Justice Souter delivered the opinion of the Court.
These cases arise under the Telecommunications Act of 1996. Each is about the power of the Federal Communications Commission to regulate a relationship between monopolistic companies providing local telephone service and companies entering local markets to compete with the incumbents. Under the Act, the new entrants are entitled, among other things, to lease elements of the local telephone networks from the incumbent monopolists. The issues are whether the FCC is authorized (1) to require state utility commissions to set the rates charged by the incumbents for leased elements on a forward-looking basis untied to the incumbents' investment, and (2) to require incumbents to combine such elements at the entrants' request when they lease them to the entrants. We uphold the FCC's assumption and exercise of authority on both issues.
The 1982 consent decree settling the Government's antitrust suit against the American Telephone and Telegraph Company (AT&T) divested AT&T of its local-exchange carriers, leaving AT&T as a long-distance and equipment company, and limiting the divested carriers to the provision of local telephone service. United States v. American Telephone & Telegraph Co., 552 F.Supp. 131 (DC 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). The decree did nothing, however, to increase competition in the persistently monopolistic local markets, which were thought
Two sets of related provisions for opening local markets concern us here. First, Congress required incumbent localexchange carriers to share their own facilities and services on terms to be agreed upon with new entrants in their markets. 47 U. S. C. § 251(c) (1994 ed., Supp. V). Second, knowing that incumbents and prospective entrants would sometimes disagree on prices for facilities or services, Congress directed the FCC to prescribe methods for state commissions to use in setting rates that would subject both incumbents and entrants to the risks and incentives that a competitive market would produce. § 252(d). The particular method devised by the FCC for setting rates to be charged for interconnection and lease of network elements under the Act, § 252(d)(1),
Companies providing telephone service have traditionally been regulated as monopolistic public utilities.
Historically, the classic scheme of administrative ratesetting at the federal level called for rates to be set out by the regulated utility companies in proposed tariff schedules, on the model applied to railroad carriers under the Interstate Commerce Act of 1887, 24 Stat. 379. After interested parties had had notice of the proposals and a chance to comment, the tariffs would be accepted by the controlling agency so long as they were "reasonable" (or "just and reasonable") and not "unduly discriminatory." Hale, Commissions, Rates, and Policies, 53 Harv. L. Rev. 1103, 1104-1105 (1940). See, e. g., Southern Pacific Co. v. ICC, 219 U.S. 433, 445 (1911). The States generally followed this same tariffschedule model. Barnes 297-298. See, e. g., Smyth, supra, at 470-476.
See also United Gas Pipe Line Co., supra, at 345.
Regulation of retail rates at the state and local levels was, on the other hand, focused more on the demand for "just and reasonable" rates to the public than on the perils of rate discrimination. See Barnes 298-299. Indeed, regulated local telephone markets evolved into arenas of statesanctioned discrimination engineered by the public utility commissions themselves in the cause of "universal service." Huber et al. 80-85. See also Vietor 167-185. In order to hold down charges for telephone service in rural markets with higher marginal costs due to lower population densities and lesser volumes of use, urban and business users were charged subsidizing premiums over the marginal costs of providing their own service. See Huber et al. 84.
These cross subsidies between markets were not necessarily transfers between truly independent companies, however, thanks largely to the position attained by AT&T and its satellites. This was known as the "Bell system," which by the mid-20th century had come to possess overwhelming monopoly power in all telephone markets nationwide, supplying local-exchange and long-distance services as well as equipment. Vietor 174-175. See also R. Garnet, Telephone Enterprise: Evolution of Bell System's Horizontal Structure, 1876-1909, pp. 160-163 (1985) (Appendix A). The same pervasive market presence of Bell providers that made it simple to provide cross subsidies in aid of universal service, however, also frustrated conventional efforts to hold retail rates down. See Huber et al. 84-85. Before the Bell system's predominance, regulators might have played competing carriers against one another to get lower rates for the public, see Cohen 47-50, but the strategy became virtually
The traditional regulatory notion of the "just and reasonable" rate was aimed at navigating the straits between gouging utility customers and confiscating utility property. FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944). See also Barnes 289-290; Bonbright 38. More than a century ago, reviewing courts charged with determining whether utility rates were sufficiently reasonable to avoid unconstitutional confiscation took as their touchstone the revenue that would be a "fair return" on certain utility property known as a "rate base." The fair rate of return was usually set as the rate generated by similar investment property at the time of the rate proceeding, and in Smyth v. Ames, 169 U. S., at 546, the Court held that the rate base must be calculated as "the fair value of the property being used by [the utility] for the convenience of the public." In pegging the rate base at "fair value," the Smyth Court consciously rejected the primary alternative standard, of capital actually invested to provide the public service or good. Id., at 543-546. The Court made this choice in large part to prevent "excessive valuation or fictitious capitalization" from artificially inflating the rate base, id., at 544, lest "`[t]he public . . . be subjected to unreasonable rates in order simply that stockholders may earn dividends,' " id., at 545 (quoting Covington & Lexington Turnpike Road Co. v. Sandford, 164 U.S. 578, 596 (1896)).
But Smyth proved to be a troublesome mandate, as Justice Brandeis, joined by Justice Holmes, famously observed
To the bewildered, Smyth simply threw up its hands, prescribing no one method for limiting use of these numbers but declaring all such facts to be "relevant."
Small wonder, then, that Justice Brandeis was able to demonstrate how basing rates on Smyth `s galactic notion of fair value could produce revenues grossly excessive or insufficient when gauged against the costs of capital. He gave the example (simplified) of a $1 million plant built with promised returns on the equity of $90,000 a year. Southwestern Bell Telephone Co., supra, at 304-306. If the value were to fall to $600,000 at the time of a rate proceeding, with the rate of return on similar investments then at 6 percent, Smyth would say a rate was not confiscatory if it returned at least $36,000, a shortfall of $54,000 from the costs of capital. But if the value of the plant were to rise to $1,750,000 at the time of the rate proceeding, and the rate of return on comparable investments stood at 8 percent, then constitutionality under Smyth would require rates generating at least $140,000, $50,000 above capital costs.
The upshot of Smyth, then, was the specter of utilities forced into bankruptcy by rates inadequate to pay off the costs of capital, even when a drop in value resulted from general economic decline, not imprudent investment; while in a robust economy, an investment no more prescient could claim what seemed a rapacious return on equity invested. Justice Brandeis accordingly advocated replacing "fair value" with a calculation of rate base on the cost of capital prudently invested in assets used for the provision of the public good or service, and although he did not live to enjoy success, his campaign against Smyth came to fruition in FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944).
In Hope Natural Gas, this Court disavowed the position that the Natural Gas Act and the Constitution required fair value as the sole measure of a rate base on which "just and
"Cost" was neither self-evident nor immune to confusion, however; witness the invocation of "reproduction cost" as a
The method worked out is not a simple calculation of rate base as the original cost of "prudently invested" capital that Justice Brandeis assumed, presumably by reference to the utility's balance sheet at the time of the rate proceeding. Southwestern Bell Telephone Co., 262 U. S., at 304-306. Rather, "cost" came to mean "cost of service," that is, the cost of prudently invested capital used to provide the service. Bonbright 173; P. Garfield & W. Lovejoy, Public Utility Economics 56 (1964). This was calculated subject to deductions for accrued depreciation and allowances for working capital,
But the mitigation was too little, the prudent-investment rule in practice often being no match for the capacity of utilities having all the relevant information to manipulate the rate base and renegotiate the rate of return every time a rate was set. The regulatory response in some markets was adoption of a rate-based method commonly called "price caps," United States Telephone Assn. v. FCC, 188 F.3d 521, 524 (CADC 1999), as, for example, by the FCC's setting of maximum access charges paid to large local-exchange companies
The price-cap scheme starts with a rate generated by the conventional cost-of-service formula, which it takes as a benchmark to be decreased at an average of some 2-3 percent a year to reflect productivity growth, Kahn, Telecommunications Act 330-332, subject to an upward adjustment if necessary to reflect inflation or certain unavoidable "exogenous costs" on which the company is authorized to recover a return. 5 FCC Rcd., at 6787, ¶ 5. Although the price caps do not eliminate games manship, since there are still battles to be fought over the productivity offset and allowable exogenous costs, United States Telephone Assn., supra, at 524, they do give companies an incentive "to improve productivity to the maximum extent possible," by entitling those that out perform the productivity offset to keep resulting profits, 5 FCC Rcd., at 6787-6788, ¶¶ 7-9. Ultimately, the goal, as under the basic prudent-investment rule, is to encourage investment in more productive equipment.
Before the passage of the 1996 Act, the price cap was, at the federal level, the final stage in a century of developing rate setting methodology. What had changed throughout the era beginning with Smyth v. Ames was prevailing opinion on how to calculate the most useful rate base, with the disagreement between fair-value and cost advocates turning on whether invested capital was the key to the right balance between investors and ratepayers, and with the price-cap scheme simply being a rate-based offset to the utilities' advantage of superior knowledge of the facts employed in costof-service rate making. What is remarkable about this evolution of just and reasonable rate setting, however, is what did not change. The enduring feature of rate setting from Smyth v. Ames to the institution of price caps was the idea that calculating a rate base and then allowing a fair rate of
Under the local-competition provisions of the Act, Congress called for rate making different from any historical practice, to achieve the entirely new objective of uprooting the monopolies that traditional rate-based methods had perpetuated. H. R. Conf. Rep. No. 104-230, p. 113 (1996). A leading backer of the Act in the Senate put the new goal this way:
While the Act is like its predecessors in tying the methodology to the objectives of "just and reasonable" and nondiscriminatory rates, 47 U. S. C. § 252(d)(1), it is radically unlike all previous statutes in providing that rates be set "without reference to a rate-of-return or other rate-based proceeding," § 252(d)(1)(A)(i). The Act thus appears to be an explicit disavowal of the familiar public-utility model of rate regulation (whether in its fair-value or cost-of-service incarnations) presumably still being applied by many States for retail sales, see In re Implementation of Local Competition in Telecommunications Act of 1996, 11 FCC Rcd. 15499, 15857, ¶ 704 (1996) (First Report and Order), in favor of novel ratesetting designed to give aspiring competitors every possible incentive to enter local retail telephone markets, short of confiscating the incumbents' property.
The physical incarnation of such a market, a "local exchange," is a network connecting terminals like telephones, faxes, and modems to other terminals within a geographical area like a city. From terminal network interface devices, feeder wires, collectively called the "local loop," are run to local switches that aggregate traffic into common "trunks." The local loop was traditionally, and is still largely, made of copper wire, though fiber-optic cable is also used, albeit to a
It is easy to see why a company that owns a local exchange (what the Act calls an "incumbent local exchange carrier," 47 U. S. C. § 251(h)) would have an almost insurmountable competitive advantage not only in routing calls within the exchange, but, through its control of this local market, in the markets for terminal equipment and long-distance calling as well. A newcomer could not compete with the incumbent carrier to provide local service without coming close to replicating the incumbent's entire existing network, the most costly and difficult part of which would be laying down the "last mile" of feeder wire, the local loop, to the thousands (or millions) of terminal points in individual houses and businesses.
The 1996 Act both prohibits state and local regulation that impedes the provision of "telecommunications service," § 253(a),
Since wholesale markets for companies engaged in resale, leasing, or interconnection of facilities cannot be created without addressing rates, Congress provided for rates to be set either by contracts between carriers or by state utility commission rate orders. §§ 252(a)—(b). Like other federal utility statutes that authorize contracts approved by a regulatory agency in setting rates between businesses, e. g., 16 U. S. C. § 824d(d) (Federal Power Act); 15 U. S. C. § 717c(c) (Natural Gas Act), the Act permits incumbent and entering carriers to negotiate private rate agreements, 47 U. S. C. § 252(a);
As to pricing, the Act provides that when incumbent and requesting carriers fail to agree, state commissions will set a "just and reasonable" and "nondiscriminatory" rate for interconnection or the lease of network elements based on "the cost of providing the . . . network element," which "may include a reasonable profit."
As the Act required, six months after its effective date the FCC implemented the local-competition provisions in its First Report and Order, which included as an appendix the new regulations at issue. Challenges to the order, mostly by incumbent local-exchange carriers and state commissions, were consolidated in the United States Court of Appeals for the Eighth Circuit. Iowa Utilities Bd. v. FCC, 120 F.3d 753, 792 (1997), aff'd in part and rev'd in part, 525 U.S. 366, 397 (1999). See also California v. FCC, 124 F.3d 934, 938 (1997), rev'd in part, 525 U.S. 366, 397 (1999) (challenges to In re Implementation of Local Competition Provisions in Telecommunications Act of 1996, 11 FCC Rcd. 19392 (1996) (Second Report and Order)).
So far as it bears on where we are today, the initial decision by the Eighth Circuit held that the FCC had no authority
This Court affirmed in part and in larger part reversed. AT&T Corp. v. Iowa Utilities Bd., 525 U. S., at 397. We reversed in upholding the FCC's jurisdiction to "design a pricing methodology" to bind state ratemaking commissions, id., at 385, as well as one of the FCC's combination rules, Rule 315(b), barring incumbents from separating currently combined network elements when furnishing them to entrants that request them in a combined form, id., at 395. We also reversed in striking down Rule 319, holding that its provision for blanket access to network elements was inconsistent with the "necessary" and "impair" standards of 47 U. S. C. § 251(d)(2), 525 U. S., at 392. We affirmed the Eighth Circuit, however, in upholding the FCC's broad definition of network elements to be provided, id., at 387, and
With the FCC's general authority to establish a pricing methodology secure, the incumbent carriers' primary challenge on remand went to the method that the Commission chose. There was also renewed controversy over the combination rules (Rules 315(c)—(f)) that the Eighth Circuit had struck down along with Rule 315(b), but upon which this Court expressed no opinion when it reversed the invalidation of that latter rule. 219 F.3d 744, 748 (2000).
As for the method to derive a "nondiscriminatory," "just and reasonable rate for network elements," the Act requires the FCC to decide how to value "the cost . . . of providing the . . . network element [which] may include a reasonable profit," although the FCC is (as already seen) forbidden to allow any "reference to a rate-of-return or other ratebased proceeding," § 252(d)(1). Within the discretion left to it after eliminating any dependence on a "rate-of-return or other rate-based proceeding," the Commission chose a way of treating "cost" as "forward-looking economic cost," 47 CFR § 51.505 (1997), something distinct from the kind of historically based cost generally relied upon in valuing a rate base after Hope Natural Gas. In Rule 505, the FCC defined 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), common costs being "costs incurred in providing a group of elements that "cannot be attributed directly to individual elements," § 51.505(c)(1). Most important of all, the FCC decided 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 Court of Appeals understood § 252(d)(1)'s reference to "the cost . . . of providing the . . . network element" to be ambiguous as between "forward-looking" and "historical" cost, so that a forward-looking ratesetting method would presumably be a reasonable implementation of the statute. But the Eighth Circuit thought the ambiguity afforded no leeway beyond that, and read the Act to require any forward-looking methodology to be "based on the incremental costs that an [incumbent] actually incurs or will incur in providing . . . the unbundled access to its specific network elements." 219 F. 3d, at 751-753. Hence, the Eighth Circuit held that § 252(d)(1) foreclosed the use of the TELRIC methodology. In other words, the court read the Act as plainly requiring rates based on the "actual" not "hypothetical" "cost . . . of providing the . . . network element," and reasoned that TELRIC was clearly the latter. Id., at
The Court of Appeals also, and for the second time, invalidated Rules 315(c)—(f), 47 CFR §§ 51.315(c)—(f) (1997), the FCC's so-called "additional combination" rules, apparently for the same reason it had rejected them before, when it struck down Rule 315(b), the main combination rule. 219 F. 3d, at 758-759. In brief, the rules require an incumbent carrier, upon request and compensation, to "perform the functions necessary to combine" network elements for an entrant, unless the combination is not "technically feasible." Id., at 759. The Eighth Circuit read the language of § 251(c)(3), with its reference to "allow[ing] requesting carriers to combine . . . elements," as unambiguously requiring a requesting carrier, not a providing incumbent, to do any and all combining. Ibid.
Before us, the incumbent local-exchange carriers claim error in the Eighth Circuit's holding that a "forward-looking cost" methodology (as opposed to the use of "historical" cost) is consistent with § 252(d)(1), and its conclusion that the use of the TELRIC forward-looking cost methodology presents no "ripe" takings claim. The FCC and the entrants, on the other side, seek review of the Eighth Circuit's invalidation of the TELRIC methodology and the additional combination rules. We granted certiorari, 531 U.S. 1124 (2001), and now affirm on the issues raised by the incumbents, and reverse on those raised by the FCC and the entrants.
The incumbent carriers' first attack charges the FCC with ignoring the plain meaning of the word "cost" as it occurs
The incumbents have picked an uphill battle. At the most basic level of common usage, "cost" has no such clear implication. A merchant who is asked about "the cost of providing the goods" he sells may reasonably quote their current wholesale market price, not the cost of the particular items he happens to have on his shelves, which may have been bought at higher or lower prices.
When the reference shifts from common speech into the technical realm, the incumbents still have to attack uphill. To begin with, even when we have dealt with historical costs as a ratesetting basis, the cases have never assumed a sense
What is equally important is that the incumbents' plainmeaning 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
The fact is that without any better indication of meaning than the unadorned term, the word "cost" in § 252(d)(1), as in accounting generally, is "a chameleon," Strickland v. Commissioner, Maine Dept. of Human Services, 96 F.3d 542, 546 (CA1 1996), a "virtually meaningless" term, R. Estes, Dictionary of Accounting 32 (2d ed. 1985). As Justice Breyer put it in Iowa Utilities Bd., words like "cost" "give ratesetting commissions broad methodological leeway; they say little about the `method employed' to determine a particular
The incumbents' alternative argument is that even without a stern anchor in calculating "the cost . . . of providing the . . . network element," the particular forward-looking methodology the FCC chose is neither consistent with the plain language of § 252(d)(1) nor within the zone of reasonable interpretation subject to deference under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843-845 (1984). This is so, they say, 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 short answer to the objection that TELRIC violates plain language is much the same as the answer to the previous plain-language argument, for what the incumbents call the "hypothetical" element is simply the element valued in terms of a piece of equipment an incumbent may not own. This claim, like the one just considered, is that plain language bars a definition of "cost" untethered to historical investment, and as explained already, the term "cost" is simply too protean to support the incumbents' argument.
Similarly, the claim that TELRIC exceeds reasonable interpretative leeway is open to the objection already noted, that responsibility for "just and reasonable" rates leaves methodology largely subject to discretion. Permian Basin Area Rate Cases, 390 U.S. 747, 790 (1968) ("We must reiterate
We think there are basically three answers to this nostimulation claim of unreasonableness: (1) the TELRIC methodology does not assume that the relevant markets are perfectly competitive, and the scheme includes several features of inefficiency that undermine the plausibility of the incumbents' no-stimulation argument; (2) comparison of TELRIC with alternatives proposed by the incumbents as more reasonable are plausibly answered by the FCC's stated reasons to reject the alternatives; and (3) actual investment in competing facilities since the effective date of the Act simply belies the no-stimulation argument's conclusion.
Not only that, but the FCC has of its own accord allowed for inefficiency in the TELRIC design in additional ways affecting the likelihood that TELRIC will squelch competition in facilities. First, the Commission 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." 47 CFR § 51.505(b)(1) (1997). This means that certain network elements, principally local-loop elements, will not be priced at their most efficient cost and configuration to the extent, say, that a shorter loop could serve a local exchange if the incumbent's wire centers were relocated for a snugger fit with the current geography of terminal locations.
Second, TELRIC rates in practice will differ from the products of a perfectly competitive market owing to built-in lags in price adjustments. In a perfectly competitive market, retail prices drop instantly to the marginal cost of the most efficient company. See Mankiw 283-288, 312-313. As the incumbents point out, this would deter market entry because a potential entrant would know that even if it could provide a retail service at a lower marginal cost, it would instantly lose that competitive edge once it entered the market and competitors adjusted to match its price. See Brief for Respondents BellSouth et al. in Nos. 00-555, etc., at 28— 29. Wholesale TELRIC rates, however, are set by state commissions, usually by arbitrated agreements with 3- or 4-year terms, see Brief for Respondent Qwest Communications International, Inc., in Nos. 00-511, etc., p. 39; Reply Brief for Petitioners Worldcom, Inc., et al. 6; Reply Brief for Respondent Sprint Corp. 7, and n. 3; Reply Brief for Petitioner
But even if a competitor could call for a new TELRIC rate proceeding immediately upon the introduction of a more efficient element by a competing entrant, the competitor would not necessarily know enough to make the call; the fact of the element's greater efficiency would only become apparent when reflected in lower retail prices drawing demand away from existing competitors (including the incumbent), forcing them to look to lowering their own marginal costs. In practice, it would take some time for the innovating entrant to install the new equipment, to engage in marketing offering a lower retail price to attract business, and to steal away enough customer subscriptions (given the limited opportunity to capture untapped customers for local telephone service) for competitors to register the drop in demand.
Finally, it bears reminding that the FCC prescribes measurement of the TELRIC "based on the use of the most efficient telecommunications technology currently available," 47 CFR § 51.505(b)(1) (1997). Owing to that condition of current availability, 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.
The incumbents present three principal alternatives for setting rates for network elements: embedded-cost methodologies, the efficient component pricing rule, and Ramsey pricing.
The generic feature of the incumbents' proposed alternatives, in other words, is that some degree of long-run inefficiency ought to be preserved through the lease rates, in order to give an entrant a more efficient alternative to leasing. Of course, we have already seen that TELRIC itself tolerates some degree of inefficient pricing in its existing wire-center configuration requirement and through the ratemaking and development lags just described. This aside, however, there are at least two objections that generally undercut any desirability that such alternatives may seem to offer over TELRIC.
The first objection turns on the fact that a lease rate that compensates the lessor for some degree of existing inefficiency (at least from the perspective of the long run) is simply a higher rate, and the difference between such a higher rate and the TELRIC rate could be the difference that keeps a potential competitor from entering the market. See n. 27, infra. Cf. First Report and Order ¶ 378 ("[I]n some areas, the most efficient means of providing competing service may be through the use of unbundled loops. In such cases, preventing access to unbundled loops would either discourage a potential competitor from entering the market in that area, thereby denying those consumers the benefits of competition, or cause the competitor to construct unnecessarily duplicative
Once we get into the details of the specific alternative methods, other infirmities become evident that undermine the claim that the FCC could not reasonably have preferred TELRIC. As for an embedded-cost methodology, the problem with a method that relies in any part on historical cost, the cost the incumbents say they actually incur in leasing network elements, is that it will pass on to lessees the difference between most efficient cost and embedded cost.
There are, of course, objections other than inefficiency to any method of ratemaking that relies on embedded costs as allegedly reflected in incumbents' book-cost data, with the possibilities for manipulation this presents. Even if incumbents have built and are operating leased elements at economically efficient costs, the temptation would remain to overstate book costs to ratemaking commissions and so perpetuate the intractable problems that led to the price-cap innovation. See supra, at 486-487.
There is even an argument that the Act itself forbids embedded-cost methods, and while the FCC rejected this absolutistic reading of the statute, First Report and Order ¶ 704,
Other incumbents say the FCC was unreasonable to pick TELRIC over a method of ratesetting commonly called the efficient component pricing rule (ECPR). See Brief for Respondent Qwest Communications International, Inc., in Nos. 00-511, etc., at 40-41. ECPR would base the rate for a leased element on its most efficient long-run incremental cost (presumably, something like the TELRIC) plus the opportunity cost to the incumbent when the entrant leasing
The FCC rejected ECPR because its calculation of opportunity cost relied on existing retail prices in monopolistic local-exchange markets, which bore no relation to efficient marginal cost. "We conclude that ECPR is an improper method for setting prices of interconnection and unbundled network elements because the existing retail prices that would be used to compute incremental opportunity costs under ECPR are not cost-based. Moreover, the ECPR does not provide any mechanism for moving prices towards competitive levels; it simply takes prices as given." Id., ¶ 709. In effect, the adjustment for opportunity cost, because it turns on pre-existing retail prices generated by embedded costs, would pass on the same inefficiencies and be vulnerable to the same asymmetries of information in ratemaking as a straightforward embedded-cost scheme.
The third category of alternative methodologies proposed focuses on costs over an intermediate term where some fixed costs are unavoidable, as opposed to TELRIC's long run. See n. 25, supra (defining the long run). The fundamental intuition underlying this method of ratesetting is that competition is actually favored by allowing incumbents rate recovery
The most commonly proposed variant of fixed-cost recovery ratesetting is "Ramsey pricing." See Iowa Utilities Bd., supra, at 426-427 (Breyer, J., concurring in part and dissenting in part). Ramsey pricing was originally theorized as a method of discriminatory taxation of commodities to generate revenue with minimal discouragement of desired consumption. Ramsey, A Contribution to the Theory of Taxation, 37 Econ. J. 47, 58-59 (1927). The underlying principle is that goods should be taxed or priced according to demand: taxes or prices should be higher as to goods for which demand is relatively inelastic. K. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 122— 125 (1991). As applied to the local-exchange wholesale market, Ramsey pricing would allow rate recovery of certain costs incurred by an incumbent above marginal cost, costs associated with providing an unbundled network element that are fixed and unavoidable over the intermediate run, typically the 3- or 4-year term of a rate arbitration agreement. The specific mechanism for recovery through wholesale lease rates would be to spread such costs across the different elements to be leased according to the demand for each particular element. First Report and Order ¶ 696. Cf. B. Mitchell & I. Vogelsang, Telecommunications Pricing: Theory and Practice 43-61 (1991). Thus, when demand among entrants for loop elements is high as compared with demand for switch elements, a higher proportion of fixed costs would be added as a premium to the loop-element lease rate than to the switch lease rate.
But this very feature appears to be a drawback when used as a method of setting rates for the wholesale market in unbundled network elements. Because the elements for which demand among entrants will be highest are the costly bottleneck elements, duplication of which is neither likely nor desired, high lease rates for these elements would be
This, according to the incumbents, will be fatal to competition. Their argument is that TELRIC will result in constantly changing rates based on ever cheaper, more efficient technology; the incumbents will be unable to write off each new piece of technology rapidly enough to anticipate an even newer gadget portending a new and lower rate. They will be stuck, they say, with sunk costs in less efficient plant and equipment, with their investment unrecoverable through depreciation, and their increased risk unrecognized and uncompensated.
The order thus treated then-current capital costs and rates of depreciation as mere starting points, to be adjusted upward if the incumbents demonstrate the need. That is, for
The incumbents' fallback position, that existing rates of depreciation and costs of capital are not even reasonable starting points, is unpersuasive. As to depreciation rates, it is well to start by asking how serious a threat there may be of galloping obsolescence requiring commensurately rising depreciation rates. The answer does not support the incumbents. The local-loop plant makes up at least 48 percent of the elements incumbents will have to provide, see id., ¶ 378, n. 818 ("As of . . . 1995 . . . [l]ocal loop plant comprises approximately $109 billion of total plant in service, which represents . . . 48 percent of network plant"), and while the technology of certain other elements like switches has evolved very rapidly in recent years, loop technology generally has gone no further than copper twistedpair wire and fiber-optic cable in the past couple of decades. See n. 10, supra (less than 1 percent of local-exchange telephone lines employ technologies other than copper or fiber). We have been informed of no specter of imminently obsolescent loops requiring a radical revision of currently reasonable depreciation.
A basic weakness of the incumbents' attack, indeed, is its tendency to argue in highly general terms, whereas TELRIC rates are calculated on the basis of individual elements. TELRIC rates leave plenty of room for differences in the appropriate depreciation rates and risk-adjusted capital costs depending on the nature and technology of the specific element to be priced (as between switches and loops, for example). For that matter, even the blanket assumption that on a TELRIC valuation the estimated purchase price of a most efficient element will necessarily be lower than the actual costs of current elements is suspect. The New York Public Service Commission, for example, used the cost of the more expensive fiber-optic cable as the basis for its TELRIC loop fixed rates, notwithstanding the fact that competitors argued that the cheaper copper-wire loop was more efficient for voice communications and should have been the underlying valuation for loop rates. See 2 Lodging Material for Respondents Worldcom, Inc., et al. 655-657 (Opinion No. 97— 2, effective Apr. 1, 1997 (Opinion and Order Setting Rates for First Group of Network Elements)). In light of the many different TELRIC rates to be calculated by state commissions across the country, see Brief for Petitioners Worldcom, Inc., et al. in No. 00-555, p. 21 ("millions"), the Commission's
Finally, as to the incumbents' accusation that TELRIC is too complicated to be practical, a criticism at least as telling can be leveled at traditional ratemaking methodologies and the alternatives proffered. "One important potential advantage of the T[E]LRIC approach, however is its relative ease of calculation. Rather than estimate costs reflecting the present [incumbent] network—a difficult task even if [incumbents] provided reliable data—it is possible to generate T[E]LRIC estimates based on a `green field' approach, which assumes construction of a network from scratch." App. 182 (Reply Comments of the National Telecommunications and Information Administration 24 (May 30, 1996)). To the extent that the traditional public-utility model generally relied on embedded costs, similar sorts of complexity in reckoning were exacerbated by an asymmetry of information, much to the utilities' benefit. See supra, at 486-487, 499. And what we see from the record suggests that TELRIC rate proceedings are surprisingly smooth-running affairs, with incumbents and competitors typically presenting two conflicting economic models supported by expert testimony, and state commissioners customarily assigning rates based on some predictions from one model and others from its counterpart. See, e. g., 1 Lodging Material for Respondents Worldcom, Inc., et al. 146-147, 367-368 (Fla. Pub. Serv. Comm'n, In re: Determination of cost of basic local telecommunications service, pursuant to Section 364.025, Florida Statutes, issued Jan. 7, 1999); 2 id., at 589-598, 701-704 (N. Y. Pub. Serv. Comm'n, Opinion No. 97-2, supra ). At bottom, battles of experts are bound to be part of any ratesetting scheme, and the FCC was reasonable to prefer TELRIC over alternative fixed-cost schemes that preserve home-field advantages for the incumbents.
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We cannot say whether the passage of time will show competition prompted by TELRIC to be an illusion, but TELRIC appears to be a reasonable policy for now, and that is all that counts. See Chevron, 467 U. S., at 866. The incumbents have failed to show that TELRIC is unreasonable on its own terms, largely because they fall into the trap of mischaracterizing the FCC's departures from the assumption of a perfectly competitive market (the wire-center limitation, regulatory and development lags, or the refusal to prescribe high depreciation and capital costs) as inconsistencies rather than pragmatic features of the TELRIC plan. Nor have they shown it was unreasonable for the FCC to pick TELRIC over alternative methods, or presented evidence to rebut the entrants' figures as to the level of competitive investment in local-exchange markets. In short, the incumbents have failed to carry their burden of showing unreasonableness to defeat the deference due the Commission. We therefore reverse the Eighth Circuit's judgment insofar as it invalidated TELRIC as a method for setting rates under the Act.
The incumbents' claim of TELRIC's inherent inadequacy to deal with depreciation or capital costs has its counterpart in a further argument. They seek to apply the rule of constitutional avoidance in saying that "cost" ought to be construed by reference to historical investment in order to avoid a serious constitutional question, whether a methodology so divorced from investment actually made will lead to a taking of property in violation of the Fifth (or Fourteenth) Amendment. The Eighth Circuit did not think any such serious question was in the offing, 219 F. 3d, at 753-754, and neither do we.
At the outset, it is well to understand that the incumbent carriers do not present the portent of a constitutional
This want of any rate to be reviewed is significant, given that this Court has never considered a taking challenge on a ratesetting methodology without being presented with specific rate orders alleged to be confiscatory. See, e. g., Duquesne Light Co., supra, at 303-304 (denial of $3.5 million and $15.4 million increases to rate bases of electric utilities); Smyth v. Ames, 169 U. S., at 470-476 (Nebraska carrier-rate tariff schedule alleged to effect a taking). Granted, the Court has never strictly held that a utility must have rates in hand before it can claim that the adoption of a new method of setting rates will necessarily produce an unconstitutional taking, but that has been the implication of much the Court has said. See Hope Natural Gas Co., 320 U. S., at 602 ("The fact that the method employed to reach [just and reasonable rates] may contain infirmities is not . . . important"); Natural Gas Pipeline Co., 315 U. S., at 586 ("The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas"); Los Angeles Gas & Elec. Corp. v. Railroad Comm'n of Cal., 289 U.S. 287, 305 (1933) ("[M]indful of its distinctive function in the enforcement of constitutional rights, the Court has refused to be bound by
The incumbents say this action is one of the rare ones placed outside the general rule by signs, too strong to ignore, that takings will occur if the TELRIC interpretation of § 252(d)(1) is allowed. First, they compare, at the level of the entire network (as opposed to element-by-element), industry balance-sheet indications of historical investment in local telephone markets with the corresponding estimate of a TELRIC evaluation of the cost to build a new and efficient national system of local exchanges providing universal service. Brief for Petitioners in No. 00-511, at 10-11, and n. 6. As against an estimated $180 billion for such a new system, the incumbents juxtapose a value representing "total plant" on the industry balance sheet for 1999 of roughly $342 billion. They argue that the huge and unreasonable difference is proof that TELRIC will necessarily result in confiscatory rates. Ibid. (citing FCC, 1999 Statistics of Communications Common Carriers 51 (Aug. 1, 2000) (table 2.9, line no. 32)).
The comparison, however, is spurious because the numbers assumed by the incumbents are clearly wrong. On the one side, the $180 billion is supposed to be based on constructing a barebones universal-service telephone network, and so it fails to cover elements associated with more advanced telecommunications services that incumbents are required to provide by lease under 47 U. S. C. § 251(c)(3). See Application by Bell Atlantic New York for Authorization under Section 271 of the Communications Act, 15 FCC Rcd. 3953, ¶ 245 (1999), aff'd, 220 F.3d 607 (CADC 2000). See also In re Federal-State Joint Bd. on Universal Serv., 14 FCC Rcd. 20432, ¶ 41, and n. 125 (1999) (explaining that the universalservice
On the other side of the comparison, the "balance sheet" number is patently misstated. As explained above, any rates under the traditional public-utility model would be calculated on a rate base (whether fair value or cost of service) subject to deductions for accrued depreciation. See Phillips 310-315. The net plant investment after depreciation is not $342 billion but $166 billion, FCC, Statistics of Communications Common Carriers, at 51 (table 2.9, line no. 50), an amount less than the TELRIC figure the incumbents would like us to assume. And even after we increase the $166 billion by the amount of net current liabilities ($22 billion) on the balance sheet, ibid. (line no. 64 minus line no. 13), as a rough (and generous) estimate of the working-capital allowance under cost of service, the rate base would then be $188 billion, still a far cry from the $342 billion the incumbents tout, and less than 5 percent above the incumbents' $180 billion universal-service TELRIC figure. What the best numbers may be we are in no position to say: the point is only that the numbers being thrown out by the incumbents are no evidence that TELRIC lease rates would be confiscatory, sight unseen.
The incumbent carriers' second try at nonrate constitutional litigation focuses on reliance interests allegedly jeopardized by an intentional switch in rate setting methodologies. They rely on Duquesne, where we held as usual that a rate setting methodology would normally be judged only by the "overall impact of the rate orders,"
In Duquesne itself, there was no need to decide whether there might be an exception to the rate-order requirement for a claim of taking by rates, and there is no reason here to decide whether the policy of constitutional avoidance should be invoked in order to anticipate a rate-order taking claim. The reason is the same in each case: the incumbent carriers here are just like the electric utilities in Duquesne in failing to present any evidence that the decision to adopt TELRIC
The effort by the Government and the competing carriers to overturn the Eighth Circuit's invalidation of the additional
We do not think Communist Party blocks our consideration of Rules 315(c)—(f). The issue there was raised by the petitioner's failure on an earlier trip to this Court to pursue a procedural objection to agency action. Litigation of the procedural point would not only have obviated the Court's need to review the constitutionality of an Act of Congress when the case got here, but could have saved five years of litigation during which time "the Board and the Court of Appeals [had] each twice more reconsidered [the] steadily growing record . . . ." Id., at 31-32, n. 8. After all that time, petitioner sought review of the procedural point.
Nothing like that can be said about these cases. Addressing the issue now would not "make waste" of years of efforts by the FCC or the Court of Appeals, id., at 32, n. 8, would not threaten to leave a constitutional ruling pointless, and would direct the Court's attention not to an isolated, "longstale" procedural error by the agency, ibid., but to the invalidation of FCC rules meant to have general and continuing applicability. There is no indication of litigation tactics behind the failure last time to appeal on these rules, which were reexamined on remand at the behest of the court, not the Government or the competing carriers.
Any issue "pressed or passed upon below" by a federal court, United States v. Williams, 504 U.S. 36, 41 (1992) (internal quotation marks omitted), is subject to this Court's broad discretion over the questions it chooses to take on certiorari, and there are good reasons to look at Rules 315(c)—(f). The Court of Appeals passed on a significant issue, and one placed in a state of flux, see Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1099, n. 8 (1991) (citations omitted), by the split between these cases and US West Communications v. MFS Intelenet, Inc., 193 F.3d 1112, 1121 (CA9 1999), (affirming identical state-commission rules), cert. denied, 530 U.S. 1284 (2000). We accordingly rejected the incumbents'
The Eighth Circuit found the four additional combination rules at odds with the plain language of the final sentence of 47 U. S. C. § 251(c)(3), which we quote more fully:
"[E]ach incumbent local exchange carrier has . . .
. . . . .
"Bundling" and "combination" are related but distinct concepts. Bundling is about lease pricing. To provide a network element "on an unbundled basis" is to lease the element, however described, to a requesting carrier at a stated price specific to that element. Iowa Utilities Bd., supra, at 394. The FCC's regulations identify in advance a certain number of elements for separate pricing, 47 CFR § 51.319 (1997), but the regulations do not limit the elements subject to specific rates. A separately priced element need not be the simplest possible configuration of equipment or function, and a predesignated unbundled element might actually comprise items that could be considered separate elements themselves. For example, "if the states require incumbent LECs to provision subloop elements [which together constitute a local loop], incumbent LECs must still provision a local loop
The additional combination rules are best understood as meant to ensure that the statutory duty to provide unbundled elements gets a practical result. A separate rate for an unbundled element is not much good if an incumbent refuses to lease the element except in combination with others that competing carriers have no need of; or if the incumbents refuse to allow the leased elements to be combined with a competitor's own equipment. And this is just what was happening before the FCC devised its combination rules. Incumbents, according to the FCC's findings, were refusing to give competitors' technicians access to their physical plants to make necessary connections. In re Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, 15 FCC Rcd. 3696, 3910, ¶ 482 (1999) (Third Report and Order), petitions for review pending sub nom. United States Telecom Assn. v. FCC, Nos. 00-1015, etc. (CADC).
The challenged additional combination rules, issued under § 251(c)(3), include two that are substantive and two that are procedural, the latter having no independent significance here. Rule 315(c) requires an incumbent to "perform the functions necessary to combine unbundled network elements in any manner, even if those elements are not ordinarily combined" in the incumbent's own network, so long as the combination is "[t]echnically feasible" and "[w]ould not impair the ability of other carriers to obtain access to unbundled network elements or to interconnect" with the
The rules are challenged alternatively as inconsistent with statutory plain language and as unreasonable interpretations. The plain language in question is the sentence that "[a]n incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service." 47 U. S. C. § 251(c)(3). The Eighth Circuit read this as unambiguously excusing incumbents from any obligation to combine provided elements, 219 F. 3d, at 759. The ruling has a familiar ring, for this is the same reason that the Court of Appeals invalidated these rules in 1997 along with Rule 315(b), as being inconsistent with a plain limit on incumbents' obligation under § 251(c)(3) to provide elements "on an unbundled basis." 120 F. 3d, at 813.
But the language is not that plain. Of course, it is true that the statute would not be violated literally by an incumbent that provided elements so that a requesting carrier could combine them, and thereafter sat on its hands while any combining was done. But whether it is plain that the incumbents have a right to sit is a question of context as much as grammar. If Congress had treated incumbents and entrants as equals, it probably would be plain enough that the incumbents' obligations stopped at furnishing an element that could be combined. The Act, however, proceeds on the understanding that incumbent monopolists and contending competitors are unequal, cf. § 251(c) ("Additional obligations of incumbent local exchange carriers"), and within the actual statutory confines it is not self-evident that in obligating
The conclusion that the language is open is certainly in harmony with, if not required by, our holding in Iowa Utilities Bd., dealing with Rule 315(b). In reinstating that rule, we rejected the argument that furnishing elements "on an unbundled basis," § 251(c)(3), must mean "physically separated," 525 U. S., at 394, and expressly noted that "§ 251(c)(3) is ambiguous on whether leased network elements may or must be separated," id., at 395. We relied on that ambiguity in holding that an incumbent has no statutory right to separate elements when a competitor asks to lease them in the combined form employed by the incumbent in its own network. Ibid. That holding would make a very odd partner with a ruling that an ambiguous § 251(c)(3) plainly empowers incumbent carriers to refuse to combine elements even when requesting carriers cannot. We accordingly read the language of § 251(c)(3) as leaving open who should do the work of combination, and under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), that leaves the FCC's rules intact unless the incumbents can show them to be unreasonable.
For the decision whether Rules 315(c)—(f) survive Chevron step two, Iowa Utilities Bd. is, to be sure, less immediate help, since in that case we found Rule 315(b) reasonable because it prevented incumbents from dismantling existing
At the outset, it is well to repeat that the duties imposed under the rules are subject to restrictions limiting the burdens placed on the incumbents. An obligation on the part of an incumbent to combine elements for an entrant under Rules 315(c) and (d) only arises when the entrant is unable to do the job itself. First Report and Order ¶ 294 ("If the carrier is unable to combine the elements, the incumbent must do so"). When an incumbent does have an obligation, the rules specify a duty to "perform the functions necessary to combine," not necessarily to complete the actual combination. 47 CFR §§ 51.315(c)—(d) (1997). And the entrant must pay "a reasonable cost-based fee" for whatever the incumbent does. Brief for Petitioner Federal Parties in Nos. 00-587, etc., p. 34. See also id., at 10, 34, n. 14.
The force of the objections is limited further by the FCC's implementation in the rules of the statutory conditions that the incumbents' duty arises only if the requested combination does not discriminate against other carriers by impeding their access, and only if the requested combination is "technically feasible," § 251(c)(3). As to the latter restriction, the Commission "decline[d] to adopt the view proffered by some parties that incumbents must combine network elements in any technically feasible manner requested." First Report and Order ¶ 296. The concern was that such a rule "could potentially affect the reliability and security of the incumbent's network, and the ability of other carriers to obtain interconnection, or request and use unbundled elements." Ibid.
This demanding sense of "technical feasibility," as a condition protecting the incumbent's ability to control the performance of its own network, is in accord with what we said in Iowa Utilities Bd. There, for example, we reinstated the Commission's "pick and choose" rule
The two substantive rules each have additional features that are consistent with the purposes of § 251(c)(3). Rule 315(c), to the extent that it raises a duty to combine what is "ordinarily combined," neatly complements the facially similar Rule 315(b), upheld in Iowa Utilities Bd., id., at 395, forbidding incumbents to separate currently combined network elements when the entrant requests them in a combined form. If the latter were the only rule, an incumbent
Of course, it is not this aspect of Rule 315(c), requiring the combination of what is ordinarily combined, that draws the incumbents' (or Justice Breyer's, see post, at 563) principal objection; they focus their attack, rather, on the additional requirement of Rule 315(c), that incumbents combine unbundled network elements "even if those elements are not ordinarily combined in the incumbent[`s] network." 47 CFR § 51.315(c) (1997). To build upon our previous example, this would seemingly require an incumbent to combine the loop, switch, and interface (ordinarily combined in its network) with a second loop and network interface (provided by the incumbent as a separate unbundled element), so that the competitive carrier could charge for a second-line connection, as for a fax or modem. See Brief for Petitioners Worldcom, Inc., et al. in No. 00-555, at 48 (providing the example).
But this provision of Rule 315(c) is justified by the statutory requirement of "nondiscriminatory access." § 251(c)(3). As we have said, the FCC has interpreted the rule as obligating
As to Rule 315(d), it is hard to see how this rule is any less reasonable than § 251(c)(2), which imposes a statutory duty to interconnect. The rule simply requires the incumbent to perform functions necessary to combine the unbundled elements it provides with elements owned by the requesting carrier "in any technically feasible manner." Essentially, it appears to be nothing more than an elementto-element version of the incumbents' statutory duty "to provide, for the facilities and equipment of any requesting . . . carrier, interconnection with the local exchange carrier's network," in § 251(c)(2).
In sum, what we have are rules that say an incumbent shall, for payment, "perform the functions necessary," 47 CFR §§ 51.315(c) and (d) (1997), to combine network elements to put a competing carrier on an equal footing with the incumbent when the requesting carrier is unable to combine, First Report and Order ¶ 294, when it would not place the incumbent at a disadvantage in operating its own network, and when it would not place other competing carriers at a competitive disadvantage, 47 CFR § 51.315(c)(2) (1997). This duty is consistent with the Act's goals of competition and nondiscrimination, and imposing it is a sensible way to reach the result the statute requires.
* * *
The 1996 Act sought to bring competition to localexchange markets, in part by requiring incumbent localexchange carriers to lease elements of their networks at rates that would attract new entrants when it would be more efficient to lease than to build or resell. Whether the FCC picked the best way to set these rates is the stuff of debate for economists and regulators versed in the technology of telecommunications and microeconomic pricing theory. The job of judges is to ask whether the Commission 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 them. The FCC's pricing and additional combination rules survive that scrutiny.
The judgment of the Court of Appeals is reversed in part and affirmed in part, and the cases are remanded for further proceedings consistent with this opinion.
It is so ordered.
Justice O'Connor took no part in the consideration or decision of these cases.
Justice Breyer, with whom Justice Scalia joins as to Part VI, concurring in part and dissenting in part.
I agree with the majority that the Telecommunications Act of 1996 (Act or Telecommunications Act), 47 U. S. C. § 251 et seq. (1994 ed. and Supp. V), does not require a historical cost pricing system. I also agree that, at the present time, no taking of the incumbent firms' property in violation of the Fifth Amendment has occurred. I disagree, however, with the Court's conclusion that the specific pricing and unbundling rules at issue here are authorized by the Act.
The primary goal of the Telecommunications Act is to "promote competition and reduce regulation" in both local
These cases require the Court to review the Commission's rules. Those rules create a "start-from-scratch" version of what the Commission calls a "Total Element Long-Run Incremental Cost" system (TELRIC). See Kahn, Tardiff, & Weisman, The Telecommunications Act at three years: an economic evaluation of its implementation by the Federal Communications Commission, 11 Info. Econ. & Policy 319, 326 (1999) (hereinafter Kahn) (referring to the FCC's system as "TELRIC-Blank Slate"). In essence, the Commission requires local regulators to determine the cost of supplying a particular incumbent network "element" to a new entrant, not by looking at what it has cost that incumbent to supply the element in the past, nor by looking at what it will cost that incumbent to supply that element in the future. Rather, the regulator must look to what it would cost a hypothetical perfectly efficient firm to supply that element in the future, assuming that the hypothetical firm were to build essentially from scratch a new, perfectly efficient communications network. The only concession to the incumbent's actual network is the presumption that presently existing wire centers—which hold the switching equipment for a local area—will remain in their current locations.
An example will help explain the system as I understand it. Imagine an incumbent local telephone company's major switching center, say, in downtown Chicago, from which cables and wires run through conduits or along poles to subsidiary switching equipment, other electronic equipment, and eventually to end-user equipment, such as telephone handsets, computer modems, or fax machines located in office buildings or private residences. A new competitor, whom the law entitles to use an "element" of the incumbent firm's system, asks for use of such an "element," say, a single five-block portion of this system, thereby obtaining access to 20 downtown office buildings. Under the Commission's TELRIC, the incumbent's "cost" (upon which "rates" must be based) equals not the real resources that the Chicago incumbent must spend to provide the five-block "element" demanded, but the resources that a hypothetical perfectly efficient new supplier would spend were that supplier rebuilding the entire downtown Chicago system, other than the local wire center, from scratch. This latter figure, of course, might be very different from any incumbent's actual costs.
As a reviewing Court, we must determine, among other things, whether the Commission has "`abuse[d]' " its statutorily delegated "`discretion' " to create implementing rules. Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29, 41 (1983) (quoting Administrative Procedure Act, 5 U. S. C. § 706(2)(A)). In doing so, we must assume that Congress intended to grant
Nonetheless, that leeway is not unlimited. It is bounded, for example, by the scope of the statute that grants authority and by the need for the agency to show a "rational connection" between the regulations and the statute's purposes. State Farm, 463 U. S., at 56. We must determine whether, despite the leeway given experts on technical subject matter, agency regulations exceed these legal limits. See id., at 43; Overton Park, supra, at 416; Administrative Procedure Act, 5 U. S. C. § 706(2)(A) (requiring agency action to be set aside if "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law"). And, reluctantly, I have come to the conclusion that they do. After considering the incumbents' objections and the Commission's responses, I cannot find that "rational connection" between statutory purpose and implementing regulation that the law demands. State Farm, supra, at 56.
Because the critical legal problem concerns the relation of the Commission's regulations to the statute's purpose, I must ask at the outset, what is that purpose? The relevant statutory provision says only that the agency shall set "rate[s]" (for "elements") "based on . . . cost." 47 U. S. C. § 252(d)(1). At first blush the word "cost" calls to mind traditional cost-based ratesetting. See Natural Gas Act, 15 U. S. C. § 717c; Natural Gas Act of 1938, §§ 4a, 5, 52 Stat. 824; Interstate Commerce Act, 49 U. S. C. § 10701 (1994 ed., Supp. V); Federal Aviation Act of 1958, 49 U. S. C. § 1302(c) (1976 ed., Supp. II) (repealed 1980); see also ante, at 478
An agency engaged in traditional ratemaking will seek to protect consumers by mandating low prices as the end result. In doing so, the agency will sometimes try to mimic the prices that it believes (hypothetically) the regulated firm (often a legal monopoly) would have set had it been an unregulated firm in a competitively structured industry. See ante, at 486; Bonbright 89 ("[M]any economists have declared that . . . the prices that would result without regulation but under pure or perfect competition would be the `ideal' prices"); 1 A. Kahn, Economics of Regulation: Principles and Institutions 63 (1988) (hereinafter Economics of Regulation) ("The traditional legal criteria of proper public utility rates have always borne a strong resemblance to the criteria of the competitive market in long-run equilibrium"). And the Commission's regulations are at least arguably consistent with an agency effort to find prices that replicate the end results of theoretically perfect competition. See Order ¶¶ 679, 738.
But that regulatory objective—low, competitionmimicking prices—is not the objective of the relevant statutory provision here. The Telecommunications Act is not a ratemaking statute seeking better regulation. It is a deregulatory statute seeking competition. It assumes that, given modern technology, local telecommunications markets may now prove large enough for several firms to compete in the provision of some services—but not necessarily all services—without serious economic waste. It finds the competitive process an indirect but more effective way to bring
Five considerations, taken together, convince me that the description of the statutory goal I have just given is an accurate one. First, the Act itself says that its objective is to substitute competition for regulation. Preamble, 110 Stat. 56 (stating that the goal of the Act is to "promote competition and reduce regulation" in both local and longdistance telecommunications markets); see also H. R. Conf. Rep. No. 104-458, at 1; ante, at 489.
Second, the Act's history suggests the Congress would have thought that goal a reasonable one. The 20th century's history of telecommunications markets is primarily one of regulation. For decades experts justified regulation on the ground that telecommunications providers were "natural monopolists," i. e., telecommunications markets would not support more than one firm of efficient size. See ante, at 475-476. But beginning in the 1970's, technological developments led to a change of expert opinion by undermining the "natural monopoly" rationale. Long-distance telecommunications markets seemed newly capable of supporting several competing firms without significant economic waste. See R. Vietor, Contrived Competition: Regulation and Deregulation in America 185-190 (1994). And opinion began to change similarly in respect to local markets. In the case of local markets, however, the change was marked by hesitation and lingering uncertainty. See P. Huber, M. Kellogg, &
Third, the Act's structure and language indicate a congressional effort to secure that very end. The Act dismantles artificial legal barriers to new entry in local markets, thereby permitting new firms to enter if they wish. § 253(a); see ante, at 491, and n. 12. But the Act recognizes that simple permission may not prove sufficient—perhaps because the incumbent will retain a "natural monopoly" form of control over certain necessary elements of service. It consequently goes on to promote new entry in three ways. See ante, at 491-492. First, it requires incumbents to "interconnect" with new entrants (at a price determined by the regulations before us), thereby allowing a new entrant's small set of subscribers to connect with the incumbent firm's likely larger customer base. § 251(c)(2). Second, it requires
Suppose, for example, the incumbent's control of certain existing cables, lines, or switching equipment would put the new entrant at an economic disadvantage because duplication of those "elements" would prove unnecessarily expensive. The new Act does not require the new entrant and incumbent to compete in respect to those elements, say, through wasteful duplication. Rather, the Act permits the new entrant to offer, and to compete with respect to, a related service by obtaining "access" to (and therefore using) those "elements" of the incumbent's network, while finding on its own other elements necessary to the service. It is as if a railroad regulator, anxious to promote railroad competition between City A and City B but aware that it would prove wasteful to duplicate a certain railroad bridge across the Mississippi River, ordered the bridge's owner to share the bridge with new competitors. The sharing would avoid wasteful duplication of the hard-to-duplicate resource—namely, the bridge. But at the same time it would facilitate competition in the remaining aspects of the A-to-B railroad service. That, I assume, is why the Act says that the "elements" that must be shared are those for which access is "necessary" and in respect to which "failure to provide access" would "impair" the ability of the new entrant "to provide the services that it seeks to offer." § 251(d)(2). See Iowa Utilities Bd., 525 U. S., at 392 (Commission must give "substance to the `necessary' and `impair' requirements");
To put the matter more concretely, imagine that a communications firm—a potential new entrant—wishes to sell voice, data, text, pictures, entertainment, or other communications services, perhaps in competition with the incumbent. That firm must decide how its service will reach a customer inside a house or office. Should the firm (1) run its own new cable into the house? (2) run wires through an already-existing electricity conduit? (3) communicate without wires, say, by wireless or one-way or two-way satellite? (4) or use the incumbent's pair of twisted copper telephone service wires already in place? If the potential new entrant claims that all but the last of these possibilities are impractical or far too expensive—that using existing telephone wires is far cheaper (in terms of real resources expended) than the alternatives—then the new entrant is claiming that the incumbent's wires are a kind of "bridge" to which it must have access. And it may ask the regulator to make its new entry feasible by requiring the incumbent to permit it to use that "element" at a reasonable price.
Fourth, the Commission has described the Act's goals as including promotion of nonwasteful competition. The preamble to the Commission's price regulations describes their statutorily based aim as "giv[ing] appropriate signals to producers and consumers and ensur[ing] efficient entry and utilization of the telecommunications infrastructure." Order ¶ 630 (emphasis added). The Commission also says that "the prices that potential entrants pay for these elements should reflect forward-looking economic costs in order to encourage efficient levels of investment and entry." Id., ¶ 672 (emphasis added). And it adds that "Congress specifically
Fifth, the Solicitor General confirmed this view at oral argument when he said that the rates in question should be set in order to "encourage new entrants to come into the market," Tr. of Oral Arg. 60, to "allow them to enter the market at competitive rates," ibid., and to "encourage them to develop new technologies," id., at 61.
The statute, then, seeks new local market competition insofar as local markets can support that competition without serious waste. And we must read the relevant ratesetting provision—including the critical word "cost"—with that goal in mind.
The Commission's critics—Verizon, other incumbents, and experts whose published articles Verizon has lodged with the Court—concede that the statute grants the Commission broad authority to define "cost[s]." They also concede that every ratesetting system has flaws. Cf., e. g., Missouri ex rel. Southwestern Bell Telephone Co. v. Public Serv. Comm'n of Mo., 262 U.S. 276, 311-312 (1923) (Brandeis, J., joined by Holmes, J., dissenting) (criticizing "reproduction cost" systems because of the administrative difficulty of determining costs); Economics of Regulation 109-111 (criticizing "historical cost" systems because of their failure to provide proper incentives).
Nonetheless, the critics argue, the Commission cannot lawfully choose a system that thwarts a basic statutory purpose without offering any significant compensating advantage. They take the relevant purpose as furthering local competition where feasible. See Part II, supra. They add that rates will further that purpose (1) if they discourage new firms from using the incumbent's facilities or "elements" when it is significantly less expensive, economically speaking, for the entrant to build or to buy elsewhere, and (2) if
First, the critics ask, why, given such a system, would a new entrant ever build or buy a new element? After all, the Commission's ratesetting system sets the incumbent's compulsory leasing rate at a level that would rarely exceed the price of building or buying elsewhere. That is because the Commission's ratesetting system chooses as its basis the hypothetical cost of the most efficient method of providing the relevant service—i. e., the cost of entering a house through the use of electrical conduits or of using wireless (if cheaper in general), and it then applies those costs (based on, say, hypothetical wireless) as if they were the cost of the system in place (the twisted pair of wires). Why then would the new entrant use an electrical conduit, or a wireless system, to enter a house when, by definition, the Commission
The Commission's system will tend to create instances in which (1) the incumbent's actual future cost of maintaining an element (say, a set of wires) will exceed (2) the new entrant's cost of building or buying elsewhere (say, through wireless or wires in electrical conduits) which, in turn, will equal (or even exceed) (3) the hypothetical future "best practice" cost (namely, what the experts decide will, in general, be cheapest). In such a case (or in related cases, where technological improvements, actual or predicted, tend to offset various cost differences), the new entrant will uneconomically share the incumbent's facilities by leasing rather than building or buying elsewhere. And that result, in the assumed circumstances, is wasteful. It undermines the efficiency goal that the majority itself claims the Act seeks to achieve. Cf. ante, at 509-510, 539.
Nor is the "sharing" of facilities (e. g., the wire pairs) that this result embodies consistent with the competition that the Act was written to promote. That is because firms that share existing facilities do not compete in respect to the facilities that they share, any more than several grain producers who auction their grain at a single jointly owned market compete in respect to auction services. Cf. Iowa Utilities Bd., 525 U. S., at 429 (Breyer, J., concurring in part and dissenting in part) ("It is in the un shared, not in the shared, portions of the enterprise that meaningful competition would likely emerge"). Yet rules that combine a
Second, what incentive would the Commission's rules leave the incumbents either to innovate or to invest in a new "element?" The rules seem to say that the incumbent will share with competitors the cost-reducing benefits of a successful innovation, while leaving the incumbent to bear the costs of most unsuccessful investments on its own. But see infra, at 552. Why would investment not then stagnate? See, e. g. , Jorde, Sidak, & Teece, Innovation, Investment, and Unbundling, 17 Yale J. Reg. 1, 8 (2000) ("It makes no economic sense for the [incumbent] to invest in technologies that lower its own marginal costs, so long as competitors can achieve the identical cost savings by regulatory fiat"); Sidak & Spulber, Deregulation and Managed Competition in Network Industries, 15 Yale J. Reg. 117, 124-125 (1998) ("If deprived of a return to capital facilities after capital has been sunk in irreversible investments, or if faced with reduced returns to investments already made, any economically rational company will eliminate or reduce similar capital investments in the future"); Armstrong, AT&T Scoffs at Possible Common Carrier Status, Telecommunications Reports,
I recognize that no regulator is likely to enforce the Commission's rules so strictly that investment literally slows to a trickle. Indeed, the majority cites figures showing that in the past several years new firms have invested $30 to $60 billion in local communications markets. See ante, at 516. We do not know how much of this investment represents facilities, say, broadband, for which an incumbent's historical network offers no substitute. Nor do we know whether this number is small or large compared with what might have been. Cf. FCC, Statistics of Communications Common Carriers 51 (table 2.7); FCC, Statistics of Communications Common Carriers 42 (table 2.7); FCC, Statistics of Communications Common Carriers 29 (table 2.7); FCC, Statistics of Communications Common Carriers 1 (table 2.7) (incumbents' similar investment over the same period amounts to over $100 billion); cf. FCC, 2000/2001 Statistics of Communications Common Carriers 51 (table 2.9) (total depreciated investment plus working capital equals $220 billion); ante, at 516, 521 (new entrants' market share provided by entrants' own facilities alone is 33%). Regardless, given the incentives, this independent investment would seem to have been made despite the "start from scratch" rules, not because of them. At best, such statistics do no more than show that at least some of the coincidences I describe below have, happily for the Commission and the public alike, come to pass. See infra, at 554, 556, 560-561.
The critics mention several other problems as well. They say, for example, that the Commission's regulations will exacerbate the problem of "stranded costs"—i. e., the need for a once-regulated incumbent to recover its reasonable, but now
Nor, in the critics' view, do the regulations possess any offsetting advantages. They lack that ease of administration that led Justices Holmes and Brandeis to favor use (for ratesetting purposes) of an incumbent's historic costs despite their economic inaccuracy. See Southwestern Bell Telephone Co., 262 U. S., at 292-296 (dissenting opinion); see also ante, at 481-483. The hypothetical nature of the Commission's system means that experts must estimate how imaginary firms would rebuild their systems from scratch— whether, for example, they (hypothetically) would receive permission to dig up streets, to maintain unsightly telephone poles, or to share their pole costs with other users, say, cable operators—and they must then estimate what would turn out to be most "efficient" in such (hypothetical) future circumstances. The speculative nature of this enterprise, the critics say, will lead to a battle of experts, each asking a commission to favor what can amount to little more than a guess. See Kahn 333, 334, n. 36, 335 (describing three models introduced in regulatory proceedings, one of which reduced all actual expenses by 27% because railroad regulation had brought similar efficiency gains, another of which assumed that all utilities, including electricity producers, would rebuild entire systems from scratch at the same time, and the third of which assumed New Hampshire's telecommunications system was administratively most efficient but then reduced its actual administrative expenses by 25%).
The criticisms described in Part III are serious, potentially severing any rational relation between the Commission's regulations and the statutory provision's basic purposes. State Farm, 463 U. S., at 56. Hence, the Commission's responses are important. Do those responses reduce the force of the criticisms, blunt their edges, or suggest offsetting virtues? I have found six major responses. But none of them is convincing.
First, the FCC points out that rates will include not only a charge reflecting hypothetical "most-efficient-firm" costs but also a depreciation charge—a charge that can reconcile a firm's initial historic investment, say, in equipment, and the equipment's current value, which diminishes over time. See Order ¶ 686 ("[P]roperly designed depreciation schedules should account for expected declines in the value of capital goods"). If, for example, an incumbent's reasonable investment, measured actually and historically, came to $50 million, but FCC experts predict a "most-efficientfirm-building-from-scratch"
This response, however, does not reflect what the Commission's regulations actually say. Those regulations say nothing about permitting recovery of reasonable historic investment nor about varying the charge to offset perverse investment incentives. Rather, they strongly indicate the opposite. They clearly require state commissions to use current depreciation rates right alongside the Commission's new and different "most-efficient-firm-building-from-scratch" charges. See Order ¶ 702. They do create an exception from "current" rates. But to take advantage of that exception "incumbent LECs" have to bear the "burden of demonstrating with specificity that the business risks that they face in providing unbundled network elements and interconnection services would justify a different . . . depreciation rate." Ibid. Unless the exception is to swallow the rule, the term "business risks" must refer to some special situation—not to the ordinary circumstance in which a new entrant simply asks to share an "element" at rates determined under Commission "most-efficient-firm" rules. In any event, that is how 24 state commissions have read the language. See 1998 Biennial Regulatory Review—Review of Depreciation Requirements for Incumbent Local Exchange Carriers, 15 FCC Rcd. 242, ¶ 69 (1999). And the FCC nowhere explicitly says to the contrary. Hence the FCC depreciation rules as written do not respond to the critics' claims in the ordinary case, nor do they otherwise transform its "most-efficient-firm-building-from-scratch" system into a system that reflects historic costs.
The FCC adds that it did not have "time" to offer more than "tentative guidance," Reply Brief for Federal Parties 11-12, that profits now may be too high, Order ¶ 702, and that the incumbents may find other ways to lower their capital costs, id., ¶ 687. These additions, however, concede the critics' basic point—that the "profit" rules as written do not provide an answer to Part III's claims. Rather, considered as a response to those claims, they must rest upon no more than hope for a regulatory coincidence. Most significantly, they hope that current market conditions mean that current profit rates somehow magically offset the adverse effects of the Commission's other regulations, see Part III, supra. See Reply Affidavit of J. Hausman ¶ 9, n. 8, submitted with Reply Comments of the United States Telcom Association, CC Docket No. 96-98 (FCC filed May 30, 1996), App. 197 (testifying for critics that profit rates would have to double or triple to secure investment). Cf. G. Hubbard & W. Lehr, Capital Recovery Issues in TELRIC Pricing: Response to Professor Jerry A. Hausman (July 18, 1996), App. 216, 221
Third, the Commission supports the reasonableness and practicality of its system with the claim that "a number of states" have used it successfully, as have several European nations. Order ¶ 681. As to domestic experience, I can find no evidence that, prior to the promulgation of the rules at issue here, any State had successfully implemented the FCC's version of TELRIC. It is hardly surprising that since then several States have tried to apply it. Nor is it surprising that their implementation has produced criticisms similar to those made here. See, e. g., MCI Telecommunications Corp. v. GTE Northwest, Inc., 41 F.Supp.2d 1157, 1168-1169, and n. 7 (Ore. 1999) (discussing problems with the FCC's TELRIC).
And the "foreign nation" part of the Commission's claim rests only upon a 1997 European Community paper referring to a "best current practice" approach as a future goal. See Commission of European Communities, Recommendation on Interconnection in a liberalised telecommunications market, C(97) 3148, §§ 3.3, 3.5 (Oct. 15, 1997), http://europa.eu.int/ ISPO/infosoc/telecompolicy/en/r3148-en.htm (Apr. 17, 2002). Indeed, Britain's FCC counterpart has said that, in the
In fact, as I understand the European system, it may turn out in practice to work roughly as follows: The relevant European regulatory agency, seeking competition, encourages new firms to enter local markets in order to provide new voice, data, text, picture, entertainment, or other communications service. Like the Commission, the agency normally has the authority to insist that an incumbent firm "unbundle," e. g., that it permit a new entrant to use its pair of twisted wires running from switching center to the inside of a house. It also has the authority to set prices. But in exercising that authority, it has neither required, nor is it likely to rely upon, any one ratesetting method. Rather, it may encourage negotiation among the parties in order to reach agreed-upon prices low enough to prevent the incumbent from blocking entry but high enough to encourage the new firm to consider other entry methods, such as use of electricity conduits, or new cables, where economically feasible. If no agreement can be reached, the regulator, in determining the price, can use formulas, modified to take proper account of depreciation and historical cost, or it can look to prices set in other European nations as a yardstick to help produce competition.
This less formal kind of "play it by ear" system, in my view, is what the statute before us intended. The Act provides for price negotiation among the parties, it brings in state regulators where necessary to break deadlocks, and it permits the States to use a variety of different ratesetting approaches, looking to experience in other States as appropriate, in order to determine proper prices. The mysterious statutory parenthetical phrase "(determined without reference
Fourth, the FCC adds that its system seeks to base rates on the costs a hypothetical "most efficient firm" hypothetically would incur were it "building from scratch." And such a system, in its view, will "simulate" or "best replicat[e], to the extent possible, the conditions of a competitive market." Order ¶ 679; see also id., ¶ 738. This response, however, does not do more than describe that very feature of the system upon which the critics focus their attack.
As I have previously said, supra, at 543, such an objective is perhaps consistent with an ordinary ratesetting statute that seeks only low prices. But the problem before us—that of a lack of "rational connection" between the regulations and the statute—grows out of the fact that the Telecommunications Act is not a typical regulatory statute asking regulators simply to seek low prices, perhaps by trying to replicate those of a hypothetical competitive market. Rather, this statute is a deregulatory statute, and it asks regulators to create prices that will induce appropriate new entry. See Part II, supra. That being so, we may assume, purely for argument's sake, that the FCC rules could successfully "replicate" the prices toward which perfectly efficient, perfectly competitive markets would tend. But see Kahn 326-327 (stating that such prices are never achieved in any actual
Fifth, the Commission says that its regulations are simply suggestive, leaving States free to depart. Reply Brief for Federal Parties 11-12. The short but conclusive answer to this response is that the Commission considered a "suggestive" approach and rejected it. See Order ¶ 66 (refusing to characterize rules as setting forth, not "requirements," but "`preferred outcomes,' " because the latter approach "would fail to establish explicit national standards for arbitration, and would fail to provide sufficient guidance to the parties' options in negotiations").
Sixth, the majority (but not the Commission) points out that local commissions are likely to leave any given set of rates in effect for some period of time. And this "regulatory lag" will solve the problem. See ante, at 505-506. I do not understand how it could solve the main problem—that of
In sum, neither the Commission's nor the majority's responses are convincing.
Judges have long recognized the difficulty of reviewing the substance of highly technical agency decisionmaking. Compare Ethyl Corp. v. EPA, 541 F.2d 1, 66 (CADC 1976) (en banc) (Bazelon, C. J., concurring) ("[T]he best way for courts to guard against unreasonable . . . administrative decisions is not . . . themselves to scrutinize the technical merits . . . [but to] establish a decision-making process that assures a reasoned decision" (internal quotation marks omitted)), with id., at 69 (Leventhal, J., concurring) (stating that judges must assure, on substantive review, "conformance to statutory standards and requirements of rationality," acquiring "whatever technical background is necessary"). This Court has emphasized the limitations the law imposes upon judges' authority to insist upon special agency procedures. Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 543-548 (1978). But it has also made clear that judges nonetheless must review for rationality the substance of agency decisions, including technical decisions. State Farm, 463 U. S., at 56. That review requires agencies to undertake the difficult task of translating technical matters into language that judges can understand and preparing technical responses to challenges of the sort found here. But, despite the difficulty, review by generalist judges is important, both
Agencies are, of course, expert in technical areas. That is why Judge Leventhal wrote that "the judges," when reviewing the rationality of substantive decisions, "must act with restraint." Ethyl Corp., 541 F. 2d, at 69. And I agree. But, he added, judges may not "abstain from any substantive review." Id., at 68. And again I agree. In these cases, the critics' claims are strong. They suggest that the FCC's pricing rule, together with its original "forced leasing" twin, see Iowa Utilities Bd., supra, at 388-392 (finding original leasing rule unlawful), would bring about, not the competitive marketplace that the statute demands, but a highly regulated marketplace characterized by widespread sharing of facilities with innovation and technological change reflecting mandarin decisionmaking through regulation rather than decentralized decisionmaking based on the interaction of freely competitive market forces. And the Commission's replies are unsatisfactory. The majority nonetheless finds the Commission's pricing rules reasonable. As a regulatory theory, that conclusion might be supportable. But under this deregulatory statute, it is not. Under these circumstances, it would amount to abstention from, indeed abdication of, "rational basis" review, were I to agree that the record here demonstrates the "rational connection" between regulations and statutory purpose upon which the law insists. State Farm, supra, at 56; Administrative Procedure Act, 5 U. S. C. § 706(2)(A); see also State Farm, supra, at 43 ("[W]e may not supply a reasoned basis for the agency's action that the agency itself has not given"). As Judge Leventhal properly put it, "Restraint, yes, abdication, no." Ethyl Corp., supra, at 69. The Court, of course, with 65 pages of careful analysis, does not abdicate its reviewing responsibility; but for the reasons stated here I cannot agree with
I disagree with the majority about one further legal issue. The statute imposes upon an incumbent the
The FCC, pointing to this provision, has said that (upon request) incumbents must themselves combine, among other things, elements that are ordinarily not combined. Rules 315(c)—(f), 47 CFR §§ 51.315(c)—(f) (1997). How, the incumbents ask, can a statute that speaks of the requesting carriers combining elements grant the FCC authority to insist that they, the incumbents, combine the elements?
In Iowa Utilities Bd., the Court found authority for a somewhat similar rule—a rule that forbids incumbents to un combine elements ordinarily found in combination. But, as the majority recognizes, ante, at 534-535, that different rule rests upon a rationale absent here. If an incumbent takes apart elements that it ordinarily keeps together, it is normally discriminating against the requesting carriers. And the statutory provision forbids discrimination. But here the incumbent simply keeps apart elements that it ordinarily keeps apart in the absence of a new entrant's demand. How does that discriminate? And if it does not discriminate, where does this statutory provision give the FCC authority to forbid it?
I cannot find the statutory authority. And I consequently would affirm the lower court on the point.
For these reasons, I dissent.
"No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service."
"(a) Agreements arrived at through negotiation "(1) Voluntary negotiations
"Upon receiving a request for interconnection, services, or network elements pursuant to section 251 of this title,an incumbent local exchange carrier may negotiate and enter into a binding agreement with the requesting telecommunications carrier or carriers without regard to the standards set forth in subsections (b) and (c) of section 251 of this title. The agreement shall include a detailed schedule of itemized charges for interconnection and each service or network element included in the agreement. The agreement, including any interconnection agreement negotiated before February 8, 1996, shall be submitted to the State commission under subsection (e) of this section."
But even on Justice Breyer's own terms, FCC rules stressing low wholesale prices are by no means inconsistent with the deregulatory and competitive purposes of the Act. As we discuss below, a policy promoting lower lease prices for expensive facilities unlikely to be duplicated reduces barriers to entry (particularly for smaller competitors) and puts competitors that can afford these wholesale prices (but not the higher prices the incumbents would like to charge) in a position to build their own versions of less expensive facilities that are sensibly duplicable. See n. 27, infra. See also infra, at 515-516 (discussing FCC's objection to Ramsey pricing). And while it is true, as Justice Breyer says, that the Act was "deregulatory," in the intended sense of departing from traditional "regulatory" ways that coddled monopolies, see supra, at 488 (remarks of Sen. Breaux), that deregulatory character does not necessarily require the FCC to employ passive pricing rules deferring to incumbents' proposed methods and cost data. On the contrary, the statutory provisions obligating the incumbents to lease their property, § 251(c)(3), and offer their services for resale at wholesale rates, § 251(c)(4), are consistent with the promulgation of a ratesetting method leaving state commissions to do the work of setting rates without any reliance on historical-cost data provided by incumbents.
"Rate of Return Regulation Eliminated—
"(A) In instituting the price flexibility required under paragraph (1) the Commission and the States shall establish alternative forms of regulation for Tier 1 telecommunications carriers that do not include regulation of the rate of return earned by such carrier . . . ."
H. R. 1555, 104th Cong., 1st Sess., § 248(b) (1995) stated: "Notwithstanding any other provision of law, to the extent that a carrier has complied with sections 242 and 244 of this part, the Commission, with respect to rates for interstate or foreign communications, and State commissions, with respect to rates for intrastate communications, shall not require rate-of-return regulation."
The Commission inferred from the omission of the express prohibitions that Congress intended to forbid a "type of proceeding" not a method. This was a reasonable inference in light of the common practice of setting wholesale rates by contracts incorporating retail rates set in state rate-ofreturn proceedings, see, e. g., Boston Edison Co. v. FERC, 233 F.3d 60, 62, and n. 1 (CA1 2000), though not the only one: Congress may, for example, have balked at limiting state regulation at such a level of specificity. Less plausible is Justice Breyer's interpretation of the statutory language, as "reflect[ing] Congress' desire to obtain not perfect prices but speedy results," post, at 559; he concludes that the provision "specifies that States need not use formal methods, relying instead upon bargaining and yardstick competition," ibid. Section 252(d)(1), however, specifies how a state commission should set rates when an incumbent and an entrant fail to reach a bargain, § 252(a)(2); it seems strange, then, to read the statutory prohibition as affirmatively urging more bargaining and regulatory flexibility, rather than as firing a warning shot to state commissions to steer clear of entrenched practices perceived to perpetuate incumbent monopolies.