Opposition Brief — At&t Corp. v. United States Telecom Assn.

Supreme Court, US

(3) 4) O D | SEP 1! - 2004

Nos. 04-12, 04-15 and 04-18 | oFFIce OF THE CLERK !

In the Supreme Court of the Gnited States

NATIONAL ASSOCIATION OF REGULATORY UTILITY

COMMISSIONERS, ET AL., PETITIONERS

Vv.

UNITED STATES TELECOM ASSOCIATION, ET AL.

AT&T CorP., ET AL., PETITIONERS

Vv.

UNITED STATES TELECOM ASSOCIATION, ET AL.

CALIFORNIA, ET AL., PETITIONERS

v.

UNITED STATES TELECOM ASSOCIATION, ET AL.

ON PETITIONS FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENTS

IN OPPOSITION

PAUL D. CLEMENT

Acting Solicitor General

JOHN A. ROGOVIN Counsel of Record

General Counsel R. HEWITT PATE

AUSTIN C. SCHLICK Assistant Attorney General

Deputy General Counsel MAKAN DELRAHIM

JOHN E. INGLE Deputy Assistant Attorney

Deputy Associate General General

Counsel CATHERINE G. O’SULLIVAN

JAMES M. CARR NANCY C. GARRISON

Counsel Attorneys

Federal Communications Department of Justice

Commission Washington, D.C. 20530-0001

Washington, D.C. 20554 202) 514-2217

QUESTIONS PRESENTED

The Telecommunications Act of 1996, Pub. L. No.

104-104, 110 Stat. 56, seeks to bring competition to loca!

telephone markets in part by requiring incumbent local

exchange carriers (ILECs) to give competitors access

to elements of the ILECs’ networks “on an unbundled

basis.” 47 U.S.C. 25i(c)(3). In determining what

network elements an ILEC must make available to new

entrants, the Federal Communications Commission is

directed to consider, “at a minimum,” whether the lack

of access to a particular nonproprietary element would

“impair” the ability of a new entrant to provide service.

47 U.S.C. 251(d)(2).. The questions presented in this

case are:

1. Whether the Commission reasonably determined

under Section 251 not to require ILECs to unbundle

certain loop facilities that allow the provision of broad-

band service.

2. Whether the court of appeals correctly deter-

mined, with respect to broadband and other network

facilities that the Commission has not required to be

unbundled under Section 251, that petitioners’ conten-

tions concerning preemption of state unbundling re-

quirements are not ripe for judicial review.

3. Whether the court of appeals erred in vacating

Commission rules requiring the unbundling, subject

to state commission determinations, of mass-market

switching and certain dedicated transport facilities

under Section 251(c)(3).

(I)

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366

OUI I acdsee natin eihipdesienlubiasidabhnaiinaiis 2, 3, 4, 5, 15, 19, 24, 26

Alascom, Inc. v. FCC, 727 F.2d 1212 (D.C. Cir.

SNES IEE cio ee ee a 20

Bartholdi Cable Co. v. FCC, 114 F.3d 274

Se a I ladon dane icenaabaiiatinnanmeaneniacanneneen 19

Batterton v. Francis, 432 U.S. 416 (1977) ..........ceceeeeeees 26

Chevron U.S.A. Inc. v. Natural Res. Def.

Counctl, Fc., 467 US. SBT (1GBA4) ......ccccsccccccsssescsesssesseosees 26

City of New York v. FCC, 486 U.S. 57 (1988) ........ eee 21

Coserv Limited Liability Corp. v. Southwestern Bell

Tel. Co., 350 F.3d 482 (Sth Cir. 2003) ...........sccssssssssssseseees 24

Fidelity Fed. Sav. & Loan Ass’n v. De la Cuesta,

i I I eect a ietanicnsetahasananieaansnndnnunincnnncnconie 21

Geier v. American Honda Motor Co., 529 U.S.

Saipan sbcahtdiengesinaeaniniaeniticasnpnpasnpainenraionesinansernnnimnneies 21

Glover v. United States, 531 U.S. 198 (2001) ............... 19

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

1997), aff’d in part and rev’d in part sub nom. AT&T

Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999) ............. 4

(III)

IV

Cases—Continued: Page

National Park Hospitality Ass’n v. Department of

the Tuterior, BEB US. BOS (BOOB) .ncccccersersssssecsccssvecscssessseses 20

Ohio Forestry Ass’n v. Sierra Club, 523 U.S. 726

Ue sicaceesicetatainisetineaieeientaniatiniah iad tialiaartli dita arcana 21

United States Telecom Ass’n v. FCC, 290 F.3d

415 (D.C. Cir. 2002), cert. denied, 538 U.S. 940

RIOT Neceusscrnidincudcsesanipnarindosssteomncinicpdaaiaaiaismeuouaaa 6, 7, 8, 26

Verizon Communications Inc. v. FCC, 535 U.S.

Fe ID rsieceiesecaiacstnapacientecniecaneieheetatiitideaiabiaieiaiaialan 6, 17, 24, 26

Wisconsin Dep't of Health & Family Servs. v.

Ber eneeeey,;, GEE TITS, GES GO) encnseneeresecsnpanciinctusannnannnemennanes 26

WorldCom, Inc. v. United States Telecom Ass’n,

cert. denied, 538 U.S. 940 (]OOB) ........cccccccccessosescssesscseccoveces 8, 26

Statutes and regulation:

Communications Act of 1934, 47 U.S.C. 151 et seq.:

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V

Statutes and regulation—Continued:

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

RIP Manas GNU csssssnscictesstlsibechscencecnibemeaiaseanateseiadpmeaneueanacaneeemaiaes

§ 706, 110 Stat. 153 (47 U.S.C. 157 note) wn.

Se Ci Bc ee PIL ED westerns sa eslsehiasccasnaeieaneasiencaaeaicains

Miscellaneous:

Implementation of the Local Competition Provisions

in the Telecommunications Act of 1996, In re,

BEF ASS d Se CAINE sctasieesceneianintiimomnaneenacnaain

Implementation of the Local Competition Provisions

of the Telecommunications Act of 1996, In re,

Bb AA s.dis Oe LED ccenessansieiniiieninianeaecammnaetaneeaion

Order and Notice of Proposed Rulemaking, FCC

No. 04-179 (Aug. 20, 2004) <http://hraunfoss.{fce.gov/

edocs_public/attachmatch/FCC-04-179Al.pdf> ... 13, 14, 25

In the Supreme Court of the United States

No. 04-12

NATIONAL ASSOCIATION OF REGULATORY UTILITY

COMMISSIONERS, ET AL., PETITIONERS

Vv.

UNITED STATES TELECOM ASSOCIATION, ET AL.

No. 04-15

AT&T CorRP., ET AL., PETITIONERS

Vv.

UNITED STATES TELECOM ASSOCIATION, ET AL.

No. 04-18

CALIFORNIA, ET AL., PETITIONERS

VU.

UNITED STATES TELECOM ASSOCIATION, ET AL.

ON PETITIONS FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENTS

IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-65a’)

is reported at 359 F.3d 554. The order of the Federal

Communications Commission (Pet. App. 66a-1035a) is

' All references to the Pet. App. are to the appendix to the

petition for a writ of certiorari in No. 04-15.

(1)

2

reported at 18 F.C.C.R. 16,978, as corrected by Errata,

18 F.C.C.R. 19,020.

JURISDICTION

The judgment of the court of appeals was entered on

March 2, 2004. On May 24, 2004, the Chief Justice

extended the time within which to file a petition for a

writ of certiorari in No. 04-12 to and including June 30,

2004. On May 25, 2004, the Chief Justice extended the

time within which to file a petition for a writ of

certiorari in Nos. 04-15 and 04-18 to and including June

30, 2004, and all the petitions were filed on that date.

The jurisdiction of this Court is invoked under 28

U.S.C. 1254(1).

STATEMENT

1. With the passage of the Telecommunications Act

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

Congress “ended the longstanding regime of state-

sanctioned monopolies” in local telephone service.

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371 (1999)

(AT&T). The 1996 Act “fundamentally restructures

local telephone markets” by imposing on incumbent

local exchange carriers (ILECs) “a host of duties

intended to facilitate market entry” by aspiring com-

petitors. Jbid. The Act imposes on each ILEC an

“obligation * * * to share its network with com-

petitors” under the terms prescribed by 47 U.S.C.

251(c). AT&T, 525 US. at 371. Under Section 251(c), a

competitive local exchange carrier (CLEC) may use the

ILEC’s network in three ways: “It can purchase local

telephone services at wholesale rates for resale to end

users; it can lease elements of the incumbent’s network

‘on an unbundled basis’; and it can interconnect its own

facilities with the incumbent’s network.” [bid.

3

The central network-sharing provision of the 1996

Act is Section 251(c)(3), which provides that a new en-

trant may “access” (i.e., lease) “elements” of an incum-

bent’s network on an “unbundled basis” under rates,

terms, and conditions that are just, reasonable, and

nondiscriminatory. 47 U.S.C. 251(e)(3). Examples of

“network elements” include “the local loops (wires

connecting telephones to switches), the switches (equip-

ment directing calls to their destinations), and the

transport trunks (wires carrying calls between

switches) that constitute a local exchange network.”

AT&T, 525 U.S. at 371.

Congress required that the Federal Communications

Commission was to complete the task of adopting regu-

lations to implement the requirements of Section

251 within six months after enactment of the 1996 Act.

47 U.S.C. 251(d)(1). For purposes of “determining what

network elements should be made available” under

Section 251(c)(3), the 1996 Act directs the Commission

to “consider, at a minimum, whether * * * access to

such network elements as are proprietary in nature is

necessary,” and whether, as to non-proprietary ele-

ments, “the failure to provide access to such network

elements would impair the ability of the telecommuni-

cations carrier seeking access to provide the services

that it seeks to offer.” 47 U.S.C. 251(d)(2) (emphasis

added). The statute does not define or otherwise

elaborate on the terms “necessary” and “impair.” This

case concerns only non-proprietary elements, and the

“impair” standard is thus at issue.

Under procedures prescribed in the 1996 Act, the

specific rights and duties of incumbents and competing

carriers are set forth in “interconnection agreements.”

If an incumbent and a competing carrier are unable to

reach a negotiated agreement, the 1996 Act provides

ee

4

that the relevant state commission shall “arbitrate” all

“open issues” between the parties by applying the “re-

quirements of section 251 of the Act, including the

regulations” adopted by the Federal Communications

Commission. 47 U.S.C. 252(c).

2. a. In August 1996, the FCC adopted initial rules

for implementing the local competition provisions of the

1996 Act. In re Implementation of the Local Competi-

tion Provisions in the Telecommunications Act of 1996,

11 F.C.C.R. 15,499 (1996) (Local Competition Order).

The FCC designated all components of the incumbents’

networks as network elements and required incum-

bents to lease to their competitors preassembled com-

binations of some or all of those elements. It also

required that rates for network elements be set under

the FCC’s “total element long-run incremental cost”

(TELRIC) pricing standard. On petitions for review,

the United States Court of Appeals for the Eighth

Circuit affirmed some parts of the Local Competition

Order and reversed others. Jowa Utils. Bd. v. FCC, 120

F.3d 753 (1997). On certiorari, this Court affirmed in

part and reversed in part. AT&T Corp. v. Iowa Utils.

Bd., 525 U.S. 366 (1999).

The Court affirmed the FCC’s general authority to

adopt rules governing the States’ participation in the

administration of the 1996 Act, including rules estab-

lishing a methodology that the States would apply

when setting the prices of unbundled network ele-

ments. AT&T, 525 U.S. at 377-385. The Court also

affirmed several aspects of the FCC’s unbundling rules,

including various rules that allowed CLECs to “lease a

complete, preassembled network” at cost-based rates.

Id. at 392-395. At the same time, the Court held that

the FCC had not adequately given effect to the “neces-

sary” and “impair” standards in adopting its rules

5

governing unbundled access under Section 251(d)(2).

Id. at 387-392. The Court held that the Commission had

erroneously read Section 251(c)(3) as requiring incum-

bents to “provide all network elements for which it is

technically feasible to provide access” and had treated

Section 251(d)(2) as merely authorizing the FCC to

“create isolated exemptions from some underlying duty

to make all network elements available.” Jd. at 391

(citation omitted). The Court further held that the

Commission had erred in refusing to consider “the

availability [to new entrants] of elements outside the

incumbent’s network” and in treating any cost or

quality difference—no matter how trivial—as con-

clusive evidence of impairment. Jd. at 389-390. While

acknowledging that the Commission was not bound to

any particular interpretation of the terms of Section

251(d)(2), the Court held that “the Act requires the

FCC to apply some limiting standard, rationally related

to the goals of the Act.” Jd. at 388.

Responding to this Court’s decision in AT&T, the

Commission revised its rules in 1999 to adopt a new

interprecation of the statutory impairment standard.

In re Implementation of the Local Competition Pro-

visions of the Telecommunications Act of 1996, 15

F.C.C.R. 3696 (1999) (Remand Order). Under the re-

vised interpretation, a competing carrier was deemed

to be “impaired” with respect to a particular element if,

“taking into consideration the availability of alternative

elements outside the incumbent LEC’s network * * °.

lack of access to that element materially diminishes a

requesting carrier’s ability to provide the services it

seeks to offer.” 47 C.F.R. 51.317(b)(1).. Under that

standard, the FCC removed some elements from the

national list (directory and operator services, packet

switching, and switching to serve certain large “enter-

6

prise” customers), but maintained access requirements

that allowed competing carriers who do not have their

own network facilities to obtain a combination of loops,

transport, and switching that could be used to serve

“mass market” (7.e., residential and small business)

customers. Numerous ILECs filed petitions for review

in the D.C. Circuit challenging the FCC’s revised

unbundling rules.

b. While those petitions were pending, this Court

rejected the ILECs’ challenge to the FCC’s TELRIC

rules for pricing unbundled elements in Verizon Com-

munications Inc. v. FCC, 585 U.S. 467 (2002). The

Court in Verizon addressed claims that were central to

the incumbents’ simultaneous D.C. Circuit challenge to

the scope of unbundling—.e., that making combinations

of all unbundled elements available at TELRIC rates

“may simulate the competition envisioned by the Act

but does not induce it” and “perversely creates incen-

tives against competition in fact.” Jd. at 503. This

Court rejected those claims, finding that the evidence

did not support the argument that TELRIC rates

would “stifle” investment incentives, 7d. at 517 n.38, and

concluding that, in any event, the statute gave the FCC

discretion to choose “to induce [potential entrants] to

compete in less capital-intensive facilities with lessened

incentives to build their own bottleneck facilities.” Jd.

at 510.

ce. Shortly after this Court issued its Verizon deci-

sion addressing TELRIC pricing, the D.C. Circuit

granted the ILECs’ petitions for review of the FCC’s

1999 Remand Order. United States Telecom Ass’n v.

FCC, 290 F.3d 415 (2002) (USTA JD, cert. denied, 538

U.S. 940 (2003). The court of appeals recognized “the

extraordinary complexity of the Commission’s task,”

and acknowledged that Congress “gave no detail as to

7

either the kind or degree of impairment” that would

justify mandatory unbundling. Jd. at 421-422. None-

theless, the court of appeals remanded the Commis-

sion’s rules for further consideration.

The D.C. Circuit determined that the Commission’s

network unbundling rules were impermissibly over-

broad in three respects. First, the court of appeals

took issue with the Commission’s decision “to adopt a

uniform national rule” requiring unbundling “without

regard to the state of competitive impairment in any

particular market.” USTA J, 290 F.3d at 422. The

court concluded that the Commission should have

adopted “a more nuanced concept of impairment” that

(among other things) accounted for the effects of any

existing implicit universal service subsidies. Jd. at 422-

423. Second, although the court recognized that “any

cognizable competitive ‘impairment’ would necessarily

be traceable to some kind of disparity in cost” between

obtaining an unbundled network element and obtaining

a reasonable substitute for the element, it faulted the

Commission for relying on cost disparities that may be

“faced by virtually any new entrant in any sector of the

economy, no matter how competitive the sector.” Jd. at

426. Lastly, the court of appeals set aside the Com-

mission’s decision to allow CLECs to lease the high-

frequency portion of ILECs’ copper loops to provide

broadband service (a practice known as “line sharing”),

because the agency “failed to consider the relevance of

competition in broadband services coming from cable

(and to a lesser extent satellite).” Jd. at 428.

The United States and the FCC did not ask this

Court to review the D.C. Circuit’s decision overturning

the Remand Order. In its response to a certiorari

petition filed by CLECs, the government agreed that

the USTA I decision was “erroneous for many of the

8

reasons set forth in the petition,” that the decision was

“in significant tension with this Court’s reasoning in

Verizon and AT&T,” and that the court of appeals did

not accord “appropriate deference to the FCC’s reason-

able implementation of a complex statute.” Fed. Resp.

Br. at 14, WorldCom, Inc. v. United States Telecom

Ass’n, cert. denied, 538 U.S. 940 (2003) (No. 02-858).

But the government explained that it had decided not

to seek review of the D.C. Circuit’s decision because the

FCC was already in the process of completing its

so-called “Triennial Review” proceeding, in which the

Commission “as a matter of discretion” had under-

taken to engage in “much” of the analysis required by

USTA I. Fed. Resp. Br. at 17. The Court denied

certiorari. 538 U.S. 940 (2003).

3. In August 2003, the Commission issued its 7'n-

ennial Review Order, the agency decision now on

review. Pet. App. 66a-1035a. In the Triennial Order,

the Commission stated that it would find competitive

impairment and require unbundling “when lack of

access to an incumbent LEC network element poses a

barrier or barriers to entry, including operational and

economic barriers, that are likely to make entry into a

market uneconomic.” Jd. at 16la. The Commission

stated that it would make this determination by asking

“whether all potential revenues from entering a market

exceed the costs of entry, taking into consideration any

countervailing advantages that a new entrant may

have.” Ibid.

Applying its revised impairment standard, the FCC

significantly cut back the scope of unbundling that it

had mandated under the 1999 Remand Order. Among

other things, the Commission substantially curtailed

mandatory unbundling of the broadband capabilities of

ILECs’ fiber loops serving residential customers. Pet.

9

App. 341a-362a. It also decided to phase out line

sharing requirements that allowed CLECs to lease the

high-frequency portion of copper loops in order to

provide broadband services to their customers. Jd. at

326a-332a. To reduce market disruption, however, the

Commission created a three-year transition period for

eliminating line sharing. During the first year of the

transition, CLECs could obtain new line sharing

arrangements by paying 25% of the full loop rate. The

following year, the line sharing rate would increase to

50% of the loop rate. Then, in the final year of the

transition, the rate for new line sharing arrangements

would increase to 75% of the loop rate. Jd. at 336a-337a.

At the same time, the Commission found that

competitive conditions justified the continued unbundl-

ing of other elements under Section 251(c)(3). In parti-

cular, the Commission maintained unbundling require-

ments for switches used to serve the mass market (2.e.,

residential and small business customers) and for

dedicated transport facilities below a certain capacity

level. Pet. App. 464a-465a, 477a-478a, 549a-55la. In

combination with unbundled loops, the availability of

unbundled switches and transport facilities enabled

CLECs to continue to serve residential users by means

of a “platform” of elements obtained entirely from

ILECs. :

The FCC found that CLECs were generally impaired

absent unbundled mass-market switching because they

could not use their own switches without obtaining ex-

pensive, operationally difficult, and disruptive manual

“hot cuts” to rewire connections between the loops used

by mass market customers and a CLEC switch. Pet.

App. 554a-556a. The Commission found that the need

for hot cuts “creates an insurmountable disadvantage to

[CLECs] seeking to serve the mass market” by con-

10

necting their own switches to the loops they would

lease from incumbents—even at the low volume of

orders that had been placed in the past. Jd. at 572a-

573a. The Commission further determined that incum-

bents likely would be unable to provide the vastly

greater volumes of hot cuts that would become neces-

sary if unbundled switching were eliminated for the

mass market and service for new and existing mass

market customers had to be cut over through the hot

cut process to non-ILEC switching facilities. Jd. at

561a-565a.

The FCC also made national impairment findings for

certain categories of dedicated transport. The Com-

mission determined that dedicated transport facilities

have natural monopoly characteristics and that there

are substantial structural impediments to the deploy-

ment of alternative transport facilities. Pet. App. 440a-

442a, 473a-477a. The Commission found that a CLEC

could earn sufficient revenues to overcome those dis-

advantages in the case of very-high-capacity transport

facilities (for which it found no impairment), but not in

the case of lower-capacity facilities such as DS1, DS3,

and dark fiber facilities (for which it found impairment

and required unbundling on a route-specific basis). Jd.

at 453a-456a, 464a-467a, 470a-471a, 477a-478a.

The Commission recognized that conditions in some

local markets might provide a basis for finding that

CLECs are not impaired without access to mass-mar-

ket switching and lower-capacity transport. Pet. App.

486a, 508a-512a, 587a-589a, 596a-597a. The record be-

fore the FCC, however, did not contain “sufficiently

granular information” to allow the agency to identify

individual local markets in which CLECs might not be

impaired. Jd. at 265a. Furthermore, the agency con-

cluded that “states are better positioned than [the

1]

FCC] to gather and assess the necessary information.”

Ibid. The FCC accordingly “delegated” to state com-

missions the task of analyzing local conditions and

determining the ILECs’ unbundling obligations for

mass-market switching and dedicated transport in any

market in which they found no impairment under FCC-

prescribed standards. Jd. at 467a-468a, 471a-473a, 479a-

480a, 570a-571a. In particular, the FCC authorized

each state commission to create exceptions to the

national unbundling requirements in any market where

the state commission (1) found that deployment-based

triggers were satisfied (id. at 481la-503a, 552a-553a,

596a-611la) or (2) determined a lack of impairment by

applying the Commission’s general impairment stan-

dard to the conditions in that local market to identify

areas where competitive facilities could potentially be

deployed (id. at 496a-497a, 503a, 61 la-612a).

The Commission addressed the possibility that a

state commission might require the unbundling of an

element that the FCC had determined not to include on

its list of unbundled elements. The Commission invited

parties, in that event, to petition the FCC for a dec-

laratory ruling that the state unbundling requirement

exceeds the limits on state authority set forth in

Section 251(d)(3). The Commission expressed the view

that any such state requirement would be “unlikely” to

survive scrutiny under Section 251(d)(3)(C), which

preempts state laws that are not “consistent with” or

“substantially prevent” implementation of the require-

ments of Section 251. Pet. App. 272a.

The Commission also concluded that the Bell operat-

ing companies must continue to provide access to some

facilities or services that are no longer generally sub-

ject to unbundling under Section 251(c)(3), in accor-

dance with the access requirements that those com-

12

panies had to satisfy to provide long-distance telephone

service under 47 U.S.C. 271. Pet. App. 755a-758a. The

Commission determined, however, that the cost-based

pricing standard prescribed by Section 252(d)(1)—and

the Commission’s TELRIC pricing rules—would not

apply to facilities or services that Bell companies pro-

vide solely to comply with Section 271. Instead, the

Commission determined that prices for those facilities

or services would be governed by the “just and rea-

sonable” pricing standard set forth in Sections 201 and

202 of the Communications Act of 1934, 47 U.S.C. 201,

202. Pet. App. 758a-764a.

4. On petitions for review, the D.C. Circuit upheld

some parts of the Triennial Order and vacated others.

Pet. App. la-65a. Among other things, the court of

appeals vacated the rules requiring unbundling of mass-

market switching and dedicated transport. Jd. at 8a-

32a. First, the court held that the Commission lacked

authority to delegate impairment determinations to the

States. Jd. at 9a-16a, 25a-27a. Having invalidated the

States’ ability to determine unbundling obligations, the

court then vacated the agency’s nationwide impairment

findings for mass-market switching and dedicated

transport. The court reasoned that the Commission, in

making the nationwide impairment findings that were

subject to further state consideration, did not itself

sufficiently account for distinctions among markets or

consider more narrowly tailored alternatives to un-

bundling. Jd. at 16a-2la, 27a-32a.

The court of appeals rejected the CLECs’ challenges

to the FCC’s rules concerning unbundling of ILEC

broadband facilities. The court held that the agency

had reasonably decided not to require unbundling of

incumbents’ broadband facilities in light of record evi-

dence showing that mandatory unbundling of such

13

facilities was discouraging both incumbents and their

potential competitors from investing in new broadband

facilities. Pet. App. 34a-35a. The court of appeals also

affirmed the Commission’s decision to phase out line

sharing. The court upheld as reasonable the Commis-

sion’s conclusion under Section 251(d)(2) that other

considerations (including the availability of alternative

broadband facilities, the skewed incentives created by

the extremely low rates that had been set for the line

sharing network element, and the presence of sub-

stantial intermodal competition in the provision of

broadband Internet access) outweighed any impair-

ment that might result if line sharing arrangements

were no longer available. Jd. at 45a-47a.

Finally, the court of appeals dismissed as unripe the

state commissions’ challenges to the FCC’s discussion

concerning preemption of state unbundling require-

ments. The court determined that the Commission had

made only a “general prediction” that state unbundling

orders might be preempted in certain circumstances.

Because the Commission had not yet taken any final

action to preempt specific state regulations, and be-

cause deferral of judicial review would not cause any

hardship to the state commissions, the court of appeals

ruled that the States’ preemption claims were not ripe

for review. Pet. App. 63a-64a.

5. On August 20, 2004, the FCC released an Order

and Notice of Proposed Rulemaking, FCC No. 04-179,

<http//hraunfoss.fec.gov/edocs_public/attachmatch/FCC

-04-179A1.pdf>, in which the agency solicited public

comment on what unbundling rules it should issue to

implement the court of appeals’ mandate, and adopted

interim measures to limit disruption in telecommunica-

tions markets during the pendency of the rulemaking.

In a statement accompanying that recent decision, FCC =

14

Chairman Powell noted that he has scheduled a Com-

mission vote on the remand proceeding for December

2004. Id. at 41.

ARGUMENT

CLECs and state commissions have petitioned this

Court to review the D.C. Circuit’s decision. Those par-

ties seek review insofar as the court of appeals upheld

the FCC’s determinations not to require unbundling of

broadband elements and to phase out line sharing;

dismissed as unripe contentions that the FCC unlaw-

fully preempted state authority; and vacated the FCC

rules requiring ILECs to unbundle mass-market

switching and certain dedicated transport facilities,

subject to impairment determinations by the States.

None of those issues warrants review by the Court in

this case.

1. Broadband Unbundling. The court of appeals

correctly affirmed the FCC’s decision not to require un-

bundling of the broadband capabilities of ILECs’ loops.

The Commission reasonably applied Section 251(d)(2)

when it considered, “at a minimum,” whether lack of

access to those broadband loop capabilities “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). In the Triennial Order, the

Commission construed the statutory “at a minimum”

clause in accordance with its plain terms to authorize

the agency to consider factors other than competitive

impairment when deciding whether to require unbun-

dling of particular network elements. Pet. App. 247a-

258a. The court of appeals correctly held that the Com-

mission’s reading of the statute was reasonable, and

that the Commission may decline to order unbundling

“even in the face of some impairment, where such un-

15

bundling would pose excessive impediments to infra-

structure investment.” Jd. at 37a. The Commission

further found that the dampening effect of unbundling

requirements on investment in broadband facilities out-

weighed the limited evidence that competitors would be

impaired without unbundled access to certain broad-

band loops. Jd. at 341a-362a. Identifying substantial

record evidence that supports the agency’s conclusion,

the court of appeals upheld the Commission’s deter-

mination not to require unbundling of broadband loop

capabilities. Jd. at 37a-45a.

There is no basis for the CLECs’ assertion (04-15

Pet. 15-19) that the court of appeals’ decision on the

broadband unbundling rules conflicts with this Court’s

decisions in AT&T and Verizon. The CLECs rely on

the Court’s conclusion in AT&T that the Act does not

impose a “facilities-ownership requirement” on carriers

that seek to lease unbundled network elements. 04-15

Pet. 16-17 (quoting AT&T, 525 U.S. at 392). But in

AT&T, this Court determined only that the Act does

not require competing carriers to deploy some facilities

of their own before they may lease any unbundled

ILEC facilities. That determination has no bearing on

the entirely different question whether considerations

of investment incentives may justify a decision by the

FCC to eliminate broadband unbundling obligations.

Contrary to the assertions of the CLECs (04-15 Pet.

17-18), the court’s affirmance of the FCC’s application

of Section 251(d)(2) to broadband elements also does not

conflict with Verizon. In that case, this Court rejected

the ILECs’ contention that the FCC’s use of the

TELRIC methodology to set rates for unbundled ele-

ments created unreasonable disincentives to invest in

new facilities. Citing record evidence of significant

investment in local telephone facilities by new com-

16

petitors, the Court concluded that the challenged regu-

latory scheme “is not easily described as an unreason-

able way to promote competitive investment.” 535 U.S.

at 517. The Verizon decision did not foreclose the

possibility that the Commission might in the future

decline to require unbundling of particular facilities,

such as new broadband loop facilities, out of concern for

the effect such unbundling might have on investment

incentives. Indeed, the Court in Verizon expressly de-

clined to endorse the specific policies before it. See id.

at 517, 539.

The court of appeals noted that the Commission had

found evidence in its Triennial Review proceeding that

the “regulatory environment” of unbundling had de-

terred ILECs from deploying the electronic equipment

needed to provide broadband service over hybrid fiber-

copper loops. Pet. App. 39a-40a, 356a-357a. Substantial

record evidence also supported the Commission’s con-

clusion that elimination of broadband unbundling

requirements would give both ILECs and CLECs

greater incentives to build out all-fiber loops to their

customers’ premises. Id. at 40a-41a, 312a-313a, 341a-

342a, 356a-357a. On the basis of that evidence speci-

fically addressing broadband facilities, the Commission

reasonably decided to lift certain broadband unbundling

requirements even though the absence of such un-

bundling might create some impairment. The court of

appeals’ affirmance of that decision involves a fact-

bound application of Section 251 and does not conflict

with any decision of this Court or any court of appeals.

Contrary to the CLECs’ suggestion (04-15 Pet. 21),

moreover, the FCC acted consistently with the Act

when it considered investment incentives as part of its

broadband unbundling analysis. In Verizon, this Court

affirmed the Commission’s rules for pricing network

17

elements after similarly considering whether those

rules would unduly discourage the development of

facilities-based competition. Verizon, 535 U.S. at 501-

523. Moreover, Congress commanded the FCC to pro-

mote broadband investment. Section 706 of the 1996

Act directs the Commission to “encourage the deploy-

ment * * * of advanced telecommunications capability

to all Americans” by utilizing “regulating [sic] methods

that remove barriers to infrastructure investment.”

110 Stat. 153 (47 U.S.C. 157 note). The Commission

determined in the Triennial Order that it could best

foster broadband investment and facilities-based com-

petition by relieving ILECs of certain unbundling

obligations with respect to broadband facilities. That

determination does not merit further review.

2. Line Sharing and Preemption

a. The court of appeals correctly upheld the FCC’s

decision to phase out line sharing requirements, under

which ILECs had been required to provide access to

the high-frequency portion of their copper loops to

CLECs for the provision of broadband services. Pet.

App. 45a-47a.

In attacking that aspect of the Triennial Order, the

state commissions focus principally on the FCC’s

finding that broadband service provided over cable

television systems (“cable modem service”) is a

competitive alternative to broadband services that are

provided over ILEC networks. 04-18 Pet. 14-17; 04-12

Pet. 28; see Pet. App. 331a-332a. The state commissions

contend that cable modem service is not widely avail-

able in every State. Even assuming that to be true,

however, it is irrelevant here. The Commission made

clear—and the court of appeals understood—that the

competitive alternative provided by cable modem

18

service was not the “dispositive” factor in the agency’s

decision to end line sharing. /d. at 46a, 332a. Rather,

the Commission determined that continuing the ILECs’

line sharing obligations was unnecessary under Section

251(d)(2) because CLECs could economically provide

broadband service by leasing the entire loop (not just

the high-frequency portion) from an ILEC. Applying

its impairment standard, which takes into account all

potential revenues from a loop’s various uses (including

voice, data, video, and other services), the Commission

concluded that the revenues from those services collec-

tively “would offset the costs associated with pur-

chasing the entire loop.” Jd. at 45a; see id. at 327a-328a.

The state commissions do not seriously contest that

fact-bound conclusion.

The Commission also found substantial evidence on

the record before it that, even if ILECs did not have to

share their loops with CLECs in line sharing arrange-

ments, in light of the rules adopted in the T'riennial

Order, CLECs could lease entire unbundled loops and

enter into “line-splitting” arrangements with other

CLECs—under which one CLEC provides broadband

service using the high-frequency capabilities of the

loop, while another CLEC (rather than the ILEC, as in

line sharing) uses the low-frequency portion of the loop

to provide voice service. Pet. App. 45a, 328a-329a. In

light of all those factors, the Commission reasonably

decided to discontinue mandatory line sharing. The

agency’s conclusion about the significance of the record

evidence raises no issue that would warrant review by

this Court.

b. To address the legitimate business concerns of

CLECs that have used line sharing arrangements to

provide broadband service to their customers, and to

protect those customers from service disruption or

19

drastic rate changes, the Commission adopted a three-

year plan for phasing out the ILECs’ line sharing

obligations and phasing in associated price increases in

annual increments. California contends that the Com-

mission’s formula for setting rates for transitional line

sharing during this three-year period impermissibly

preempts state ratemaking authority. 04-18 Pet. 20-23.

Because it appears that no party raised that issue

before the FCC, the issue cannot be raised on judicial

review of the Triennial Order. See 47 U.S.C. 405;

Bartholdi Cable Co. v. FCC, 114 F.3d 274, 279-280 (D.C.

Cir. 1997). This preemption issue, moreover, received

so little attention in the briefs below that the court of

appeals did not even address it. See Glover v. United

States, 531 U.S. 198, 205 (2001) (“In the ordinary course

we do not decide questions neither raised nor resolved

below.”). In any event, the issue concerns a three-year

transition period, of which one year already has run. It

therefore lacks ongoing importance.

Finally, California’s ratesetting-preemption claim

lacks merit. The FCC has authority to adopt pricing

methodologies for unbundled network elements, which

the States then apply. AT&T, 525 U.S. at 377-385.

Like the pricing rules at issue in AT&T and Verizon,

the Commission’s transitional pricing rules for line

sharing do not set specific rates. Rather, they require

that line sharing rates reflect certain percentages of the

full loop rate that is set by the relevant State. Con-

sistent with the statutory division of responsibilities

between the FCC and the States, the FCC has estab-

lished a methedology and the States will “implement

that methodology, determining the concrete result in

particular circumstances.” Jd. at 384. Furthermore,

the States’ past efforts to establish line sharing rates

justified the FCC’s decision to place limits on the

20

States’ discretion to set transitional rates. As the court

of appeals observed, most States had previously set line

sharing rates “at approximately zero,” which “distorted

competitive incentives.” Pet. App. 45a-46a. The

Commission’s transitional rate formula was reasonably

designed to address that problem.

ce. California contends that the FCC unlawfully

preempted state authority to require line sharing when

it is not required under FCC rules. 04-18 Pet. 23-28.

The court of appeals correctly ruled that that con-

tention is not ripe in the instant proceeding. Pet. App.

638a-64a. Contrary to California’s suggestion, the Tri-

ennial Order does not include final FCC action pre-

empting any state line sharing rule or other unbundling

requirement. In paragraph 195 of the Triennial Order,

the Commission invited parties to seek declaratory

rulings from the FCC if they believe that a particular

state unbundling obligation is inconsistent with the

limits on state authority in 47 U.S.C. 251(d)(8) and the

FCC’s rules. Pet. App. 272a. The Commission pre-

dicted that if States require line sharing or unbundling

of elements that the FCC has determined not to subject

to mandatory unbundling under Section 251, such state

requirements are “unlikely” to be found consistent with

the 1996 Act. Jd. at 68a, 272a. But the Commission did

not preempt any state rules, and it is uncertain whether

the FCC ever will issue a preemption order of this sort

in response to a request for declaratory ruling. See

Alascom, Inc. v. FCC, 727 F.2d 1212, 1218-1220 (D.C.

Cir. 1984). There also is no urgency to review that

issue before a concrete controversy involving a parti-

cular state ruling is presented. Under the circum-

stances, California’s preemption claim is not ripe for

review. See National Park Hospitality Ass’n v. De-

partment of the Interior, 538 U.S. 803, 807-812 (2003);

21

Ohio Forestry Ass’n v. Sierra Club, 523 U.S. 726, 732-

737 (1998).

Even if California’s preemption claim were ripe,

California is wrong in arguing (04-18 Pet. 24-26) that

the FCC’s unbundling rules lack preemptive effect.

This Court has long recognized that “[(flederal regula-

tions have no less pre-emptive effect than federal

statutes.” Fidelity Fed. Sav. & Loan Ass’n v. De la

Cuesta, 458 U.S. 141, 158 (1982). Accordingly, “[t]he

statutorily authorized regulations of an agency will pre-

empt any state or local law that conflicts with such

regulations or frustrates the purposes thereof.” City of

New York v. FCC, 486 U.S. 57, 64 (1988).

California incorrectly contends that Section 251(d)(3),

which preserves some state authority, effectively nulli-

fies the preemptive power of the FCC’s unbundling

regulations. Unless Congress expressly provides

otherwise, a statutory “saving clause” such as Section

251(d)(8) does not diminish the preemptive force of

federal regulations. See Geier v. American Honda

Motor Co., 529 U.S. 861, 869-874 (2000). Section

251(d)(8) is essentially a “conflict-preemption” provision

and is, therefore, limited in scope. It does not preserve

all state network-access requirements, but only pre-

serves those state regulations that are “consistent with

the requirements” of Section 251 and do “not sub-

stantially prevent implementation” of those require-

ments. 47 U.S.C. 251(d)(8)(B) and (C). Because Con-

gress authorized the Commission to set standards gov-

erning the determination of “what network elements

should be made available,” 47 U.S.C. 251(d)(2), state

laws or rulings inconsistent with the FCC’s unbundling

regulations would be inconsistent with the congression-

ally authorized “implementation of the requirements of

22

[Section 251],” 47 U.S.C. 251(d)(8)(C), and hence pre-

empted.

d. The National Association of Regulatory Utility

Commissions and the Arizona Corporation Commission

(collectively NARUC) make a similar preemption claim

concerning the pricing of facilities or services for which

the FCC has determined not to continue unbundling

obligations under 47 U.S.C. 251(¢c)(3). 04-12 Pet. 29-30.

The Bell companies must continue to provide some

facilities or services under the separate requirements of

47 U.S.C. 271, the statute that governs the Bell

companies’ entry into the long-distance market. In the

Triennial Order, the FCC ruled that the cost-based

pricing standard prescribed by 47 U.S.C. 252(d)(1) does

not apply to those facilities or services that must be

made available only under Section 271, rather than

under Section 251. The Commission stated that, in that

situation, rates must comply with the “just and

reasonable” pricing standard in Sections 201 and 202 of

the Communications Act of 1934, 47 U.S.C. 201, 202.

Pet. App. 758a-764a. The Commission also stated that

determining a Bell company’s compliance with that

pricing standard for a particular facility or service

requires “a fact-specific inquiry” that the agency will

undertake, if necessary, “in an enforcement proceeding

brought pursuant to section 271(d)(6).” Id. at 764a.

NARUC claims that the FCC’s “pricing proposal”

under Section 271 intrudes on the States’ authority to

set rates for network elements. 04-12 Pet. 29-30. That

issue was not prominently raised in the briefs below,

and the court of appeals did not address it. The issue is

unripe for consideration by this Court for another rea-

son as well. As petitioners acknowledge, 04-12 Pet. 29,

the FCC has made only a pricing “proposal.” The Com-

mission has yet to apply its announced “just and

23

reasonable” approach to rates in any State. Unless and

until the Commission conducts an enforcement pro-

ceeding under Section 271(d)(6) to review rates in a

particular State, there is no final agency action for a

court to review, nor any concrete injury to NARUC.

In addition, NARUC is wrong to suggest that the

FCC’s pricing proposal forecloses the States from

setting rates for facilities or services that are provided

solely to comply with Section 271. In the Triennial

Order, the FCC expressed no opinion as to precisely

what role the States would play in establishing rates

under Section 271. Until the Commission expressly

addresses that question, the matter is not suitable for

judicial review.

In any event, NARUC’s challenge to the FCC’s pric-

ing discussion rests on a flawed legal premise. NARUC

suggests that Section 252 of the Act gives state com-

missions exclusive authority to set rates for network

elements and equivalent facilities and services under all

circumstances. 04-12 Pet. 29-30. That is incorrect.

Section 252(c)(2) directs state commissions to “establish

any rates for * * * network elements according to

subsection (d).” 47 U.S.C. 252(c)(2) (emphasis added).

Section 252(d) specifies that States set “the just and

reasonable rate for network elements” only “for pur-

poses of [47 U.S.C. 251(c)(3)].” 47 U.S.C. 252(d)(1). The

statute makes no mention of a state role in setting rates

for facilities or-services that are provided by Bell com-

panies to comply with Section 271 and are not governed

by Section 251(c)(3). The FCC reasonably concluded

that it is authorized to review the rates for those

facilities or services, because the statute elsewhere ex-

pressly empowers the FCC to enforce compliance with

24

the requirements of Section 271. See 47 U.S.C.

271(d)(6).”

3. Narrowband Unbundling. Finally, all of the peti-

tioners seek review of the D.C. Circuit’s vacatur of the

agency rules requiring the unbundling of mass-market

switching and dedicated transport. 04-15 Pet. 22-30; 04-

12 Pet. 15-28; 04-18 Pet. 29. The court of appeals

vacated those rules on the grounds that: (1) the FCC

lacked authority for its delegation to the States of re-

sponsibility for deciding whether the FCC’s unbundling

standards would allow an ILEC to obtain relief for

particular facilities in particular geographic areas; and

(2) without that state-based exception process, the

FCC’s nationwide findings of impairment with respect

to mass-market switching and dedicated transport were

overly broad. Pet. App. 8a-27a.

The D.C. Circuit’s analysis of the FCC’s nationwide

impairment findings is inconsistent in some respects

with the applicable principles of deferential judicial re-

view. As this Court has recognized, the 1996 Act is a

complex statute replete with ambiguity, and Congress

“is well aware that the ambiguities it chooses to pro-

duce in a statute will be resolved by the implementing

agency.” AT&T, 525 U.S. at 397; see Verizon, 535 US.

at 539 (“The job of judges is to ask whether the Com-

mission made choices reasonably within the pale of

statutory possibility in deciding what and how items

must be leased and the way to set rates for leasing

2 This case does not involve the question whether state com-

missions may arbitrate issues outside the scope of Section 251(c)

when parties voluntarily include those issues within negotiations

toward an interconnection agreement. See generally Coserv

Limited Liability Corp. v. Southwestern Bell Tel. Co., 350 F.3d 482

(5th Cir. 2003).

25

them.”). Nevertheless, the Commission intends to

proceed expeditiously to adopt new rules in light of the

requirements specified by the D.C. Circuit in USTA I

and this case. In its Notice of Proposed Rulemaking

concerning those new rules, the Commission recognized

“the necessity of formulating permanent rules quickly”

and stated its intent to issue such rules within approxi-

mately six months. See FCC No. 04-179, 4 15,

21 <http://hraunfoss.fec.gov/edocs_public/attachmatch/

FCC-04-179A1l.pdf>. The Chairman of the FCC has

scheduled the matter for a vote by the full Commission

in December 2004. See pp. 13-14, supra. -

Quick agency action to establish new rules consistent

with the court of appeals’ decision will avoid the

uncertainty—for consumers and the communications

industry as a whole—that would be associated with the

process of merits review by this Court and any ensuing

remand proceedings in the court of appeals. For that

reason, and to conserve both judicial and agency re-

sources, the government has concluded that the court of

appeals’ decision does not, on balance, warrant review

at this time.

a. The ILECs contended below—and the court of

appeals agreed—that the FCC lacked authority under

the Communications Act to delegate to the state com-

missions a central role in making final unbundling

determinations for mass-market switching and some

types of dedicated transport. Although the court of

appeals discussed delegation issues generally, see Pet.

App. 10a-16a, its conclusion was that the provisions of

the Communications Act do not indicate with sufficient

clarity a congressional authorization for the specific

state role established by the Triennial Order. Id. at 9a-

10a. That conclusion is not in conflict with any other

judicial decision specifically addressing the Act. Fur-

26

thermore, the D.C. Circuit has not applied the

delegation analysis described in the instant decision in

any other context, and the practical consequences of its

approach are unclear. For those reasons, it would be

premature for this Court to consider the broader dele-

gation questions asserted by the petitions for certiorari,

including the arguments that the court of appeals’

reasoning conflicts in some respects with Batterton v.

Francis, 432 U.S. 416 (1977), and Wisconsin Depart-

ment of Health & Family Services v. Blumer, 534 U.S.

473 (2002).

b. In this case and USTA I, the D.C. Circuit imposed

on the Commission, in conducting its impairment

analysis under Section 251(c)(8) and (d)(2), require-

ments that go beyond those found in the statute itself.

As the court of appeals has recognized, the 1996 Act

provides the FCC with “no detail” about how to carry

out the “extraordinar[ily] complex[]” task of deter-

mining which network elements incumbent carriers

must make available to competitors. USTA I, 290 F.3d

at 421-422. Furthermore, as the government explained

in its response to the petition for certiorari in USTA I,’

the D.C. Circuit’s constraints on the FCC’s impairment

analysis are in tension with this Court’s reasoning in

AT&T and Verizon. In those cases, this Court re-

affirmed and applied the settled principle that review-

ing courts must generally defer to an expert agency’s

reasonable implementation of a complex, broadly

drafted statute. See, eg., AT&T, 525 U.S. at 397;

Verizon, 535 U.S. at 539; see generally Chevron U.S.A.

Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,

843-845 (1984).

3 Fed. Resp. Br. at 14-16, WorldCom, Inc. v. United States

Telecom Ass’n, supra (No. 02-858).

27

Nevertheless, the court of appeals did not purport to

apply the statutory impairment standard conclusively

to particular facts. The court instead stated that it was

making “general observations” about its understanding

of the impairment standard and required the Commis-

sion to conduct “a re-examination” of impairment issues

on remand and “implement a lawful scheme.” Pet. App.

21a, 22a, 27a. As noted, the FCC intends quickly to-

issue new network-unbundling rules that comply with

the court of appeals’ decision. In light of that intention,

and for the other reasons stated above, the United

States and the FCC have concluded that this aspect of

the court of appeals’ decision does not warrant further

review.

CONCLUSION

The petitions for a writ of certiorari should be denied.

Respectfully submitted.

PAUL D. CLEMENT

Acting Solicitor General

JOHN A. ROGOVIN

General Counsel

AUSTIN C. SCHLICK

Deputy General Counsel

JOHN E. INGLE

Deputy Associate General

Counsel

JAMES M. CARR

Counsel

Federal Communications

Commission

SEPTEMBER 2004

R. HEWITT PATE

Assistant Attorney General

MAKAN DELRAHIM

Deputy Assistant Attorney

General

CATHERINE G. O’SULLIVAN

NANCY C. GARRISON

Attorneys