535 U.S. 467 (2002), 00-511, Verizon Communications Inc. v. FCC

Docket Nº:No. 00-511.
Citation:535 U.S. 467, 122 S.Ct. 1646, 152 L.Ed.2d 701, 70 U.S.L.W. 4396
Court:United States Supreme Court

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535 U.S. 467 (2002)

122 S.Ct. 1646, 152 L.Ed.2d 701, 70 U.S.L.W. 4396




No. 00-511.

United States Supreme Court

May 13, 2002[*]

Argued October 10, 2001



In order to foster competition between monopolistic carriers providing local telephone service and companies seeking to enter local markets, provisions of the Telecommunications Act of 1996 (Act) entitle the new entrants to lease elements of the incumbent carriers’ local-exchange networks, 47 U.S.C. § 251(c), and direct the Federal Communications Commission (FCC) to prescribe methods for state utility commissions to use in setting rates for the sharing of those elements, § 252(d). Such “just and reasonable rates” must, inter alia, be “based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the . . . network element.” § 252(d)(1)(A)(i). Regulations appended to the FCC’s First Report and Order under the Act provide, among other things, for the treatment of “cost” under § 252(d)(1)(A)(i) as “forward-looking economic cost,” 47 CFR § 51.505, something distinct from the kind of historically based cost previously relied on in valuing a rate base, see, e. g., FPC v. Hope Natural Gas Co., 320 U.S. 591, 596–598, 605; define the “forward-looking economic cost of an element [as] the sum of (1) the total element long-run incremental cost of the element [TELRIC,] and (2) a reasonable allocation of forward-looking common costs,” § 51.505(a), “incurred in providing a group of elements that “cannot be attributed directly to individual elements,” § 51.505(c)(1); and, most importantly, specify that the TELRIC “should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration, given the existing location of the incumbent[’s] wire centers,” § 51.505(b)(1). The regulations also contain so-called “combination” rules requiring an incumbent, upon request and compensation, to perform the functions necessary to combine network elements

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for an entrant, unless the combination is not technically feasible. §§ 51.315(b)–(f). Challenges to the regulations, mostly by incumbent carriers and state commissions, were consolidated in the Eighth Circuit, which initially held, inter alia, that the FCC had no authority to control state commissions’ ratesetting methodology and that the FCC misconstrued § 251(c)(3)’s plain language in implementing the combination rules. Reversing in large part in AT&T Corp. v. Iowa Utilities Bd., 525 U.S. 366, 384–385, this Court, among its rulings, upheld the FCC’s jurisdiction to impose a new ratesetting methodology on the States and reinstated the principal combination rule, Rule 315(b), which forbids incumbents to separate currently combined network elements before leasing them to entrants who ask for them in a combined form. On remand, the incumbents’ primary challenge went to the FCC’s ratesetting methodology. The Eighth Circuit understood § 252(d)(1) to be ambiguous as between “forward-looking” and “historical” cost, so that a forward-looking ratesetting method would presumably be reasonable, but held that § 252(d)(1) foreclosed the use of the TELRIC methodology because the Act plainly required rates based on the actual, not hypothetical, cost of providing the network element. The court also invalidated the additional combination rules, Rules 315(c)–(f), reading § 251(c)(3)’s reference to “allow[ing] requesting carriers to combine . . . elements” as unambiguously requiring requesting carriers, not providing incumbents, to do any and all combining.


1. The FCC can require state commissions to set the rates charged by incumbents for leased elements on a forward-looking basis untied to the incumbents’ investment. Because the incumbents have not met their burden of showing unreasonableness to defeat the deference due the FCC, see Chevron U.S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843–845, the Eighth Circuit’s judgment is reversed insofar as it invalidated TELRIC. Pp. 497–528.

(A) This Court rejects the incumbents’ argument that “cost” in § 252(d)(1)’s requirement that “the . . . rate . . . be . . . based on the cost . . . of providing the . . . network element” can only mean, in plain language and in this particular technical context, the past cost to an incumbent of furnishing the specific network element actually, physically, to be provided, as distinct from its value or the price that would be paid for it on the open market. At the most basic level of common usage, “cost” has no such clear implication. A merchant asked about the “cost” of his goods may reasonably quote their current wholesale market price, not the cost of the items on his shelves, which he may have bought at higher or lower prices. When the reference shifts into

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the technical realm, the incumbents are still unconvincing. “Cost” as used in calculating the rate base under the traditional cost-of-service method did not stand for all past capital expenditures, but at most for those that were prudent, while prudent investment itself could be denied recovery when unexpected events rendered investment useless. Duquesne Light Co. v. Barasch, 488 U.S. 299, 312. And even when investment was wholly includable in the rate base, ratemakers often rejected the utilities’ “embedded costs,” their own book-value estimates, which typically were geared to maximize the rate base with high statements of past expenditures and working capital, combined with unduly low depreciation rates. See, e. g., Hope Natural Gas Co., supra, at 597–598. Equally important, the incumbents’ plain-meaning argument ignores the statutory setting in which the mandate to use “cost” in valuing network elements occurs. First, the Act uses “cost” as an intermediate term in the calculation of “just and reasonable rates,” § 252(d)(1), and it was the very point of Hope Natural Gas that regulatory bodies required to set rates expressed in these terms have ample discretion to choose methodology, 320 U.S., at 602. Second, it would be strange to think Congress tied “cost” to historical cost without a more specific indication, when the very same sentence that requires “cost” pricing also prohibits any reference to a “rate-of-return or other rate-based proceeding,” § 252(d)(1), each of which has been identified with historical cost ever since Hope Natural Gas was decided. Without any better indication of meaning than the unadorned term, the word “cost” in § 252(d)(1) gives ratesetting commissions broad methodological leeway, but says little about the method to be employed. Iowa Utilities Bd., supra, at 423. Pp. 497–501.

(B) Also rejected is the incumbents’ alternative argument that, because TELRIC calculates the forward-looking cost by reference to a hypothetical, most efficient element at existing wire centers, not the actual network element being provided, the FCC’s particular methodology is neither consistent with § 252(d)(1)’s plain language nor within the zone of reasonable interpretation subject to Chevron deference. Pp. 501–522.

(1) The term “cost” is simply too protean to support the incumbents’ argument that plain language bars a definition of “cost” untethered to historical investment. What the incumbents call the “hypothetical” element is simply the element valued in terms of a piece of equipment an incumbent may not own. P. 501.

(2) Similarly, the claim that TELRIC exceeds reasonable interpretative leeway is open to the objection that responsibility for “just and reasonable” rates leaves methodology largely subject to discretion. E. g., Permian Basin Area Rate Cases, 390 U.S. 747, 790.

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The incumbents nevertheless field three arguments, which the Court rejects. Pp. 501–522.

(a) The incumbents argue, first, that a method of calculating wholesale lease rates based on the costs of providing hypothetical, most efficient elements may simulate the competition envisioned by the Act but does not induce it. There are basically three answers to this no-stimulation unreasonableness claim. Pp. 503–517.

(i) The basic assumption of the no-stimulation argument— that in a perfectly efficient market, no one who can lease at a TELRIC rate will ever build—is contrary to fact. TELRIC does not assume a perfectly efficient wholesale market or one that is likely to resemble perfection in any foreseeable time, cf. Iowa Utilities Bd., supra, at 389–390, but includes several features of inefficiency that undermine the incumbents’ argument. First, because the FCC has qualified any assumption of efficiency by requiring ratesetters to calculate cost on the basis of the existing location of the incumbent’s wire centers, § 51.505(b)(1), certain network elements will not be priced at their most efficient cost and configuration. Second, TELRIC rates in practice will differ from the products of a perfectly competitive market owing to lags in price adjustments built into the state-commission ratesetting process. Finally, because measurement of the TELRIC is based on the use of the most efficient telecommunications technology currently available, ibid., the marginal cost of a most efficient element that an entrant alone has built and uses would not set a new pricing standard until it became available to competitors as an alternative to the incumbent’s corresponding element. Pp. 504–507.

(ii) It cannot be said that the FCC acted unreasonably in picking TELRIC to promote the mandated competition. Comparison of TELRIC with alternatives proposed by the incumbents as more reasonableembedded-cost methodologies, an efficient component pricing rule, andRamsey pricing, the most commonly proposed variant of fixed-cost recovery ratesetting...

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