Opposition Brief — AT&T Corp. v. Iowa Utilities Board

Jn the Supreme Court of the Uutes States

Octosper Term, 1997

AT&T Corp., ET AL..

. Petitioners,

lows Uturties Boarp. ET AL..

Respondents.

AT&T Corp.. ET AL..

Petitioners.

CALIFORNIA, ET AL..

Re spondents

AND RELATED PETITIONS

On Petitions For A Writ Of Certiorari

To The United States Court Of Appeals

For The Eighth Circuit

BRIEF FOR CALIFORNIA IN OPPOSITION

Perer ArtnH, Jr.

Mark FoGe_Man*

505 Van Ness Avenue

San Francisco, CA 94102

Telephone: (415) 703-1992

*Counsel of Record

Attorneys for California

December 12, 1997

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 42.283)

QUESTIONS PRESENTED

1. Whether the Eighth Circuit correctly concluded,

in light of the mandatory rules of statutory construction

contained in Section 2(b) of the Communications Act of

1934, as amended, and Section 601(c)(1) of the Telecom-

munications Act of 1996, that Congress intended to pre-

serve the role of the States and the dual jurisdictional

scheme for telecommunications regulation by conferring

on the States authority over intrastate pricing, dialing

parity and other requirements of the 1996 Act, except

where the Act expressly confers authority over such

intrastate requirements on the FCC.

2. Whether the Eighth Circuit correctly concluded

that the FCC’s “pick and choose” rule, which was stayed

and later vacated by the Eighth Circuit because it

impeded free and unfettered negotiation between incum-

bent local exchange carriers and competitive local

exchange carriers concerning the terms and conditions of

interconnection, is inconsistent with the language, pur-

poses and structure of the 1996 Act.

3. Whether the Eighth Circuit correctly concluded

that the FCC rule which would in all cases have required

incumbent local exchange carriers to recombine on

request unbundled network elements purchased by com-

petitive local exchange carriers is inconsistent with the

language, purposes and structure of the 1996 Act, where

the rule would have permitted competitive local

exchange carriers engaging in resale to avoid paying

resale prices and where there exist numerous remedies

under the Act to redress specific instances in which an

incumbent local exchange carrier takes action which

impedes competitive entry.

il

QUESTIONS PRESENTED - Continued

4. Whether when Congress enacts a dual jurisdic-

tional scheme establishing separate spheres of authority

for “expert” Federal and State regulatory agencies, the

Federal agency is entitled to Chevron deference with

respect to determinations it makes that are within the

State agency’s sphere of authority or that address the line

between the two spheres of authority.

TABLE OF CONTENTS

Page

ee IED «o's cnn tvolcscteccecess i

STATEMENT OF CALIFORNIA ................ l

STATEMENT OF THE CASE.................;. l

REASONS FOR DENYING THE PETITIONS.... 5

EE 56 te dabye vedacedcl seabbeaksene 14

iv

TABLE OF AUTHORITIES

Page

Cases

Altamont Gas Transmission Co. v. FERC, 92

F.3d 1239 (D.C. Cir. 1996), cert. denied sub

nom. Indicated Expansion Shippers v. FERC,

SUF Wa: Gee eee GUD che ccshald. tucd.clc..s 11

Burlington Truck Lines v. United States, 371

ft RA Te ong OO SAE oe 6

California v. FCC, 75 F.3d 1350 (9th Cir.), cert.

denied, 116 S. Ct. 1841 (1996).............. 8, 13

California v. FCC, 124 F.3d 934 (8th Cir. 1997) ..... 4

California v. FCC, 905 F.2d 1217 (9th Cir. 1990) ..... XS

California v. FCC, 4 F.3d 1505 (9th Cir. 1993) ..... 6

Chevron U.S.A., Inc., v. NRDC, 467 U.S. 837

Gass nakweos<oudhaeae ee ee 10, 11, 12

Clark v. Alexander, 85 F.3d 146 (4th Cir. 1996) ....11

FCC v. Iowa Utils. Bd., 117 S. Ct. 378 (No.

A-299 Oct. 31, 1996) (Thomas, J., in cham-

bers), 117 S. Ct. 429 (No. A-299 Nov. 12,

DOD Ce GN ailtn 6s ichakuetbioevies cakes 4

Illinois Pub. Telecommunications Ass'n v. FCC,

117 F.3d 555, clarified on other grounds on

reh’g, 123 F.3d 693 (D.C. Cir. 1997) ........... 12

lowa Utils. Bd. v. FCC, 109 F.3d 418 (8th Cir.

RR rr a a et 3, 8, 12

TABLE OF AUTHORITIES - Continued

Page

lowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir.

a lt a ea 0 ne a 4

Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S.

ee a ia cksa wend e u ebod 6, 7, 11, 13, 14, 15

Mississippi Power & Light Co. v. Mississippi ex

rel. Moore, 487 U.S. 354 (1988)................ 11

NARUC v. FCC, 880 F.2d 422 (D.C. Cir. 1989) ..... 8

Northwest Central Pipeline Corp. v. Kansas

Corp. Comm’n, 489 U.S. 493 (1989)............ 11

Reno v. ACLU, 117 S. Ct. 2329 (1997)............ 5

SEC v. Chenery Corp., 332 U.S. 194 (1943)........ 6

ADMINISTRATIVE DeEctIsIONS

In the Matter of MTS and WATS Market Struc-

ture, 4 FCC Red 5660 (1989), adopting Rec-

ommended Decision and Order, In the Matter

of MTS and WATS Market Structure, 4 FCC

ey ee NE Dh Gd o CM Aan ed Soe ebas'c coc s 7

ONA Reconsideration Order, 5 FCC Red 3084

Rs ee ER ee ee a a ed ee ne 6

STATUTES

ee eee, © Pen... cc ecadseovedes 13

ES ey ey passim

Se Cs We ED odo cddsecrensecbuusssnensvedéoses 2

vi

TABLE OF AUTHORITIES - Continued

Page

OF GE © Be dev tin tedincikiiess Mm ee 2

OF Wee I ED ccna vacts dacccoccuriconue. 2

OF Dib Gis Fh ee k's whe wedi uleaud cc eee 13

Orner AUTHORITIES

Application of MCI Telecommunications Corp.

for Arbitration Pursuant to Section 252(b) of

the Telecommunications Act of 1996, Con-

necticut Dept. of Pub. Util. Control Docket

No. 96-0909, Reply Letter of MCI dated Nov.

Bin WOW s adn cletbiinn ealitns SR de kee eek an See a 10

Rulemaking on the Commission’s Own Motion

to Govern Open Access to Bottleneck Services

and Establish a Framework for Network

Architecture Development of Dominant Car-

rier Networks, CPUC Rulemaking No.

93-04-003, ALJ Ruling (Mar. 4, 1997) ........... 9

STATEMENT OF CALIFORNIA

The People of the State of California and the Public

Utilities Commission of the State of California (hereinaf-

ter collectively “California”) are the sole State parties

that challenged both the FCC’s First Report and Order'

and its Second Report and Order? and hence are the sole

State respondents who prevailed in both Eighth Circuit

cases below. California, which initiated its transition to

local telephone competition in 1993, has an immense

interest in bringing fair and effective local competition

to its 32 million citizens as soon as possible. In addition,

in California virtually every telephone call which is

subject to the dialing parity rules contained in the Sec-

ond Report and Order is intrastate in nature. California

files this separate brief in opposition in both cases

because of its unique interest and perspective.

STATEMENT OF THE CASE

Congress enacted the Telecommunications Act of

19967 to open all local telecommunications markets to

competition. The Act established a set of duties with

which incumbent local exchange carriers were required

to comply and identified the functions, features and

services that incumbent local exchange carriers were

required to make available to competing local exchange

Carriers, as well as the mutual duties of carriers to each

' Pet. App. 131a, ef seq.

2? Pet. App. 338a, ef seq.

* Pub. L. No. 104-104, 110 Stat. 56 (Feb. 8, 1996), codified at and

amending the Communications Act of 1934, 47 U.S.C. §§ 151, et seq.

other. 47 U.S.C. § 251.4 It authorized carriers to negoti-

ate agreements relating to the terms and conditions upon

which interconnection, resale and the purchase of

unbundled network elements would occur in order to

allow the competing carrier access to the incumbent’s

network. § 252. To the extent that such negotiations were

unsuccessful, it authorized State commissions to arbi-

trate and resolve disputes, and it permitted aggrieved

carriers to appeal State commission determinations to

Federal district courts. Jd. Only if a State commission

failed to carry out its responsibility under § 252 was the

FCC empowered to “assume the responsibility of the

State commission. .. . ” § 252(e)(5).

The 1996 Act did not fundamentally alter the dual

State/Federal jurisdictional scheme established by Sec-

tion 2(b) of the 1934 Act, 47 U.S.C. § 152(b). By leaving

§ 2(b) intact when it passed the 1996 Act (with narrow

and limited exceptions), Congress preserved the FCC’s

broad authority over “interstate” matters but also contin-

ued to fence off from FCC reach and regulation “intra-

state” matters which fall within the exclusive authority

of the States.

Nevertheless, with the enactment of the new law, the

FCC saw opportunity. It issued its epic First Report and

Order which tore asunder the dual jurisdictional scheme

wrought by Congress by asserting FCC jurisdiction over

intrastate matters that Congress reserved to the States,

dictated a single methodology for the intrastate (and

interstate) pricing of local competition services

* Unless otherwise stated, statutory references are to the 1934 Act, as

amended by the 1996 Act. See Note 3, supra.

nationally which it required the States to employ,’ depu-

tized the States to carry out its policies, and appointed

itself the court of review of all State actions.® It simul-

taneously issued its similarly lengthy Second Report and

Order which arrogated to itself the power to dictate to

the States the standards for intraLATA dialing parity,

even though almost every telephone call in the United

States which is subject to those standards is intrastate in

nature.’

Thirty-three States, along with other parties, chal-

lenged the FCC’s opportunistic seizure of authority in

the United States Court of Appeals for the Eighth Cir-

cuit. Some sought a stay of the FCC’s pricing and “pick

and choose” rules pending decision on the merits, and

the Eighth Circuit granted the stay. Jowa Utils. Bd. v.

FCC, 109 F.3d 418 (8th Cir. 1996). On motions to vacate

the stay filed by the petitioners herein, which raised the

very same arguments which they now raise in their

petitions for certiorari (in many cases those argumenis

5 It did so despite significant differences in evolving local markets

and network investment, and in derogation of proceedings in numerous

States, including California, which had begun the process of transitioning

to local telephone competition several years before the 1996 Act was

conceived.

® Pet. App. 30a-34a.

? The rules for interLATA or long distance dialing parity were

established more than a decade ago following the AT&T divestiture,

leaving the sole question the appropriate dialing parity rules for intraLATA

calls (both local and toll). It was undisputed below that no measurable

percentage of intraLATA calls (local and toll) associated with California

LATAs is interstate in nature, and that nationally .002, or approximately 2

out of every 1000 intraLATA calls (local and toll), are interstate in nature.

Moreover, 4 scant two per cent of intraLATA toll calls are interstate in

nature.

are taken verbatim from their applications to vacate the

stay), this Court unanimously declined to disturb the

ruling, rejecting petitioners’ claims that there was a

“reasonable probability” that four members of the Court

would vote to grant certiorari, a “significant possibility”

of reversal of the Eighth Circuit’s decision and “a likeli-

hood” of irreparable harm arising from the decision. See

FCC vy. lowa Utils. Bd., 117 S. Ct. 378 (No. A-299 Oct.

31, 1996) (Thomas, J., in chambers), 117 S. Ct. 429 (No.

A-299 Nov. 12, 1996) (per curiam).

After full briefing and argument, the Eighth Circuit

rendered its final decision, fully consistent with its ear-

lier stay ruling, vacating portions of the First Report and

Order and associated FCC regulations. lowa Utils. Bd. v.

FCC, 120 F.3d 753 (8th Cir. 1997). Shortly thereafter,

the Eighth Circuit rendered its final decision vacating

portions of the Second Report and Order and associated

FCC regulations. California v. FCC, 124 F.3d 934 (8th

Cir. 1997). The court of appeals decisions restored the

dual jurisdictional scheme, upholding State authority

over intrastate pricing and dialing parity standards, and

vacated the FCC’s “pick and choose” rule. On rehearing

in the Jowa Utils. Bd. case, the court of appeals also

vacated the FCC’s regulation requiring incumbent local

exchange carriers to recombine unbundled network ele-

ments on the request of a competing local exchange

carrier. Pet. App. 69a.

The decisions of the court of appeals cure the juris-

dictional maladies of the FCC’s orders, effectuate clear

congressional intent, and engender a workable blueprint

for the ongoing transition from regulation to local tele-

phone competition.

These petitions for certiorari follow.

REASONS FOR DENYING THE PETITIONS

The Telecommunications Act of 1996 may be “an

unusually important legislative enactment,” Reno v.

ACLU, 117 S. Ct. 2329, 2337 (1997), but that observa-

tion does not address the standards for this Court’s

exercise of its certiorari jurisdiction. In attempting to

address those standards, the petitioners argue that cer-

tiorari should be granted because the Eighth Circuit’s

decisions are incorrect, there is a conflict between the

circuits, and there may never be another opportunity for

any court to address the issues presented.

a. The claim that the court of appeals’ decisions

are incorrect is unmeritorious. It was the FCC’s First

Report and Order and Second Report and Order, both of

which usurped State authority over intrastate matters by

reading § 2(b) out of the Act, that erred. Indeed, Con-

gress considered including provisions that would have

made § 2(b) inapplicable to the local competition por-

tions of the Act but affirmatively deleted those provi-

sions from the final version of the statute. See Pet. App.

18a n. 17. There is, however, no necessity for this

Court’s advertence to legislative history. Section 2(b)

itself, which Congress left intact, is unambiguous in

providing that “nothing in this chapter shall be construed

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

to... charges, classifications, practices, services, facili-

ties, or regulations for or in connection with intrastate

communications service” (emphasis added). Thus, as the

court of appeals correctly found, in the absence of clear

statutory language overriding § 2(b) with respect to

particular provisions of the 1996 Act, the section applies.

A further pronouncement of Congress also compels

this view. In § 601(c)(1) of the 1996 Act (enacted and

signed into law but not codified), Congress provided:

“This Act shall not be construed to modify, impair, or

supersede Federal, State, or local law unless expressly so

provided in such Act or amendments.” This provision,

which like § 2(b) is a mandatory rule of Statutory con-

struction, demonstrates that § 2(b), except where

expressly modified, impaired, or superseded, remains in

full force and effect. It also demonstrates that State

authority to regulate intrastate telecommunications under

State law, except where expressly modified, impaired, or

superseded, similarly remains in full force and effect.

The facial language of the statute accordingly supports

the Eighth Circuit’s conclusions. Accord, Louisiana Pub.

Serv. Comm'n v. FCC, 476 U.S. 355, 368-370, 374

(1986).

The petitioners press their claim that the so-called

impossibility or inseverability exception to § 2(b), see

Louisiana, 476 U.S. at 375-376 n. 4, precludes the appli-

cability of § 2(b) to the local competition provisions of

the Act. This argument is patently without merit. Not

only was it not a stated basis for the FCC’s decisions

below, see SEC v. Chenery Corp., 332 U.S. 194, 196

(1943); Burlington Truck Lines v. United States, 371

U.S. 156, 168-169 (1962), but it is flatly refuted by the

FCC’s ONA Reconsideration Order, 5 FCC Red 3084

(1990), reversed on other grounds sub nom. California v.

FCC, 4 F.3d 1505 (9th Cir. 1993), in which the FCC

required, and the Ninth Circuit upheld, dual Federal/

State tariffing of basic network elements, the very sort of

network elements at issue in this case. 4 F.3d at 1513,

1515. The ONA Tariffing decision flies in the face of the

new-found assertion by the FCC that Federal regulation

of the intrastate component of unbundled network ele-

ments is compelled by necessity. Indeed, as noted by the

court of appeals below, ratemaking is inherently sever-

able. Pet. App. 20a. This Court has agreed. Louisiana,

476 U.S. at 375.

Nor is there an inseverability issue with respect to

dialing parity requirements, even though dialing parity

does not involve rates. Again, the FCC did not rely on

inseverability in the Second Report and Order. More-

over, the Second Report and Order, at | 37,® itself

acknowledges that dialing parity rules can be separated

into interstate and intrastate components. In addition, the

FCC’s interest in imposing dialing parity rules which

would apply to intraLATA calls which are 99.8 per cent

intrastate in nature (100 per cent in California) is obvi-

ously de minimis. See Note 7, supra. Notably, in other

contexts, the FCC itself has held that the Federal interest

in regulating service which involves less than ten per

cent interstate traffic is de minimis.? Decision and Order,

In the Matter of MTS and WATS Market Structure, 4 FCC

Red 5660 (1989), at ¥ 2, adopting Recommended Deci-

sion and Order, In the Matter of MTS and WATS Market

Structure, 4 FCC Red 1352 (1989).

® Paragraphs 31-96 of the Second Report and Order, which deal

directly with the FCC’s dialing parity requiremenis and the jurisdictional

issue they implicate, are conspicuously absent from the Petitioners’

Appendix. For the Court’s convenience, California reproduces { 37, which

it has cited, in the appendix to this brief at App. 1-2.

° Approximately 92 per cent of all telephone calls made nationally

are intrastate in nature. Statistics of Communications Common Carriers

(FCC, 1994), at p. 22. Indeed, in 1993 there were nearly twice as many

intrastate telephone calls made in California (68+ billion) as there were

interstate calls made in the entire United States (38+ billion). /d. Thus the

FCC’s construction of the Act would leave a very thin interstate tail

Wagging a very substantial intrastate dog.

8

Finally, the FCC’s inseverability claim ignores

repeated holdings that the exception to § 2(b) is “a

limited one.” California v. FCC, 905 F.2d 1217, 1243

(9th Cir. 1990). Where such a claim is properly asserted,

the FCC bears the burden, plainly not satisfied here, “of

justifying its entire preemption order by demonstrating

that the order is narrowly tailored to preempt only such

State regulations as would negate valid FCC regulatory

goals.” Id. (emphasis in original); accord, California vy.

FCC, 75 F.3d 1350, 1359 (9th Cir.), cert. denied, 116 S.

Ct. 1841 (1996) (FCC bears burden of demonstrating

negation); NARUC v. FCC, 880 F.2d 422, 430 (D.C. Cir.

1989) (“The FCC has the burden . . . of showing with

some specificity that [state regulation] . . . would negate

the federal policy... .”). As noted, the FCC never even

addressed inseverability in its orders below.

Nor is there merit to the claim that the Eighth

Circuit erred in invalidating the FCC's “pick and

choose” rule. The Court has already implicitly rejected

that claim in upholding the court of appeals’ stay of the

rule. Jowa Utils. Bd. v. FCC, supra, 109 F.3d at 423. The

Eighth Circuit correctly concluded below that by “dis-

courag[ing] the give-and-take process that is essential to

successful negotiations,” Pet. App. 26a, the “pick and

choose” rule “would thwart the negotiation process and

preclude the attainment of binding negotiated agree-

ments.” /d. This commonsense proposition is obviously

correct and hardly presents a weighty question worthy of

the Court’s review.

Nor is there merit to the claim that the Court should

grant certiorari because the Eighth Circuit erred in

invalidating the FCC’s rule requiring incumbent local

exchange carriers to recombine unbundled network ele-

ments on request. Pet. App. 70a-7la. The FCC regulation

9

invalidated by the Eighth Circuit would in all cases have

permitted competitive exchange carriers engaging in

resale to avoid resale prices and to purchase services for

resale at unbundled network element prices, a possibility

that could have severely undermined State pricing deter-

minations under the Act. This, the Eighth Circuit con-

cluded, “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. While the Eighth

Circuit’s invalidation of the FCC’s regulation plainly has

a well-reasoned basis, the question presented to this

Court is merely whether the broad mandatory require-

ment of the FCC’s regulation was valid, not whether

States, under their authority to-impose and-enforce com-

petitive cost-based pricing of access to unbundled net-

work elements and resale, might permissibly impose a

Similar requirement in generic proceedings or individual

adjudications. Indeed, long before the Eighth Circuit

invalidated the FCC’s regulation, the California Public

Utilities Commission noted the issue and preserved the

possibility of addressing it, should the Eighth Circuit so

rule and this Court deny certiorari. See Rulemaking on

the Commission's Own Motion to Govern Open Access to

Bottleneck Services and Establish a Framework for Net-

work Architecture Development of Dominant Carrier

Networks, CPUC Rulemaking No. 93-04-003, ALJ Rul-

ing (Mar. 4, 1997), at 9-12.!° The State of Connecticut is

presently considering the same issue. See Application of

10 See App. 3-7.

10

MCI Telecommunications Corp. for Arbitration Pursuant

to Section 252(b) of the Telecommunications Act of 1996,

Connecticut Dept. of Pub. Util. Control Docket No.

96-0909, Reply Letter of MCI dated Nov. 21, 1997.!! In

fact, MCI has represented to the Connecticut commission

that the States of Ohio and Texas have already addressed

the issue as a matter of State law. /d.

The methods which States may devise to deal with

the two countervailing problems of a reseller’s evading

resale prices and an incumbent’s provision of network

access in a way that imposes undue costs on competitive

entry are not yet before the Court. While it is hard to see

how the Eighth Circuit’s invalidation of the FCC's insuf-

ficiently considered regulation presents a question of

monumental public concern, related issues which have in

fact arisen in State commission arbitration and other

proceedings may at some time present questions worthy

of this Court’s review. In any event, contrary to the

petitioners’ puffed arguments, it can hardly be said that

the FCC’s blunderbuss regulation is the sine qua non of

local telephone competition.

Indeed, from the perspective of the States, the court

of appeals gave the FCC far more than it deserved by

according the agency’s interpretation of the statute Chev-

ron deference.'? Pet. App. 8a. In the first place, Chevron

deference is inappropriate where, as here, the statutory

language is clear on its face. Even more importantly,

however, when Congress enacts a dual jurisdictional

scheme establishing separate spheres of authority for

'l See App. 8-13.

'2 Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).

“expert” Federal and State regulatory agencies, the Fed-

eral agency must not be accorded Chevron deference

with respect to determinations it makes that are within

the State agency’s sphere of authority or that address the

line between the two spheres of authority. In such cir-

cumstances, according the Federal agency Chevron def-

erence may give it a license to expand its authority

beyond the limit intended by Congress.

That was precisely the situation in Louisiana, 476

U.S. at 374-375, where Chevron deference was not

accorded to the FCC. The Court simply stated: “An

agency may not confer power upon itself. To permit an

agency to expand its power in the face of a congressional

limitation on its jurisdiction would be to grant to the

agency power to override Congress. This we are both

unwilling and unable to do.” This case, more than most,

demonstrates that where a dual scheme is involved,

Chevron deference is never appropriate because the

agency receiving the deference may use it to upset the

statutory balance established by Congress. See, e.g.,

Northwest Central Pipeline Corp. v. Kansas Corp.

Comm'n, 489 U.S. 493, 512, 515-516 n. 12 (1989);

Altamont Gas Transmission Co. v. FERC, 92 F.3d 1239,

1246-1248 (D.C. Cir. 1996), cert. denied sub nom. Indi-

cated Expansion Shippers v. FERC, 117 S. Ct. 1568

(1997); Clark v. Alexander, 85 F.3d 146, 152 (4th Cir.

1996); but see Mississippi Power & Light Co. v. Missis-

sippi ex rel. Moore, 487 U.S. 354, 380-381 (1988)

(Scalia, J., concurring in the judgment) (suggesting that

Chevron deference should extend to an agency’s deter-

mination of the scope of its own authority). Stated

another way, by retaining § 2(b) in the Act, Congress

12

legislatively determined that Chevron deference is inap-

plicable to the FCC’s expansive determination of its own

jurisdiction.

b. With respect to a purported conflict between the

circuits, there is none. The Solicitor General effectively

concedes this point by arguing that the Eighth Circuit's

decisions “conflict in principle with the decisions of

other federal circuits.” FCC Pet. 11 (emphasis added).

Indeed, the only cited court of appeals case which con-

strues the 1996 Act is /llinois Pub. Telecommunications

Ass'n v. FCC, 117 F.3d 555, 561-562, clarified on other

grounds on reh'g, 123 F.3d 693 (D.C. Cir. 1997). FCC

Pet. 17. That case holds that a provision of the 1996 Act

“should not be read to confer upon the FCC jurisdiction

over [intrastate matters] unless [the provision] is ‘so

unambiguous or straightforward so as to override the

command of § 152(b).’ ” The jurisdictional rulings below

are completely in harmony with this formulation, com-

pare id. with Pet. App. 16a, and fully consistent with

Louisiana and its progeny. There is simply no conflict.

c. Finally, the petitioners argue that certiorari

should be granted because the Court will likely have no

future opportunity to address the scope of the FCC’s

Statutory authority. First, this assertion is speculative;

there must be a current necessity for the Court’s exercise

of its certiorari power. Second, this Court has already

looked at these questions and has rejected the very

arguments raised in the petitions for certiorari in ruling

on the applications to vacate the Eighth Circuit's stay of

the pricing and “pick and choose” rules. Third, issues of

preemption and jurisdiction under the 1996 Act have

persistently arisen in appeals of FCC decisions, and there

is no reason to suppose they will not continue to do so.

See, e.g., lowa Utils. Bd. v. FCC, supra, Pet. App.

13

la-67a (appeal of FCC’s First Report and Order under

the 1996 Act); California v. FCC, supra, Pet. App.

73a-9la (appeal of FCC’s Second Report and Order

under the 1996 Act); Jllinois Pub. Telecommunications

Ass'n v. FCC, supra, 117 F.3d 555 (appeal of FCC’s pay

phone order under the 1996 Act); Texas Office of Public

Utility Counsel, et al. v. FCC (Sth Cir. Nos. 97-60421, et

al. Pet. for Review filed June 25, 1997) (appeal of FCC’s

universal service order under the 1996 Act). Fourth,

appeals from the rulings of the district courts on arbitra-

tion appeals pursuant to § 252(e)(6) will reach the courts

of appeals, permitting unfettered review of jurisdictional

issues raised in those proceedings despite the Hobbs Act,

28 U.S.C. § 2342(1).'3 And fifth, there is no reason to

suppose that district courts will not defer to the Eighth

Circuit's decisions if certiorari is denied. The question is

not whether a denial of certiorari will deprive the Court

of a future opportunity to address the issues in this case,

but whether a grant of certiorari is presently necessary to

settle those issues. It is not.

In the final analysis, this case is fundamentally the

same as Louisiana. There, the FCC argued that “federal

displacement of state regulation is justified under the Act

when necessary ‘to avoid frustration of validly adopted

federal policies.” ” 476 U.S. at 362, 363. In the face of

this argument, the Court observed that “it goes without

Saying that we do not assess the wisdom of the asserted

13 Although AT&T attempts to bloat the importance of the issues by

decisions “should stay proceedings pending this Court's decision,” AT&T

Pet. 11, California is unaware of AT&T, MCI or the FCC requesting that

any district court do so. Moreover, all three of those parties have appeared

in numerous such district court cases and have filed pleadings relying on

the Eighth Circuit’s decisions on various issues.

14

federal policy of encouraging competition within the

telecommunications industry. Nor do we consider

whether the FCC should have authority to enforce, as it

sees fit, practices which it believes would best effectuate

this purpose.” Jd. at 359. The Court then rejected the

FCC’s argument, stating: “As we so often admonish,

only Congress can rewrite this statute.” Jd. at 376.

Similarly here, the petitioners seek to justify the

FCC’s usurpation of State authority over intrastate mat-

ters based on the assertion that a construction of the

Statute displacing the role of the States is necessary to

avoid the frustration of competition. FCC Pet. 24, 29-30.

The petitioners’ assertion is both false and irrelevant. It

is false because, as the FCC acknowledged in both of its

orders below, the States pioneered the shift from regula-

tion to local competition long before the 1996 Act was

conceived. Moreover, the States have consistently met

and continue to meet their responsibilities under the Act.

Thus, if “[{i]ncumbent monopolists benefit enormously

from any delay in opening their markets to competition,”

FCC Pet. 30, it is the FCC’s overreaching, not any action

or inaction by the States, that has spawned that result.

Finally, the petitioners’ assertion is irrelevant because

here, as in Louisiana, and as correctly found by the court

of appeals, the FCC’s remedy lies with Congress, not this

Court.

CONCLUSION

While the 1996 Act may be “an unusually important

legislative enactment,” the questions presented by these

cases are half as important and twice as easy as peti-

tioners would have the Court believe. The Court has

previously rejected the same hyperbolic arguments in

15

ruling on the same petitioners’ applications to vacate the

Eighth Circuit's stay of the FCC’s orders. Moreover, the

Eighth Circuit's decisions are correct, they are fully

consistent with congressional intent, and they provide a

workable blueprint for the transition from regulation to

local telephone competition under the 1996 Act. There is

no conflict between the decisions below and the deci-

sions of this Court or other circuits. Additionally, there

is no necessity for this Court to address the jurisdictional

questions, which it has already addressed in Louisiana

and in its order denying the applications to vacate the

Stay. Finally, as competition moves forward, after the

delay engendered by the FCC’s jurisdictionally defective

reading of the Act, this Court and other courts will have

opportunities to address the 1996 Act, if and when the

need arises.

The petition for a writ of certiorari should be

denied.

Respectfully submitted,

Perer Artu, Jr.

Mark Foce_Man*

505 Van Ness Avenue

San Francisco, CA 94102

Telephone: (415) 703-1992

*Counsel of Record

Attorneys for California

December 12, 1997

App. |

APPENDIX

Second Report and Order, FCC 96-333, 11 FCC

Red 19392, 19414 | 37 (1996) (footnotes omitted.)

c. Discussion

37. With respect to toll service, we conclude that

section 251(b)(3) requires, at a minimum, that customers

be entitled to choose presubscribed carriers for their

intraLATA and interLATA toll calls. Because of the vari-

ations that exist among LATA boundaries and toll traffic

within, and among, the various states, we have also

concluded that each state should have the opportunity to

determine whether customers should be able to pre-

subscribe to carriers for intrastate toll service and for

interstate toll service in lieu of the intraLATA and inter-

LATA toll presubscription dichotomy that we have estab-

lished as a minimum nationwide standard at this time.

Although toll dialing parity typically has been based on

LATA boundaries in multi-LATA states where it has been

implemented, we do not impose a requirement that toll

dialing parity be based only on LATA boundaries given

our expectation that implementation of the 1996 Act

eventually will diminish the significance of LATA

boundaries. We are aware that BOCs remain subject to

certain LATA boundary restrictions for at least the near-

term and that some BOCs may find it technically infeas-

ible, or otherwise undesirable, to implement toll dialing

parity based on state boundaries. We thus conclude that

States should be able to take the relevance of those

factors into account, where applicable, and have the

flexibility to require that toll dialing parity implementa-

tion be based on state boundaries where they determine

that implementing toll dialing parity on the basis of state

App. 2

boundaries would be pro-competitive and otherwise in

the public interest. In Alaska and Hawaii, states with no

LATAs, toll dialing parity will continue to be based on

state boundaries.

App. 3

Excerpt from ALJ Ruling, Rulemaking No.

93-04-003 (Cal. Pub. Utils. Comm’n Mar. 4, 1997)

BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF CALIFORNIA

(Filed

Mar. 4, 1997)

Rulemaking on the Commission’s

Own Motion to Govern Open

Access to Bottleneck Services

and Establish a Framework for

Network Architecture

Development of Dominant

Carrier Networks.

SAN FRANCISCO

OFFICE

No. R.93-04-003

Investigation on the

Commission’s Own Motion

into Open Access and

Network Architecture

Development of Dominant

)

)

)

)

)

)

)

) 1.93-04-002

)

)

)

)

)

Carrier Networks. )

ADMINISTRATIVE LAW JUDGE’S RULING

DECIDING ISSUES RAISED AT JANUARY 28,

1997 PREHEARING CONFERENCE, GRANTING

ONE-WEEK EXTENSION OF TIME FOR

FILING OPENING COMMENTS, AND

SETTING SCHEDULE FOR PROCEEDING

* * *

Should The Issue of “Arbitrage” Between Rates

For Rebundled Network Elements And Rates For

Wholesale Service Be Considered In the Pricing

Hearings?

A second important question at the PHC [pre-hear-

ing conference], which counsel for GTEC characterized

App. 4

as “separate, although related” to the issue of “actual

costs” (id. at 268), was whether hearing time should be

allotted to the issue of rate “arbitrage.” Pacific described

the issue as follows on pages 2-3 of its January 22 PHC

statement:

“The FCC has ordered that CLCs be allowed to

purchase and combine unbundled network ele-

ments together. In some instances, the combina-

tion of [unbundled network elements, or UNEs]

can be used to create the same retail services

which we offer for resale at a discount... . In

these situations, there is an opportunity for

arbitrage if there is a difference between the

price for the combined UNEs and the resale

price for the retail service. This arbitrage has

potentially large financial impacts, since key

services vulnerable to this arbitrage include our

basic exchange services, and our switched

access services provided to interexchange car-

riers.”

At the PHC, counsel for AT&T argued that since the

potential for such arbitrage is inherent in the Telecom-

munications Act of 1996 (Act), the issue is “not legiti-

mate” and a “red herring.” Counsel for MCI explained

how the potential for arbitrage arises from the different

pricing standards for UNEs and wholesale service con-

tained in the Act:

“The Act clearly contemplates the kind of bot-

tom-up TELRIC analysis, or some version of

that, that the FCC and this Commission have

pursued, [fJor what the FCC calls UNEs and

what this Commission has called BNFs.

App. 5

“Conversely, the Act also clearly contemplates

that the determination of an appropriate whole-

sale discount looks at the retail rate — the rate[,]

not the cost — and then takes away from that

avoided cost.

“So if there is an [arbitrage] issue to be

addressed . . . it may well be that that is what

the Act itself contemplates.” (1/28 PHC Tr. at

255.)

Counsel for GTEC responded with the observation

that the Act’s differing pricing standards cannot be con-

sidered the end of the debate:

“Contrary to the comments of one of the par-

ties, we're not seeking to change the pricing

standards that have been set up under the Act.

We recognize that there’s two distinct stan-

dards.

“However, I think that the Act as well as the

FCC Order were silent when you came to the

issue of how those two pricing standards inter-

act.

“And I agree with [counsel for Pacific] that if

you have a situation where somebody can pur-

chase the little [unbundled] pieces and combine

them up at a lower price than the resale rate,

essentially you’re making [the wholesale] sec-

tion of the statute meaningless; and I think

that’s not the way statutes are intended to be

read.” (Id. at 269.)

Upon reflection, I agree with Pacific and GTEC that

the arbitrage issue is not necessarily inherent in the Act’s

two pricing standards, but arises out of the way in which

App. 6

the FCC has interpreted § 251(c)(3) of the Act in its First

Report and Order. This issue is hotly contested and is

squarely before the Eighth Circuit in Jowa Utilities

Board.'° If the Eighth Circuit concludes that the FCC’s

interpretation of § 251(c)(3) is erroneous, then it seems

likely that this Commission will have to deal with the

arbitrage issue. If the Eighth Circuit concludes that the

FCC’s interpretation of § 251(c)(3) is correct, then bar-

ring an appeal to the Supreme Court, the arbitrage issue

will presumably become moot. Either way, the prudent

10 The issue is framed as follows at pages 64-65 of the Brief of the

Regional Bell Companies and GTE (Large LEC Brief) in Jowa Utilities

Board:

“Under section 251(c)(4), Congress imposed a distinct duty on

incumbent LECs to provide retail services to requesting

carriers at wholesale rates so that those carriers can resell the

services to subscribers. Congress defined a distinct pricing

standard for resold services, see § 252(d)(3), and expressly

restricted the uses that can be made of them, see § 271(e)(1).

The Order would nullify these provisions by construing section

251(c)(3) to give requesting carriers an entirely different

avenue for reselling the incumbent LEC’s own finished

service, solely through the imaginary process of ‘unbundling’

the LEC’s entire network and ‘reassembling’ the pieces. .. .

The FCC's ‘rebundle’ rule in effect adds to the two options

enacted by Congress (unbundled elements and resale) a third

option that does not appear in the statute (rebundled elements).

These rebundled elements can be exactly the same, in every

respect, as the LECs’ resold services, but they must be priced

at rates much lower than those derived from the wholesale

discount for resold services. This is not only contrary to the

terms of section 251(c)(3), but also flatly contradicts the

specific pricing standards and other restrictions that Congress

crafted for limiting the reselling of services under the Act.”

For a full discussion of this issue, see the following portions of the briefs in

lowa Utilities Board: Large LEC Brief at 64-69, FCC Brief at 99-106, Brief

of AT&T et al. at 72-77, Large LEC Reply Brief at 42-45.

App. 7

course of action is to allot hearing time on a provisional

basis to consider the arbitrage issue, and then await

developments. Accordingly, the revised procedural

schedule attached to this Ruling as Appendix A includes

an extra week of hearing time to deal with the arbitrage

question.

* * *

/s/ A. Kirk McKenzie

A. Kirk McKenzie

Administrative Law Judge

App. 8

Reply Letter Brief of MCI, Application of MCI

Telecommunications Corporation for Arbitration

Pursuant to Section 252(b) of the

Telecommunications Act of 1996,

Connecticut Dept. of Pub. Util. Control

Docket No. 96-09-09 (Filed Nov. 24, 1997)

(LOGO)

MCI Telecommunications

Corporation

Public Policy Kimberly A. Wild

Northern Region Attorney

Five International Drive

Rye Brook, NY 10573-1095

914 933 6127

Fax 914 251 2287

E mail: 2053845 @mcimail.com

November 21, 1997

(Received Nov. 24, 1997)

Via Federal Express

Robert J. Murphy

Executive Secretary

Department of Public Utility Control

10 Franklin Square

New Britain, CT 06051

Re: Docket No. 96-09-09 — Application of MCI

Telecommunications Corporation for Arbitra-

tion Pursuant to Section 252(b) of the Tele-

communications Act of 1996

App. 9

Dear Secretary Murphy:

MCI Telecommunications Corporation (“MCI”) sub-

mits this letter in response to the November 14, 1997

letter of the Southern New England Telephone Company

(“SNET”) in the above-referenced docket. SNET, in its

letter, seeks to reopen the arbitration between the parties

in order to modify certain provisions contained in the

Agreement for Network Interconnection and Resale

between SNET and MCImetro (“Agreement”). In partic-

ular, SNET requests that the Department of Public Util-

ity Control (“Department”) reopen the proceeding to

modify the Warranties section (April 23, 1997 Errata,

Section 13) as well as the provision regarding combina-

tions of unbundled network elements (Agreement, Issue

16). SNET claims that the October 14, 1997 Eighth

Circuit Court decision invalidates these provisions of the

Agreement and therefore under the Regulatory

Approvals section as well as the Governmental Compli-

ance section! they should be renegotiated. MCI emphat-

ically disagrees with SNET’s position with respect to

these provisions and believes that the provisions should

not be modified and should remain in full force and

effect. MCI requests that the Department deny SNET’s

request to reopen the arbitration proceeding and instead

enforce the relevant provisions of the Agreement.

On October 21, 1997, SNET sent a letter to MCI

requesting an opportunity to “renegotiate” the sections of

the Agreement relating to combinations of unbundled

elements and warranties due to the recent decision of the

Eighth Circuit. SNET requested that MCI respond to its

request by October 31, 1997. SNET indicated that if it

' April 23, 1997 Errata at Section 2.2., Agreement, Governmental

Compliance at p. 71.

App. 10

did not receive a response from MCI by October 31,

1997, it would petition the Department to reopen the

proceeding. MCI, by letter dated November 3, 1997,

responded to SNET by stating that it was always avail-

able to discuss the parties relationship, but that the

provisions of the Eighth Circuit decision cited by SNET

do not require renegotiation of the Agreement.? On

November 14, 1997, SNET filed its request with the

Department to reopen the Agreement between the parties

for the limited purpose described above.

SNET’s request to renegotiate the Warranties sec-

tion of the Agreement in light of the recent Eighth

Circuit decision makes no sense. The Eighth Circuit

decision has no bearing on the Warranties section con-

tained in the Agreement and therefore should not be used

as grounds to alter the provision. The Warranties section

should stand as issued by the Department.

SNET provides no credible support for its request to

renegotiate the provision of the Agreement pertaining to

the combination of unbundled network elements.*

SNET’s legal argument in support of its request, that the

2 SNET in its November 14, 1997 letter to the Department, grossly

mischaracterizes MCI’s position by stating that MCI refused to negotiate

“based on its position that the Eighth Circuit Court's Opinion does not

allow for the reopening of the Agreement.” (Emphasis added.) A quick

reading of MCI’s November 3, 1997 response shows that MCI took no

such position. Rather, MCI stated that the Eighth Circuit decision does not

require the Agreement to be renegotiated. MCI did, however, indicate to

SNET in its November 3, 1997 response that it was available to discuss the

3 Issue 16 — Combinations of Unbundled Elements — provides in

pertinent part “SNET shall provide MCIm, at MCIm’s request, additional

combinations of the unbundled elements which SNET has agreed to make

available pursuant to this Agreement.”

— ee Ow

App. 11

Eighth Circuit decision has interpreted Section 251(c)(3)

of the Telecommunications Act of 1996 (“Act”) to pro-

hibit the incumbent local exchange carrier (“ILEC”)

from combining network elements upon request is pat-

ently incorrect. The Eighth Circuit found and held that

the FCC’s regulation that required ILECs to perform the

combinations was inconsistent with the Act. The Act

does not prohibit ILECs from voluntarily agreeing to

perform element combinations — as SNET did* — and it

likewise does not prohibit the state commissions from

requiring the ILEC to do so as a matter of state law and

policy. The limited legal effect of the Eighth Circuit

opinion is the invalidation of the FCC’s regulations man-

dating that ILECs perform the combinations.

Other state commissions have recently ruled on this

issue. In Ohio, the Public Utilities Commission noted

that the Eighth Circuit’s October 14 decision “did not

address state action under Federal Law or state action

under state law.” Further, the Ohio Commission found

that the “Eighth Circuit’s Order on rehearing notwith-

standing, Ameritech’s agreement through the give and

take of an arm’s length negotiation process, establishes

an independent basis upon which to enforce the terms of

the interconnection agreements. . . . ” (emphasis added).

Similarly, the Texas Public Utilities Commission has

* On December 23, 1996, SNET submitted Revised Best and Final

Offer language to the Arbitrator regarding the combination of unbundled

elements (Issue 16). SNET’s language did not object to the combination of

unbundled elements instead, SNET agreed to provide such combinations of

unbundled network elements and agreed to work with MCI to define the

agreed upon time frame in which a combination would be made available

and the priority in which a combination would be made available. SNET’s

December 23, 1996 Revised Best and Final Offers at p. 16. A majority of

SNET’s Best and Final Offer language is contained in the Agreement.

App. 12

recently found that Southwestern Bell may not now

refuse to provide combinations of elements even after

the Eighth Circuit’s order because Southwestern Bell had

voluntarily agreed to provide such combinations in its

interconnection agreement.*

In addition, the portions of the Agreement that

SNET bases its request for renegotiation on, in particu-

lar; the Regulatory Approvals section and the Govern-

mental Compliance section®, do not support or justify its

request. These provisions of the Agreement condone

renegotiation when a provision is rendered unlawful or is

invalidated by a subsequent court order or other legisla-

tive, regulatory or legal action. As noted above, the

Eighth Circuit’s invalidation of the FCC’s regulation

does not make the provision of the Agreement pertaining

to combinations of unbundled elements unlawful nor

does it invalidate that provision.

5 Similarly, in an earlier decision, not on the issue of combinations of

elements, the New York Public Service Commission concluded that it

would not interfere with those provisions arrived at through negotiations by

the parties and that there is no legal requirement that the Commission

amend those portions of an agreement. October 1, 1997 Order Approving

Interconnection Agreement, Rejecting Portions Thereof, and Granting

Reconsideration at pp. 5-6.

6 Regulatory Approvals, Section 2.2 states in pertinent part “In the

event .. . a court with appropriate jurisdiction issues orders, which make

unlawful any provision of the Agreement, the parties shall negotiate

promptly and in good faith . ” (Emphasis added.) Governmental

Compliance statcs in pertinent part “{I}n the event that legislative,

regulatory, other legal action or changes in laws invalidate a material

term(s) of this Agreement . . . the Parties shall attempt to renegotiate a new

term(s) as may be required to allow this Agreement to continuc.”

(Emphasis added.)

App. 13

In conclusion, MCI requests that the Department

deny SNET’s request to reopen the arbitration in light of

the recent Eighth Circuit Court decision for the purpose

of renegotiating the Warranties provision and the provi-

sion regarding combinations of unbundled network ele-

ments. These provisions should not be modified and

should remain in full force and effect.

Sincerely,

/s/ Kimberly A. Wild

Kimberly A. Wild

cc: Kathleen Carrigan