# Petitioners Brief — Federal Communications Commission v. Iowa Utilities Board

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petitioners Brief
- **Published:** January 1, 2002
- **Citation:** 537 U.S. 807

## Text

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

2
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

—

15

31

1a

25

(1984) 11, 21, 40

City of New Orleans v. FERC, 67 F.3d 947
(D.C. Cir. 1995)

(III)

30-31

IV

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

V

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
15

43

5

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

VI

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
U.

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)

2

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

3

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-

1

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).

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.

6

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

7

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).

8

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-

9

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

10

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

11

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).

12

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).

13

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.

14

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).

15

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

16

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

17

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

18

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

19

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

20

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

i

21

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.

22

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

23

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

24

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

25

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.”).

26

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.

\

27

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

28

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

29

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-

30

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. —

31

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

32

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

33

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-

34

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.

35

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

36

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).

37

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).

38

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

39

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.

40

b. In Iowa Utilities Board I, after concluding that
Rule 315(b) satisfies step one of the Chevron analysis
because Ҥ 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

41

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.

42

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

43

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.

44

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

45

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.

46

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)

2a

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0422%3A08. Public record. Not legal advice.