointed

out that the failure to vacate this rule would fatally undermine

the Court’s rationale for allowing entrants to purchase all the

network elements required to provide finished service. If an

entrant could purchase elements already pre-assembled, it

would face none of the additional costs and risks that the Court

had identified and would, in effect, simply be obtaining

finished service for resale, but at a lower price that undermined

the system of universal service. The Eighth Circuit agreed and

specifically vacated section 51.315(b). The Court explained

that its ruling was critical for preserving a coherent reading of

the Act, for 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 resale on the other.” Pet. App. 71a.

Third, the Court vacated the FCC’s rule purporting to

implement section 252(i). Under that section, incumbents must

“make available any interconnection, service, or network

element provided under an agreement . . . to which it is a party

to any other requesting telecommunications carrier upon the

same terms and conditions as those provided in the agreement.”

The FCC concluded that under this provision an entrant could

pluck out from any other agreement solely the terms that

applied to a single service or network element without having

to accept any other provisions of the agreement -- even if terms

on another matter had been the critical guid pro quo that made

the favorable term selected by the entrant possible. The Court

of Appeals recognized that this construction would render

12

unworkable the process of private negotiations that Congress

had outlined as the primary means of implementing the Act.

Incumbents could not realistically engage in a free give-and-

take in bargaining if new entrants would always remain free to

jettison selected portions of their agreements and to pick and

choose the most favorable terms obtained by other carriers as

replacements. The Court thus vacated the FCC’s “pick and

choose” rule as an unreasonable construction of the Act.

REASONS FOR DENYING THE WRIT

SUMMARY

None of the three separate issues raised by the petitions for

certiorari warrants review by this Court.

ae L. : The Eighth Circuit’s ruling that the FCC lacks

jurisdiction to impose pricing rules on the States does not merit

review in this Court for several reasons.

First, the petitions for review largely ignore the actual

holding below -- which rested on the 1996 Act’s express

assignment of pricing authority to the States. Only by ignoring

this holding, which involves only a straightforward application

of settled principles of statutory construction, can petitioners

attempt to suggest that this case raises more far-reaching issues

concerning the jurisdiction of the FCC. In addition, as

explained below, the holding below is plainly correct.

Second, petitioners’ attempt to concoct a circuit split out

of the Court of Appeals’ alternative reasoning based on section

2(b) of the Communications Act fails for at least three separate

reasons. First, the theory on which petitioners rely in this

Court -- that, despite section 2(b), the FCC has jurisdiction

because the local telephone network is used inseverably for

both intrastate and interstate communications -- was not the

basis upon which the agency asserted jurisdiction in the First

Report and Order. Under settled principles of administrative

law, that rationale cannot now provide a basis for second-

guessing the Court of Appeals. Second, the Court of Appeals

13

explicitly held that, because the 1996 Act expressly assigned

jurisdiction to the States, it was not necessary to rest its

decision on whether the services in question were intrastate or

interstate in nature and on how that might affect the application

of section 2(b). Third, the Eighth Circuit's decision cannot

possibly conflict with the decisions of other circuits

interpreting section 2(b) for the additional reason that none of

the cases cited by petitioners involved an express statutory

assignment of jurisdiction to the States.

Third, while important at the time (because it stayed the

FCC’s arbitrary proxy prices), the Eighth Circuit’s

jurisdictional decision has had no real impact on the

substantive pricing rules that have been imposed on LECs,

because, as FCC Commissioners have repeatedly proclaimed,

virtually every State has adopted a substantive pricing

approach similar to that adopted by the FCC. Revisiting and

reversing the Eighth Circuit's jurisdictional holding would only

lead to delays from further rounds of litigation and, by the

FCC’s own admission, could accomplish little substantive

change in the pricing approach the States have applied.

2. Nor is it appropriate to grant certiorari to review the

Court of Appeals’ decision that incumbent LECs cannot be

required to provide competitors with unbundled network

elements already preassembled into finished telephone service.

First, the Eighth Circuit’s decision on this issue is plainly

correct. It would be contrary to the plain language of the

statute, and would undermine the entire structure of the Act, if

a competitor were allowed to evade the wholesale pricing

standards established by Congress merely by relabeling its

purchase of local service as the purchase of all the network

elements necessary to provide that service already

preassembled into a finished package. Congress did not intend

to allow an entrant to purchase local service at roughly half the

cost of wholesale service and to avoid its obligation to

contribute toward the provision of universal service merely by

14

relabeling its purchase of service as the purchase of all the

elements of a LEC’s network already bundled together.

Second, granting certiorari on this question would require

the Court also to delve into at least two additional questions

that are inextricably intertwined with the issue on which

petitioners’ seek review and that the Court of Appeals decided

in petitioners’ favor. Specifically, the questions of (i) what

parts of a LEC’s business constitute “network elements,” and

(ii) whether a competitor can purchase ai! of the elements

necessary to provide finished telephone service, are

inextricably linked with the Court of Appeals’ decision that a

LEC, while required to provide a competitor with all network

elements, need not provide them already preassembled into

finished telephone service. It would be unfair, and would

result in an incoherent interpretation of the 1996 Act. for the

Court to attempt to address the Court of Appeals’ invalidation

of section 51.315(b) of the First Report and Order without also

addressing these other issues. The Court simply cannot wade

halfway into the complex telecommunications issues presented

by this case. While we believe that the Court should not

reopen any of these issues that consumed hundreds of pages of

briefing below, we intend to file promptly a conditional cross-

petition raising those issues that are intertwined with the

nonjurisdictional unbundling issues raised by the petitions.

3. Finally, the Court of Appeals’ decision invalidating

the FCC’s “pick and choose” interpretation of section 252(i)

of the Act is plainly correct and involves only the most fact-

bound application of settled rules of Statutory construction. It

's Nn NO event worthy of review by this Court.

15

I. The Eighth Circuit’s Ruling that the FCC Lacks

Jurisdiction To Impose Its Pricing Theories on the

States Was Plainly Correct And in Any Event Involves

Only Settled Principles of Statutory Construction.

A. The Eighth Circuit Correctly Determined That the

Plain Terms of the Act Assign the States the Task

of Implementing the Pricing Terms of the Act.

The petitions for certiorari largely ignore the actual

holding below, which rested on the express assignment of

pricing authority to the States in section 252. Instead, they

focus their attacks on the Court’s alternative analysis under

section 2(b). That tactic is hardly surprising, for a review of

the terms of section 252 readily demonstrates that Congress

straightforwardly assigned authority over pricing to the States,

and that nothing in the ruling below merits this Court’s review.

As the Eighth Circuit explained, section 252(c) commands

the “State commission[s]” to “establish any rates for

interconnection, services, or network elements,” and it requires

them to follow only the standards outlined in subsection

252(d).° Section 252(d), a section entitled “Pricing Standards,”

provides the specific substantive standards the States are to

apply, “thus negating the need for additional FCC-mandated

ratemaking standards or guidelines.” Pet. App. 14a.’

. Congress addressed any concerns that might be raised under the Tenth

Amendment by ensuring that States could opt out of their role under the Act.

See 47 U.S.C. § 252(e)(5).

? Contrary to the claims of petitioner MCI, the decision below raises no

constitutional concern that federal lawmaking authority has been delegated

to the States. MCI attempts to manufacture such a problem by grossly

misquoting the opinion to suggest that state commissions would be

““dictat[ing] the substantive standards” under the Act. See MCI Pet. at 26.

The passage cited actually states simply that Congress had not intended the

FCC to be “in a position to dictate the substantive standards governing the

(continued...)

16

The absence of any role for the FCC in pricing is

confirmed by the structure of section 252(c). In defining

States’ obligations for conducting arbitrations, that section

creates a clear dichotomy. Section 252(c)(1) makes it plain

that in imposing terms on subjects over which the FCC has

some rulemaking authority under section 251, States must

ensure that those terms meet both “the requirements of section

251" and “the regulations prescribed by the Commission

pursuant to section 251.” In sharp contrast, in the very next

paragraph, the Act addresses the States’ role in setting prices

as a separate matter and -- omitting any reference to FCC rules

-- commands solely that “a state commission shall . . . establish

rates for interconnection, services, or network elements

according to subsection [252}(d).” As the Court of Appeals

explained in entering its stay of the FCC’s pricing rules, the

contrast between section 252(c)(1) and section 252(c)(2) makes

it plain that “where Congress intended for the state

commissions to follow FCC rules in arbitrations, it expressly

said so.” 109 F.3d at 424.

In short, the Eighth Circuit was correct in concluding that

“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 prices.” Pet.

App. l3a.

The Eighth Circuit also rightly concluded that even if there

were some ambiguity in the terms of section 252, section 2(b)

” (...continued)

[rural] exemption process.” Pet. App. 30a. A restriction on the FCC in

implementing the rural exemption provisions of the Act in no way suggests

that States have been granted federal lawmaking authority, and it certainly

has no bearing on the States’ role under the provisions MCI purported to be

addressing -- the pricing provisions. Relying on state agencies to apply the

pricing standards spelled out in the Act through quasi-adjudicative

arbitrations raises no constitutional concerns whatsoever.

17

of the Communications Act would preclude FCC jurisdiction

over pricing. 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 service.” 47 U.S.C. § 152(b).

As this Court has pointed out, section 2(b) is a “congressional

denial of power to the FCC” that “fences off” intrastate matters

from FCC control. Louisiana Pub. Serv. Comm'n v. FCC, 476

US. 355, 370, 374 (1986). This restriction on the FCC can be

overcome only if Congress includes “unambiguous” and

“straightforward” language in the Act either modifying section

2(b) or expressly granting the FCC additional authority. /d. at

377. Here, the provisions of the Act allowing new entrants

access to incumbents’ networks so that they may provide

competing local telephone service clearly address

predominantly intrastate matters. Yet the FCC cannot point to

either exception to section 2(b). There is no “unambiguous”

grant of authority to the FCC over pricing, nor did Congress

amend section 2(b) to exempt the local competition provisions

from its operation.

The FCC’s strained attempts to find unambiguous

language supplying its claimed authority over pricing are of no

avail. The FCC first points to section 251(d)(1), which

provides only that the FCC must promulgate any regulations

implementing section 251 within 6 months of the date of

enactment. But even the FCC tacitly acknowledges that

section 251(d) provides no clear grant of rulemaking authority

over pricing as it equivocates between calling the section a

“grant” and a “confirmation” of authority. See FCC Pet. at 12.

Such a provision that appears to assume an unspecified

measure of rulemaking authority conferred upon the FCC

elsewhere can hardly override the express delegation to the

States of authority over pricing in section 252(d). Indeed, the

section cannot possibly grant authority over pricing, for to the

extent it implies any authority at all, it refers only to rules to

“implement the requirements of this section.” (Emphasis

added). But it is plainly section 252, not section 251, that

provides the pricing standards under the Act. The FCC can

only pretend that section 251 “prescribes a set of new federal

standards to govern . . . the prices that incumbent{s] . . . may

charge competitors,” FCC Pet. at 11, by studiously ignoring the

section that by its terms actually addresses “Pricing Standards”

-- that is, section 252(d).

Nor can the FCC or its supporters rely on the fact that

section 251(c)(3), in defining the duty to provide unbundled

elements, requires that elements be provided on “rates, terms,

and conditions that are just [and] reasonable,” to claim that the

FCC must have authority to implement the “rate provisions of

Section 251(c).” FCC Pet. at 15. The mere reference to “just

and reasonable” rates in section 251(c) cannot provide the FCC

the authority it purported to exercise in issuing its exhaustive

pricing regulations. To the contrary, in outlining its forward-

looking cost methodology, the FCC explicitly sought to

implement the cost-based pricing standard that Sate

commissions were directed to apply under section 252(d).

See First Report and Order { 628, 630-633 (App. 2a-7a).

Pointing now to section 251(c)’s “just and reasonable”

language thus cannot possibly justify the FCC’s rules.

Next, the FCC and other petitioners point to general grants

of rulemaking authority elsewhere in the Communications Act

of 1934. For example, the FCC relies on the last sentence of

section 201(b). The Eighth Circuit rightly concluded, however,

that this grant of authority is limited to interstate matters.

Section 201(a) is expressly limited to “interstate or foreign

communication by wire or radio,” and section 201(b) begins by

making it plain that it is addressing “such communication

service” -- that is, the same interstate or foreign communication

* Similarly, section 252(c) refers to state commissions following FCC

rules promulgated only under section 251. See § 252(c\1).

19

addressed in section 201(a). The FCC's claim that the last

sentence of the section is somehow freed from the same

restriction blithely ignores everything that comes before. In

any event, any grant of general rulemaking authority in the

1934 Act cannot override Congress's express assignment to the

States of authority over the specific pricing terms of the local

competition provisions of the 1996 Act. That result follows

ineluctably from the long-settled canon of construction that

specific terms trump the general. See, e.g, Morales v. Trans

World Airlines, Inc., 504 U.S. 374, 384-85 (1992).

At bottom, the FCC and its supporters rest their arguments

on the assumption that it would be inconceivable that the

federal Act could ever apply to a subject without

simultaneously giving the FCC rulemaking authority. Nothing

in the text of the Act, however, dictates that the FCC’s

authority must follow wherever Congress has applied federal

law, especially where Congress has specifically assigned

authority for implementing certain provisions of the Act to

state commissions.”

B. The Eighth Circuit’s Decision Does Not Create

Any Circuit Conflict Concerning the Application

of Section 2(b).

Petitioners next claim that the Eighth Circuit’s decision

creates a conflict among the circuits concerning the application

of section 2(b). That assertion is false for at least three

independent reasons.

* The question of authority over dialing parity rules that was addressed in

the Eighth Circuit's ruling on the Second Report and Order does not raise

any fundamentally different analysis. There too, the plain terms of the Act

indicate State control, see, e.g, 47 U.S.C. § 271(e 2B) (indicating that

States may issue orders requiring toll dialing parity), and in any event, the

FCC can point to no unambiguous grant of authority to overcome section

2(b).

20

First, the so-called “inseverability” analysis on which the

FCC now relies to support its claimed authority over pricing

formed no part of the agency's rationale for its jurisdiction

when it issued the First Report and Order. See First Report and

Order 4J 83-103, 111-120 (Pet. App. 190a-202a, 210a-21 5a).

Under settled principles of administrative law, this new-found

theory cannot serve as a basis for second-guessing the Court of

Appeals’ decision now. See SEC v. Chenery Corp., 332 US.

194, 196 (1947). In any event, inseverability analysis could

never justify the broad authority the FCC has claimed -- an

authority that includes the power to set wholesale rates for

wholly intrastate local telephone service. There is no plausible

basis for claiming that allowing the States authority to set such

wholesale rates for local service would negate the FCC's

ability to regulate interstate communications.

Second, and equally importantly, petitioners flatly misread

the decision below. Petitioners claim that the Eighth Circuit

rested its jurisdictional holding critically on the conclusion that

section 2(b) denies the FCC authority because the local

competition provisions address services that are

“fundamentally intrastate” in nature. According to petitioners,

that reasoning supposedly conflicts with the decisions holding

that where equipment is used to provide both interstate and

intrastate service, and the FCC cannot successfully regulate the

interstate aspects of the equipment’s use as a separate matter,

the FCC may regulate both interstate and intrastate uses of the

equipment. See, e.g., FCC Pet. at 19. According to petitioners,

other circuits would have recognized that the local exchange is

used to provide both interstate and intrastate services and on

that basis would have granted the FCC’s claimed authority over

all pricing under the Act.

The central flaw in petitioners’ argument is that the Eighth

Circuit did not, as petitioners suggest, rest its decision

primarily on section 2(b). To the contrary, as outlined above,

the Court relied on the plain terms of the Act, which “directly

21

and straightforwardly assig|n] to the States the authority to set

the prices regarding the local competition provisions of the

Act.” Pet. App. 17a. The Court went on to address section

2(b) only to demonstrate that even if the text of section 252

were not so clear, any ambiguity would still have to be

resolved by assigning control over pricing to the States.

Characterizing the services covered in the local competition

provisions as intrastate or interstate thus formed no essential

part of the Court’s holding. Indeed, the Court even took pains

to make it clear that “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 ~ viding

the need to analyze the interstate/intrastate character of these

services.” Pet. App. 22a (emphasis added). The decision

cannot create a circuit conflict concerning the application of

the so-called “inseverability” exception to section 2(b) when

the Court made it clear that the entire analysis under section

2(b) was only an alternative rationale for its result.

To the extent the Court below did point out that “even a

traditional analysis of the interstate/intrastate quality of the

local competition provisions of the Act reveals that these

functions . . . are fundamentally intrastate in character,” Pet.

App. 22a (emphasis added), it was providing reasoning in the

alternative that was not essential to its holding. Petitioners’

attempt to seize upon this dicta as the critical basis for a

purported circuit conflict, see, e.g, FCC Pet. at 19; AT&T Pet.

at 13, is nothing but an effort to manufacture an illusory

dispute and cannot justify review by this Court.

Third, because the Act straightforwardly assigns the States

the task of implementing the pricing provisions, this case is

readily distinguishable from those in which inseverability

analysis has been applied to extend FCC jurisdiction over

intrastate matters. Indeed, the Eighth Circuit distinguished

many of the very cases petitioners cite on precisely that basis.

See Pet. App. 21a.

22

C. The Eighth Circuit’s Ruling Implementing the Balance

of Authority Specified By Congress in No Way

Impedes the Implementation of the Act.

Petitioners finally attack the Eighth Circuit’s decision on

the grounds that, in their view, by depriving the FCC of

absolute authority to dictate national pricing rules, it makes the

implementation of the Act, and the advent of competition,

impossible. In reality, however, it is further review of the

FCC’s jurisdictional claims that would lead to delay.

In part, petitioners suggest that uniformity is critical to the

success of the Act. But throughout the petitions there is also an

undercurrent suggesting something more sinister in allowing

the States an independent role in applying the terms of the Act

to local conditions. Petitioner MCI brazenly makes its mistrust

explicit as it charges the States with “complicity . . . in past

monopolistic local markets” and exclaims that, given their

“complicity,” “Congress kept state commissions on a short

leash” in performing any role under the Act. MCI Pet. at 7.

Contrary to such wild claims, the terms of the Act make it

plain that Congress intended the States to play a vital and

independent role in implementing critical terms of the Act.

While the FCC and its supporters see any variation in the

application of the Act as a descent into chaos that must be

stopped, the 104th Congress saw it as federalism. As this

Court has often pointed out, decentralized decisionmaking is

one of the most salutary aspects of our federalist system of

government. Cf Gregory v. Ashcrofi, 501 U.S. 452, 458

(1991) (noting that the “federalist structure of joint sovereigns”

“allows for more innovation and experimentation in

government”). The 104th Congress that passed the

Telecommunications Act was keenly aware of the benefits that

can come from keeping power in the hands of the States and

thus called upon the state commissions -- which have regulated

local telephone service for decades -- to play a central role in

implementing the Act by conducting the case-specific

23

arbitrations that would lead to interconnection agreements.

The States, after all, were in the best position to implement the

Act in a manner that would not undermine the mechanisms

used in each locality for promoting universal service.

In large part, the FCC simply assumes that there must be

an overriding concern for producing a single, uniform

application of the terms of the Act nationwide. Thus, the FCC

and its supporters complain that under the Eighth Circuit's

decision, the district court review process provided by

Congress may take years before a completely uniform

interpretation of the pricing provisions of the Act is achieved.

The answer to this claimed infirmity in the decision is simple:

the federal agency’s obsession with rigid uniformity in results

appears nowhere in the text of the statute. To the contrary, the

Act relies primarily on private negotiations to establish

interconnection agreements and frees such negotiated

agreements from many of the specific requirements of the Act.

See § 252(a). That rule obviously permits the widest

imaginable variation in results. In addition, after assigning

individual state commissions the task of conducting

arbitrations, Congress provided for the most decentralized

system of review possible -- review in the 93 federal district

courts. See § 252(e)(6). Nothing about that system reveals a

congressional concern with rapidly establishing a single,

rigidly uniform application of the Act. To the contrary,

Congress gave the States a vital role in implementing the Act

precisely so that state commissions could use their localized

experience to apply the Act to the varying circumstances in

each of the fifty States.

That process of applying the Act, moreover, has long been

underway. And while the FCC claims that it wants to speed

implementation of the Act, it is actually further review of the

FCC’s claims to jurisdiction that will disrupt the steady

progress the States have made in moving towards competition

under the Act. Since the Eighth Circuit stayed the FCC’s

24

pricing rules over a year ago, state commissions have

proceeded rapidly with localized, case-specific arbitrations and

have produced final interconnection agreements allowing new

entrants to use incumbents’ facilities, just as Congress

intended. And despite the FCC’s claims last fall that only it,

and not the States, could be trusted to impose proper prices

under the Act, as events have unfolded, the FCC has recently

proclaimed that in fact “virtually every state” has followed the

general approach adopted by the FCC and has required pricing

based on forward-looking measures of cost. See, e.g. Reed

Hundt, Chairman, FCC, remarks to the Chamber of Commerce,

Washington, D.C. (May 29, 1997) (“[V]irtually every state in

the Union has adopted our policies.”).

Given the FCC’s own assertions about the success its

pricing theories have enjoyed in the States, the dire claims

presented to this Court concerning the implementation of the

Act ring rather hollow. Indeed, it seems clear that what is at

stake here is not a battle over a fundamentally different pricing

theory that will make or break competition in local telephone

service, but rather a turf battle over whether or not a federal

agency can augment its power so as to dictate every nuance of

the pricing decisions state regulators must make under the Act.

Even if the Court were to grant review and even if it were

somehow to conclude that the Eighth Circuit erred in its rulings

on the FCC’s jurisdiction over pricing, that decision would

hardly lead to any speedier implementation of the local

competition provisions of the Act. To the contrary, it would

only produce lengthy rounds of additional litigation.

To begin with, GTE and other parties argued below that

the FCC’s pricing rules were invalid not only because the FCC

lacked jurisdiction, but also because the substantive pricing

standards violated the terms specified by Congress. On remand

the Eighth Circuit would have to revisit the question of the

substantive validity of the FCC’s pricing rules. And given that

the Eighth Circuit already has squarely concluded that the

25

proxy prices the FCC developed based on its pricing theories

were likely to cause incumbents irreparable harm, there is a

substantial possibility that the Eighth Circuit will strike down

the FCC’s pricing rules on the merits. In that event, the FCC

would have to re-work its pricing approach before there could

be any question of its rules ultimately being implemented by

state commissions across the country.

Moreover, even if a set of pricing rules from the FCC were

eventually approved in court, that would not mean that such

rules could instantly be implemented. Since the Eighth Circuit

stayed the FCC’s pricing rules over a year ago, the States have

been conducting arbitrations under their own interpretations of

the Act’s pricing provisions. Most of those arbitrations have

produced final agreements that are now before district courts

under the review provisions specified by Congress.

See § 252(e)(6). Changing the applicable pricing rules now

would mean suspending all of those district court actions,

turning the clock back to the fall of 1996, and returning the

arbitrated agreements to the States so that state commissions

could re-wor., their pricing decisions to conform precisely to

the FCC’s rules. There is no reason to expect that this would

be a speedy process. While most States have adopted many of

the same basic approaches favored by the FCC, local variations

in the details are plentiful -- just as Congress intended in

allowing state commissions to use their local experience to

implement the basic pricing standards of the Act. Even a slight

change in the method used for determining the costs that

underlie the cost-based pricing mandated by section 252(d)(2)

could mean requiring the preparation of entirely new cost

models, a process that could take many months of work.

In short, for well over a year, since the Eighth Circuit first

stayed the FCC’s pricing rules, the States have been laboring

to implement the local competition provisions of the Act and

have proceeded far along the path of using their own localized

expertise to apply the pricing standards specified in section

26

252(d). The FCC, moreover, has publicly declared that the

most critical aspects of its own pricing theories have been

adopted across the country by the States acting independently.

If this Court were to grant review now, the progress the States

have made would be suspended and implementation of the Act

would only be delayed.

Il. The Eighth Circuit’s Holding that Incumbent LECs

Cannot Be Required to Provide Unbundled Elements

Already Preassembled Into Platforms Was Plainly

Correct, and in Any Event Involves Only Settled

Principles of Statutory Construction.

The Court of Appeals’ ruling that entrants may not obtain

network elements already preassembled into fully operational

service platforms also does not merit review for at least two

reasons.

First, the holding was simply a correct application of

standard rules of construction. The holding implements the

clear directive in section 251(c)(3) that incumbents must

provide “unbundled network elements in a manner that allows

requesting carriers to combine such elements.” (emphasis

added). As the Eighth Circuit explained, this “sentence

unambiguously indicates that requesting carriers will combine

the unbundled elements themselves” -- incumbent LECs, in

other words, have no duty to accomplish the combining for

new entrants. Pet. App. 53a.

The Eighth Circuit’s ruling on this point, moreover, was

critical for maintaining a coherent interpretation of the

obligations imposed on incumbents by the Act. GTE and other

petitioners had argued that new entrants should not be allowed

to provide local service solely through the purchase of

unbundled elements because it would create opportunities for

rampant arbitrage. As outlined above. given the prevailing

interpretation that the pricing standards for wholesale service

and for network elements were different, allowing entrants to

27

obtain all the elements needed for local service would simply

allow them to obtain effectively the same thing as wholesale

service, but at a different, lower price. Moreover, it would

allow entrants to obtain the incumbent’s finished service while

completely evading any contribution toward universal service.

The Eighth Circuit did not agree entirely with either side

on this issue. The Court ruled that an entrant could provide

service solely through purchasing unbundled network elements,

but it emphasized that its ruling would nor result in the

arbitrage GTE and others had feared. It was critical to the

Court’s analysis that, even though an entrant could effectively

provide the incumbent’s own finished service by means of

purchasing network elements, purchasing elements would not

be a simple substitute for purchasing wholesale service because

it would require the entrant to assume much higher costs and

risks. In particular, purchasers of elements would have to bear

the costs and risks associated with combining the elements

themselves. As the Court explained, “our decision requiring

the requesting carriers to combine the elements themselves

increases the costs and risks associated with unbundled access

as a method of entering the local telecommunications industry

and simultaneously makes resale a distinct and attractive

option.” Pet. App. 56a-57a (emphasis added).

Allowing new entrants to obtain all of the network

elements needed to provide service already combined together,

however, “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 resale on the other.” Order on Rehearing, Pet.

App. 7la. As the Court recognized, obliterating that distinction

would make no sense of the Act, and would simply allow the

disastrous arbitrage that GTE and other LECs had feared.

Petitioners primarily argue that the Eighth Circuit

misinterpreted the term “unbundled.” All the ink petitioners

28

spil! on the meaning of “unbundled” in other contexts, see, e.g.,

FCC Pet. 26-27, AT&T Pet. 24-25, however, is entirely beside

the point. Contrary to the picture petitioners would like to

paint, the Court did not simply look at the term “unbundled” in

isolation and produce the “unexplained assertion,” AT&T Pet.

at 23, that unbundled must mean “separated.” Rather, the text

of section 251(c)(3) makes it clear that Congress envisioned

requesting carriers undertaking the burden of “combining”

physically separated elements. Thus, whatever “unbundled”

may mean in other contexts, read in the context of the sentence

in which it appears in section 251(c)(3), it refers to pieces of

the network that have been provided on a separated basis and

which carriers can “combine.” Moreover, as the Eighth Circuit

explained, the burdens and risks associated with combining

unbundled elements are essential for making sense of the

overall structure of the Act since they preserve a vital

distinction between purchasing unbundled elements and

purchasing services for resale.

In short, the Eighth Circuit’s ruling ensuring that

incumbents will not be forced to provide new entrants with

elements already pre-assembled into operational platforms not

only implements the plain terms of section 251(c)(3) but is also

necessary to preserve the distinction between network elements

and resold service as separate methods of entry into the local

market and to prevent new entrants from pocketing for

themselves the very revenues that support universal service.

Second, as the above analysis suggests, the Eighth

Circuit’s decision to vacate the rule requiring incumbents to

provide pre-assembled packages of elements was only one

facet of its broader reading of the unbundling provisions of the

Act. Thus, the Eighth Circuit ruled in favor of the FCC and

other petitioners in determining both (i) that virtually all of the

business functions of an incumbent LEC were network

elements that must be provided to competitors and (ii) that an

entrant could provide service solely through the purchase of an

29

incumbent’s elements. As a result, if this Court were to

reexamine the Eighth Circuit’s ruling on the issue of pre-

combined network element packages, it would necessarily

require wading into a re-evaluation of the Court of Appeals’

entire approach to understanding the unbundling duties

required by the Act. To preserve its rights on these issues,

GTE intends to file a conditional cross-petition for certiorari

challenging both the Eighth Circuit’s decision affirming the

scope of the FCC’s unbundling rules and its conclusion that

new entrants can be allowed to provide local service solely

through the use of unbundled network elements.

Ill. The Eighth Circuit’s Decision to Vacate the “Pick and

Choose” Rule Correctly Implements the Terms of the

Act and Does Not Merit Review in this Court.

Petitioners’ final claim is that the Eighth Circuit erred in

striking down the FCC’s rule purporting to implement section

252(i). That section provides that a “local exchange carrier

shall make available any interconnection, service, or network

element provided under an agreement . . . to which it is a party

to any other requesting telecommunications carrier upon the

same terms and conditions as those provided in the agreement.”

47 U.S.C. § 252(i). The FCC ruled that under this section

requesting carriers could “pick and choose” among individual

provisions of interconnection agreements, selecting only the

terms that seemed favorable to them and leaving others behind.

The Eighth Circuit rightly concluded that such an

interpretation would undermine the process Congress outlined

for implementing the Act and thus was not a reasonable

reading of the text. Negotiating an interconnection agreement

necessarily involves a process in which each party may make

a concession on a particular point in return for a concession

from the other party -- often on an unrelated part of the

agreement. That bargaining process would be derailed,

however, if after accepting one set of trade-offs in an

agreement every new entrant would remain free to abandon

30

some terms of its deal and to pick out individual terms some

other carrier had obtained -- terms unrelated to the particular

bargains that had been struck in that entrant’s own

negotiations. In essence, agreements reached by negotiation

would never actually be binding since a new entrant would

always be free to jettison the trade-offs it had accepted and to

cherry-pick favorable provisions found elsewhere. The Eighth

Circuit was thus entirely correct in concluding that the FCC’s

construction was not a reasonable reading of the Act.

Petitioners claim that the Eighth Circuit misapplied the

rule of Chevron by substituting its construction of an

ambiguous provision for the FCC’s. See, e.g., AT&T Pet. at

29. That claim, however, mischaracterizes the Eighth Circuit's

analysis. The Court fully acknowledged that “the language of

subsection 252(i) in isolation does not clearly reveal

Congress’s intent,” and, following Chevron precisely,

explained that “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.” Pet. App. 25a

(quoting National R.R. Passenger Corp. v. Boston & Maine

Corp., 503 U.S. 407, 417 (1992)). The Eighth Circuit

reasonably concluded that given the emphasis in the Act on

establishing a system of private negotiations, the FCC's

expansive reading of section 252(i) would undermine the very

process Congress had intended to be the primary means for

implementing the local competition provisions of the Act.

In any event, even if the Eighth Circuit had erred in

applying Chevron analysis, the fact-bound application of such

a well-settled rule of law to the construction of a single section

of a statute cannot justify review in this Court.

CONCLUSION

For the foregoing reasons, the petitions for certiorari

should be denied.

31

Respectfully submitted,

WILLIAM P. BARR PAUL T. CAPPUCCIO

WARD W. WUESTE Counsel of Record

M. EDWARD WHELAN STEVEN G. BRADBURY

GTE SERVICE CORPORATION PATRICK F. PHILBIN

1850 M. Street, N.W. KIRKLAND & ELLIS

Washington, D.C. 20036 655 Fifteenth Street, N.W.

(202) 463-5200 Washington, D.C. 20005

(202) 879-5000

Counsel for Respondents GTE Service Corporation, GTE

Alaska Incorporated, GTE Arkansas Incorporated, GTE

California Incorporated, GTE Florida Incorporated, GTE

Midwest Incorporated, GTE South Incorporated, GTE

Southwest Incorporated, GTE North Incorporated, GTE

Northwest Incorporated, GTE Hawaiian Telephone

Company Incorporated, GTE West Coast Incorporated,

Contel of Minnesota, Inc., and Contel of the South, Inc.

Deceraber 18, 1997

APPENDIX

EXCERPTS FROM IN THE MATTER OF

CC DOCKET NO. 96-98 (AUG. 8, 1996)

T7 619, 628, 630-633, 685, 696

(y

2a

default proxy ceiling or outside the default proxy range, the

state must give full and fair effect to the economic costing

methodology we set forth in this Order and must create a

of review after notice and opportunity for the affected parties

to participate.

7° * *]

B. Cost-Based Pricing Methodology

1. Application of the Statutory Pricing Standard

c. Discussion

628. Sections 251(c\2) and (c)(3) impose an identical

duty on incumbent LECs to provide interconnection and access

to network elements “on rates, terms, and conditions that are

just, reasonable, and nondiscriminatory.”' In addition, both

interconnection and unbundled network elements are made

subject to the same pricing standard in section 252(d)1).

Based on the plain language of sections 251(c)(2), (c)(3), and

section 252(d\(1), we conclude that Congress intended to apply

the same pricing rules to interconnection and unbundled

network elements. The pricing rules we adopt shall, therefore,

apply to both.

[* * *]

2. Rate Levels

a. Pricing Based on Economic Costs

(1) Background

630. We observed in the NPRM that economists

generally agree that prices based on forward-looking long-run

incremental costs (LRIC) give appropriate signals to producers

and consumers and ensure efficient entry and utilization of the

' 47 USC. § 251(cX2), (cX3)

3a

telecommunications infrastructure.’ We noted, however, that

there was a lack of general agreement on the specifics of

methodology for deriving prices based on LRIC or total service

long-run incremental cost (TSLRIC). We invited parties to

comment on whether we should require the states to employ a

LRIC-based pricing methodology and to explain with

specificity the costing methodology they support.’ We

recognized, however, that prices based on LRIC might not

permit recovery of forward-looking costs if there were

significant forward-looking joint and common costs among

network elements.‘ We sought comment on how, if rates are

set above incremental cost, to deal with the problems inherent

in allocating common costs and any other overheads.” We

observed that, by defining the unbundled elements at a

sufficiently aggregated level, it may be possible to reduce the

costs to be allocated as joint and common by identifying a

substantial portion of costs as incremental to a particular

element. To the extent that joint and common costs cannot be

entirely eliminated, we sought comment on various

methodologies for assigning them, including the use of a fixed

allocator or on the basis of inverse demand elasticity. We also

sought comment on whether, regardless of the method of

allocating common costs, we should limit rates to levels that do

not exceed stand-alone costs. Finally, we invited parties to

comment on whether a LRIC-based methodology would

establish a price for interconnection and unbundled network

? NPRM at para. 124.

> Id. at para. 126.

* Id. at para. 129.

* Id. at para. 130.

* Jd. For a definition of stand-alone costs, see Section VII.B.2.a. infra.

4a

elements that includes a reasonable profit and thus complies

with section 252(d)(1).’

631. | Anumber of states already employ, or have plans

to utilize, some form of LRIC or TSLRIC methodology in their

approach to setting prices for unbundled network elements,"

with several states choosing LRIC or TSLRIC as a price floor.’

For instance, the Connection Commission adopted a TSLRIC

methodology to measure the cost of service on SNET, its

principal incumbent LEC."® Arizona also requires incumbent

LECs to conduct TSLRIC costs studies to establish the

* 47 U.S.C. § 252(d)(1 (Ai); NPRM at para. 129.

* See, e.g., California Commission comments at 29 (California has

adopted TSLRIC as the standard for developing the costs of unbundled

elements and in a rulemaking this summer will determine the unbundled

network elements and what level of shared and common costs should be

included in the pnce of each), Michigan Commission comments at 13 (1996

pnices for loops to remain at levels established by the Michigan Commission

in its orginal interconnection order or at TSLRIC), Texas Commission

comments at 22 (Texas Commission has employed LRIC-based pricing

methodologies for many years, SWBT and GTE required to file LRIC costs

studies to be used in pricing not later than November |, 1996).

* See, e.g., Colorado Commission comments at Attachment (Rules

Prescribing Principles for Costing and Pricing of Regulated Services of

Telecommunications Service Providers) 4 CCR 723-30, Rules 4-5, Hawaii

Admunstrative Rules, Sections 6-80-32-34 (setting out a three-tiered pricing

regime with TSLRIC set as floor for pricing of competitive services),

Louisiana Commission comments at Attachment (Louisiana Public Service

Commission “Regulations for Competition in the Local

Telecommunications Market”), p. 30, Washington Commission comments

at 25, Appendix B (Washington Utilities and Transportation Commission

v. U S West Communications, Docket No. UT-950200 at 82 (Washington

Commission, April 11, 1996)), Wisconsin Stat. Ann. section 196.204

(requiring the price of each network service or function to exceed TSLRIC).

" Connecticut Commission comments at 4.

Sa

underlying cost of unbundled services and facilities.'' The

Cost (“LRSIC”) , which is closely related to TSLRIC." The

Missouri and Wyoming Commissions are among a number of

state commissions that have not yet adopted a pricing

methodology, but are considering LRIC or TSLRIC.”

Oklahoma law provides for submission of LRIC cost studies

and studies identifying a contribution to common costs for

interconnection of facilities and access to network elements to

the Oklahoma Commission during an arbitration.'* A number

of states have yet to choose a pricing methodology. For

instance, the New York Commission sets prices on a case-by-

case basis.'* Unbundled element prices also exist in several

States pursuant to negotiated interconnection agreements that

'' Arizona Commission comments, Exhibit V (Anzona Administrative

Code R14-2-1101 et seq.), p. 10.

See, Ohio Commission comments at 43-45.

See, e.g., Missouri Commission comments at || (supports LRIC for

costing, LRIC is defined in pending state legislation); Wyoming

Commission comments at 26-27 (draft rules propose use of TSLRIC as a

price floor, with prices to include a contribution to shared, common, and

joint costs, and the sum of prices for unbundled elements not to exceed retail

for bundled services, incumbent LECs shall impute the pnces of unbundled

elements into the price floors of each of their own services that utilize the

network elements).

‘* Oklahoma Commission comments at appendix A (Corporation

Commission Telephone Rules OAC 165:55-17-25), pp.10-11.

'* Competition, The State Experience at 80 (compilation of written

responses by state commission staffs to questions by FCC staff, compiled

by NARUC) (March 8, 1996).

6a

have either already been approved by state commissions or are

under consideration. '*

632. Section 252(d){1) requires, inter alia, that rates

for interconnection and unbundled network elements be based

on “cost (determined without reference to a rate-of-return or

other rate-based proceeding).”'’ We tentatively concluded in

the NPRM that this language precludes states from setting rates

by use of traditional cost-of service regulation, with its detailed

examination of historical carrier investment and expenses."

Instead, we indicated our belief that the statue contemplates the

use of other forms of cost-based price regulation, such as the

setting of prices based on forward-looking economic cost

methodologies (such as LRIC) and do not involve the use of an

embedded rate base. We sought comment on whether section

252(d)(1) forecloses consideration of historical or embedded

costs or merely prohibits state commissions from conducting

a traditional rate-of-return proceeding to establish prices for

interconnection and unbundled network elements. Embedded

costs are the costs that the incumbent LECs carry on their

accounting books that reflect historical purchase prices,

‘* According to information in our possession, such agreements have

been negotiated in, among other states, Alabama, Florida, Georgia,

Kentucky, Illinois, Louisiana, Mississippi, North Carolina, South Carolina,

and Tennessee. Letter from W.W. Jordan, Executive Director--Federal

Regulatory, BellSouth, to William F. Caton, Acting Secretary, July 11, 1996

at Attachment (containing chart detailing agreements between BellSouth

and new entrants in Alabama, Florida, Georgia, Kentucky, Louisiana,

Mississippi, North Carolina, South Carolina, and Tennessee);

“Interconnection Agreement Under Sections 251 and 252 of the

telecommunications Act of 1996, by and between, Ameritech Information

Industry Services and MFS Intelenet of Illinois, Inc.,” dated May 17, 1996

(filed July 25, 1996).

" 47U.SC. § 252(d\(1)B).

‘* NPRM at pars 123.

7a

regulatory depreciation rates, system configurations, and

operating procedures. We invited parties to comment on

whether incumbent LECs should be permitted to recover some

portion of their historical or embedded costs over TSLRIC."”

633. In the NPRM, we noted that certain incumbent

LECs had advocated that interconnection and access to

unbundled element prices be based on the “efficient

component pricing rule” (ECPR).” Under this approach, an

incumbent LEC that sells an essential input element, such as

interconnection, to a competing network would set the price of

that input element equal to “the input’s direct per-unit

incremental costs plus the opportunity cost to the input supplier

of the sale of a unit of input.””’ We tentatively concluded in

the NPRM that ECPR or equivalent methodologies are

inconsistent with the section 252(d)(1) requirement that rates

be based on “cost,” and we proposed to preciude the states

from using this methodology.”

.° - >)

(3) Discussion

(a) Total Element Long Run

Incremental Cost

'% Id. at para. 129.

% Id. at para. 147. See William |. Baumol, Some Subtle Issues in

Railroad Deregulation, \0 Int’! J. Trans. Econ. 341 (1983), William Baumol

& Gregory Sidak, Toward Competition in Local Telephony (1994), William

Baumal & G gory Sidak, The Pricing of Inputs Sold to Competitors, \\

Yale J. on Reg. 171 (1994).

** William Baumol & Gregory Sidak, The Price of Inputs Sold to

Competitors, || Yale J. on Reg. 171, 178.

@ NPRM at para. 148.

8a

685. Under the third approach, prices for

interconnection and access to unbundled elements would be

developed from a forward-looking economic cost methodology

based on the most efficient technology deployed in the

incumbent LEC’s current wire center locations. This approach

mitigates incumbent LECs’ concerns that a forward-looking

pricing methodology ignores existing network design, while

basing prices on efficient, new technology that is compatible

with the existing infrastructure. This benchmark of forward-

looking cost and existing network design most closely

represents the incremental costs that incumbents actually

expect to incur in making network elements available to new

entrants. Moreover, this approach encourages facilities-based

competition to the extent that new entrants, by designing more

efficient network configurations, are able to provide the service

at a lower cost than the incumbent LEC. We, therefore,

conclude that the forward-looking pricing methodology for

interconnection and unbundled network elements should be

based on costs that assume that wire centers will be placed at

the incumbent LEC’s current wire center locations, but that the

reconstructed local network will employ the most efficient

technology for reasonably foreseeable capacity requirements.

ih * 7

696. We conclude that forward-looking common costs

shall be allocated among elements and services in a reasonable

manner, consistent with the pro-competitive goals of the 1996

Act. One reasonable allocation method would be allocate

common costs using a fixed allocator, such as a perceitage

markup over the directly attributable forward-looking costs.

We conclude that a second reasonable allocation method would

allocate only a relatively small share of common costs to

certain critical network elements, such as the local loop and

collocation, that are most difficult for entrants to replicate

promptly (i.e., bottleneck facilities). Allocation of common

costs on this basis ensures that the prices of network elements

9a

that are least likely to be subject to competition are not

artificially inflated by a large allocation of common costs. On

the other hand, certain other allocation methods would not be

reasonable. For example, we conclude that an allocation

methodology that relies exclusively on allocating common

costs in inverse proportion to the sensitivity of demand for

various network elements and services may not be used.” We

conclude that such an allocation could unreasonably limit the

extent of entry into local exchange markets by allocating more

costs to, and thus raising the prices of, the most critical

bottleneck inputs, the demand for which tends to be relatively

inelastic. Such an allocation of these costs would undermine

the pro-competitive objectives of the 1996 Act.

® See Frank P. Ramsey, A Contribution to the Theory of Taxation, 37

Econ. J. 47 (1927), see generally Kenneth E. Train, Optimal Regulation:

The Economic Theory of Natural Monopoly 115-40 (1992) (discussing

efficiency properties of Ramsey prices), Bridger M. Mitchell & Ingo

Vogelsang, Telecommunications Pricing: Theory and Practice 43-61

(1991). The sensitivity of demand is measured by the elasticity of demand,

which is defined as the percentage change in the quantity of a service

demanded for a one per cent change in price.