At&T Communications of Il v. Illinois Bell Tel., 03-2735.

• Citation: 349 F.3d 402
• Decision Date: 10 November 2003
• Docket Number: No. 03-2735.,No. 03-2766.,03-2735.,03-2766.
• Parties: AT&T COMMUNICATIONS OF ILLINOIS, INC., et al., Plaintiffs-Appellees, v. ILLINOIS BELL TELEPHONE CO. and Ameritech Corp., Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

349 F.3d 402

AT&T COMMUNICATIONS OF ILLINOIS, INC., et al., Plaintiffs-Appellees, v. ILLINOIS BELL TELEPHONE CO. and Ameritech Corp., Defendants-Appellants.

No. 03-2735.

No. 03-2766.

United States Court of Appeals, Seventh Circuit.

Argued September 24, 2003.

Decided November 10, 2003.

COPYRIGHT MATERIAL OMITTED

David W. Carpenter (argued), Mark B. Blocker, Sidley Austin Brown & Wood, Chicago, IL, for Voices for Choices, AT&T Communications of Illinois and Association for Local Telecommunications Services.

Mark D. Schneider, Jenner & Block, Washington, DC, John R. Harrington, Jenner & Block, Chicago, IL, for MCI Metro Access Transmission Services.

Stephen M. Shapiro (argued), Theodore A. Livingston, Mayer, Brown, Rowe & Maw, Chicago, IL, for Illinois Bell Telephone and Ameritech.

Julian Solotorovsky, Henry T. Kelly, Kelley, Drye & Warren, Chicago, IL, for Talk America, Z-Tel Communications, Corecomm Illinois, Data Net Systems, Trucomm, and Focal Communications Co. of Illinois.

Julie B. Lucas, Robert J. Kelter, Citizens Utility Board, Chicago, IL, for Citizens Utility Board.

Thomas H. Rowland, Rowland & Moore, Chicago, IL, for Globalcom.

Owen E. MacBride, Barry S. Alberts, Schiff, Hardin & Waite, Chicago, IL, for TDS Metrocom, MPower Communications, and McLeodUSA Telecommunications Services.

Before BAUER, EASTERBROOK, and DIANE P. WOOD, Circuit Judges.

EASTERBROOK, Circuit Judge.

The Telecommunications Act of 1996 requires incumbent local exchange carriers — the "Baby Bell" descendants of American Telephone & Telegraph, spun off in 1982 as part of the divestiture that ended the national telephone monopoly—to provide "unbundled" services to new entrants. One of history's ironies is that AT&T itself, reduced to a long-distance carrier by the 1982 decree, has become one of the principal new entrants into local phone service. Meanwhile the Baby Bells, now grown up, are expanding into long-distance service. Many carriers offer local and national wireless service within each incumbent's service area. The result is vigorous competition. But much of the competition entails fighting over the spoils of the 1996 Act. New entrants want to combine the "unbundled network elements" into complete packages of services (called local loops) that they can resell in competition with the incumbent—and, if the wholesale price is right, they can underbid the incumbent at retail while still making a profit. The incumbents would like to set the price of "network elements" high enough to make as much per customer when selling services to their rivals at wholesale as they do when selling to customers at retail. Prices for unbundled elements affect not only the allocation of income among producers but also new investment and innovation: if the price to rivals is too low, they won't build their own plant (why make capital investments when you can buy for less, one unbundled element at a time?), and the incumbents won't maintain or upgrade their facilities (why make costly capital investments if you have to sell local loops to rivals for less than it costs to produce them?).

The Federal Communications Commission implemented the 1996 Act by directing the carriers and state utility commissions to set prices using TELRIC — an acronym for "total element long-run incremental cost." See 47 C.F.R. §§ 51.505-.515. TELRIC obliges both incumbents and state regulators to set prices based on the long-run costs that would be incurred to produce the services in question using the most-efficient telecommunications technology now available, and the most efficient network configuration. Incumbents that have aging and inefficient equipment thus must sell for less than their historical cost; the old system that calculated rates based on actual cost of equipment plus a reasonable rate of return on capital is out the window. In Verizon Communications Inc. v. FCC, 535 U.S. 467, 122 S.Ct. 1646, 152 L.Ed.2d 701 (2002), the Supreme Court held that TELRIC is a choice within the FCC's discretion.

TELRIC is a framework rather than a formula; there is considerable play in the joints. See AT&T Corp. v. FCC, 220 F.3d 607, 615-16 (D.C.Cir.2000); Sprint Communications Co. v. FCC, 274 F.3d 549, 556 (D.C.Cir.2001). Incumbent carriers may be unable to agree with would-be entrants about what the most efficient technology is, how much it would cost to construct, and what the incremental costs of a given network element would be. Moreover, even when the parties can agree on the technology, they may be unable to agree on vital details. One such detail is the "fill factor." Any sensible carrier builds more network capacity than can be used at the moment; that way capacity will be available as additional customers demand service, without waiting for the arrival of new equipment, excavating streets to lay new wire, and so on. Moreover, many kinds of telecommunications equipment have minimum efficient sizes; a switch able to handle 100,000 circuits may be cheaper than two switches able to handle 50,000 circuits apiece. The fill factor reflects the extent of this (economically justified) unused capacity. If an efficient network configuration would have 50% of the circuits in use and 50% idle—ready for new customers, a shift in demand, or use in the event of a breakdown—then the price per loop to a rival would be the average long-run cost per loop divided by 0.5. If the efficient fill factor were to have 2/3 of the circuits in use, then the price would be the long-run cost divided by 0.667, and so on. The lower the efficient fill factor, the higher the price per loop the incumbent can charge to rivals. And TELRIC does not contain an algorithm for determining the fill factor. The FCC has approved several. In the Triennial Review Order the FCC explained that many issues have a range of reasonable answers for the parties—or state regulators, acting under state law—to flesh out. See Report and Order, FCC 03-36, 68 Fed. Reg. 52,276, 52,284 (Aug. 21, 2003). Moreover, the Commission has opened an investigation of TELRIC's operation to ensure that price does not fall below the level needed to encourage efficient investment in new facilities by both incumbents and their rivals. See Notice of Proposed Rulemaking, FCC 03-224, 68 Fed. Reg. 59,757 (issued Sept. 15, 2003, and published Oct. 17, 2003).

The first step in arriving at a price for a network element is negotiation between the incumbent and its rival. 47 U.S.C. §§ 251(c)(1), 252(a). If the carriers cannot agree, then the state agency resolves the dispute. 47 U.S.C. § 252(b). The statute refers to this as "arbitration," a misleading appellation. Arbitration is final (with the few exceptions provided in 9 U.S.C. § 10); the state agency's decision, by contrast, is subject to plenary review in federal district court. 47 U.S.C. § 252(e)(6). Having a state agency's decision reviewed by a federal court is another of the 1996 Act's innovations, and like TELRIC it has received the Supreme Court's imprimatur. See Verizon Maryland Inc. v. Public Service Commission of Maryland, 535 U.S. 635, 122 S.Ct. 1753, 152 L.Ed.2d 871 (2002).

Shortly after the 1996 Act went into force, AT&T and MCI demanded access to the unbundled elements of Illinois Bell, a subsidiary of Ameritech, one of the original Bell Operating Companies (or BOCs, as the divestiture decree called the Baby Bells). AT&T and MCI sought the complete package of services that would enable a retail customer to use the phone system; the parties call this the "unbundled network element platform" or UNE-P. The parties could not agree on price, so their dispute was resolved in 1997 by the Illinois Commerce Commission. The ICC set a price of about $5 per month per UNE-P in Chicago, and about $12 on average statewide. Retail customers pay an average of about $36 per month for the service one UNE-P creates.

Prices set in 1997 were subject to adjustment by the ICC after five years, and when that time came Illinois Bell asked the ICC to raise the rates it could charge. By then Ameritech had been acquired by SBC, another of the original BOCs, and SBC was less willing than Ameritech to accept a low rate-especially not when, by SBC's calculation, it costs $29 per month to supply the UNE-P that fetches $36 from a retail customer but only $12 on average from AT&T or MCI. At the same time, SBC was negotiating with additional potential entrants, or disputing with them before the ICC, and it did not want the $12 average rate to propagate. (For simplicity, we disregard the status of the negotiations, contracts, and proceedings between SBC and rivals other than AT&T and MCI.)

While the ICC had the dispute under advisement, the Illinois legislature enacted 220 ILCS 5/13-408, which established some rules for decision:

This Section applies to and covers certain unbundled network element rates that shall be charged by incumbent local exchange carriers that are subject to regulation under an alternative regulation plan under Section 13-506.1 of this Act. The General Assembly finds and determines that it should provide direction to the Illinois Commerce Commission regarding the establishment of the monthly recurring rates that such incumbent local exchange carriers shall charge other telecommunications carriers for unbundled loops, whether provided on a stand-alone basis or in combination with other unbundled network elements, in order to ensure (i) that such rates are consistent with the requirements of the federal Telecommunications Act of 1996, the regulations promulgated thereunder, and subsection (g) of Section 13-801 of this Act, and (ii) that such incumbent local exchange carriers are able to recover the efficient, forward-looking costs of creating, operating, and maintaining the network outside plant infrastructure capacity and switching and transmission network capacity necessary to permit such incumbent local exchange carriers to meet in a timely and adequate fashion the obligations...