Petitioners Brief — Federal Communications Commission v. Iowa Utilities Board

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Nos. 00-511, 00-555, 00-587, 00-590 and 00-602

In the Supreme Court of the United States

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VERIZON COMMUNICATIONS, INC., ET AL., PETITIONERS

Vv.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

AND RELATED CASES

ON WRITS OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR PETITIONERS

FEDERAL COMMUNICATIONS COMMISSION AND

THE UNITED STATES

BARBARA D. UNDERWOOD

Acting Solicitor General

Counsel of Record

JOHN M. NANNES

Acting Assistant Attorney

General

JOHN E. INGLE

Deputy Associate General LAWRENCE G. WALLACE

Counsel Deputy Solicitor General

LAURENCE N. BOURNE BARBARA MCDOWELL

Counsel Assistant to the Solicitor

Federal Communications General

Commission

( CATHERINE G. O’SULLIVAN

Washington, D.C. 20554

NANCY C. GARRISON

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

ee ia

QUESTIONS PRESENTED

This Court granted certiorari on the following ques-

tions presented in the petition for a writ of certiorari

filed by the Federal Communications Commission and

the United States (No. 00-587):

1. Whether the court of appeals erred in holding

that 47 U.S.C. 252(d)(1) (Supp. IV 1998), a provision of

the Telecommunications Act of 1996, forecloses the

cost methodology adopted by the Federal Communi-

cations Commission for determining the rates that new

entrants into local telecommunications markets must

pay incumbent local telephone companies for providing

interconnection and network elements.

2. Whether 47 U.S.C. 251(c)(3) (Supp. IV 1998) pro-

hibits regulators from requiring that incumbent local

telephone companies combine certain previously un-

combined network elements when a new entrant re-

quests the combination and agrees to compensate the

incumbent for performing that task.

(I)

TABLE OF CONTENTS

Opinions below

Jurisdiction

Statutory provisions involved

Statement

Summary of argument

Argument:

I. The FCC’s choice of a forward-looking pricing

methodology based on the most efficient

technology currently available is consistent with

the text and purpose of the 1996 Act N

II. The combinations rules at issue here, like the one

upheld in Jowa Utilities Board I, are consistent

with the text of the 1996 Act and promote Con-

gress’s purpose of assuring reasonable and non-

TABLE OF AUTHORITIES

Cases:

AT&T v. FCC, 220 F.3d 607 (D.C. Cir. 2000

AT&T v. Iowa Utils. Bd., 525 U.S. 366 (1999) ..............

Bell Atlantic-Del., Inc. v. McMahon, 80 F. Supp. 2d

218 (D. Del. 2000) *

BellSouth Corp. v. FCC, 162 F.3d 678 (D.C. Cir.

1998)

Burlington N. R. R. v. Surface Transp. Bd., 114 F 2¢

206 (D.C. Cir. 1997)

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

—

(1984) 11, 21, 40

City of New Orleans v. FERC, 67 F.3d 947

(D.C. Cir. 1995)

(III)

30-31

Cases—Continued: Page

FPC v. Texaco, Inc., 417 U.S. 380 (1974) 29

Farmers Union Cent. Exch., Inc. v. FERC,

734 F. 2d 1486 (D.C. Cir.), cert. denied, 469 U.S. 1034

(1984) 29

GTE S. Inc. v. Morrison, 6 F. Supp. 2d 517

(E. D. Va. 1998), aff d on other grounds, 199 F. 3d

733 (4th Cir. 1999) 26

GTE Serv. Corp. v. FCC, cert. granted, 120 S. Ct.

2214, cert. dismissed, 121 S. Ct. 423 (2000) 15

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

1997) 10, 13, 35, 44

MCI Communications v. AT&T, 708 F.2d 1081

(7th Cir.), cert. denied, 464 U.S. 891 (1983) 22-23

MCI Telecomms. v. U.S. West, 204 F.3d 1262

(9th Cir. 2000) ... 36

Missouri ex rel. S.W. Bell Tel. Co. v. Public Serv.

Comm n, 262 U.S. 276 (1923) 28

Potomac Elec. Power Co. v. ICC, 744 F.2d 185

(D.C. Cir. 1984) 25

Strickland v. Commissioner, Me. Dep’t of Human

Servs., 48 F.3d 12 (Ist Cir.), cert. denied, 516 U.S.

850 (1995) 22

Texas Office of Pub. Util. Counsel v. FCC, 183 F.3d

393 (1999) 15

US West Communications v. MFS Intelenet, Inc.,

193 F.3d 1112 (9th Cir. 1999), cert. denied, 120 S. Ct.

2741 (2000) 14, 36

U.S. Const. Amend. V (Takings Clause) 11, 15

Communications Act of 1984, 47 U.S.C. 153(29) (Supp.

IV 1998) 4, 16, 27

Telecommunications Act of 1996, Pub. L. No. 104-104,

110 Stat. 56 (47 U.S.C. 251 et seq.) 2, 3, 21

Title I, 110 Stat. 61:

47 U.S.C. 251 (Supp. IV 1998) 10

Statutes and regulations Continued: Page

47 U.S.C. 251-253 (Supp. IV 1998) 3

47 U.S.C. 251(c)(2) (Supp. IV 1998) 4, 16

47 U.S.C. 251 % )-) (Supp. IV 1998) 3

47 U.S. C. 251(c)(3) (Supp. IV 1998) passim

47 U.S.C. 251(e)(4) (Supp. IV 1998) 33

47 U.S.C. 251(d)(2) (Supp. IV 1998) 4,11

47 U.S.C. 251(d)(2)(A) (Supp. IV 1998) 4

47 U.S.C. 251(d)(2(B) (Supp. IV 1998)

47 U.S.C. 252 (Supp. IV 1998) 10

47 U.S.C. 252(d)(1) (Supp. IV 1998) passim

47 U.S.C. 252(d)(1(A) (Supp. IV 1998) 22

47 U.S.C. 252(d)(3) (Supp. IV 1998) 33

47 U.S.C. 252(e)(5) (Supp. IV 1998) 4

passim

47 U.S.C. 254 (Supp. IV 1998)

47 US.C. 271 (Supp. IV 1998)

Title VI, § 601(a)(2), 110 Stat. 143 (47 U.S.C. 152

note (Supp. IV 1998))

47 C. F. R.:

Section 51.315(b)

Section 51.315(c) 9, 10, 34, 45

Section 51.315(c)(1) 34

Section 51.315(c)(2) 34

Section 51.315(c)-(f) passim

Section 51.315(d) 34

Section 51.315(e) 34

Section 51.315(f) 34

Section 51.505(b)(1) 9, 11, 16, 23, 26, 31, 46

Miscell

Application by Bell Atlantic New York for Authori-

zation Under Section 271 of the Communications

Act to Provide In-Region, InterLATA Services

in the State of New York, 15 F.C.C.R. 3953

(1991) 42-43

Application of BellSouth Corp., et al., for Provision of

In-Region, InterLATA Services in Louisiana, In re,

13 F.C.C.R. 20,599 (1998) 42

20 C.J.S. Cost (1940) 22

Miscellaneous Continued: Page

Comments of the ALTS, CC Dkt. No. 96-98 (filed May

26, 1999) 44

Comments of the Competitive Telecommunications

Ass’n, CC Dkt. No. 96-98 (filed May 26, 1999) 44

Commission Recommendation on Interconnection in a

Liberalised Telecommunications Market (Pt. 1,

Interconnection Pricing), O. J. 1998 L0 73/42). 25

Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines,

Nationwide (I. C. C. Feb. 8, 1983) 24

Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines,

Nationwide, 1 I. C. C. 2d 520 (1985), aff'd sub nom.

Consolidated Rail Corp. v. United States, 812 F. 2d

1444 (3d Cir. 1987) 24, 25

Federal-State Joint Board on Universal Service,

Report and Order, In re, 12 F. C. C. R. 8776 (1997) 15, 24

David Gabel & David I. Rosenbaum, Who’s Taking

Whom: Some Comments and Evidence on the

Constitutionality of TELRIC, 52 Fed. Comm. LJ.

239 (2000) 30

Peter Huber, Michael Kellogg & John Thorne, Federal

Telecommunications Law (2d ed. 1999) 25-26

Implementation of the Local Competition Provisions

in the Telecommunications Act of 1996, First Report

and Order, In re, 11 F.C.C.R. 15,499 (1996) 6

Implementation of the Local Competition Provisions

of the Telecommunications Act of 1996, Third

Report and Order and Fourth Further Notice of

Proposed Rulemaking, In re, 15 F.C. C. R. 3696

(1999), petitions for review pending sub nom.

United States Telecom Ass n v. FCC, No. 00-1015

et al. (D.C. Cir. Jan. 19, 2000) 11, 35, 41, 42, 43, 44

Industry Analysis Division, FCC:

Local Telephone Competition: Status as of June 30,

2000 (2000) 2

Local Telephone Competition at the New

Millennium (2000) 2

In the Supreme Court of the United States

Nos. 00-511, 00-555, 00-587, 00-590 and 00-602

VERIZON COMMUNICATIONS, INC., ET AL., PETITIONERS

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

AND RELATED CASES

ON WRITS OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR PETITIONERS

FEDERAL COMMUNICATIONS COMMISSION AND

THE UNITED STATES

OPINIONS BELOW

The opinion of the court of appeals (No. 00-587 Pet.

App. la-43a) is reported at 219 F.3d 744. The Local

Competition Order of the Federal Communications

Commission (FCC) is reported at 11 F.C. C. R. 19,392.

JURISDICTION

The judgment of the court of appeals was entered on

July 18, 2000. The government’s petition for a writ of

certiorari in No. 00-587 was filed on November 29, 2000,

and was granted on January 22, 2001. The jurisdiction

of this Court rests on 28 U.S.C. 1254(1).

(1)

STATUTORY PROVISIONS INVOLVED

The relevant provisions of the Telecommunications

Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, are re-

produced in the appendix to our petition in No. 00-587

(U.S. Pet. App.) at 104a-125a and in the Joint Appendix

(J.A.) at 9-48. In referring to the provisions of the Act,

we have cited the 1998 Supplement to the United

States Code.

STATEMENT

1. a. Throughout most of the United States, local

telephone service has long been dominated by a single

incumbent “local exchange carrier,” or LEC. That

incumbent LEC, whether a regional Bell company or an

independent carrier, owns almost all of the loops (the

wires that connect telephones to switches) in its service

area, along with the switches (which direct calls to their

destinations) and the transport trunks (which carry

calls between switches). The incumbents’ control over

those facilities has solidified their de facto monopoly

position in most local telecommunications markets.

Indeed, even today, after years of efforts to open

those markets to competition, incumbents still provide

service over approximately 93% of local telephone lines.

See Industry Analysis Division, FCC, Local Telephone

Competition: Status as of June 30, 2000, at 1 (2000); see

also Industry Analysis Division, FCC, Local Telephone

Competition at the New Millennium, Table 6 (2000) (as

of December 1999, incumbents controlled approxi-

mately 94% of total local telecommunications revenues).

The barriers to entry into local telecommunications

markets are different from, and vastly more formidable

than, the barriers to entry into the long-distance mar-

ket. It has been economically practicable for some long-

distance carriers to build their own interexchange

infrastructure—e.g., to lay cable or build microwave

networks connecting local calling areas to one another

—because they can rely (albeit at a cost) on the LECs

on either end of an interexchange call to route the call

through the various switches and local loops from the

call’s origin to its destination. But, at least with current

technology, it would be economically impracticable for

even the largest prospective competitor to duplicate

completely the functions of an incumbent LEC’s entire

network. And, without rights of interconnection, a po-

tential competitor could not gradually enter the market

through partial duplication of those functions; a new

carrier would win few customers if its customers could

call only one another and not customers on the incum-

bent LEC’s separate (and completed) network.

b. “Until the 1990s, local phone service was thought

to be a natural monopoly. * Technological ad-

vances, however, have made competition among mul-

tiple providers of local service seem possible.” AT&T v.

Towa Utils. Bd. (Iowa Utils. Bd. D, 525 U.S. 366, 371

(1999). Congress enacted the Telecommunications Act

of 1996 (1996 Act), Pub. L. No. 104-104, 110 Stat. 56, to

open local telecommunications markets to full com-

petition. Congress recognized that no prospective en-

trant could replicate, at least in the short term, all of an

incumbent’s existing local network infrastructure.

Accordingly, in the local competition provisions of the

1996 Act, 47 U.S.C. 251-253, Congress provided the

means for potential competitors to enter local markets

by using the incumbents’ networks in a variety of ways.

See 47 U.S.C. 251(c)(2)-(4).

Central to the local competition provisions is Section

251(c)(3), which entitles a new entrant to gain “access”

to (i.e., to lease) an incumbent’s “network elements,”

such as loops, switching capability, and other com-

ponents and capabilities of the incumbent’s network.

47 U.S.C. 251(c)(3); see also 47 U.S.C. 153(29) (defining

“network element”). That provision permits new en-

trants, some of which may also have network elements

of their own, to lease from an incumbent whatever

elements they need to provide services to their own

customers.’ The 1996 Act further permits new entrants

to “interconnect” their own facilities with those in the

incumbent’s network “at any technically feasible point.”

See 47 U.S.C. 251(c)(2).

An incumbent may charge a new entrant for inter-

connection and access to network elements. If the

incumbent and the new entrant cannot agree on those

charges, the state public utility commission, acting as

arbitrator, sets the rates that the incumbent may

charge. Under the 1996 Act, the state commissions

must set rates that are “nondiscriminatory” and “based

An incumbent’s obligation to lease network elements to new

entrants extends only to those elements designated by the FCC

under Section 251(d)(2). That provision states that, “[iJn deter-

mining what network elements should be made available for pur-

poses of” Section 251(c)(3), the FCC “shall consider, at a mini-

mum,” certain competitive standards. 47 U.S.C. 251(d)(2). With

respect to most elements, the statutory standard that the FCC

must consider is whether “the failure to provide access to such net-

work elements would impair the ability of the telecommunications

carrier seeking access to provide the services that it seeks to

offer.“ 47 U.S.C. 251(d)(2)(B); see also 47 U.S.C. 251(d)(2)(A)

(providing that, with respect to “proprietary” elements, the

relevant standard is whether “access to such network elements

* * * is necessary”).

2 A state commission may decline to perform of that statutory

role, in which case the FCC would resolve individual disputes

between carriers over the rates to be charged for providing

interconnection and access to network elements. See 47 U.S.C.

252(e)(5).

on the cost (determined without reference to a rate-of-

return or other rate-based proceeding) of providing the

interconnection or network element (whichever. is

applicable).” 47 U.S.C. 252(d)(1).* The rates “may in-

clude a reasonable profit” for the incumbent. Jbid. In

setting such rates, the state commissions must follow

the FCC’s pricing rules that give content to that statu-

tory standard. See Jowa Utils. Bd. I, 525 U.S. at 383-

385. Those are among the rules at issue here.

The 1996 Act also conferred significant benefits or

the incumbent LECs. For example, the 1996 Act “re

lieves the [regional Bell companies] of several of

the burdens imposed by the [1982 AT&T consent

decree], particularly by prescribing in [47 U.S.C.] § 271

a method whereby [they] can achieve a long-sought-

after presence in the long distance market.” BellSouth

Corp. v. FCC, 162 F.3d 678, 690 (D.C. Cir. 1998) (em-

phasis and citation omitted); see also 1996 Act, Title VI,

§ 601(a)(2), 110 Stat. 143 (superseding GTE consent de-

cree). The 1996 Act further entitles incumbent LECs,

8 Section 252(d)(1), titled “Interconnection and network

element charges,” provides in full:

Determinations by a State commission of the just and rea-

sonable rate for the interconnection of facilities and equipment

for purposes of subsection (c)(2) of section 251 of this title, and

the just and reasonable rate for network elements for purposes

of subsection (c)(3) of such section—

(A) shall be

(i) based on the cost (determined without reference

to a rate-of-return or other rate-based proceeding) of pro-

viding the interconnection or network element (whichever is

applicable), and

(ii) nondiscriminatory, and

(B) may include a reasonable profit.

like other telecommunications carriers, to invoke its

local competition provisions to expand their opera-

tions into new geographic areas throughout the

United States and compete for the customers of other

incumbents.

2. In August 1996, the FCC issued its initial order

addressing the most basic issues involving local com-

petition arising under the 1996 Act. See In re Imple-

mentation of the Local Competition Provisions in the

Telecommunications Act of 1996, First Report and

Order (Local Competition Order), 11 F.C.C.R. 15,499

(1996). A cornerstone of that order is the FCC’s choice

of the cost methodology total element long-run incre-

mental cost,” or TELRIC—that state public utility

commissions are to employ in resolving disputes be-

tween carriers about the “cost[s]” that Section 252(d)(1)

allows the incumbent to recover from the new entrant

for providing interconnection and network elements.

See Local Competition Order (paras. 674-703), J.A.

376-396.

a. TELRIC embodies a “forward-looking” approach

to calculating the cost of providing network elements

and interconnection. The essential objective of any

forward-looking methodology is to determine what it

would cost, in today’s market, to replace the functions

of an asset that make it useful. That is the asset’s

“forward-looking” cost (also known as its “replacement”

or “economic” cost), as distinguished from the cost of

duplicating the asset in every physical particular (some-

times called an item’s “reproduction” or “replication”

cost). Thus, under a forward-looking methodology, if an

incumbent bought an analog switch in 1985 at a fixed

cost of $150 per line, and an efficient carrier would

address the same business needs today by purchasing

a digital switch at a fixed-cost of $100 per line (more

efficient digital switches have supplanted analog

switches in the market), the latter figure is the appro-

priate basis for determining what a new entrant would

pay for leasing switching capacity. Similarly, if a loop

cost $100 to install in 1985 but would cost $150 to install

today (because, for example, labor costs have

increased), the rate for leasing that loop would be based

on the higher current cost figure.

The forward-looking purchase price of an asset is

only one variable in the TELRIC compensation cal-

culus. TELRIC also takes into account (1) the duration

of an element’s useful life, as reflected in the applicable

depreciation schedule; (2) the cost of capital (7.e., the

required return, or profit, on investment); and (3)

various types of costs, such as maintenance costs. See

Local Competition Order (para. 703), J.A. 396. One of

TELRIC’s principal objectives is to ensure an incum-

bent’s opportunity, when leasing network elements to

others, to recover the full forward-looking cost of those

elements (including the cost of capital) over their useful

lives.

The FCC has delegated many of the essential details

of implementing TELRIC to the state public utility

lt cannot be said in the abstract whether a forward-looking

approach or a historical approach will producer higher cost figures

in a particular setting. Cf. Jowa Utils. Bd. I, 525 U.S. at 384

(noting that “[i)t is the States that will * * implement that

methodology li e., TELRIC], determining the concrete result in

particular circumstances”). Indeed, when the Iowa Utilities Board

challenged the FCC’s jurisdiction to set prices for network

elements, it expressed concern that TELRIC would produce

higher, not lower, network element prices in lowa than would a

historical cost methodology. See Mot. of lowa Utils. Bd. for Stay

at 9, Iowa Utils. Bd. v. FCC, No. 96-3321 (8th Cir., filed Sept. 19,

1996).

commissions. For example, the FCC has not set depre-

ciation schedules itself, but has left it to the state

commissions to determine, among other things, how

best to adopt “specific depreciation rate adjustments

that reflect expected asset values over time,” including,

where relevant, “expected declines in the value of

capital goods.” Local Competition Order (para. 686),

J.A. 384-385. Similarly, the FCC has given the state

commissions great discretion to determine the

appropriate cost of capital. Local Competition Order

(para. 702), J.A. 395-396. The FCC has authorized the

state commissions to increase the cost of capital, if

warranted, to compensate incumbents for the risk of

increased competition. Ibid.

The FCC rejected the argument of several incum-

bent LECs that the 1996 Act entitles them to rates for

interconnection and network elements based on the

“historical” (or embedded“) costs reflected on their

accounting books. The FCC recognized that those costs

could be either higher or lower than forward-looking

costs. Local Competition Order (para. 705), J.A. 398-

399. With respect to those circumstances in which

historical costs are higher (the only circumstances with

which the incumbents were concerned), the FCC

reasoned that the use of such costs in determining the

rates charged new entrants would be economically

arbitrary and would frustrate the competitive

objectives of the 1996 Act. See Local Competition

Order (paras. 704-711), J.A. 397-403.

In asking what it would cost to replace the functions

that make an asset valuable, a forward-looking

cost methodology requires an inquiry into currently

available substitutes—including assets that perform

the same functions as the asset in the incumbent’s

network, but that do not resemble the asset in all re-

spects (e.g., because they embody more efficient

technology than the original asset). See pp. 6-7, swpra.

Some incumbents urged the FCC to foreclose any con-

sideration of currently available substitutes in

TELRIC. The FCC rejected the incumbents’ sugges-

tion as arbitrarily limiting the inquiry into the forward-

looking cost of replacing an asset’s useful functions in

today’s market. See Local Competition Order (paras.

683-685), J.A. 382-384.

The FCC determined that TELRIC should, however,

take as given the incumbent’s existing wire centers

(i. e., its switch locations), thereby confining the inquiry

to efficient alternatives that are compatible with the

most basic geographical design of the existing net-

work. Local Competition Order (para. 685), J.A. 383-

384. The FCC observed that such a limitation would

give new entrants additional incentives to save costs by

constructing facilities of their own embodying “more

efficient network configurations.” Ibid.

The FCC codified its determinations on this subject

in a regulation providing that, for purposes of deter-

mining the rates at which an incumbent may lease

network elements to a new entrant, an element’s cost

“should be measured based on the use of the most effi-

cient telecommunications technology currently avail-

able and the lowest cost network configuration, given

the existing location of the incumbent LEC’s wire

centers.” 47 C.F.R. 51.505(b)(1).

b. At the same time that the FCC promulgated the

pricing rules discussed above, the FCC also promul-

gated another set of rules, which have come to be

known as the “combinations” rules. See Local Com-

petition Order (paras. 292-297), J.A. 295-299. Rule

315(b) provides that, “[e]xcept upon request, an

incumbent LEC shall not separate requested network

elements that the incumbent LEC currently combines.”

47 C. F. R. 51.315(b). Rule 315(c)—the principal

combinations rule at issue here—further requires

incumbent LECs, at the request of a new entrant (and

for a cost-based fee), to combine previously uncombined

elements, “even if those elements are not ordinarily

combined” within the incumbent’s network. 47 C.F.R.

51.315(c). This latter rule is designed principally for

circumstances in which an incumbent is able to link

facilities within its network more efficiently, and thus

less expensively, than the new entrant. The new en-

trant must bear the costs of combination, whether

performed by the new entrant itself or by the incum-

bent; the principal objective of Rule 315(c) is to help the

new entrant avoid unnecessary costs and delays.

3. a. In 1996 and 1997, the Eighth Circuit stayed

and then invalidated the FCC’s pricing rules on the

ground that the 1996 Act gives state public utility

commissions, not the FCC, general jurisdiction to inter-

pret the pricing provisions of Sections 251 and 252.

Iowa Utils. Bd. v. FCC, 120 F.3d 753, 794-800 (1997).

The Eighth Circuit’s jurisdictional orders remained in

effect until early 1999. During that period, the great

majority of state commissions voluntarily applied the

FCC’s basic forward-looking methodology in adjudicat-

ing disputes between incumbents and new entrants

over the rates to be charged for interconnection and

network elements. See pp. 25-26, infra. In January

1999, this Court reversed the Eighth Circuit’s jurisdic-

tional ruling, holding that the FCC has statutory

authority to establish national pricing standards under

Sections 251 and 252. Iowa Utils. Bd. I, 525 U.S. at 376-

385. The Court remanded the case to the Eighth

Circuit to address (among other things) the substantive

validity of the FCC’s cost methodology.

In July 2000, the Eighth Circuit issued its decision on

remand. The court upheld the FCC’s use of a forward-

looking, rather than historical, cost methodology and

rejected as premature the incumbents’ Takings Clause

challenge to that methodology. U.S. Pet. App. 10a-18a.

But the court nonetheless invalidated the key regula-

tion specifying that, apart from the “wire center” ex-

ception, the forward-looking cost of an element “should

be measured based on the use of the most efficient

telecommunications technology currently available and

the lowest cost network configuration,” 47 C. F. R.

51.505(b)(1). U.S. Pet. App. 6a-10a.

The Eighth Circuit held that the regulation was con-

trary to “the plain meaning” of Section 252(d)(1) and

thus did not satisfy step one of this Court’s Chevron

analysis. U.S. Pet. App. 8a; see also id. at 4a; see

generally Chevron U.S.A. Inc. v. NRDC, Inc., 467 US.

837, 842-843 (1984) (“First, always, is the question

whether Congress has directly spoken to the precise

question at issue * * * for the court, as well as the

agency, must give effect to the unambiguously ex-

5 This Court separately upheld several of the FCC’s rules on

the merits but invalidated a portion of the FCC’s original imple-

mentation of the “necessary” and “impair” standards of Section

2510d) 2), see note 1, supra, and remanded to the FCC for further

rulemaking. See Jowa Utils. Bd. I, 525 U.S. at 387-392. The FCC

issued an order on remand in December 1999. See In re Imple-

mentation of the Local Competition Provisions of the Telecom-

munications Act of 1996, Third Report and Order and Fourth

Further Notice of Proposed Rulemaking (UNE Remand Order),

15 F.C.C.R. 3696 (1999), petitions for review pending sub nom.

United States Telecom Ass n v. FCC, Nos. 00-1015, et al. (D.C. Cir.

Jan. 19, 2000).

pressed intent of Congress.”). The court noted that

Section 252(d)(1) requires that the determination of the

“just and reasonable rate” that an incumbent may

charge for interconnection or network elements be

based on “the cost (determined without reference to a

rate-of-return or other rate-based proceeding) of

providing the interconnection or network element.”

U.S. Pet. App. 5a. Emphasizing the word “the” in the

final phrase of that provision (id. at 7a, 8a), the court

concluded that Congress’s use of the definite article

generally forecloses regulators from looking beyond

“the” actual facilities deployed by the incumbent in _.

determining forward-looking costs. Id. at 8a-10a.°

b. In July 1997, the Eighth Circuit invalidated Rules

315(c)-(f), which require incumbents to combine pre-

viously uncombined elements in their networks at the

request of new entrants. The court concluded (among

other things) that such a requirement was foreclosed by

Section 251(c)(3), which states that an incumbent must

provide new entrants with “nondiscriminatory access to

network elements on an unbundled basis” and “in a

manner that allows requesting carriers to combine such

elements.” The court reasoned that a new entrant’s

right to “unbundled” elements embodies only a right

to “physically separated” elements; that the second

sentence of Section 251(c)(3) requires incumbents only

to “provide such unbundled network elements in a man-

After the Eighth Circuit ruled, the FCC and the United

States moved for a partial stay of the mandate pending this

Court’s disposition of the case, explaining that, if the mandate

were to issue immediately, it would cause severe and potentially

unnecessary disruption in implementation of the 1996 Act. The

Eighth Circuit granted that motion and stayed its mandate, pend-

ing this Court’s review, with respect to the FCC’s pricing rules

implementing Section 252(d)(1).

ner that allows requesting carriers to combine such

elements”; and that the plain language of that sentence,

by negative implication, precludes provisions that, like

Rules 315(c)-(f), require incumbents to provide new

combinations of elements to potential competitors. See

120 F.3d at 813. The court did not discuss Rule 315(b).

Each side filed petitions for rehearing arguing for or

against the proposition that the court’s invalidation of

Rules 315(c)-(f) compelled the invalidation of Rule

315(b) as well. In October 1997, the court resolved

those petitions in favor of invalidating Rule 315(b). See

id. at 813, 820.

We sought certiorari to challenge the Eighth Cir-

cuit’s invalidation of Rule 315(b). This Court reinstated

Rule 315(b). Jowa Utils. Bd. I, 525 U.S. at 393-395. The

Court concluded that Section 251(c)(3) “is ambiguous

on whether leased network elements may or must

be separated,” and that Rule 315(b) is an “entirely

rational” means for the FCC to “ensur{e) against an

anticompetitive practice.” Id. at 395. In concluding

that nothing in Section 251(c)(3) prevented the FCC

from adopting that rule, the Court found that the term

“unbundled” in Section 251(c)(3) could refer to sepa-

rately priced assets as distinguished from “physically

separated” assets; the Court also found that the second

sentence of Section 251(c)(3) “does not say, or even

remotely imply, that elements must be provided

{in discrete pieces] and never in combined form.” Id.

at 394. The Court did not explicitly address Rules

315(c)-(f).

On remand, the FCC and certain private parties

asked the Eighth Circuit to restore Rules 315(c)-(f),

arguing that this Court’s rationale for reinstating Rule

315(b) applied equally to those rules. The Eighth

Circuit rejected that request. U.S. Pet. App. 26a-29a.

Once again, the court held that Congress, in the second

sentence of Section 251(c)(3), “has directly spoken on

the issue of who shall combine previously uncombined

network elements,” and stated that “(i]t is the request-

ing carriers who shall ‘combine such elements.’” Id. at

28a-29a. The court acknowledged that its holding on

that point conflicts with a recent decision of the Ninth

Circuit, which sustained, as consistent with the 1996

Act, a state public utility commission’s imposition of

combinations requirements similar to Rules 315(c)-(f).

Id. at 27a-28a (citing US West Communications v. MFS

Intelenet, Inc., 193 F.3d 1112, 1121 (9th Cir. 1999), cert.

denied, 120 S. Ct. 2741 (2000)).

4. The local competition provisions of the 1996 Act

are complemented by 47 U.S.C. 254, the provision of the

1996 Act relating to “universal service.” For many

years, federal and state regulators sought to ensure low

rates for subscribers in “high cost” areas through a

variety of implicit cross-subsidy mechanisms. For

example, incumbent LECs often charged retail rates to

customers in densely populated urban areas that well

exceeded the cost of serving those customers; those

revenues were then used to subsidize the retail rates

charged customers in remote rural areas that are much

more expensive to serve. Congress recognized that the

emergence of local competition would tend to erode the

source of such cross-subsidies, as new entrants won the

business of customers who would otherwise pay above-

cost rates to incumbents. A central objective of Section

254 is to phase out the implicit cross-subsidies and

replace them with explicit and competitively neutral

funding mechanisms supported by all providers of tele-

communications services, including new entrants that

provide service through the use of an incumbent LEC’s

network elements under Section 251(c)(3).

In 1997, the FCC issued rules implementing Section

254 and, among its many other determinations, chose a

forward-looking cost methodology similar to TELRIC

as a key factor in determining the level of federal

funding to supplement state efforts to subsidize afford-

able service to high cost areas. See In re Federal-State

Joint Board on Universal Service, Report and Order

(Universal Service Order), 12 F.C.C.R. 8776 (1997). In

1999, the Fifth Circuit adjudicated various challenges to

the Universal Service Order. See Texas Office of Pub.

Util. Counsel v. FCC, 183 F.3d 393 (1999). Among its

other holdings, that court rejected the argument of

certain incumbent LECs that construing Section 254 to

permit the use of TELRIC (instead of a historical cost

methodology) is barred by the Takings Clause. Id. at

413 & n. 14. In June 2000, this Court granted a petition

for a writ of certiorari on that issue that was filed by

GTE, one of the corporate predecessors (along with

Bell Atlantic) to Verizon Communications, Inc. See

GTE Serv. Corp. v. FCC, 120 S. Ct. 2214 (No. 99-1244).

On November 2, 2000, the Court granted Verizon’s

unopposed motion to dismiss that case. See 121 S. Ct.

423.

SUMMARY OF ARGUMENT

This case concerns two sets of rules adopted by the

FCC to implement the provisions of the 1996 Act that

are designed to stimulate competition in local telecom-

munications markets by giving new entrants a right of

access to incumbents’ existing networks. One set of

rules prescribes the methodology that state public

utility commissions are to apply in setting the rates

that new entrants must pay in order to interconnect

with, and lease elements of, the incumbents’ networks.

The other set of rules requires that incumbents provide

network elements to new entrants in combined form, if

the new entrant requests the combination and agrees to

compensate the incumbent for implementing it. Both

sets of rules are fully consistent with the text and

purpose of the Act, and reflect reasonable policy choices

of the expert agency charged with implementing the

Act. The court of appeals had no valid basis to set aside

any of those rules.

A. In the 1996 Act, Congress sought to encourage

the development of competition in local telecommuni-

cations markets by enabling new entrants, at rates

based on “cost,” to interconnect with, and lease

elements of, incumbent carriers’ existing networks. 47

U.S.C. 252(d)(1); see 47 U.S.C. 251(c)(2) and (3). As the

court of appeals recognized, “cost” is a term of some

ambiguity. The FCC, after considering various meth-

odologies for determining the costs of providing inter-

connection and network elements, determined that a

methodology based on “forward-looking” costs is both

faithful to the Act and necessary to ensure robust local

competition.

The forward-looking cost of an asset (i e., its

“economic” or “replacement” cost) reflects the cost, in

today’s market, of obtaining the functions of the asset

that make it valuable. An asset’s forward-looking cost

necessarily varies with the cost of currently available

substitutes that, although not identical to the asset in

all respects, perform the same functions. The FCC thus

provided that, as a general matter, the forward-looking

cost of “network elements” (i.e. equipment, facilities, or

functions used in the provision of telecommunications

service, 47 U.S.C. 153(29)) “should be measured based

on the use of the most efficient telecommunications

technology currently available and the lowest cost

network configuration.” 47 C.F.R. 51.505(b)(1). The

court of appeals, while upholding the FCC’s choice of a

methodology based on forward-looking costs, struck

down that key rule for measuring such costs.

The court of appeals concluded that the text of the

1996 Act, and specifically Section 252(d)(1), forecloses

a methodology that takes into account the costs of

efficient, currently available alternatives. But Section

252(d)(1) does not dictate any particular cost method-

ology. Section 252(d)(1) provides simply that the rate

that an incumbent may charge for network elements is

to be based on “the cost of providing the

network element.” That is precisely the cost that the

FCC’s rule seeks to measure. The FCC’s methodology,

including its consideration of efficient, currently avail-

able alternatives, is directed at determining the

forward-looking cost of the element of the incumbent’s

network that the new entrant seeks to lease. It is not,

as the court of appeals apparently believed, directed at

determining the cost of something else.

The court of appeals also suggested that the FCC’s

rule is inconsistent with the 1996 Act because “Con-

gress was dealing with reality, not fantasizing about

what might be.” U.S. Pet. App. 9a. A primary objec-

tive of rate regulation, however, is to establish the price

that would exist in a fully competitive market. Given

that objective, the more appropriate way to “deal[{) with

reality” in determining the forward-looking costs of

network elements is to take currently available alter-

natives into account, rather than to pretend that they

do not exist. In competitive markets, the price that a

firm would pay to lease particular facilities varies with

the cost of obtaining the function of those facilities

through some other means, including through the use of

more efficient substitutes. Taking those substitutes

fully into account is not “fantasizing about what might

be,” but a routine component of any sensible inquiry

into the forward-looking cost of an asset, which ap-

proximates the going market price (or current value) of

the asset in a competitive market. It is particularly

sensible to account for such substitutes when dealing

with an industry, such as telecommunications, in which

technology changes rapidly.

There is nothing novel about regulators’ use of

forward-looking cost methodologies that consider the

costs of efficient, currently available alternatives.

Other federal agencies, with court approval, have

employed similar methodologies, based on “hypo-

thetical” costs, for other regulated industries. The

FCC’s methodology is based on the similar forward-

looking methodologies developed by several state

public utility commissions, which had already moved to

open local telecommunications markets to competition

before the enactment of the 1996 Act. Such experience

belies concerns, which may underlie the court of

appeals’ invalidation of the FCC’s rule, about the

administrability of a forward-looking methodology that

considers the costs of efficient, currently available

alternatives.

B. The court of appeals also erred in invalidating the

FCC’s combinations rules, Rules 315(c)-(f), which re-

quire incumbent carriers, at the request of a new

entrant (and for a cost-based fee), to combine certain

elements in their networks that they do not ordinarily

combine. Those rules, like the related Rule 315(b) that

this Court upheld in Jowa Utilities Board I, serve to

enforce Congress’s mandate that incumbents provide

new entrants with “nondiscriminatory access” to net-

work elements. 47 U.S.C. 251(c)(3). Rule 315(b) pro-

hibits an incumbent from separating previously com-

bined network elements over the objection of a new

entrant, whereas Rules 315(c)-(f) allow a new entrant

to pay the incumbent to combine previously uncom-

bined network elements in the many instances in which

the incumbent may do so more efficiently.

The court of appeals viewed Rules 315(c)-(f) as incon-

sistent with the second sentence of Section 251(c)(3),

which states that an incumbent “shall provide * * *

unbundled network elements in a manner that allows

requesting carriers to combine such elements.” The

court drew from that language the negative inference

that incumbents cannot be required to provide network

elements in combined form. But that sentence simply

guarantees new entrants the right, if they so choose, to

obtain network elements in a form that allows them to

combine those elements themselves. It does not speak

to whether the FCC may also require incumbents to

combine requested network elements when the new

entrant is willing to pay for that service. Indeed, the

Court expressly rejected the court of appeals’ similar

reading of that statutory provision in Jowa Utilities

Board I, recognizing that Section 251(c)(3) “does not

command thle] conclusion” that incumbents may be

compelled to “leas[e] * * * network elements in dis-

crete pieces” only, and “never in combined form.” 525

U.S. at 394 (emphasis added).

Rules 315(c)-(f), like Rule 315(b), are consistent with

the text of the 1996 Act, and advance its purpose of

encouraging competition in local telecommunications

markets. All of those rules are designed to prevent

incumbents from imposing unnecessary and often de-

bilitating costs and delays on new entrants that

incumbents would not incur when serving their own

retail customers—costs and delays that the FCC

found could significantly undermine the utility of new

entrants’ statutory right to enter the marketplace

through the leasing of network elements. The FCC’s

choice in Rules 315(c)-(f), as in Rule 315(b), to “opt in

favor of ensuring against an anticompetitive practice”

that incumbents may employ against new entrants “is

well within the bounds of the reasonable.” Jowa Utils.

Bd. I, 525 U.S. at 395.

ARGUMENT

I. THE FCC’S CHOICE OF A FORWARD-LOOKING

PRICING METHODOLOGY BASED ON THE MOST

EFFICIENT TECHNOLOGY CURRENTLY AVAIL-

ABLE IS CONSISTENT WITH THE TEXT AND

PURPOSE OF THE 1996 ACT

In the 1996 Act, Congress directed that the rate that

an incumbent LEC may charge a new entrant for

leasing a network element “shall be based on the cost

* * * of providing the * * * network element.” 47

U.S.C. 252(d)(1). In the order under review here, the

FCC made two critical decisions in implementing that

statutory standard. First, the FCC determined that

the “cost” of “providing” a network element is the

forward-looking (“economic” or “replacement”) cost of

the element, i e., the cost of replacing the features or

functions of the element on today’s market, not what-

ever “historical” costs might be reflected on a particular

incumbent’s accounting books. Second, the FCC deter-

mined that ascertaining an element’s forward-looking

cost involves consideration of the cost of any efficient

alternatives currently available on the market, not

just alternatives that are physically identical to the

facilities currently in place. See Local Competition

Order (paras. 672-707), J.A. 375-401. In each instance,

the FCC made a reasonable policy choice, in an area of

its expertise, on a matter that Congress left for the

FCC to resolve. See Chevron U.S.A. Inc. v. NRDC,

Inc., 467 U.S. 837, 842-845 (1984).

The court of appeals sustained the first of the FCC’s

determinations but erroneously rejected the second as

inconsistent with the text of the 1996 Act. The court

had no basis under Chevron to decline to defer to either

determination. The FCC’s recognition that a forward-

looking cost methodology must consider efficient, cur-

rently available alternatives, like the FCC’s choice of

that methodology itself, not only comports with Con-

gress’s language, but also advances Congress’s purpose

of promoting competition in local telecommunications

markets. See 1996 Act, preamble, 110 Stat. 56. Indeed,

a forward-looking cost inquiry that does not take into

account the costs of efficient available alternatives

would, like a historical cost inquiry, produce rates that

turn on choices that a particular incumbent made in the

past about which equipment to install or when to install

it. It would ignore factors relevant to any carrier’s

present choices in a competitive market with respect to

entry, expansion, and pricing.’

1. Congress provided that the “just and reasonable

rate” at which an incumbent LEC may lease a network

element to a new entrant is a rate “based on the cost

* * * of providing the * * * network element.” 47

At the same time that the Court granted our petition for

certiorari in this case, the Court granted the petition of Verizon

Communications, Inc., in No. 00-511, which challenges the FCC’s

choice of a pricing methodology based on forward-looking, as op-

posed to historical, costs. It is necessary to discuss the FCC’s

decision to adopt a forward-looking methodology in order to ex-

plain why such a methodology necessarily, and appropriately,

entails a consideration of efficient, currently available alternatives.

We will, however, defer our full discussion of that methodology

until our response to Verizon’s brief on the merits.

U.S.C. 252(d)(1)(A). As the court of appeals recognized,

Congress did not itself prescribe how that “cost” is to

be determined; rather, Congress left it to the FCC to

consider which of the several methodologies for deter-

mining “cost” would most appropriately serve the

purposes of the 1996 Act. See U.S. Pet. App. lla (“We

conclude the term ‘cost,’ as it is used in the statute, is

ambiguous, and Congress has not spoken directly on

the meaning of the word in this context.”); ef. Strick-

land v. Commissioner, Me. Dep’t of Human Servs., 48

F.3d 12, 19 (1st Cir.) (describing the term “cost” as “one

of equivocal meaning”) (quoting 20 C.J.S. Cost (1940)),

cert. denied, 516 U.S. 850 (1995).

The FCC, in determining that the appropriate “cost”

of providing a network element, for purposes of 47

U.S.C. 252(d)(1), is the forward-looking cost of that

element, found guidance in the central purposes of the

1996 Act: to bring meaningful competition to local tele-

communications markets; to ensure the efficient use of

existing network facilities, many of which embody

significant economies of scale and scope; and to

encourage new entrants to make economically rational

decisions about whether, or how, to enter a given local

market. See Local Competition Order (paras. 620, 630,

679, 705-706), J. A. 327-328, 333-334, 379-380, 398-399.

The FCC explained that a forward-looking meth-

odology emulates rational economic behavior in a

competitive market; a firm considers forward-looking

costs, not historical costs, in making decisions about

entry, expansion, and price. See Local Competition

Order (paras. 620, 679, 740), J.A. 327-328, 379-380, 422-

423; see also MCI Communications v. AT&T, 708 F.2d

1081, 1116-1117 (7th Cir.) (It is current and antici-

pated cost, rather than historical cost that is relevant to

business decisions to enter markets.”), cert. denied, 464

U.S. 891 (1983); U.S. Pet. App. 12a (acknowledging that

“(florward-looking costs have been recognized as

promoting a competitive environment which is one of

the stated purposes of the Act”). The FCC thus

concluded that a forward-looking methodology would

send appropriate signals for entry, investment, and

innovation to potential competitors in local telecom-

munications markets. See Local Competition Order

(paras. 620, 630), J.A. 327-328, 333-334.

Any inquiry into forward-looking costs asks how

much it would cost, in today’s market, to replace the

functions of an item that make it valuable. See pp. 6-9,

supra. An item’s forward-looking cost, like its fair

market value, necessarily varies with the cost of

currently available substitutes that perform the item’s

functions. For example, the forward-looking cost (as

well as the fair market value) of a personal computer, a

video cassette recorder, or a telephone switch declines

as more efficient substitutes are introduced into the

market; those substitutes, although performing the

same functions as the original item, may not resemble

the original item in every physical particular. That

principle is embodied in the key regulation at issue

here, which provides that, as a general matter, forward-

looking cost “should be measured based on the use of

the most efficient telecommunications technology cur-

rently available and the lowest cost network configura-

tion.” 47 C. F. R. 51.505(b)(1).°

8 As noted above (p. 9), however, the FCC directed that the

inquiry into forward-looking costs is to take as given “the existing

location of the incumbent LEC’s wire centers” (i- e., switch

locations). 47 C.F.R. 51.505(b)(1); see Local Competition Order

(paras. 683-685), J.A. 382-384. That pragmatic limitation serves

to confine the forward-looking cost inquiry to those efficient

alternatives that are compatible with the most basic geographic

There is nothing novel about regulators’ use of

forward-looking cost methodologies that take into

account the costs of efficient, currently available alter-

natives. Other federal agencies, with court approval,

have employed similar methodologies, based on “hypo-

thetical” costs, to govern other regulated industries. In

the 1980s, for example, the Interstate Commerce Com-

mission employed a forward-looking cost methodology

based on “most efficient” alternatives to determine the

maximum rate that a market-dominant railroad could

charge a coal shipper that was the “captive” of that

railroad.”

structure of the existing network. It also enabled the state public

utility commissions and the industry to employ existing forward-

looking cost models, which typically incorporated a wire-centers

limitation as part of their methodology. See generally Universal

Service Order, 12 F.C.C.R. at 8903-8905. And the FCC observed

that this limitation, by encouraging new entrants to save costs “by

designing more efficient network configurations,” would provide

an incentive for new entrants to construct their own facilities.

Local Competition Order (para. 685), J.A. 383-384.

Under the ICC’s standard, the railroad could charge the

captive shipper no more than the “stand alone” cost of

the coal, defined as the forward-looking cost that the shipper itself

would incur were it to transport the coal to its destination using

the most efficient railroad system that could be configured to

accomplish that task. See Ex Parte No. 347 (Sub-No. 1), Coal Rate

Guidelines, Nationwide, 1 1.C.C.2d 520, 542-546 (1985), aff d sud

nom. Consolidated Rail Corp. v. United States, 812 F.2d 1444,

1451, 1457 (3d Cir. 1987); see also Ex Parte No. 347 (Sub-No. 1),

Coal Rate Guidelines, Nationwide, slip op. 10-13 (unpublished

decision issued Feb. 8, 1983) (delineating substantially similar

interim standard). The D.C. Circuit, in an opinion joined by then-

Judge Scalia, upheld the ICC’s use of that methodology. The court

reasoned that, although the methodology “deals with hypothetical

and not actual transportation situations, it provides an appropriate

analytical tool for determining whether a return on noncompetitive

The FCC based TELRIC on the similar, and simi-

larly “hypothetical,” forward-looking cost methodolo-

gies developed by several state public utility com-

missions that had already taken steps to open local

markets to competition. Local Competition Order

(paras. 631, 681), J.A. 334-336, 381. The European Com-

mission has endorsed a cost methodology similar to

TELRIC—based on a model hypothesizing “an efficient

operator employing modern technology”—as a means of

opening European telecommunications markets to

competition.“

Moreover, during the period from 1996 through early

1999 when the FCC’s pricing rules were stayed and

then vacated by the Eighth Circuit on jurisdictional

grounds (see p. 10, supra), the overwhelming majority

of state public utility commissions independently and

voluntarily embraced the essentials of TELRIC,

including its consideration of efficient available alter-

natives, in their implementation of the local-competition

provisions of the 1996 Act. See Peter Huber, Michael

Kellogg & John Thorne, Federal Telecommunications

Law § 2.4.4.1, at 185 (2d ed. 1999) (“While the lowa

traffic ‘properly reflects the high demand for the service, but is not

set at an unreasonably high or monopoly level. Potomac Elec.

Power Co. v. ICC, 744 F.2d 185, 198-194 (D.C. Cir. 1984) (quoting

interim ICC Guidelines); see also Consolidated Rail Corp., 812

F.2d at 1453-1457 (affirming in full final ICC guidelines); Bur-

lington N. R.R. v. Surface Transp. Bd., 114 F.3d 206, 212-215 (D.C.

Cir. 1997) (affirming Surface Transportation Board’s application of

those guidelines).

10 See Commission Recommendation on Interconnection in a

Liberalised Telecommunications Market (Pt. 1, Interconnection

Pricing), O. J. 1998 L073/42 (“Interconnection costs should be

calculated on the basis of forward-looking long run average incre-

mental costs, since these costs closely approximate those of an

efficient operator employing modern technology.”).

Utilities Board case was being litigated, most states

used their price-setting authority in ways closely

following the FCC models.“). “ The federal courts have

consistently endorsed that choice on the merits in their

review of the state commissions’ actions. See, e.g., GTE

S. Ine. v. Morrison, 6 F. Supp. 2d 517, 528-530 (E.D. Va.

1998), aff’d on other grounds, 199 F.3d 733, 742-744, 749

(4th Cir. 1999); see also Bell Atlantic-Del., Inc. v.

McMahon, 80 F. Supp. 2d 218, 235-236 (D. Del. 2000).

2. While affirming the FCC’s choice of a forward-

looking cost metnodology, the Eighth Circuit rejected,

as contrary to the text of Section 252(d)(1), the FCC’s

explanation of what that methodology should measure

—i.e., that, for the most part, forward-looking cost

“should be measured based on the use of the most effi-

cient telecommunications technology currently avail-

able and the lowest cost network configuration.” 47

C.F.R. 51.505(b)(1). Contrary to the Eighth Circuit’s

conclusion, just as Congress left it to the FCC to define

“cost” for purposes of Section 252(d)(1), Congress left it

to the FCC to determine how that “cost” should be

calculated. Nothing in Congress’s directive that “the

just and reasonable rate for network elements * * *

shall be based on the cost of providing the * * *

network element,” 47 U.S.C. 252(d)(1), forecloses con-

sideration of efficient, currently available alternatives.

The Eighth Circuit gave little explanation for its

holding beyond the twin observations that (1) “Con-

1! Similarly, in their brief opposing the FCC’s petition for

certiorari on the jurisdictional question in Jowa Utilities Board

(on the ground that the question was not of sufficient national

importance), the Bell companies appeared to acknowledge that

“‘virtually every state in the union’ has adopted pricing policies

compatible with the FCC’s own notions.” Reg’! Bell Operating

Cos. Br. in Opp. at 19-20, Jowa Utils. Bd. I, Nos. 97-826, et al.

gress intended the rates to be ‘based on the cost

of providing the interconnection or network element

requested by a new entrant and (2) “Congress was

dealing with reality, not fantasizing about what might

be.” U.S. Pet. App. 8a-9a. Neither observation, how-

ever, is at all inconsistent with the FCC’s methodology.

First, the Eighth Circuit appears, at the outset, to

have misconstrued the statutory term “network ele-

ment.” Congress used that term to describe, at an

appropriately high level of generality, the class of

“facilit{ies]” (or “features, functions, and capabilities”)

associated with particular tasks within the network.

See 47 U.S.C. 153(29) (defining “network element”); see

Iowa Utils. Bd. I, 525 U.S. at 387 (concluding, given

“the breadth of this definition,” that the term “network

element” is not limited to “physical facilities and equip-

ment,” but includes such “features, functions, and

capabilities” as directory assistance, caller I.D., and call

forwarding). For example, fiber wires and copper

wires, despite their physical differences, are both

examples of the loop element because they serve the

same function. See Local Competition Order (para.

380), J.A. 310-311. Similarly, analog switches and

digital switches are both examples of the switching

element. See Local Competition Order (para 412), J.A.

323-324. The Eighth Circuit’s decision, however, seems

to rest on the erroneous premise that the term

“element” is confined to individual pieces of equipment.

Second, the Eighth Circuit apparently thought that

regulators, in considering the costs of efficient sub-

stitutes, are determining the forward-looking cost of

something other than the underlying “network element”

whose functions the new entrant seeks to obtain. That

is simply wrong. As the Eighth Circuit itself

recognized, the “cost” inquiry mandated by Section

252(d)(1) is reasonably construed to permit an inquiry

into forward-looking cost. The forward-looking cost of

an asset turns on the cost of replacing the functions of

the asset, an inquiry that necessarily entails considera-

tion of any efficient, currently available substitutes that

perform those same functions. By definition, then, that

inquiry requires examination of the current cost of

obtaining those substitutes.”

Perhaps the Eighth Circuit thought that the forward-

looking inquiry should turn on the cost of replicating an

incumbent’s existing facilities in every physical parti-

cular (rather than simply replacing their functions),

whether or not any rational actor would construct such

facilities in today’s market. But nothing in the

language of Section 252(d)(1) remotely compels the

adoption of that wooden and long-discredited methodo-

logical approach. See Local Competition Order (para.

684), J.A. 383 (recognizing that such an approach could

produce rates “that reflect inefficient or obsolete

network design and technology”); see also Missouri ex

rel. S. W. Bell Tel. Co. v. Public Serv. Comm’n, 262 U.S.

276, 312 (1923) (Brandeis, J., dissenting) (disparaging,

as the least appropriate cost-methedology, an inquiry

into “what it would cost to reproduce the identical

property”).

Third, contrary to the Eighth Circuit’s suggestion,

the more appropriate way to deall] with reality” (U.S.

12 To take an example from common experience, a real estate

appraiser is still determining the fair market value of one’s own

house (and not somebody else’s), even though the appraiser takes

into account the prices at which comparable houses in the neigh-

borhood have sold. Similarly, here, a utility regulator is still

determining the forward-looking cost of the incumbent’s own

facilities, even though the regulator takes into account the costs of

Pet. App. 9a) in determining the forward-looking costs

of network elements is to take currently available

alternatives into account, rather than to pretend that

they do not exist. The central objective of rate regu-

lation has traditionally been to “restore the ‘true’

market price — the price that would result through the

mechanism of a truly competitive market.” Farmers

Union Cent. Exch., Inc. v. FERC, 734 F. 2d 1486, 1510

(D.C. Cir.), cert. denied, 469 U.S. 1034 (1984); see, e. g.,

FPC v. Texaco, Inc., 417 U.S. 380, 397-398 (1974). In

competitive markets, the price that a firm would pay or

charge to lease particular facilities varies with the cost

of obtaining the function of those facilities through

some other means, including through the use of more

efficient substitutes; the firm would not arbitrarily

blind itself to the availability of such substitutes.

Thus, taking efficient substitutes fully into account is

not, as the Eighth Circuit stated, “fantasizing about

what might be.” It is instead a routine component of

any sensible inquiry into the forward-looking cost of an

asset, which approximates the going market price (or

current value) of the asset in a competitive market.

Indeed, it would be unrealistic, in conducting such an

inquiry, to omit any consideration of efficient substi-

tutes and to proceed on the assumption that technology

has frozen in time and has no bearing on the cost of

replacing the functions of an asset. That is particularly

true with respect to an industry, such as the telecom-

munications industry, in which technology changes so

rapidly.

An unstated premise of the Eighth Circuit’s ruling

may have been that an inquiry into the cost of obtaining

a given function with “the most efficient telecom-

munications technology currently available,” rather

than the technology actually employed by the incum-

bent, would be unduly difficult to administer.“ We

intend to address the administrability of TELRIC gen-

erally in our response to Verizon’s challenge to that

methodology. See note 7, supra. The short answer,

however, is that regulators and businesses have been

engaging, for Some years, in inquiries into the costs of

efficient available alternatives. See pp. 24-25, supra;

Local Competition Order (para. 681), J.A. 381 (“dis-

agree(ing],” based on the experience of “[a] number of”

state commissions with similar forward-looking meth-

odologies, that “the information required to compute

prices based on forward-looking costs is inherently so

hypothetical as to be of little or no practical value”);

David Gabel & David I. Rosenbaum, Who’s Taking

Whom: Some Comments And Evidence on the Consti-

tutionality of TELRIC, 52 Fed. Comm. L.J. 239, 256-

257 (2000) (noting examples of telecommunications com-

panies’ using forward-looking methodologies in their

own pricing decisions well before the FCC’s adoption of

TELRIC, including BellSouth’s use of an analysis that

“assumed that the network engineer will * * * select[]

the most economically efficient technology”). More-

over, all cost methodologies, including those based on

historical costs, involve inquiries that are to some

extent “hypothetical” A historical cost methodology,

for example, entails inquiries into, among other things,

whether, and to what extent, the investments made by

a regulated entity in the past were prudent. See, e. g.,

City of New Orleans v. FERC, 67 F.3d 947, 954 (D.C.

The Eighth Circuit did not describe what sort of forward-

looking methodology it would consider permissible under the 1996

Act. Nor has such a description yet been offered by the incumbent

LECs, such as Verizon, which oppose any forward-looking meth-

odology. —

Cir. 1995). And a replication or reproduction cost meth-

odology entails inquiries into the cost, in today’s

market, of duplicating the precise facilities that were

constructed years ago and that may since have become

obsolete or unavailable.

In sum, the FCC’s determination that the forward-

looking cost inquiry must consider the costs of efficient,

currently available alternatives is consistent with the

text of Section 252(d)(1) and reasonably seeks to

advance the 1996 Act’s pro-competitive purposes. The

court of appeals thus erred in invaliding 47 C.F.R.

51.505(b)(1).

II. THE COMBINATIONS RULES AT ISSUE HERE,

LIKE THE ONE UPHELD IN JOWA UTILITIES

BOARD I, ARE CONSISTENT WITH THE TEXT

OF THE 1996 ACT AND PROMOTE CON-

GRESS’S PURPOSE OF ASSURING REASON-

ABLE AND NONDISCRIMINATORY ACCESS TO

INCUMBENTS’ NETWORKS

The Eighth Circuit also erred in vacating the FCC’s

Rules 315(c)-(f) governing the combination of network

elements. See 47 C.F.R. 51.315(c)-(f). The court of

appeals’ ruling is predicated on a strained “plain

language” reading of the statute that is, in all pertinent

respects, indistinguishable from the analysis that

this Court rejected in Jowa Utilities Board I, 525 U.S.

at 394-395. The FCC’s rules, by contrast, reflect a

reasonable reading of ambiguous statutory language

and promote the purposes of the statute by deterring a

species of discriminatory conduct by incumbents

against new entrants.

1. a. Rules 315(c)-(f) are part of a package of regu-

lations implementing the important provision of the

1996 Act, codified at 47 U.S.C. 2510) (8), that requires

incumbent LECs to grant new entrants access to net-

work elements for a just and reasonable cost-based fee.

Those regulations also include Rule 315(b), which was

upheld by this Court in Jowa Utilities Board I.

Section 251(c)(3) provides, in pertinent part, that

each incumbent LEC has:

[t]he duty to provide, to any requesting telecom-

munications carrier for the provision of a telecom-

munications service, nondiscriminatory access to

network elements on an unbundled basis at any

technically feasible point on rates, terms, and

conditions that are just, reasonable, and nondis-

criminatory * * *. An incumbent local exchange

carrier shall provide such unbundled network

elements in a manner that allows requesting car-

riers to combine such elements in order to provide

such telecommunications service.

47 U.S.C. 251(c)(3); see Jowa Utils. Bd. I, 525 U.S. at

394-395 (discussing Section 251(c)(3)).

Section 251(c)(3) thus grants new entrants the right,

among other things, to lease network elements on an

“unbundled” basis—that is, to select those elements

that they need, without also being forced to use and pay

for elements that they do not need or that they can

more efficiently provide themselves or obtain else-

where. See Jowa Utils. Bd. I, 525 U.S. at 394-395. New

entrants often need more than just a single network

element, however. In those instances in which new

entrants need “combinations” of network elements, the

additional mandate of Section 251(c)(3) that incumbents

offer “nondiscriminatory access” on “reasonable” terms

prohibits incumbents from imposing arbitrary and

economically wasteful limitations on access that would

not apply to their own retail operations.

Section 251(c)(3) serves a crucial role in opening local

markets to competition. Virtually no competitor, with

current technology, could replicate an incumbent’s en-

tire network, at least in the short term. While resale is

one competitive option, that option limits new entrants

to competing only on price, and only within the margin

between the incumbent’s retail price and the wholesale

discount required under 47 U.S.C. 251(c)(4) and

252(d)(3). See Local Competition Order (para. 332),

J.A. 307. Access to unbundled network elements, on

the other hand, provides new entrants with the ability

to compete broadly with incumbents, not just as to

price, but also as to product, since network elements

may be capable of performing functions that incum-

bents have not chosen to offer to their retail customers,

but that new entrants may incorporate into their own

offerings. See Local Competition Order (paras. 332-

333), J.A. 307-308.

b. The FCC adopted its various combinations rules

to implement comprehensively the nondiscrimination

mandate of Section 251(c)(3) in the varied instances in

which a new entrant might require more than one net-

work element. Rule 315(b), the first in the package

of combinations rules, applies to existing network

element combinations, i.e., those that the incumbent

LEC “currently combines” for itself. Rule 315(b) pro-

hibits the incumbent, “(e]xcept upon [the competitor’s]

request,” from disconnecting those network elements

and providing them only in “separate[d]” form. 47

C.F.R. 51.315(b). As the Court recognized in Jowa

Utilities Board I, Rule 315(b) enforces the nondis-

crimination mandate of Section 251(c)(3) by “preventing

incumbent LECs from ‘disconnect[ing] previously con-

nected elements * * * not for any productive reason,

but just to impose wasteful reconnection costs on new

entrants.’” 525 U.S. at 395.

Rules 315(c)-(f), the remaining combinations rules,

address the incumbent LEC’s duty to provide new en-

trants with a meaningful opportunity to obtain new

combinations of existing network elements. That duty

is set out principally in Rule 315(c), which requires an

incumbent LEC, at the request of a new entrant and

for a reasonable cost-based fee, to combine network

elements “even if those elements are not ordinarily

combined” within the incumbent’s network. 47 C. F. R.

51.3150 e).“ Rule 315(c) advances the nondiserimination

requirement of Section 251(c)(3) by allowing new en-

trants to pay the incumbent to combine network

elements in the many instances in which the incumbent

may do so more efficiently, thereby enabling new

entrants to avoid unnecessary and often debilitating

costs and delays that an incumbent would not suffer

4 The duty set forth in Rule 315(c) applies only where the

requested combination is At lechnically feasible” and only where

compliance with the request (would not impair the ability of

other carriers to obtain access to unbundled network elements or

to interconnect with the incumbent LEC’s network.” 47 C.F.R.

51.315(c)(1) and (2). Rules 315(d), (e), and (f) supplement or clarify

the basic obligation of Rule 315(c) in various ways that the Eighth

Circuit did not consider independently problematic. Rules 315(e)

and (f) provide state public utility commissions with specific

guidance on the application of the two qualifications to the general

duty stated in Rule 315(c). 47 C.F.R. 51.315(e) and (f). Rule 315(d)

imposes on incumbent LECs a related duty to “perform the func-

tions necessary to combine unbundled network elements with

elements possessed by the requesting telecommunications carrier

in any technically feasible manner.” 47 C.F.R. 51.315(d). In all

cases, the requesting carrier would have to pay the reasonable cost

of effecting a combination.

when serving its own retail customers. See Local

Competition Order (paras. 293-294), J.A. 295-297; see

also In re Implementation of the Local Competition

Provisions of the Telecommunications Act of 1996,

Third Report and Order and Fourth Further Notice of

Proposed Rulemaking (UNE Remand Order), 15

F. C. C. R. 3696, 3909-3910 (1999) (para. 481), petitions for

review pending sub nom. United States Telecom Ass’n

v. FCC, Nos. 00-1015, et al. (D.C. Cir. Jan. 19, 2000).

ce. In its first Jowa Utilities Board decision, the

Eighth Circuit struck down all of the FCC’s combina-

tions rules based on a single integrated analysis. See

120 F.3d at 813. Focusing on two portions of Section

251(c)(3), the court of appeals ruled that—whether one

considers network elements that are already combined

by an incumbent LEC or new combinations of network

elements sought by a competitor—the FCC had no

statutory basis to require incumbents to provide new

entrants with access to network elements in combined

form. The Eighth Circuit reasoned, first, that the term

“unbundled” in the first sentence of Section 251(c)(3)

means disconnected or “uncombined,” and that Section

251(c)(3) therefore “requires an incumbent LEC to

provide access to the elements of its network only on an

unbundled (as opposed to a combined) basis.” bid.

Second, drawing a negative inference from language in

the second sentence of Section 251(c)(3) that requires

incumbents to provide access to network elements “in a

manner that allows requesting carriers to combine

such elements,” the court of appeals concluded that the

provision “unambiguously indicates that requesting

carriers will combine the unbundled elements them-

selves.” Ibid.

On review of that decision in Jowa Utilities Board I,

this Court reinstated Rule 315(b), the only one of the

combinations rules then before the Court, while reject-

ing the court of appeals’ rationale for striking down all

of the combinations rules. First, the Court disagreed

with the court of appeals’ construction of the statutory

term “unbundled” as meaning “physically separated,”

noting that “the only [dictionary] definition given

* * * matches the FCC’s interpretation of the word:

‘to give separate prices for equipment and supporting

services.“ Iowa Utils. Bd. I, 525 U.S. at 394. Second,

tire Court found that the requirement in the second

sentence of Section 251(c)(3) that incumbents provide

access to network elements in a manner that “‘allows

requesting carriers to combine’ them * * * does not

say, or even remotely imply, that elements must be

provided only [in discrete pieces] and never in com-

bined form.“ Ibid. To the contrary, the Court found

that Rule 315(b), with its purpose of preventing incum-

bent LECs from “impos[ing] wasteful reconnection

costs on new entrants,” is an “entirely rational” appli-

cation of Section 251(c)(3)’s nondiscrimination require-

ment. Id. at 395.

Because this Court’s decision in Iowa Utilities Board

I with respect to Rule 315(b) undermines the Eighth

Circuit’s rationale for invalidating all of the combina-

tions rules, the FCC and others asked the court of

appeals on remand to reinstate Rules 315(c)-(f).” In

response, the court of appeals reconsidered the validity

15 In the interim, the Ninth Circuit concluded that this Court’s

reasons for upholding Rule 315(b) apply equally to, and thus had

undermined the Eighth Circuit’s analysis with respect to, combina-

tions requirements such as those contained in Rules 315(c)-(f). See

US West Communications v. MFS Intelenet, Inc., 198 F.3d 1112,

1121 (9th Cir. 1999), cert. denied, 120 S. Ct. 2741 (2000); MCI

Telecomms. v. U.S. West, 204 F.3d 1262, 1268 (9th Cir. 2000).

of Rules 315(c)-(f)," but ultimately reaffirmed its

original holding that those Rules “violate the plain

language” of Section 251(c)(3). U.S. Pet. App. 29a.

2. The court of appeals’ decision on remand once

again to invalidate Rules 315(c)-(f) on the basis of an

alleged plain language reading of Section 251(c)(3)

conflicts with this Court’s reading of that provision in

Iowa Utilities Board I. Nothing in Section 251(c)(3)

gives incumbent LECs the right to fore new entrants

to combine network elements themselves, even when

the incumbents can do the combining more efficiently

and the new entrants will pay the incumbents to do so.

To the contrary, the FCC has ample authority to

prohibit such conduct in light of Congress’s directive in

Section 251(c)(3) that an incumbent provide new

1%6 See Order at 2-3, Jowa Utils. Bd. v. FCC, No. 96-3321 (8th

Cir. June 10, 1999) (“The briefs should also address whether or not,

in light of the Supreme Court’s decision, this court should take any

further action with respect to * * § 315(c)-(f).”). In opposing

our petition for certiorari and those of other parties with respect to

this question, Verizon suggested that we “forfeited” our op-

portunity to challenge the court of appeals’ invalidation of Rule

315(c)-(f) by not having done so in Jowa Utilities Board I. See

Verizon et al. Br. in Opp. 13-16, WorldCom, Inc. v. Verizon Com-

munications, Inc., Nos. 00-555, et al. For reasons that we ex-

plained in our reply brief at the petition stage, our decision not to

seek review of the court of appeals’ invalidation of Rules 315(c)-(f)

in Iowa Utilities Board I should not preclude our doing so now,

especially given the emergence of a circuit conflict, acknowledged

by the court of appeals in this case, concerning the scope of the

duty to provide access to network element combinations under

Section 251(c)(3). See No. 00-587 U.S. Reply Br. 6-8. Indeed, the

Eighth Circuit itself reopened the question of the validity of Rules

315(c)-(f) after this Court’s decision in Jowa Utilities Board I and

ruled anew on that question in the decision on review here. This

Court granted certiorari on that question. See Order 3-4, Verizon

Communications v. FCC, Nos. 00-511, et al. (Jan. 22, 2001).

entrants with “nondiscriminatory access” to its network

and Congress’s overriding purpose in the 1996 Act

to stimulate competition in local telecommunications

markets.

a. On remand, the court of appeals again focused, as

it had in its earlier decision invalidating the com-

binations rules, on the second sentence of Section

251(c)(3), which states that an incumbent LEC must

provide unbundled elements “in a manner that allows

requesting carriers to combine such elements.” U.S.

Pet. App. 28a (quoting 47 U.S.C. 251(c)(3)). The court

reasoned that “Congress has directly spoken on the

issue of who shall combine previously uncombined

network elements,” and that “[iJt is the requesting car-

riers who shall ‘combine such elements.“ Id. at 28a-

29a. The court was mistaken.

The statutory sentence upon which the court of ap-

peals relied simply guarantees new entrants the right,

if they so choose, to obtain network elements in a form

that allows them to combine the network elements

themselves. It does not speak to whether the FCC may

also require incumbents to combine requested network

elements when the new entrant is willing to pay for

that service. Indeed, this Court expressly addressed

the same statutory language in Jowa Utilities Board I.

The Court recognized that, although the second sen-

tence of Section 251(c)(3) “contemplates that elements

may be requested and provided” in “discrete pieces,” it

“does not say, or even remotely imply, that elements

must be provided only in this fashion and never in

combined form.” 525 U.S. at 394. Similarly, there is no

basis here to conclude that, because that same sentence

confers on new entrants the right to combine elements

of the incumbent’s network, it precludes the FCC from

issuing rules recognizing a new entrant’s additional

right to have an incumbent combine those elements for

a cost-based fee. Cf. id. at 397 (recognizing that [we

can only enforce the clear limits that the 1996 Act

contains”).

The court of appeals sought to distinguish the

question presented in Jowa Utilities Board I with

respect to Rule 315(b), which the court characterized as

“whether the [1996] Act prohibited the combination of

network elements,” from the question presented on

remand with respect to Rules 315(<)-(f), which the court

characterized as “who shall be required to do the com-

bining.” U.S. Pet. App. 28a. But none of the combina-

tions rules presents the question whether Section

251(c)(3) prohibits the combination of network elements

(even if a new entrant requests a combination and the

incumbent is willing to provide it). The incumbents

would not have asked for such a ruling, which would

curtail their own freedom to provide combinations

when it suits them, and Section 251(c)(3) could not

plausibly be read to impose such a prohibition. Instead,

all of the combinations rules, Rule 315(b) as well as

Rules 315(c)-(f), raise the same question of “who shall

be required to do the combining,” whether the

combination is an existing one made by the incumbent

for its own business purposes (the circumstance

addressed by Rule 315(b)) or is a new one that the new

entrant requests and compensates the incumbent for

making (the circumstance addressed by Rules 315(c)-

(f)). This Court’s determination that the second sen-

tence of Section 251(c)(3) “does not say, or even re-

motely imply” that incumbents cannot be required to

provide network elements in combined form, Jowa

Utils. Bd. I, 525 U.S. at 394, vitiates the “plain langu-

age” basis for the court of appeals’ ruling on remand.

b. In Iowa Utilities Board I, after concluding that

Rule 315(b) satisfies step one of the Chevron analysis

because “§ 251(c)(3) is ambiguous on whether leased

network elements may or must be separated,” the

Court considered whether Rule 315(b) also satisfies

step two of that analysis. See Chevron, 467 U.S. at 845

(once a count determines that Congress did not express

its intent on a given issue, the only question that

remains is whether the agency’s resolution of that issue

“is a reasonable one”). The Court recognized that Rule

315(b), which “find[s] its basis in § 251(c)(3)’s nondis-

crimination requirement,” is designed to prevent

incumbent LECs from disconnecting previously com-

bined network elements “not for any productive reason,

but just to impose wasteful reconnection costs on new

entrants.” Jowa Utils. Bd. I, 525 U.S. at 395. The

Court concluded that “(ijt is well within the bounds of

the reasonable for the Commission to opt in favor of

ensuring against [that] anticompetitive practice” by

promulgating Rule 315(b). Ibid.

The same analysis should apply here. Rules 315(c)-(f),

like Rule 315(b), are based on Section 251(c)(3)’s re-

quirement that incumbent LECs provide “nondiscrimi-

natory access” to their networks on “reasonable” terms

and conditions. Moreover, Rules 315(c)-(f), like Rule

315(b), are designed to ensurle] against an anti-

competitive practice” of incumbents. Jowa Utils. Bd. I,

525 U.S. at 395. Here, the anticompetitive practice is

an incumbent’s refusal to combine network elements,

which the incumbent has the technological capability to

combine but which the incumbent has not combined for

its own business purposes, when a new entrant

requests the combination and agrees to compensate the

incumbent to effectuate the combination. Such a

practice, like the similar practice addressed by Rule

315(b), typically is engaged in by incumbents “not for

any productive reason,” ibid., because the new entrant

will compensate the incumbent for its costs in

combining the network elements. Instead, incumbents

engage in the practice “just to impose wasteful * * *

costs on new entrants,” ibid., because a new entrant

would combine the elements itself if it could do so more

efficiently, and thus at lower cost, than could the

incumbent. A new entrant has no interest in incurring

unnecessary costs to obtain network element connec-

tions.

Thus, Rules 315(c)-(f), like Rule 315(b), are designed

to prevent incumbents from erecting barriers to new

entrants’ access to network element combinations that

incumbents themselves would not encounter. The FCC

found that incumbent LECs “routinely” create new

network element combinations for themselves when it

serves their own business purposes to do so. UNE

Remand Order (para. 481), 15 F.C.C.R. at 3909-3910.

That is surely the case, for instance, when incumbents

provide their own customers with a “second line” (e.g.,

for a computer, a home business, or a teen-ager), or

when they provide dedicated lines to high-end

customers. Ibid. Rules 315(c)-(f) prevent incumbents

from arbitrarily impeding the ability of new entrants

also to provide such combinations. UNE Remand

Order (paras. 481-482), 15 F.C.C.R. at 3909-3910.”

Indeed, the FCC has found that the refusal of

The FCC has thus far withheld judgment on the question

whether Rule 315(b) preserves a new entrant’s right to obtain

combinations of network elements that are “ordinarily combined”

in the incumbent’s network, even if the particular facilities at issue

are not yet connected. See UNE Remand Order (para. 479), 15

F. C. C. R. at 3908-3909.

incumbents to combine network elements sought by

new entrants not only is discriminatory, but signifi-

cantly undermines the utility of the statutory right

of prospective competitors to enter the marketplace

through the leasing of network elements. See Local

Competition Order (paras. 293-294), J.A. 295-297; UNE

Remand Order (paras. 481-482), 15 F.C.C.R. at 3909-

3910.

c. To be sure, new entrants may, under the Eighth

Circuit’s ruling, combine network elements themselves.

But that strategy for obtaining combinations may not

be available to new entrants in all instances. The FCC

has found that “practical difficulties,” such as a new

entrant’s lack of information about the incumbent’s

network, may “in practice” make it “impossible” for the

new entrant to make new combinations of network

elements without the incumbent’s assistance. Local

Competition Order (paras. 293-294), J.A. 295-297.

Moreover, even where a new entrant has the techni-

cal ability to combine elements itself, the incumbents

have imposed other obstacles to the new entrant’s

doing so. For instance, incumbents often have pro-

hibited new entrants from making connections unless

they first purchase collocation space—for which

charges can run into the hundreds of thousands of

dollars—in the incumbents’ central offices. See UNE

Remand Order (paras. 263, 482), 15 F.C.C.R. at 3815-

3816, 3910 (citing In re Application of BellSouth Corp.,

et al., for Provision of In-Region, InterLATA Services

in Louisiana, 13 F.C.C.R. 20599, 20703-20705 (1998)

(para. 168)). Such restrictions not only are anti-

Verizon has suggested that, in granting Verizon authority to

provide long-distance services in New York, the FCC endorsed

such restrictions as consistent with Section 251(c)(3). See Verizon

competitive, but also defeat the purpose of some net-

work element combinations, which are designed, at

least in part, to avoid the need to purchase collocation

space.” Such restrictions also undermine the assump-

Br. in Opp. 21-22 & n.15 (citing Application by Bell Atlantic

New York for Authorization Under Section 271 of the Communi-

cations Act To Provide In-Region, InterLATA Sevices in the State

of New York, 15 F.C.C.R. 3953, 4078-4079 (1991) (paras. 231-232)).

That contention mischaracterizes the FCC’s ruling. Due to the

expedited nature of proceedings under Section 271, compliance

with the “competitive checklist” prerequisites to Bell company

entry into the long-distance market is determined in light of

interpretations of the FCC’s rules in existence at the time the

application is filed. See AT&T v. FCC, 220 F.3d 607, 631-632 (D.C.

Cir. 2000). In the cited order, the FCC noted that its finding that

Verizon had satisfied the prerequisites for entry in the long-

distance market under 47 U.S.C. 271 was predicated on the Eighth

Circuit’s decision to vacate Rules 315(c)-(f) and on the view that,

“[gliven this vacuum, it would be inequitable to penalize

[Verizon] for complying with the rules established by the New

York Commission.” 15 F.C.C.R. at 4080 (para. 236) & n.753. That

ruling does not constitute an endorsement of the Eighth Circuit’s

view of Section 251(c)(3) or of the reasonableness of Verizon’s

conduct in the absence of the Eighth Circuit’s decision.

That would be the case with respect to the so-called

“enhanced extended link” (or EEL), which consists of the combina-

tion of a local loop and dedicated transport from the loop’s end

office to another central office. See UNE Remand Order (para.

477), 15 F.C.C.R. at 3908. A new entrant with some switches of its

own, but without collocation space at each end office, may seek to

use this network element combination in order to serve customers

whose loops are connected to end offices other than those at which

the new entrant has a switch. Incumbents customarily require

new entrants first to purchase special access service under tariff in

place of the dedicated transport network element, and then to

convert to the EEL once the “combination” has thereby been

created. UNE Remand Order (paras. 480-481), 15 F.C.C.R. at

3909-3910.

tion underlying the Eighth Circuit’s invalidation of the

combinations rules that incumbents “would rather allow

entrants access to their networks than have to rebundle

the unbundled elements for them.” 120 F.3d at 813.

Other practices of incumbent LECs since the Eighth

Circuit vacated Rules 315(c)-(f) further demonstrate

the need for those rules as a protection against dis-

crimination. One such practice involves the so-

called “UNE platform” (or UNE-P)—the “entire pre-

assembled network” that incumbents must provide to

new entrants pursuant to Rule 315(b). See Jowa Utils.

Bd. I, 525 U.S. at 395. To date, the UNE platform has

been the most important vehicle for competitive entry

into local markets for residential and small business

customers, because the UNE platform allows new en-

trants to lease all of the facilities needed for providing

local service to those customers at their forward-

looking cost. See UNE Remand Order (para. 12),

J.A. 15 F.C.C.R. at 3702-3703; Comments of the Com-

petitive Telecommunications Ass’n at 49-51, CC Dkt.

No. 96-98, (filed May 26, 1999). Yet, many incumbents,

citing the Eighth Circuit’s vacatur of Rules 315(c)-(f),

are refusing to make the UNE platform available to

new entrants, except when the new entrant wins over a

customer of the incumbent at the customer’s existing

location, i.e., where there is an existing combination

that falls squarely within the scope of Rule 315(b).

Thus, when a customer moves from one location to

another, even within the same building, an incumbent

may claim that the connection at the new location

constitutes a “recombination” outside the scope of Rule

315(b). See, e.g., Comments of the ALTS at 79, CC Dkt.

No. 96-98 (filed May 26, 1999). The incumbent may do

so even though no new physical connection is required

and the incumbent can activate an existing connection

through a few simple computer keystrokes.

In sum, the court of appeals and the incumbent LECs

view the 1996 Act as requiring incumbents to share

their networks only in narrowly circumscribed ways.

Thus, even if combining network elements costs them

nothing because they will be fully compensated for the

economic cost of doing so, and even if refusing to com-

bine network elements results in the wasteful, ineffi-

cient, and discriminatory imposition of costs on com-

petitors, the incumbents assert that the FCC is without

authority to require incumbents to combine network

elements, because the 1996 Act, while referencing a

duty to provide elements in unbundled form, does not

expressly reference a duty to combine. But nothing in

the text or purpose of the Act suggests that Congress

intended a result so contrary to its central purpose of

encouraging competition in local telecommunications

markets by, inter alia, providing new entrants with

“nondiscriminatory access” to incumbents’ network

elements on “reasonable” terms and conditions. 47

U.S.C. 251(c)(3). The FCC’s requirement that incum-

bents perform the combinations sought by new

entrants—if the combination is It lechnically feasible,”

47 C.F.R. 51.315(c), and if the new entrant bears the

costs—is “well within the bounds of the reasonable.”

Iowa Utils. Bd. I, 525 U.S. at 395.

CONCLUSION

The decision of the court of appeals should be re-

versed insofar as it vacated 47 C. F. R. 51.505(b)(1) and

47 C. F. R. 51.315(c)-(f).

Respectfully submitted.

BARBARA D. UNDERWOOD

Acting Solicitor General

JOHN M. NANNES

Acting Assistant Attorney

General

Joun E. INGLE LAWRENCE G. WALLACE

Deputy Associate General Deputy Solicitor General

Counsel BARBARA MCDOWELL

LAURENCE N. BOURNE Assistant to the Solicitor

Counsel ine General

Federal Communications CATHERINE G. O’SULLIVAN

Commission NANCY C. GARRISON

Attorneys

APRIL 2001

APPENDIX

The parties to the proceeding are as follows:

The petitioners in this Court in No. 00-587 are the

United States and the Federal Communications Com-

mission.

The respondents are:

Ad Hoc Telecommunications Users Committee

Airtouch Communications, Inc.

Alabama Public Service Commission

American Communications Services, Inc.

Ameritech Corporation

AT&T Corporation

BellSouth Corp.

California Public Utilities Department

Cincinnati Bell Telephone Company

Citizens Telephone Company of Kecksburg

Comcast Corporation

Concord Telephone Company

Consumers’ Utility Counsel Division, Governor’s

Office of Consumer Affairs

Contel of Minnesota, Inc.

Contel of the South, Inc.

Department of Public Utilities of the

Commonwealth of Massachusetts

Excel Telecommunications, Inc.

General Communications, Inc.

GST Telecom, Inc.

GTE Alaska, Inc.

GTE Arkansas, Inc.

GTE Midwest, Inc.

GTE Service Corporation

GTE Southwest, Inc.

ICG Telecom Group, Inc.

(la)

Information Technology Industry Council

Iowa Utilities Board

Jones Intercable, Inc.

Kansas Corporation Commission

Kentucky Public Service Commission

KMC Telecom, Inc.

Maryland Public Service Commission

MCI Telecommunications Corporation

Mid-Sized Incumbent Local Exchange Carriers

Mississippi Public Service Commission

National Cable Television Association

National Rural Telecom Association

National Telephone Cooperative Association

New York State Department of Public Service

North Carolina Utilities Commission

North State Telephone Company

Oregon Public Utility Commission

Organization for the Promotion and Advancement

of Small Telecommunications Companies

Pennsylvania Public Utility Commission

People of the State of California & PUC of

California

Public Utilities Commission of the State of

Colorado

Public Service Commission of Wisconsin

Public Service Commission of the State of Montana

Qwest Communications

Rock Hill Telephone Company

Roseville Telephone Company

Rural Telecommunications Group

Rural Telephone Coalition

SBC Communications, Inc.

South Dakota Public Utilities Commission

Sprint Communications Company

Sprint Corporation

Sprint PCS

Sprint Spectrum, L.P.

State of Texas

Telecommunications Resellers Association

Texas Office of Public Utility Counsel

The Ad Hoe Coalition of Telecommunications

Manufacturing Companies

The Competition Policy Institute

United States Telecom Association

US Telephone Association

Verizon California, Inc. (formerly GTE California,

Inc.)

Verizon Communications, Inc. (formerly Bell

Atlantic Corp.)

Verizon Florida, Inc. (formerly GTE Florida, Inc.)

Verizon Hawaii Int'l, Inc. (formerly GTE Hawaiian

Tel. Co., Inc.)

Verizon North, Inc. (formerly GTE North, Inc.)

Verizon Northwest, Inc. (formerly GTE

Northwest, Inc.)

Verizon South, Inc. (formerly GTE South, Inc.)

Verizon West Coast, Inc. (formerly GTE West

Coast, Inc.) |

Virginia State Corporation Commission

Winstar Communications

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.