Opposition Brief — Federal Communications Commission v. Iowa Utilities Board
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Supreme Court of the United States] oy,
WorLDCoMo, INC., ef al. “1 y>
Puitle, CLERK.
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VERIZON COMMUNICATIONS INC., ef al.,
Respondents.
FEDERAL COMMUNICATIONS COMMISSION and
UNITED STATES OF AMERICA,
Petitioners,
IOWA UTILITIES BOARD, et al.,
Respondents.
AT&T Corp.,
. ‘: Petitioner,
IOWA UTILITIES BOARD, et al.,
Respondents.
On Petitions for Writs of Certiorari
to the United States Court of Appeals
for the Eighth Circuit
BRIEF IN OPPOSITION OF
BELLSOUTH, SBC, AND VERIZON
WILLIAM P. BARR MARK L. EVANS
M. EDWARD WHELAN Counsel of Record
VERIZON SERVICES GROUP MICHAEL K. KELLOGG
1850 M Street, N.W. HENK BRANDS
Washington, D.C. 20036 KELLOGG, HUBER, HANSEN,
(202) 463-5200 Topp & EVANS, P.L.L.C.
1615 M Street, N.W.
PATRICK F. PHILBIN Suite 400
STEVEN G. BRADBURY Washington, D.C. 20036
JENNIFER R. BROSNAHAN (202) 326-7900
KIRKLAND & ELLIS
655 15th Street, N.W. Counsel for BellSouth
Washington, D.C. 20005 Corporation and
(202) 879-5000 SBC Communications Inc.
Counsel for Vefizon Entities November 17, 2000
(Additional Counsel Listed on Inside Cover)
MICHAEL E. GLOVER
VERIZON
1320 North Courthouse Road
8th Floor
Arlington, Virginia 22201
(703) 974-2944
Counsel for Verizon Entities
CHARLES R. MORGAN
M. ROBERT SUTHERLAND
BELLSOUTH CORPORATION
1155 Peachtree Street, N.E.
Atlanta, Georgia 30309
(404) 249-4839
Counsel for BellSouth
Corporation
JAMES D. ELLIS
PAUL K. MANCINI
SBC COMMUNICATIONS INC.
175 E. Houston
San Antonio, Texas 78205
(210) 351-3500
ROGER K. TOPPINS
HOPE E. THURROTT
CHRISTOPHER M. HEIMANN
SBC COMMUNICATIONS INC.
1401 I Street, N.W.
Suite 1100
Washington, D.C. 20005
(202) 326-8891
Counsel for SBC
Communications Inc.
QUESTIONS PRESENTED
1. Whether the FCC acted unlawfully in adopting, for
purposes of calculating the price of unbundled network
elements, a methodology for measuring the costs of
incumbent local exchange carriers (“LECs”) that assumes,
among other things, a network that at all times is optimally
efficient in both its configuration and its use of technology.
2. Whether the FCC acted unlawfully in adopting a rule
that requires incumbent LECs, on request, to combine
previously uncombined network elements.
3. Whether the FCC acted unlawfully in adopting, for
purposes of fixing wholesale discounts, a methodology that
measures the costs that an incumbent LEC will avoid as a
result of the wholesale arrangement on the counterfactual
assumption that the incumbent LEC will entirely withdraw
from retailing.
(i)
CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 29.6 of the Rules of this Court,
respondents BellSouth Corporation, SBC Communications
Inc., and the Verizon Entities” state the following:
BellSouth Corporation has no parent company, and no
publicly owned company owns 10% or more of its stock.
SBC Communications Inc. has no parent company, and no
publicly owned company owns 10% or more of its stock.
On June 30, 2000, GTE Corporation and Bell Atlantic
Corporation closed their merger, and Bell Atlantic
Corporation subsequently changed its name to Verizon
Communications Inc. Verizon Communications Inc. is the
ultimate parent of each of the other Verizon Entities. No
publicly owned company owns 10% or more of the stock of
Verizon Communications Inc.
" The Verizon Entities consist of Verizon Communications Inc., GTE
Incorporated, Verizon California Inc. (f/k/a GTE California
Incorporated), Verizon Florida Inc. (f/k/a GTE Florida Incorporated),
GTE Midwest Incorporated, Verizon South Inc. (f/k/a GTE North
Incorporated), GTE Southwest Incorporated, Verizon North Inc. (f/k/a
GTE North Incorporated), Verizon Northwest Inc. (f/k/a GTE Northwest
Incorporated), Verizon Hawaii International Inc. (f/k/a GTE Hawaiian
Telephone Company Incorporated), Verizon West Coast Inc. (f/k/a GTE
West Coast Incorporated), Contel of Minnesota, Inc., and Contel of the
South, Inc.
(ii)
QUESTIONS PRESENTED .........----++++5: i
CORPORATE DISCLOSURE STATEMENT .......
TABLE OF AUTHORITIES ..........---+++5::
ARGUMENT:
1. IF THIS COURT GRANTS THE PETITION
IN NO. 00-511, RESPONDENTS DO NOT
OPPOSE CERTIORARI IN THESE CASES
INSOFAR AS PETITIONERS SEEK REVIEW
OF THE EIGHTH CIRCUIT’S HOLDING
CONCERNING RULE S505(bX(1) .....----
ll. THE EIGHTH CIRCUIT’S HOLDING
CONCERNING THE ADDITIONAL-
COMBINATIONS RULE DOES NOT MERIT
FURTHER REVIEW. .......... +--+ +s=:
Ii. THE EIGHTH CIRCUIT’S HOLDING
CONCERNING THE WHOLESALE-
DISCOUNT RULE DOES NOT MERIT
FURTHER REVIEW. .........--. ++ eee 25
«: «) . 77 re 30
(iii)
TABLE OF AUTHORITIES
CASES
AT&T Corp. v. lowa Utils. Bd., 525 U.S. 366 (1999)
American Trucking Ass’ns, Inc. v. ICC, 669 F.2d 957
(Sth Cir. 1982), cert. denied, 460 U.S. 1022
SE thee dakecnbectadedsesabnbesa ‘17
Communist Party of the United States v. Subversive
Activities Control Bd. , 367 U.S. 1 (1961) 14, 15, 21
GTE Serv. Corp. v. FCC, 205 F.3d 416 (D.C. Cir.
Dt -enbunns 664 c0b06 6405s’ ees 22, 24
Hartford Underwriters Ins. Co. v. Union Planters
Bank, N.A., 120 S. Ct. 1942 (2000) ........ 28
Hartman v. Duffey, 88 F.3d 1232 (D.C. Cir. 1996),
cert. denied, 520 U.S. 1240 (1997) ........ 15
Iowa Utils. Bd. v. FCC:
109 F.3d 418 (8th Cir. 1996) ............ 17
120 F.3d 753 (8th Cir. 1997), aff'd in part,
rev'd in part sub nom. AT&T
Corp. v. lowa Utils. Bd., 525 U.S. 366
RE a eee ae Pee 11, 12, 23
135 F.3d 535 (8th Cir. 1998), vacated, 525
Le 17
No. 96-3321 (and consolidated cases) (8th Cir.
EE ea ee 12
No. 96-3321 (and consolidated cases) (8th Cir.
i . c.teketean ane e & 4 27
Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S.
Philips Corp., 510 U.S. 27 (1993) ......... 14
(v)
vi
Laffey v. Northwest Airiines, Inc., 740 F.2d 1071,
1089 (D.C. Cir. 1984), cert. denied, 469 U.S.
SGD 45.0060 eh aweudweccdeens 15
MCI Telecomms. Corp. v. Illinois Bell Tel. Co., 222
F.3d 323 (7th Cir. 2000), petition for cert.
filed, 69 U.S.L.W. 3297 (U.S. Oct. 23, 2000)
a ee eee eT Te ee 18
MCI Telecomms. Corp. v. U.S. West Communica-
tions, 204 F.3d 1262 (9th Cir.), cert. denied,
No. 00-214, 2000 WL 1202088 (Nov. 13,
My 14060540 646 weee een beeees 16, 19
Northwestern Indiana Tel. Co. v. FCC, 872 F.2d 465
(D.C. Cir. 1989), cert. denied, 493 U.S. 1035
EE “den koe doe ean eens... 15
Omni Outdoor Advertising, Inc. v. Columbia Outdoor
Advertising, Inc., 974 F.2d 502 (4th Cir.
Perret ee re a ee 15
Texas Office of Pub. Util. Counsel v. FCC, 183 F.3d
393 (Sth Cir. 1999), cert. dismissed, No.
99-1244, 2000 WL 1641148 (Nov. 2, 2000) ... 10
U S West Communications v. MFS Intelenet, Inc. , 193
F.3d 1112 (9th Cir. 1999), cert. denied, 120
§-§ e 16, 19
U S West Communications, Inc. v. Hamilton, Nos.
99-35586 et al., 2000 WL 1568707 (9th Cir.
eh Cy C66 ehnne cataae enc’ cus 19
United States v. Adesida, 129 F.3d 846 (6th Cir.
1997), cert. denied, 523 U.S. 1112 (1998) .... 15
United States v. Kress, 58 F.3d 370 (8th Cir. 1995) ... 15
Vii
ADMINISTRATIVE DECISIONS
AT&T Communications of Illinois, Inc. Petition for a
Total Local Exchange Wholesale Service Tariff
from Illinois Bell Telephone Co., Nos. 95-
0458 & 95-0531, Order, 1996 Ill. PUC
LEXIS 320 (111. Commerce Comm'n June 26,
0 Fa errs ere ey 29
AT&T Communications of the Southwest, Inc.'s
Petition for Arbitration, Case Nos. TO-97-40
& TO-97-67, Arbitration Order, 1996 Mo.
PSC LEXIS 65 (Mo. Pub. Serv. Comm’n
et ee cecenededcneeseeeeté aes 29
Application by Bell Atlantic New York for
Authorization Under Section 271 of the
Communications Act To Provide In-Region,
InterLATA Service in the State of New York,
Memorandum Opinion and Order, 15 FCC
i} ee ee 22
Commission Investigation Relative to the Estab-
lishment of Local Exchange Competition and
Other Competitive Issues, Case No. 95-845-
TP-COI, Finding and Order, 1996 Ohio PUC
LEXIS 361 (Ohio Pub. Utils. Comm’n June
SO PPT eT Tr Terrie TTL 29
Implementation of the Local Competition Provisions
in the Telecommunications Act of 1996, First
Report and Order, 11 FCC Red 15499
DD 5 céeseekb ee ben 9aeens 4,5, 11, 25
Vill
Petition for Arbitration of an Interconnection Agree-
ment Between MCImetro Access Transmission
Services, Inc. and GTE Northwest Inc., Docket
No. UT-960338, Arbitrator’s Report and
Decision (Wash. Utils. & Transp. Comm’n
Rage. D, TAD cccccvccsvccecssconses: 28
U S West Communications, Inc. Filing of Advice
Letter No. 2610, Docket No. 96S-233T,
Commission Decision and Order Regarding
Interim Tariffs (Colo. Pub. Utils. Comm’n
a ew rr ere 29
CONSTITUTION, STATUTES, REGULATIONS,
AND RULES
ee Me I as ta ee ad eee ees 5
Communications Act of 1934, 47 U.S.C. §§ 151 ef seq.:
Gr as DD enkGce eee seuen passim
ee SD ne ddive wees eaeeve 25
fF ie > 06060) 4,6,7,9
gp © Tot F000 eee i)
A bi) = ee 3, 25, 28
Oy ee ED. «66s Seca eeeen snes 17
GUE. See 6 ec sncbotves as 17, 18
GP ee ED bc cds cH Re FERC Hoes 17
Hobbs Act, 28 U.S.C. §§ 2341 ef seq. ...... 3, 17, 19
Telecommunications Act of 1996, Pub. L. No.
re, Sn ee a ees oe a seeks 19, 27
Gs EEE bo bc ved scent eoneeseuens 17
47 C.F.R.:
aT in 6 iS alee Oe eke ole oe ee passim
DD ¢«icobes en be aaheaken cane 1]
ie. + os ees > o/bded eewrea passim
BED woé be ekC Obs SANS Oe oka es 11
—) 8 EGER ee eare a> tee passim
ee 2, 25, 26
Disks bens eweiugess theese ee es 21
“ns on ob os Oe Pe ae ee ee 29
OTHER MATERIAL
Declaration of A. Daniel Kelley, attached to
Comments of WorldCom, Inc., Application by
Verizon New England Inc., et al. for
Authorization to Provide In-Region, Inter-
LATA Services in Massachusetts, CC Docket
No. 00-176 (FCC filed Oct. 16, 2000)
<http://gullfoss2.fcc.gov/prod/ecfs/retrieve
.cgi?native or pdf=pdf&id document
SE 6 bdr see eet en bn 8 0 8 6 27
William Fellner, The Influence of Market Structure on
Technological Progress, in Am. Econ. Ass’n,
Readings in Industrial Organization and Public
Policy 277 (Homewood: Richard D. Irwin,
a errr ee eee rere 9
Alfred Kahn, Letting Go: Deregulating the Process of
Deregulation, or: Temptation of the Klepto-
crats and the Political Economy of Regulatory
Disingenuousness (Inst. of Pub. Utils. &
Network Indus., 1998) .......... 9, 11, 25, 28
x
Mike Mills, AT&T Corp. Halts Effort to Sell Local
Residential Phone Service, Wash. Post, Dec.
JA ... Peeee Pee
Robert Stern, Eugene Gressman, Stephen Shapiro &
Kenneth Geller, Supreme Court Practice (7th
~ . Pre rer ee
Charles Wright, Arthur Miller & Edward Cooper,
Federal Practice and Procedure (1981) ......
IN THE
Supreme Court of the United States
No. 00-555
WORLDCOM, INC., ef al.,
Petitioners,
Vv.
VERIZON COMMUNICATIONS INC.., ef ai.,
Respondents.
No. 00-587
FEDERAL COMMUNICATIONS COMMISSION and
UNITED STATES OF AMERICA,
Petitioners ,
v.
IOWA UTILITIES BOARD, et al.,
Respondents.
No. 00-590
AT&T Corp.,
Petitioner,
v.
IOWA UTILITIES BOARD, et al.,
Respondents.
On Petitions for Writs of Certiorari
to the United States Court of Appeals
for the Eighth Circuit
BRIEF IN OPPOSITION OF
BELLSOUTH, SBC, AND VERIZON
Respondents BellSouth Corporation, SBC Communications
Inc., and the Verizon Entities (“the incumbent LEC
respondents”) submit this brief in opposition to the petitions
for writs of certiorari filed by the FCC and its supporters
AT&T Corp. and WorldCom, Inc.
In challenging the Eighth Circuit’s decision in this case, the
Federal Communications Commission (“FCC”) presents two
questions: (1) whether the Eighth Circuit erred in invalidating
47 C.F.R. § 51.505(b)(1), under which incumbent LECs, in
2
return for furnishing network elements to competitors, may
recover only the costs that would be incurred by a
hypothetical network that is at all times optimally efficient in
terms of technology and configuration; and (2) whether the
Eighth Circuit erred in invalidating 47 C.F.R. § 51.315(c)-(f),
under which incumbent LECs must combine, on a
competitor’s request, any elements that are not already
combined in their network. AT&T and WorldCom (but not
the FCC) raise a third issue: whether the Eighth Circuit erred
in invalidating Rule 609, under which the wholesale discount
for resold services is determined on the counterfactual
assumption that the incumbent LEC abandons retailing and
becomes a pure wholesaler. '
The FCC’s first question presented (concerning the agency’s
hypothetical-network assumptions) is closely related to the
issue raised in a pending petition for a writ of certiorari that
we filed last month. In that petition, we challenge the Eighth
Circuit’s holding that the statute does not require the FCC to
use a methodology that takes into account the costs that
incumbent LECs have actually incurred historically for
network elements. If the Court grants our petition, we
therefore do not oppose certiorari in these cases insofar as
petitioners seek review of the Eighth Circuit’s holding
concerning Rule 505(b)(1). On the merits, however, we
disagree with the FCC’s position and believe, as we
summarize below, that the Eighth Circuit’s decision on this
issue is correct. If this Court grants certiorari — and if it does
not endorse the historical-cost reasoning urged in our own
petition — it should affirm the court of appeals’ decision
concerning Rule 505(b)(1).
' AT&T and a fourth petitioner, General Communication, Inc., also
challenge the Eighth Circuit’s invalidation of rules relating to rural
incumbent LECs. Those issues will be addressed in the United States
Telecom Association’s separate brief in opposition.
3
The FCC’s second question presented (concerning the
additional-combinations rule) does not merit further review.
The Eighth Circuit invalidated the additional-combinations
rule more than three years ago, and neither the FCC nor any
of its supporters chose to raise the issue in the petitions for
writs of certiorari they filed at that time. Under settled
principles, they thereby forfeited their challenge. Moreover,
their claim of a conflict with decisions from the Ninth Circuit
is spurious. Because the Eighth Circuit issued its decision in
the course of Hobbs Act review of agency regulations, its
holding — that the statute does not permit the imposition of an
additional-combinations requirement — has nationally binding
effect. Now that the Eighth Circuit has clarified that its
holding was not superseded by this Court’s decision in AT&T
Corp. v. lowa Utilities Board, 525 U.S. 366 (1999), there is
no reason to believe that the Ninth Circuit will decline to
follow the Eighth Circuit’s holding in future cases. In any
event, it is unlikely that the issue will again arise in courts of
appeals outside the Eighth Circuit: as the FCC acknowledges,
in the absence of further review, the agency must conform its
regulations to the Eighth Circuit’s decision. Finally, the
absence of an additional-combinations rule is not of great
import, and the Eighth Circuit’s holding is correct.
The third question (concerning the wholesale discount),
which is raised only by AT&T and WorldCom, likewise does
not warrant further review. The FCC has chosen not to raise
this question, and it would be unprecedented for this Court, at
the behest of private parties, to review a judgment invalidating
a federal regulation when the agency that promulgated it has
declined to seek review. Moreover, the court of appeals was
correct in holding that the FCC’s counterfactual retail-exit
assumption is contrary to 47 U.S.C. § 252(d)(3). Finally,
neither AT&T nor WorldCom points to any conflict among
the circuits, and, even if they could do so, any conflict would
4
dissipate once the FCC promulgates its rules implementing the
Eighth Circuit’s decision.
I. IF THIS COURT GRANTS THE PETITION IN
NO. 00-511, RESPONDENTS DO NOT OPPOSE
CERTIORARI IN THESE CASES INSOFAR AS
PETITIONERS SEEK REVIEW OF THE
EIGHTH CIRCUIT’S HOLDING CONCERNING
RULE 505(b)(1).
The first issue raised by the FCC and its supporters,
concerning the Eighth Circuit’s invalidation of Rule 505(b)(1),
is closely related to the issue presented in our own petition in
No. 00-511. Ifthe Court grants our petition, we therefore do
not oppose certiorari with respect to the Eighth Circuit's
invalidation of Rule 505(b)(1). As explained below, however,
our decision not to oppose certiorari should not be viewed as
signaling agreement with the substantive arguments set forth
in the petitions of the FCC and its supporters.
A. Section 251(c)(3) of the Communications Act requires
that incumbent LECs furnish competitive LECs with “access
to network elements on an unbundled basis.” 47 U.S.C.
§ 251(c)(3). Section 252(d)(1) contains the applicable pricing
standard: the price incumbent LECs may charge competitive
LECs for leasing unbundled network elements must be “based
on the cost . . . of providing the . . . network element” and
“may include a reasonable profit.” Jd. § 252(d)(1). Although
the FCC in regulating incumbent LECs’ rates traditionally
used a historical-cost methodology, which measures the
amount actually spent on a network, the FCC in the Local
Competition Order’ adopted a so-called forward-looking
methodology, which seeks to project the amount that might be
2 Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, First Report and Order, 11 FCC Red
15499 (1996) (“Local Competition Order”).
5
spent on a hypothetical network in the future. See Local
Competition Order 44 620, 683. The FCC adopted this
methodology because, in its view, it would “best replicat{e]
. . . the conditions of a competitive market.” Jd. 4 679.
At the same time, the FCC subjected its forward-looking
methodology (dubbed “TELRIC,” which is short for Total
Element Long Run Incremental Cost) to certain idiosyncratic
assumptions. The FCC required forward-looking costs to be
calculated on the assumption that, at any given time, an
incumbent LEC operates a purely hypothetical network
employing “the most efficient network architecture, sizing,
technology, and operating decisions that are operationally
feasible and currently available to the industry.” /d. 4 683.
According to the FCC, this assumption would again “replicate
conditions in a highly competitive marketplace.” /d. The
FCC made only one minor exception to its assumptions:
although its methodology assumes networks that are optimally
efficient at all times and in all respects, it assumes that those
networks place the wire center (at which all “local loops”
converge and connect to a switch) in the same location as the
incumbent LECs’ actually existing networks. See id. { 685.
This wire-center exception, the FCC said, would “mitigat/e]
incumbent LECs’ concerns that a forward-looking pricing
methodology ignores existing network design.” /d.
Before the court of appeals, the incumbent LEC respondents
challenged both the FCC’s adoption of a forward-looking-
cost methodology and the FCC’s hypothetical-network
assumptions. First, the incumbent LECs argued that the
Statute, by (among other things) using the term “cost,”
requires a methodology that takes account of the historical
costs actually incurred — particularly because a refusal to
permit recovery of costs that were prudently incurred in the
past might effect a taking in violation of the Fifth
Amendment. They also claimed that the FCC had failed to
explain coherently why it should abandon the historical-cost
6
approach that it had traditionally used. Second, the incumbent
LECs argued that a proper interpretation of Section 252(d)(1)
at a minimum prohibited the FCC from making efficiency
assumptions that by their nature could never be met in real
life. They also claimed that the FCC had acted arbitrarily in
FCC’s belief that these assumptions would hold true in a
perfectly competitive market was economically incorrect.
The court of appeals agreed in part and disagreed in part.
It rejected the incumbent LECs’ first contention. According
to the court, “the term ‘cost,’ as it is used in the statute, is
ambiguous,” and the FCC’s decision to interpret that term as
referring to forward-looking and not historical costs was
“reasonable.” Pet. App. lla, 12a.’ The court rejected as
“not ripe for review” the incumbent LECs’ claim that
constitutional considerations required the FCC to construe the
statute to permit incumbent LECs to recover the historical
costs they had actually incurred. /d. at 16a-17a. On the other
hand, the court of appeals sustained the incumbent LECs’
challenge to Rule 505(b)(1). As the court noted, the language
of Section 252(d)(1) requires that network-element rates be
based on “the cost to the ILEC of providing its existing
facilities and equipment.” /d. at 9a. “[I]t is the cost of
providing the actual facilities and equipment that will be used
by the competitor (and not some state of the art presently
available technology ideally configured but neither deployed
by the ILEC nor to be used by the competitor) which must be
ascertained and determined.” /d. at 9a-10a.
B. On October 4, 2000, we filed a petition for a writ of
certiorari (No. 00-511) seeking review of the Eighth Circuit's
judgment insofar as that court upheld the FCC’s rejection of
> “Pet. App.” refers to the Appendix to the FCC’s Petition in No.
00-587.
7
a historical-cost methodology. As our petition explains, the
Eighth Circuit’s error concerns a question — what price may
incumbent LECs charge their competitors for leasing parts of
their network? — of great importance to the vast and growing
telecommunications industry. See Incumbent LECs’ Pet. 2.
The FCC and its supporters now seek review of the other
aspect of the Eighth Circuit’s decision concerning network-
element prices — its holding that the statute prohibits the
hypothetical-network approach embodied in Rule 505(b)(1).
The question presented in their petitions is thus closely
intertwined with the question presented in No. 00-511. Both
arise under the same statutory provision, Section 252(d)(1),
and both concern pricing of the same unbundled network
elements. It would be artificial to place before the Court one
aspect of the FCC’s pricing methodology (its refusal to permit
recovery of historical costs, despite the serious constitutional
issues raised by this) but not a closely related aspect (the
hypothetical-network assumptions made in the FCC’s
methodology). See Incumbent LECs’ Pet. 20-21 n.7.
Accordingly, if the Court grants our petition, respondents do
not Oppose certiorari in these cases insofar as petitioners seek
review of the Eighth Circuit’s holding concerning Rule
505(b)(1).*
C. On the merits, however, the Eighth Circuit's judgment
with respect to this issue was correct. Although we will
postpone to our merits briefs (assuming the Court grants
certiorari) a full rebuttal of the argument advanced by the
FCC and its supporters, certain points require mention even
at this early stage.
* The FCC has reached a similar conclusion: observing that the
questions presented in our petition and the first question presented in its
petition are “closely interrelated,” it “dojes] not oppose” our petition.
FCC Pet. 23 n.13.
1. The FCC and its supporters characterize TELRIC as a
reasonable methodology that has widespread economic
support. They are mistaken. Even assuming that a forward-
looking methodology might be permissible under the Act,
TELRIC makes unrealistic efficiency assumptions that are
without any basis in economics.
At any given time, TELRIC allows incumbent LECs to
recover only the costs that would be incurred by a
hypothetical network that, save for its wire-center location, is,
as a theoretical matter, at all times optimally efficient in all
respects. Because costs in the telecommunications industry
(much as in the computer industry) are constantly declining
due to rapid technological progress, providing service with a
network embodying the latest technology is inevitably less
costly than doing so with a network using older technology.
And it is self-evident that providing service with a network
employing optimal network architecture, sizing, and operating
decisions is less costly than doing so with a network not
answering that description.
Real-life carriers cannot constantly modify their real-world
networks to make them optimally efficient in terms of
technology and configuration. Telephone networks consist
largely of long-lived capital goods, such as switches, wire,
cable, poles, and conduit. Replacing or uprooting already
installed plant and equipment before the end of its economic
life would be imprudent and wasteful. Thus, the FCC’s
approach irrationally assumes the use of a network more
efficient than could ever exist in real life.
The FCC thereby also undershot its target of setting prices
at the level that would prevail in a competitive market. Even
in a perfectly competitive market, output prices would not
constantly decline to the cost of providing service with an
9
optimally efficient network.’ Even if new entrants could build
their costs if they set their prices to reflect only the costs of
providing service over their newly built networks. After all,
the reality that networks that are optimally efficient today will
no longer be optimally efficient tomorrow applies to entrants
no less than to incumbents.°
2. The FCC and its supporters are similarly mistaken in the
way they describe and criticize the Eighth Circuit’s decision.
In particular, the FCC and its supporters misread the Eighth
Circuit’s opinion when they claim that the court eccentrically
latched onto the word “the” in Section 252(d)(1)(A)i)’s
phrase “cost. ..of... the... network element.” FCC
Pet. 11, 17; AT&T Pet. 7; WorldCom Pet. 18. Far from
hinging on a single article, the Eighth Circuit’s opinion
recognized that Section 252(d)(1) governs pricing “for
purposes of subsection (c)(3) of [Section 251]”; that Section
* See Alfred Kahn, Letting Go: Deregulating the Process of
Deregulation, or: Temptation of the Kleptocrats and the Political
Economy of Regulatory Disingenuousness 91 (Inst. of Pub. Utils. &
Network Indus., 1998) (“Kahn, Letting Go”); William Fellner, The
Influence of Market Structure on Technological Progress, in Am. Econ.
Ass'n, Readings in Industrial Organization and Public Policy 277, 289-90
(Homewood: Richard D. Irwin, 1958).
* In proceedings below and elsewhere, the FCC and its supporters
have made three arguments in response to our challenge. They have
claimed that the wire-center exception ameliorates TELRIC’s under-
recovery, that regulatory lag (i.e., the time lapse between re-
determinations of rates) likewise ameliorates the problem, and that proper
depreciation rules may be able to solve the problem altogether. But the
wire-center exception and regulatory lag only diminish, and come
nowhere near eliminating, the harm to incumbent LECs. The FCC’s
reliance on depreciation rules is entirely baseless. The order under
review nowhere reflects any intent to solve the problem described above
with special depreciation rules.
10
251(c)(3) requires incumbent LECs to make available only the
network elements that they actually have, not superior
network elements; and that “the cost... of... the.
network element” therefore must refer to the cost of the actual
network elements made available — not to network elements
better and more efficient than could ever exist in real life. See
Pet. App. 8a-10a. Far from being illogical, that reading is
compelled by the language, structure, and purpose of the
statute.’
The FCC and its supporters also argue that, because a
hypothetical-network approach is part and parcel of any
forward-looking methodology, the Eighth Circuit contradicted
itself by holding that the statute condones a forward-looking
methodology but forecloses a hypothetical-network approach.
See FCC Pet. 17; WorldCom Pet. 19. A forward-looking-
cost methodology, according to the FCC, assumes a time
horizon long enough to allow all elements to be replaced.
And, if one is going to replace assets, the FCC argues, it is
irrational to assume that they will be replaced with anything
other than the most efficient assets available in the
marketplace.
The FCC’s argument starts from a_ considerable
disadvantage: if it were correct, TELRIC itself would be
fatally self-contradictory. After all, TELRIC itself does not
’ Because a different statute was involved, the FCC and its supporters
are wrong when they argue (see FCC Pet. 15, 22; AT&T Pet. 14;
WorldCom Pet. 2, 14) that the Eighth Circuit’s decision conflicts with the
Fifth Circuit's decision in Texas Office of Public Utility Counsel v. FCC,
183 F.3d 393 (Sth Cir. 1999), cert. dismissed, No. 99-1244, 2000 WL
1641148 (Nov. 2, 2000). Even further afield is AT&T's claim that the
Eighth Circuit’s decision conflicts with decisions of other courts of
appeals upholding cost methodologies adopted by other agencies. See
AT&T Pet. 13-14. Those methodologies were different from the FCC’s
and were promulgated pursuant to entirely different statutes.
11
apply the optimal-efficiency assumptions consistently: it holds
wire-center locations constant. See Local Competition Order
{ 685. Indeed, there is nothing to the argument. Even if
forward-looking methodologies contemplate replacement of
assets, the FCC has never explained why it follows that one
must assume that all network assets will be replaced instantly
and simultaneously. That assumption is plainly unrealistic.
See Kahn, Letting Go 91.
The FCC and its supporters distort the Eighth Circuit’s
opinion in various additional ways that require even less
discussion at this point. For example, they surmise that the
Eighth Circuit may have held that the statute requires a short-
run forward-looking-cost methodology, which, because it
would make no allowance for capital investment, would result
in lower (not higher) element prices. See FCC Pet. 20 &
n.10; WorldCom Pet. 19. But the Eighth Circuit nowhere
said this and in fact left undisturbed the part of Rule 505(b)
mandating a long-run methodology. Similarly, the FCC and
its supporters are wrong in suggesting that the Eighth Circuit
believed the statute to require a reproduction methodology.
See FCC Pet. 18; WorldCom Pet. 19. The court of appeals
simply did not say that anywhere.
Il. THE EIGHTH CIRCUIT’S HOLDING CON-
CERNING THE ADDITIONAL-COMBINATIONS
RULE DOES NOT MERIT FURTHER REVIEW.
A. The next issue raised by the FCC concerns Rules
315(c)-(f), the so-called “additional combinations” rule.
Under this rule, an incumbent LEC must upon request
“combine unbundled network elements in any manner, even
if those elements are not ordinarily combined in the incumbent
LEC’s network.” 47 C.F.R. § 51.315(c). The Eighth Circuit
invalidated this rule more than three years ago, in its July
1997 decision. See lowa Utils. Bd. v. FCC, 120 F.3d 753,
813 (8th Cir. 1997). The court of appeals held that the rule
12
was contrary to Section 251(c)(3), which, after providing in
the first sentence only that incumbent LECs must make
available unbundled network elements to requesting
competitive LECs, provides in the second sentence that
incumbent LECs must do so “in a manner that allows
requesting carriers to combine such elements in order to
provide such telecommunications service.” 47 U.S.C.
§ 251(c)(3). The court of appeals held that the statute is thus
clear that incumbent LECs cannot be required to do the
combining. See 120 F.3d at 813.
In 1997, the FCC and its supporters filed petitions for
certiorari raising various issues, but they failed to seek review
of the Eighth Circuit’s invalidation of Rules 315(c)-(f).
Accordingly, this Court’s previous opinion in this case did not
address Rules 315(c)-(f). See Pet. App. 26a. Nevertheless,
petitioners requested (and received) permission to address in
their remand briefs whether this Court’s decision undermined
the Eighth Circuit’s previous holding with respect to Rules
315(c)-(f). See Order at 2-3, Jowa Utils. Bd. v. FCC, No.
96-3321 (and consolidated cases) (8th Cir. June 10, 1999). In
their remand briefs, the FCC and its supporters argued that
this Court’s reasoning with respect to another rule, Rule
315(b), which prohibits incumbent LECs from separating
already combined elements, implied that the Eighth Circuit’s
holding concerning Rules 315(c)-(f) could not stand either.
See Pet. App. 24a. They argued that, whereas the Eighth
Circuit had invalidated Rule 315(b) as contrary to the
language of Section 251(c)(3) requiring access to elements
only “on an unbundled (as opposed to a combined) basis,”
120 F.3d at 813, this Court had held that the “unbundled”
language in Section 251(c)(3) was “ambiguous on whether
leased network elements may or must be separated,” 525 U.S.
at 395. Contending that the Eighth Circuit’s ruling with
respect to Rules 315(c)-(f) turned on its view of the same
13
“unbundled” language, the FCC and its supporters argued that
this ruling could not survive this Court’s decision.
The Eighth Circuit disagreed and saw no reason to disturb
its earlier ruling. As the court of appeals explained, this
Court’s decision concerning Rule 315(b) hinged on its
determination that Section 251(c)(3) was ambiguous on
whether an incumbent LEC may separate already combined
elements. See Pet. App. 28a. In the court of appeals’ view,
that holding did not affect its earlier conclusion that Section
251(c)(3) directly addressed whether an incumbent LEC may
be required to combine elements that are not already
combined. See id. Whereas Congress had left ambiguous
whether an incumbent LEC may separate already combined
elements, the court of appeals said, it had “directly spoken on
the issue of who shall combine previously uncombined
network elements” by providing that an incumbent LEC need
do no more than provide elements “‘in a manner that allows
requesting carriers to combine such elements in order to
provide such telecommunication service.’” /d. at 28a-29a.
B. The FCC and its supporters now invite this Court to
review that ruling. See FCC Pet. 25-29; AT&T Pet. 24-30;
WorldCom Pet. 23-27. This Court should decline that
invitation, for four reasons.
First, although the FCC and its supporters imply that this
Court somehow overlooked something when, in its previous
decision in this case, it “did not specifically address Rules
315(c)-(f),” AT&T Pet. 26; see also FCC Pet. 27; WorldCom
Pet. 24, there is no basis for their indignation. This Court’s
previous decision failed to address the Eighth Circuit’s
holding concerning Rules 315(c)-(f) not because of some
oversight on the Court’s part but because the FCC and its
supporters never challenged it. Although their petitions
challenged several other holdings of the court of appeals, they
presented no question concerning the additional-combinations
14
rule. By failing to include that challenge, the FCC and its
supporters waived it.*
In that respect, this case is indistinguishable from
Communist Party of the United States v. Subversive Activities
Control Board, 367 U.S. 1 (1961). There, the petitioner
challenged numerous rulings of a federal agency in its petition
for review to the court of appeals, including the agency’s
refusal to compel production of a particular set of documents
(though it did not argue the point in its brief). See id. at 30.
Upon losing in the court of appeals, the petitioner filed a
petition for a writ of certiorari, but it did not include among
the questions presented the agency’s refusal to compel
production of the documents. See id. After prevailing in this
Court on other grounds, the petitioner raised the issue on
remand in the court of appeals. See id. Following another
loss in the court of appeals, the petitioner filed a second
petition for a writ of certiorari, raising the document-
production issue for the first time in this Court. See id.
Although this Court granted the petition and addressed other
issues, it refused to address the document-production issue,
Stating:
* The FCC candidly acknowledges that it did not itself challenge
Rules 315(c)-(f) but implies that AT&T did challenge those rules — even
though it concedes that AT&T mentioned those rules “only in passing.”
FCC Pet. 13 n.6; see id. at 27. In fact, AT&T failed to mention the
additional-combinations rule in its 1997 petition. AT&T's only reference
to that rule appeared in its merits brief, and then only as part of a
misguided claim that the Eighth Circuit had invalidated the rule on
grounds related to its jurisdictional holding. See Brief of Petitioners
AT&T et al. at 34, AT&T Corp. v. FCC, Nos. 97-826 et al. (filed Apr.
3, 1998). As confirmed by this Court’s refusal to address that claim, this
plainly was not enough to preserve any additional-combinations
argument, see Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S. Philips
Corp., 510 U.S. 27, 31-32 & n.5 (1993) — let alone the different
argument made now.
|
|
15
It is too late now for the Party to raise this error of
the Board. That error could have been raised here
five years ago. . . . The demands not only of orderly
procedure but of due procedure as the means of
achieving justice according to law require that when
a case is brought here for review of administrative
action, all the rulings of the agency upon which the
party seeks reversal, and which are then available to
him, be presented. Otherwise we would be
promoting the “sporting theory” of justice... . We
hold that the Communist Party abandoned its claim
of error . . . by failing to raise that question in its
previous petition for certiorari here.
Id. at 30-32."
* The rule is no different in the federal courts of appeals. See, e.g.,
United States v. Adesida, 129 F.3d 846, 849-50 (6th Cir. 1997)
(“Defendant could have raised his arguments . . . in the prior appeal, but
failed to do so, and, therefore, he waived his right to raise these issues
. . . before this court on appeal after remand.”), cert. denied, 523 U.S.
1112 (1998); Hartman v. Duffey, 88 F.3d 1232, 1236 (D.C. Cir. 1996)
(“We do not reach the merits of defendant's arguments on this issue
because of the defendant's failure to pursue it in its prior appeal.”), cert.
denied, 520 U.S. 1240 (1997); United States v. Kress, 58 F.3d 370, 373
(8th Cir. 1995) (“Where a party could have raised an issue in a prior
appeal but did not, a court later hearing the same case need not consider
the matter.”); Omni Ouidoor Advertising, Inc. v. Columbia Outdoor
Advertising, Inc., 974 F.2d 502, SOS (4th Cir. 1992) (“[I]n its initial
appeal to this court, Omni chose to focus exclusively on the conspiracy
aspects of the case. Now that Omni has lost on those grounds [in the
Supreme Court], it cannot turn back the clock and resuscitate the
monopolization and attempt to monopolize theories that it earlier chose
not to pursue.”); Northwestern Indiana Tel. Co. v. FCC, 872 F.2d 465,
470 (D.C. Cir. 1989) (“It is elementary that where an argument could
have been raised on an imitial appeal, it is inappropriate to consider that
argument on a second appeal following remand.”), cert. denied, 493 U.S.
1035 (1990); Laffey v. Northwest Airlines, Inc., 740 F.2d 1071, 1089
16
The FCC and its supporters here seek to pursue the very
sporting theory of justice that this Court denounced. Perhaps
fearful that an overabundance of issues raised would make it
less likely that this Court would agree to review any, neither
the FCC nor its supporters chose to raise the additional-
combinations issue three years ago. They did challenge the
court of appeals’ holding concerning Rule 315(b), presenting
an issue concerning which there was likewise no conflict of
authority. Only after prevailing on that issue in this Court did
they raise the issue of Rules 315(c)-(f) on remand, claiming
that the precedent they had established in connection with
Rule 315(b) would be helpful to that end. This kind of
incrementalism cannot be permitted. If it were, the FCC
would presumably be free, were it to prevail here on the
additional-combinations issue, to raise in a third petition the
court of appeals’ holding concerning the superior-quality rule
(see Pet. App. 25a-26a) — an issue that it did not raise three
years ago or even now. Judicial review would never come to
an end.
Second, the FCC and its supporters are wrong in arguing
(see FCC Pet. 27-28; AT&T Pet. 26-27; WorldCom Pet. 23-
24) that there is a certworthy conflict of authority between
the Eighth Circuit’s decision on review of an FCC rule-
making and two decisions of the Ninth Circuit on review of
state commissions’ arbitration orders. See U S West Commu-
nications v. MFS Intelenet, Inc., 193 F.3d 1112 (9th Cir.
1999), cert. denied, 120 S. Ct. 2741 (2000); MCI Telecomms.
(D.C. Cir. 1984) (per curiam) (“ Adherence to the rule that a party waives
a contention that could have been but was not raised on a prior appeal is,
of course, necessary to the orderly conduct of litigation.”) (internal
quotation marks, citation, and brackets omitted), cert. denied, 469 U.S.
1181 (1985); Charles Wright, Arthur Miller & Edward Cooper, Federal
Practice and Procedure § 4478, at 801 (1981) (“[iJ}f the matter is omitted
from one appeal, . . . it may be held foreclosed on a later appeal”).
17
Corp. v. U.S. West Communications, 204 F.3d 1262 (9th
Cir.), cert. denied, No. 00-214, 2000 WL 1202088 (Nov.
13, 2000). As explained more fully below, now that the
Eighth Circuit has explained that its holding concerning the
additional-combinations rule survives this Court’s previous
decision in this case, the Ninth Circuit will likely follow the
Eighth Circuit’s holding in future cases. Even if this were
otherwise, the conflict would dissipate without this Court’s
intervention.
The Eighth Circuit decided this case on petitions for review
of agency rulemaking filed under the Hobbs Act (28 U.S.C.
§§ 2341 et seq.) in various courts of appeals and consolidated
in the Eighth Circuit in accordance with the lottery mechanism
of 28 U.S.C. § 2112(a)(3). See Pet. App. 4a; Jowa Utils. Bd.
v. FCC, 109 F.3d 418, 421 (8th Cir. 1996). Thus, there can
be no doubt that, insofar as the FCC itself is concerned, the
Eighth Circuit’s interpretation of Section 251(c)(3) is binding
nationwide. For example, now that the Eighth Circuit has
held that an additional-combinations requirement violates
Section 251(c)(3), the FCC is no longer free to reimpose such
a requirement when adjudicating a case in which it acts as an
arbitrator under Section 252(e)(6).'° That is so even in
arbitration cases that are appealable only to courts of appeals
other than the Eighth Circuit. See, e.g., lowa Utils. Bd. v.
FCC, 135 F.3d 535 (8th Cir. 1998), vacated on other
grounds, 525 U.S. 1133 (1999); American Trucking Ass’ns,
Inc. v. ICC, 669 F.2d 957, 960-61 (Sth Cir. 1982) (per
curiam), cert. denied, 460 U.S. 1022 (1983).
'© Pursuant to Section 252(e)(5), the FCC arbitrates interconnection
disputes whenever a state commission declines to do so. See 47 U.S.C.
§ 252(e\5). The resulting arbitration decisions are reviewable in courts
of appeals. See 47 U.S.C. § 402(a); 28 U.S.C. §§ 2341 ef seq.
18
The FCC argues, however, that the Eighth Circuit had
exclusive jurisdiction to determine only the validity of
requirements imposed by FCC rules — not equivalent
requirements imposed by state commissions. See FCC Pet. 28
& n.16. Thus, in the FCC’s view, when the Eighth Circuit
invalidates FCC rules, state commissions (at least
commissions in States outside the Eighth Circuit’s territory)
remain free to decide for themselves whether the
Communications Act permits them to impose a duty to
provide additional combinations. See id. at 28. Although
those determinations are then subject to review in federal
district courts and courts of appeals, see 47 U.S.C.
§ 252(e)(6), those courts, in the FCC’s view, would also be
free to determine afresh whether the requirements involved are
consistent with the statute, see FCC Pet. 28 n.16. In the
FCC’s view, then, state commissions need not obey the
Eighth Circuit — even though state commissions must obey
the FCC, which itself must obey the Eighth Circuit.
The FCC’s view is mistaken. After this Court’s
jurisdictional holding in its previous decision in this case, it is
Clear that state commissions act merely as “‘deputized’ federal
regulator(s]”: they exercise a “federal regulatory function
delegated to them by the federal government.” MC/
Telecomms. Corp. v. Illinois Bell Tel. Co., 222 F.3d 323,
341, 344 (7th Cir. 2000), petition for cert. filed, 69
U.S.L.W. 3297 (Oct. 23, 2000) (No. 00-653). Plainly, the
deputy may not do what the principal may not. Interpretations
that are binding on the FCC are therefore just as binding on
State Commissions.
Any other conclusion would be fatally at odds with this
Court’s view that “a federal program administered by 50
independent state agencies is surpassing strange.” Jowa Utils.
Bd. , 525 U.S. at 378 n.6; see id. at 385 n.10 (“we are aware
of no similar instances in which federal policymaking has been
turned over to state administrative agencies”). The regime
19
that the FCC proposes here would be a great deal stranger: it
would involve a federal program in which 50 independent
state agencies must follow FCC rules that are upheld but may
follow or ignore as they see fit FCC rules that are invalidated.
That regime would also be entirely at odds with the FCC’s
previous claim that Congress empowered it to decide
interpretive issues arising under the Telecommunications Act
of 1996 in the course of rulemaking “so that a single court of
appeals could resolve those issues on the merits.” Opening
Brief for the Federal Petitioners at 40, FCC v. Jowa Utils.
Bd., No. 97-831 (filed Apr. 3, 1998).
It is far from clear that the Ninth Circuit viewed matters
differently. When incumbent LECs argued that the Ninth
Circuit was bound to follow the Eighth Circuit's holding, the
Ninth Circuit did not quarrel with the premise but stated only
that “[t}he Supreme Court’s opinion . . . undermined the
Eighth Circuit's rationale.” U S West, 193 F.3d at 1121; see
also MCI Telecomms., 204 F.3d at 1268 (“The Court’s
holding concerning Rule 315(b) . . . confirms that the Eighth
Circuit's interpretation of the Act was incorrect.”). Thus, the
Ninth Circuit apparently believed that, although it would
ordinarily be required to follow the Hobbs Act court's
holdings, that duty was superseded by intervening Supreme
Court precedent undermining the Eighth Circuit's holding.
Now that the Eighth Circuit has explained that this Court's
holding with respect to Rule 315(b) did not undermine the
court of appeals’ rationale with respect to Rules 315(c)-(f), see
Pet. App. 27a-28a, the Ninth Circuit presumably will follow
the Eighth Circuit in future cases.'' There will be time
'"" U § West Communications, Inc. v. Hamilton, Nos. 99-35586 et al.,
2000 WL 1568707 (9th Cir. Sept. 13, 2000), is not to the contrary.
Although the court there cited the two decisions discussed in the text, it
did not have occasion to revisit their substance because it rested its
holding on an unrelated ground (mootness). See id. at *8.
20
enough to grant review if and when this expectation turns out
to be mistaken.”
In any event, even if it were clear that the Ninth Circuit
believed itself free to ignore the Eighth Circuit’s holding, the
conflict should dissolve without this Court’s intervention. The
FCC acknowledges that, absent further review, it will be
required to conform its regulations to the Eighth Circuit's
decision.’ Although the FCC and its supporters make these
statements about the invalidated pricing rules, there is no
reason why the same principle would not apply equally to the
additional-combinations rule. Thus, if the Court denies
certiorari here, the FCC will presumably conform its
regulations to the Eighth Circuit’s view of the law, making
clear that incumbent LECs are not required to provide their
competitors with additional combinations. With a nationally
binding FCC rule in effect, conflicts could no longer arise.
Third, as the FCC and its supporters have effectively
conceded, the Eighth Circuit’s invalidation of the additional-
combinations rule is insufficiently significant to warrant this
Court’s attention in the absence of a certworthy conflict of
authority. In 1997, the FCC and its supporters raised various
conflict-less issues, including the validity of Rule 315(b) (the
" And, in that case, it would plainly be more sensible to accept for
review a case from the Ninth Circuit: unlike the instant case, a case from
the Ninth Circuit would present not only the issue of the meaning of the
'’ See FCC Pet. 22 (“[iJn the absence of further review by this Court,
the FCC would be required to consider new, nationally binding rules
consistent with the Eighth Circuit's decision”); see also Pet. App. 16a
(“Our remand to the FCC of the TELRIC rule should result in a new rule
for determining the compensation that the ILECs will receive for the new
competitor's use of the ILEC’s property.”); WorldCom Pet. 14 (“The
FCC would have to begin a new rulemaking proceeding to devise new
pricing principles for unbundled network elements and resold services.”).
21
separation rule) and Rule 809 (the pick-and-choose rule). But
they did not raise the additional-combinations issue.'* Even
now, the FCC and its supporters apparently do not believe the
invalidation of the additional-combinations rule to be of the
same importance as the invalidation of Rule 505(b)(1):
whereas they each sought a stay of the Eighth Circuit’s
mandate insofar as Rule 505(b)(1) was concerned, they sought
no comparable relief with respect to Rules 315(c)-(f). Indeed,
AT&T’s petition ranks the issue fourth in importance — after
the even more clearly uncertworthy rural and resale-discount
issues. See AT&T Pet. i.
This implicit acknowledgment — that the Eighth Circuit’s
invalidation of Rules 315(c)-(f) raises no issue of sufficient
significance to warrant this Court’s review — is correct.
Although the FCC suggests (Pet. 25-26) that competitive
LECs may be unable to combine network elements if
incumbent LECs fail to do it for them, that is simply not so.
In the wake of the Eighth Circuit’s 1997 decision, incumbent
LECs have made not-already-combined elements available to
competitive LECs by delivering each individual element to
competitive LECs’ facilities, where they are perfectly able to
combine the elements and integrate them with their own
facilities. That arrangement works just as well for elements
to be combined as for individually furnished network
elements."
As this Court put it in the similar Communist Party case: “The
[previous] petition for certiorari . . . presented ten major questions and
innumerable subsidiary points. Yet the [issue raised in the second round
of review], which it is now argued looms so large in the context of this
extraordinarily lengthy and complex proceeding, was not raised, and not
raised by highly experienced lawyers who vigorously contended every
step of the litigation.” 367 U.S. at 32 0.8.
'> Incumbent LECs furnish elements to be combined in the same way
in which they furnish all network elements: by stringing wires from the
22
Finally, the Eighth Circuit’s holding concerning the
additional-combinations rule is correct. Section 251(c)(3)
imposes upon incumbent LECs only an obligation to furnish
unbundled network elements. The Act nowhere imposes an
obligation to supply the labor and ingenuity necessary to
combine unbundled network elements. Moreover, the second
sentence of Section 251(c)(3) confirms that Congress
envisioned that competitive LECs would do the combining, by
imposing upon incumbent LECs only an obligation to furnish
unbundled network elements “in a manner that allows
requesting carriers to combine such elements.” 47 U.S.C.
§ 251(c)(3). After this Court’s previous decision concerning
unbundling duties, see 525 U.S. at 388-90, it is plain that the
FCC has no authority to “impos{e] an [unbundling] obligation
on LECs that has no apparent basis in the statute,” G7E Serv.
Corp. v. FCC, 205 F.3d 416, 423 (D.C. Cir. 2000). Because
the statute provides no basis for — and indeed contradicts —
an obligation to combine unbundled network elements, the
element (say, the loop or the switch port) to competitive LECs’
“collocation” areas, the parts of the incumbent LEC’s central office that
competitive LECs rent. In those areas, competitive LECs can then
combine the leased elements or integrate them with elements of their
own. To the extent that the FCC and its supporters claim that incumbent
LECs have refused to allow competitive LECs to combine network
elements, see FCC Pet. 26; AT&T Pet. 28 & n.11; WorldCom Pet. 25-
26, they are referring to something altogether different. For reasons of
safety and network integrity, incumbent LECs usually do not permit
competitive LECs’ technicians to roam through the central office and
physically combine elements in the incumbents’ areas. But, as the FCC
has itself found, that hardly disables competitive LECs from combining
network elements. See Application by Bell Atlantic New York for
Authorization Under Section 271 of the Communications Act To Provide
In-Region. InterLATA Service in the State of New York, Memorandum
Opinion and Order, 15 FCC Red 3953, 44 231-232 (1999).
23
Eighth Circuit was entirely correct in holding that the FCC is
powerless to impose it.'®
This Court’s decision concerning Rule 315(b) did not
undermine the Eighth Circuit’s interpretation. The Eighth
Circuit “did not . . . employ the same rationale for
invalidating subsections (c)-(f) as [it] did in invalidating
subsection (b).” Pet. App. 28a. Whereas the court of appeals
invalidated Rule 315(b) on the basis of its interpretation of the
phrase “on an unbundled basis” in the first sentence of Section
251(cX(3), see 120 F.3d at 813; 525 U.S. at 376-77, it
invalidated Rules 315(c)-(f) on the basis of its reading of the
second sentence of Section 251(c)(3) and its interrelation with
the first sentence, see 120 F.3d at 813.'’ As urged by the
FCC,"* this Court held merely that the FCC needs no express
'© The FCC itself has stated that the Eighth Circuit's interpretation was
merely “a restatement of its conclusion in striking down the related rule
requiring ILECs to provide ‘superior’ network elements: ‘[SJubsection
251(c)(3) implicitly requires unbundled access only to an incumbent
LEC’s existing network — not to a yet unbuilt superior one."” FCC
Response to Petitions for Rehearing at 9, Jowa Utils. Bd. v. FCC, No.
96-3321 (and consolidated cases) (8th Cir. filed Oct. 1, 1997). That
conclusion was similarly correct, as confirmed by the fact that neither the
FCC nor any of its supporters has challenged it even now.
"’ The paragraph in the Eighth Circuit's 1997 opinion that begins with
“Section 251(c\(3)" was separately added after the Eighth Circuit
resolved a rehearing petition specifically challenging Rule 315(b).
Compare 1997 U.S. App. LEXIS 18183 with 1997 U.S. App. LEXIS
28652. That paragraph thus addresses only Rule 315(b), whereas the
preceding paragraph addresses only Rules 315(c)-(f).
'* See Reply Brief for the Federal Petitioners and Brief for the Federal
Cross-Respondents at 24 n.17, AT&T Corp. v. lowa Utils. Bd., No. 97-
826 ef al. (filed June 17, 1998) (“the discriminatory and wasieful
character of the conduct prohibited in Rule 315(b) justifies that rule quite
apart from a separate issue on which we have not sought this Court's
review: whether an incumbent must itself combine previously uncombined
elements before making them available to new entrants”).
24
statutory authorization to “ensur[e] against an anticompetitive
practice” in the form of the imposition of “wasteful costs” in
connection with the provision of unbundled network elements.
525 U.S. at 395. That holding in no way conflicts with its
holding elsewhere that the FCC may not impose entirely new
sharing duties without express statutory basis. See id.
at 389-90.
The FCC objects, however, that network elements can
sometimes be connected at lower cost if the incumbent LEC
does it for the competitive LEC. See FCC Pet. 25-26; see
also AT&T Pet. 28; WorldCom Pet. 25-26. Perhaps this is
sO in some cases. But, “[iJt was precisely this kind of
rationale, based on presumed cost savings, that the Supreme
Court flatly rejected in Jowa Utilities Board.” GTE Serv.
Corp., 205 F.3d at 424. As Justice Breyer pointed out,
unbundling requirements can bring not only procompetitive
benefits but also “administrative and social costs.” 525 U.S.
at 428. And those costs quickly mount “as one moves beyond
the sharing of readily separable and administrable physical
facilities” to the sharing of the “work force” required to
combine separate elements in the incumbent LEC’s network.
Id. at 429. Thus, to claim that additional combinations must
be provided whenever this would be more efficient from the
competitive LECs’ perspective ignores that “the statute’s
unbundling requirements, read in light of the Act’s basic
purposes, require balance,” and that “[rjegulatory rules that
go too far, expanding the definition of what must be shared
beyond that which is essential to that which merely proves
advantageous to a single competitor, risk costs that, in terms
of the Act’s objectives, may make the game not worth the
candle.” /d. at 429-30.
25
Il. THE EIGHTH CIRCUIT’S HOLDING CON-
CERNING THE WHOLESALE-DISCOUNT RULE
DOES NOT MERIT FURTHER REVIEW.
A. Section 251(c)(4) requires incumbent LECs “to offer for
resale at wholesale rates any telecommunications service that
the carrier provides at retail.” 47 U.S.C. § 251(c)(4). The
applicable pricing provision, Section 252(d)(3), provides that
the wholesale rate must be set “on the basis of” the incumbent
LEC’s “retail rates,” “excluding the portion thereof
attributable to any . . . costs that will be avoided by the local
exchange carrier.” Jd. § 252(d)(3). The FCC adopted a
pricing rule that deducts from an incumbent LEC’s retail rates
not only the retailing costs that the incumbent LEC actually
avoids due to the wholesale arrangement, nor only the costs
that the incumbent LEC could reasonably avoid if it tried as
hard as humanly possible, but, rather, all the costs that it
would avoid if, contrary to reality, it entirely withdrew from
retailing to become a pure wholesaler. See Local Competition
Order 4911 (“the avoided costs are those that an incumbent
LEC would no longer incur if it were to cease retail operations
and instead provide all of its services through resellers”);
47 C.F.R. § 51.609 (listing categories of costs deemed
avoidable).
In their challenge below, the incumbent LECs argued that,
because retail costs do not decline in direct proportion to the
amount of retail business lost, the FCC’s wholesale discount
is necessarily greater than the costs that any incumbent LEC
could ever hope to avoid in real life. Incumbent LECs
demonstrated that retail costs are often fixed and “lumpy”:
when an incumbent LEC loses a certain number of retail
customers, for example, it may be able to lay off a
proportional number of sales representatives, but it may not be
able to save a proportional amount of rent on its retailing
centers. See Kahn, Letting Go 97. Thus, the incumbent
26
LECs argued, the FCC’s rule was both contrary to the statute
and arbitrary and capricious.
The Eighth Circuit invalidated the FCC’s rule as contrary
to the statute's plain language. The court observed that, by
making the wholesale rate a function of the incumbent LEC’s
retail rate, “[t}he statute recognizes that the ILEC will itself
remain a retailer of telephone service with its own continuing
costs of providing that retail telephone service.” Pet. App.
20a. In contrast, the court noted, the FCC’s rule “treats the
ILEC as if it were strictly a wholesaler whose sole business is
to supply local telephone service in bulk to new purveyors of
retail telephone service.” /d. That, the court held, the FCC
could not do because, “[u}nder the stwtute as it is written, it is
only those continuing costs of providing retail telephone
service which will be avoided by selling to the competitor the
services it requests which are to be excluded.” /d.
Accordingly, the court of appeals vacated Rule 609 and
remanded the matter to the agency for further proceedings.
Id.
B. AT&T and WorldCom — but not the FCC — now seek
review of the Eighth Circuit’s wholesale-discount holding.
This is unwarranted, for three reasons.
First, the FCC’s failure to seek review presumably reflects
its recognition that the invalidation of Rule 609 is not a matter
of sufficient national importance to justify this Court’s
attention. It would be unprecedented for this Court to second-
guess the expert agency on that point. AT&T and WorldCom
point to no case in which this Court agreed to review a court
of appeals’ decision invalidating a federal administrative
regulation in a case in which the promulgating agency itself,
though a party, declined to seek review.'®
'? And, as WorldCom correctly observes, see WorldCom Pet. 17 n.7,
the wholesale-pricing issue is “completely independent from” TELRIC-
27
Moreover, even AT&T and WorldCom have recognized
that the resale rule has limited practical significance compared
to Rule 505(b)(1). Whereas both companies sought a stay in
connection with the court of appeals’ holding concerning Rule
505(b)(1), they did not similarly seek a stay with respect to
the resale rule and, indeed, did not even support the stay
request filed by a third party.” This is not surprising. As
WorldCom recently stated: “Neither WorldCom nor AT&T
_ is relying on resale in. . . any . . . state.”"' AT&T's
assertion that it is now developing “plans to use resale”
(AT&T Pet. 24) is surprising. After embarking on a broad-
based resale initiative in the wake of the enactment of the
Telecommunications Act of 1996, AT&T announced in 1997
that it was withdrawing from resale entirely.” To our
knowledge, there have been no contrary announcements since.
Second, the Eighth Circuit's holding is correct. AT&T and
WorldCom imply that the issue presented is whether the
statutory phrase “costs that will be avoided by the local
exchange carrier” should be read to mean either “costs that
related issues. Thus, it would be inappropriate to grant review in
connection with the wholesale-discount issue on the theory that the issue
is related to the issue concerning Rule 505(b)(1).
* The Eighth Circuit, similarly recognizing the differential impact,
stayed its mandate concerning Rule 505(b)(1) but denied the stay request
with respect to the wholesale-discount rule. See Jowa Utils. Bd. v. FCC,
No. 96-3321 (and consolidated cases) (8th Cir. Sept. 22, 2000).
2! Declaration of A. Daniel Kelley q 11, attached to Comments of
WorldCom, Inc., Application by Verizon New England Inc., et al. for
Authorization to Provide In-Region, InterLATA Services in
Massachusetts, CC Docket No. 00-176 (FCC filed Oct. 16, 2000)
<http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf= pdf&
id document = 651 1959786 > .
2 See, e.g., Mike Mills, AT&T Corp. Halts Effort to Sell Local
Residential Phone Service, Wash. Post, Dec. 19, 1997, at G01.
28
the incumbent LEC actually avoids” or “costs that the
incumbent LEC can reasonably avoid.” In fact, AT&T and
WorldCom could not prevail under either standard. The
Eighth Circuit held only that the statutory language cannot be
interpreted to refer to costs that the incumbent LEC would
avoid if it entirely withdrew from retail. See Pet. App. 19a-
20a. That holding is unquestionably correct. The FCC’s
assumption that incumbent LECs will abandon retailing is as
contrary to reality as an assumption that incumbent LECs ride
magic carpets. It is also contrary to the statute. By making
incumbent LECs’ retail rates the starting point for their
wholesale rates, Congress plainly assumed that incumbent
LECs would not withdraw from retailing. See 47 U.S.C.
§ 252(d)(3). If Congress had intended that all retailing costs
be deducted, it would simply have omitted the words “that
will be avoided by the local exchange carrier.””
Finally, AT&T and WorldCom point to no conflict among
the circuits. Although WorldCom cites purportedly
conflicting decisions of two district courts and a handful of
state commissions, see WorldCom Pet. 28-29 n.10,”* it is
* Petitioners’ complaint that the Eighth Circuit's view implicitly
makes entrants bear part of the retailing costs of the incumbent LEC
(AT&T Pet. 22-23) constitutes a policy argument that is at odds with the
Statute’s plain language and is therefore more properly directed to
Congress. See, e.g., Hartford Underwriters Ins. Co. v. Union Planters
Bank, N.A., 120 S. Ct. 1942, 1951 (2000). Besides, petitioners’ policy
argument cannot be grounded in principles of economic efficiency: the
invalidated FCC rule had the effect of “encourag{ing] the entry of
resellers whose additional costs of performing [the retail] function exceed
the costs society will save by having the incumbents cease to perform it.”
Kahn, Letting Go 97.
** In fact, many of the decisions to which WorldCom points (Pet. 28-
29 n.10) do not address the issue presented here: whether Section
252(d)(3) permits a retail-exit assumption. See, e.g., Petition for
Arbitration of an Interconnection Agreement Between MCImetro Access
29
settled that a conflict of authority warrants this Court's
attention only if it is between courts of appeals or state courts
of last resort, see Sup. Ct. Rule 10(a); Robert Stern, Eugene
Gressman, Stephen Shapiro & Kenneth Geller, Supreme Court
Practice 178 (7th ed. 1993). Moreover, even if there were a
genuine conflict, it would dissipate without this Court's
intervention. As discussed above, the FCC has acknowledged
that, in the wake of the Eighth Circuit’s decision, it is
“required to consider new, nationally binding rules consistent
with the Eighth Circuit's decision,” FCC Pet. 22, which will
preclude the possibility of future conflicting state commission
(or district court) rulings.
Transmission Services, Inc. and GTE Northwest Inc., Docket No. UT-
960338, Arbitrator’s Report and Decision at 21 (Wash. Utils. & Transp.
Comm'n Apr. 3, 1997); AT&T Communications of the Southwest, Inc.'s
Petition for Arbitration, Case Nos. TO-97-40 & TO-97-67, Arbitration
Order, 1996 Mo. PSC LEXIS 65, at *60-*61 (Mo. Pub. Serv. Comm'n
Dec. 11, 1996); U S West Communications, Inc. Filing of Advice Letter
No. 2610, Docket No. 96S-233T, Commission Decision and Order
Regarding Interim Tariffs at 10, 24 (Colo. Pub. Utils. Comm'n June 21,
1996); AT&T Communications of Illinois, Inc. Petition for a Total Local
Exchange Wholesale Service Tariff from Illinois Bell Telephone Co., Nos.
95-0458 & 95-0531, Order, 1996 Ill. PUC LEXIS 320, at *16, *22, *37-
*38 (Ill. Commerce Comm'n June 26, 1996); Commission Investigation
Relative to the Establishment of Local Exchange Competition and Other
Competitive Issues, Case No. 95-845-TP-COI, Finding and Order, 1996
Ohio PUC LEXIS 361, at *107 (Ohio Pub. Utils. Comm'n June 12,
1996).
30
CONCLUSION
If the Court grants the petition in No. 00-511, respondents
do not oppose certiorari in these cases insofar as petitioners
seek review of the Eighth Circuit’s holding concerning Rule
505(b)(1).
should be denied.
WILLIAM P. BARR
M. EDWARD WHELAN
VERIZON SERVICES GROUP
1850 M Street, N.W.
Washington, D.C. 20036
(202) 463-5200
PATRICK F. PHILBIN
STEVEN G. BRADBURY
JENNIFER R. BROSNAHAN
KIRKLAND & ELLIS
655 15th Street, N.W.
Washington, D.C. 20005
(202) 879-5000
MICHAEL E. GLOVER
VERIZON
1320 North Courthouse Road
8th Floor
Arlington, Virginia 22201
(703) 974-2944
Counsei for Verizon Entities
CHARLES R. MORGAN
M. ROBERT SUTHERLAND
BELLSOUTH CORPORATION
1155 Peachtree Street, N.E.
Atlanta, Georgia 30309
(404) 249-4839
Counsel for BellSouth
Corporation
In all other respects, the petitions for certiorari
Respectfully submitted,
MARK L. EVANS
Counsel of Record
MICHAEL K. KELLOGG
HENK BRANDS
KELLOGG, HUBER, HANSEN,
TODD & EVANS, P.L.L.C.
1615 M Street, N.W.
Suite 400
Washington, D.C. 20036
(202) 326-7900
Counsel for BellSouth
Corporation and
SBC Communications Inc.
JAMES D. ELLIS
PAUL K. MANCINI
SBC COMMUNICATIONS INC.
175 E. Houston
San Antonio, Texas 78205
(210) 351-3500
ROGER K. TOPPINS
HOPE E. THURROTT
CHRISTOPHER M. HEIMANN
SBC COMMUNICATIONS INC.
1401 I Street, N.W.
Suite 1100
Washington, D.C. 20005
(202) 326-8891
Counsel for SBC
Communications Inc.
November 17, 2000
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.