# Opposition Brief — AT&T Corp. v. Iowa Utilities Board > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0136%3A08 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1998 - **Citation:** 523 U.S. 1135 ## Text Nos. 97-826, 97-829, 97-830 and 97-8 IN THE Supreme Court of the United States October Term, 1997 AT&T CorpP.., et al., Petitioners, Vv. IOWA UTILITIES BOARD, et al., Respondents, AT&T CorpP., et ai.. Petitioners, Vv. CALIFORNIA, ef al., 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. 2000* (202) 879-5000 Counsel for Respondent GTE Entities* December 18, 1997 *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 Telepho.1e Company Incorporated GTE West Coast Incorporated Contel of Minnesota, Inc. Contel of the South, Inc. “4 7 ae ay Pr, 7 ie in 4 ) 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 apply to both. iy * *] 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(¢X2), (©)G) 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. * Id. For a definition of stand-alone costs, see Section VILB.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 ” 47U.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 price of each), Michigan Commission comments at 13 (1996 pnices for loops to remain at levels established by the Michigan Commission in its original 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 Admumstrative Rules, Sections 6-80-32-34 (setting out a three-tiered pricing regime with TSLRIC set as floor for pricing of competitive services); Louisiana Commussion 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 (Arizona Administrative Code R14-2-1101 et seq.), p. 10. 2 See, Ohio Commission comments at 43-45. "See, e.g., Missouri Commission comments at |1 (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 prices 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). " 47 U.S.C. § 252(d\(1)B). ‘© NPRM at para. 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 tu 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 preclude the states from using this methodology.” ty 7 aft (3) Discussion (a) Total Element Long Run Incremental Cost '% Id. at para. 129. 2% Jd. at para. 147. See William J. Baumol, Some Subile Issues in Railroad Deregulation, 10 Int’! J. Trans. Econ. 341 (1983), William Baumol & Gregory Sidak, Toward Competition in Local Telephony (1994), William Baumal & Gregory 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, 11 Yale J. on Reg. 171, 178. 2 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. [ *> * * ] 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 percentage 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0136%3A08. Public record. Not legal advice.