Amici include both Republican and Democratic members of the House Committee on Commerce, which had jurisdiction over the 1996 Act. Amici believe that if properly interpreted this legislation will open the door to fuller competition in all telecommunications markets. Because of our involvement in shaping the relevant provisions of the Telecommunications Act, and because our constituents will benefit directly from the healthy competitive environment the Act was designed to foster, amici have a particular interest in seeing that it is implemented in accord with legislative mandates.

The FCC's First Report and Order is an act of extraordinary arrogance. The Order blatantly disregards congressional intent in two material respects: it asserts federal jurisdiction in areas that Congress intended to reserve for state control, and it establishes rules for the unbundling of network elements that are contrary to congressional intent, and that threaten the viability of established telecommunications networks.

In order to reach the conclusions found in the Order, the Commissioners either had to determine that they had the authority to ignore the plain intent of the peoples' elected representatives, or that Congress doesn't know enough about legislative drafting to explicitly amend sections of the law that it wanted to change.

Apparently unbeknownst to the Commission, however, Congress debated at great length about the proper allocation of state and federal responsibilities. In the end, we decided to leave regu- lation of most local matters, including especially the pricing of local facilities and services, to the states. To implement that design, the House/Senate conference committee added specific language clearly vesting such authority in the states. See, e.g., 47 U.S.C.  252(d) (governing local pricing).

Just as important, Congress left key provisions of the 1934 Act in place. These include  2(b), codified at 47 U.S.C.  152(b), which plainly states that "nothing in this Act shall be construed to apply or to give the Commission jurisdiction with respect to . . . intrastate communication service . . . ."

The Commission's foray into areas Congress reserved to the states is doubly improper because it establishes rules for the unbundling of network elements that would hamper full competition and reduce investment in local telecommunications networks. Congress deliberately crafted separate pricing methods for competitors to have access to local facilities and services, depending on whether they are facilities-based competitors or resale competitors. The purpose of this distinction was to encourage investment in telecommunications facilities and to create jobs. The Commission's rules eviscerate this important distinction by making the more attractive cost-based pricing method available to other types of competitors. The result of the Commission's failure to respect Congress' distinction between the two types of competitors is that the pricing benefits Congress intended to inure to those who invested and created jobs will instead be available to pure resellers. The Commission adopts quick fixes that Congress rejected in favor of encouraging long-term investment and employment. The Commission's agenda must, where there is conflict, take a back seat to Congress' own plan for the industry.

The Telecommunications Act did not create an entirely new federal regulatory scheme in the telecommunications area. Rather, it amended existing law in response to market developments that have rendered old monopolies obsolete. Congress drew upon more than sixty years of experience under the Communications Act of 1934 and, in particular, decided not to upset the basic jurisdictional balance of the 1934 Act.

A. The 1934 Act Assigned Jurisdiction of Intrastate Services to the States.

The Communications Act of 1934 firmly established a "system of dual state and federal regulation" of the telecommunications industry. Louisiana Public Serv. Comm'n v. FCC, 476 U.S. 355, 360 (1986). Congress created the Federal Communications Commission and granted it authority to regulate "interstate and foreign commerce" in wire and radio communication, 47 U.S.C.  151, while leaving intrastate service to state control. To brace this divide, and ensure that federal regulators would not encroach on a state's jurisdiction, Congress expressly denied the FCC jurisdiction over intrastate matters, except in a few enumerated instances. 47 U.S.C.  152(b).

The proper division of federal and state power was the " dominating controversy'" during the drafting of the 1934 Act. The states were particularly concerned by the broad power that the Interstate Commerce Commission, which then regulated both railroads and interstate telecommunications, had claimed over intrastate railroad rates as an incident of regulating interstate rates. See Houston & Texas Ry. v. United States, 234 U.S. 342 (1914); Wisconsin R.R. Comm'n v. Chicago, B & R R.R., 257 U.S. 563 (1922). State authorities feared that if the new federal communications agency were given the same power that the ICC had, they would be displaced from the field of telecommunications.

Congress responded with  2(b) of the 1934 Act. Section 2(b) provided in 1934, as it does today, that "nothing in this Act shall be construed to apply or to give the [FCC] jurisdiction with respect to . . . charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service by wire or radio of any carrier." 47 U.S.C.  152(b). The provision straightforwardly "reserves to the States exclusive jurisdiction over intrastate telephone and telegraph communication." S. Rep. No. 781, 73d Cong., 2d Sess. 3 (1934).

Consistent with this legislative intent, the Supreme Court held in Louisiana PSC that  2(b) "fences off from FCC reach or regulation intrastate matters -- indeed, including matters `in connection with' intrastate service." 476 U.S. at 370. The Court explained that any attempt by the FCC to regulate intrastate matters, even to effectuate a federal policy, would constitute an agency conferring power on itself. "To permit an agency to expand its power in the face of a congressional limitation on its jurisdiction would be to grant to the agency power to override Congress." Id. at 374-75. This the Court was "both unwilling and unable to do." Id. at 375.

B. The Telecommunications Act Preserves the States' Authority to Regulate Intrastate Communications.

Since 1934, the FCC by and large has respected the limitation that  2(b) places on its jurisdiction. Even under the 1996 Act, it generally admits that "in the absence of a grant of authority to the Commission, State and local regulators retain jurisdiction over intrastate matters." Memorandum Opinion and Order, In re Classic Telephone, Inc., CCBPol 96-10,  24 (FCC Oct. 1, 1996). Yet the FCC apparently thought it could get around this basic principle in its Order. While conceding that the 1996 Act does not explicitly grant it authority over local interconnection and pricing, the FCC contends that Congress implicitly "expand[ed] the applicability of . . . national rules to historically intrastate issues." Order  83-84. Nothing is further from the truth.

There was no general effort to expand federal power through the 1996 Act. Rather, Congress was concerned with limiting federal regulation. Thus, members carefully considered the proper limits of federal and state jurisdiction. Where it wanted to give the FCC authority in areas of traditional state responsibility, Congress said so. For example,  251(b)(2) and (d)(2) give the FCC authority to draw up rules concerning local number portability and network unbundling, respectively. Likewise, as explained below, Congress indicated when regulatory powers should be exercised exclusively by the states. In particular, Congress did not silently transfer the states' traditional responsibility to set prices for local services to federal regulators.

First, Congress determined to keep  2(b), and hence the Louisiana PSC decision, intact. This determination was deliberate. Congress knows how to amend  2(b) to carve out specified intrastate services from its broad scope. For example, when Congress drew up provisions relating to telecommunications services for hearing- and speech-impaired individuals under the Americans with Disabilities Act, it amended the first clause of  2(b) so that those provisions would cover intrastate services. See Pub. L. 101-336, Title IV,  401(b)(1), 104 Stat. 369 (1990). Congress similarly amended  2(b) in 1991 and 1993 when imposing federal restrictions on telephone dialing equipment and regulation of mobile services, respectively.

In 1996, the House and Senate conferees decided, after much debate, not to establish a similar carve-out from state jurisdiction in the new telecommunications law. Both the House and Senate bills would have added Part II, Title II of the amended Communications Act (which includes the interconnection, resale, and unbundling requirements) to the list of provisions carved from  2(b)'s scope. But the conferees deleted that language. This Court should respect the conferees' decision and reject the FCC's claim that  2(b) was implicitly amended.

Indeed, the conferees specifically addressed whether federal or state rules would be used to resolve disputes regarding the terms and prices of interconnection, unbundling, and resale. Under the House bill's proposed  242(a)(2), local carriers were required "to offer unbundled services, elements, features, functions, and capabilities whenever technically feasible, at just, reasonable, and nondiscriminatory prices and in accordance with [proposed] subsection [242](b)(4)." Proposed subsection (b)(4), in turn, authorized the FCC to promulgate regulations implementing section 242's guidelines for interconnection and pricing. H.R. 1555, 104th Cong., 1st Sess.  101(a) (1995). State commissions would merely "supervis[e]" the private negotiations. Id. (proposed  242(a)(8)). The Senate bill, by contrast, gave the state commissions responsibility to "resolve" open issues and "impose[e] appropriate conditions upon the parties" in arbitration proceedings, S. 652, 104th Cong., 1st. Sess.  101(a) (1995) (proposed  251(d)(5)(C)), subject to FCC regulations.

Procedurally, the conferees largely followed the Senate approach. Where local competitors can resolve their differences through private negotiations, they are left to do so, subject only to a state determination that the final agreement is nondiscriminatory and consistent with the public interest. 47 U.S.C.  252(e)(2)(A). But where the terms and prices of interconnection cannot be resolved through private negotiations, either party can ask "a State commission" to mediate differences, id.  252(a)(2), or to arbitrate any open issues, id.  252(b). If the parties select arbitration, the Act provides rules, including pricing standards, for the "State commission" to follow. Id.  252(c),(d).

The final version of the law vests much more substantive authority in the state commissions than either the House or the Senate bill. Consistent with the Senate approach,  252(c)(1) of the Act requires state commissions, as a general matter, to conduct arbitrations in a manner that "meets the requirements of section 251, including the regulations prescribed [by the FCC] thereunder." But the very next subsection of the Act establishes a special rule for pricing: It instructs state arbitrators "to establish any rates for interconnection, services, or network elements according to subsection (d)," without any reference to Commission regulations. 47 U.S.C.  252(c)(2).

Section 252(d) confirms the states' responsibility for pricing. Subsection 252(d)(1) provides that "a State commission," in determining "the just and reasonable rate" for interconnection or network elements, should ensure that the rates are "nondiscriminatory" and "based on the cost . . . of providing the interconnection or network element" and "may include a reasonable profit." Subsection (d)(2) provides guidance regarding so-called "reciprocal compensation," where carriers pass calls back and forth between their networks. Subsection (d)(3) specifies that "a State commis- sion" is to determine wholesale rates for telecommunications services "on the basis of retail rates charged to subscribers . . ., excluding . . . costs that will be avoided by the local exchange carrier."

These provisions, we thought, would make it crystal clear that the states set prices for local interconnection, unbundling, and resale where the parties need outside help. As the Conference Report explained with respect to wholesale rates, the rate "is to be determined by the State Commission." S. Rep. No. 230, 104th Cong., 2d Sess. 126 (1996).

Incredibly, the Commission read these provisions as crying out for federal regulation. It reasoned that regulations are needed to "equaliz[e] bargaining power" between incumbent local carriers and new entrants, and that "[n]ational (as opposed to state) rules more directly address these competitive circumstances." Order  55. The Commission simply refuses to accept Congress' judgment that state regulators -- who have decades of experience with local pricing issues -- are better positioned than the FCC to know what constitutes an unreasonable demand in particular local negotiations. As long as a state commission complies with the statutory pricing constraints and abides by FCC regulations in those areas (such as number portability and unbundling) where the FCC was given specific authority, the state commission is free to arbitrate pricing disagreements as it sees fit.

II. THE FCC'S RULES WILL REDUCE COMPETITION, JOB CREATION, AND INVESTMENT

The FCC's rules would eliminate virtually all of the flexibility that Congress gave the state commissions. Worse than that, however, they would frustrate the development of genuinely competitive local telecommunications markets.

Congress carefully balanced the interests of incumbent local carriers and new entrants when it drew up the 1996 Act. The conference committee hammered out critical compromises that were designed to give all carriers, old and new, a fair chance to compete. Legislators believed that full and fair competition would "unleash such competitive forces and innovation that our Nation [would] see more technological development and deployment in the next 5 years than we have already seen this century," leading to "hundreds of thousands of new jobs and tens of billions of dollars being invested in infrastructure and technology." 142 Cong. Rec. H1174 (daily ed. Feb. 1, 1996) (statement of Rep. Buyer). Much of the anticipated growth was expected to come from the local exchange market.

The idea was simple. For several decades, competition in local markets has been artificially constrained by authorized monopolies. If those monopolies are eliminated, new businesses will enter the market. They will install their own wires and switches, and they will develop new products and services to attract customers. Today's incumbents will fight back by increasing their own investments in local facilities and services.

But a rational new entrant will not spend the money to install facilities if it has a guaranteed competitive advantage when it uses the incumbent's network. And the incumbent will not invest in upgrading its facilities when its competitors get the greatest benefit from that investment. Neither side would have an incentive to build or invest. Congress' whole plan for job creation and economic growth would be frustrated.

The Commission has arrogantly imposed, through the Order, its own view of what Congress should have done through the Act. The FCC's overreaching is well illustrated by the unbundling provisions of the FCC's rules, under which new entrants have a choice of buying retail services under one pricing formula, or buying all the network capacity needed to provide that same service under a totally different pricing formula. See Order  328-41. These provisions erase carefully drawn statutory distinctions between resale pricing, on one hand, and pricing of network elements, on the other.

Section 252(d) sets out distinct pricing formulas for network unbundling and resale of retail services. 47 U.S.C.  252(d). As with jurisdiction over local pricing disputes, this distinction was hammered out in the House/Senate conference. The Senate bill contained no specific pricing guidelines relating to resale of incumbent carriers' retail services, but introduced the requirement that local exchange carriers make pieces of their networks separately available for competitors' use at prices "based on the cost . . . of providing the unbundled element" which "may include a reasonable profit." S. 652,  101(a) (proposed  251(d)(6)). Conversely, the House bill established only a broad "just, reasonable, and nondiscriminatory prices" standard for unbundling of local network facilities, H.R. 1555,  101(a) (proposed  242(a)(2)), but required that local carriers "offer services, elements, features, functions, and capabilities for resale at wholesale rates," id. (proposed  242(a)(3)(A)).

The conferees realized that the specific pricing rules in the House and Senate bills addressed different situations. The House's formula for resale was designed principally for situations where a non-facilities-based carrier wants to sell the very same service that the incumbent provides its customers. H.R. Rep. No. 204, 104th Cong., 1st Sess. 72 (1995). Local regulators set some retail prices (usually prices for basic residential service) below cost, and make up for these losses by setting other retail prices (like prices for advanced business services) above cost. Id. If the Senate's "cost plus profit" approach were used for sales to pure resellers of the incumbent's retail services, those resellers could earn large profits by targeting business customers whom the incumbent must charge above-market prices. This targeted approach, or "cream-skimming," would leave incumbents no way to recover the losses they must incur from serving subsidized customers.

When the conference committee reconciled the two bills it clearly distinguished (as the Senate and House had not done) between (1) a competitor's right of "access to network elements on an unbundled basis" for the provision of its own facilities-based telecommunications services and (2) a competitor's right to purchase the incumbent's retail services at wholesale rates for the purpose of resale. 47 U.S.C.  251(c)(3), (4). The conferees adopted pricing models that reflected that distinction. The Senate's "cost plus profit" formula was adopted for the purchase of unbundled elements, and the House's "retail price minus avoided costs" formula was adopted for the purchase of retail services to be made available to resellers. 47 U.S.C.  252(d).

The FCC, however, has allowed competitors who have no local facilities of their own, and thus were expected to be governed by the House's wholesale pricing formula, to obtain all the network elements that go into an incumbent's service under the Senate's "cost plus profit" formula.

The Commission's rules have the perverse effect of allowing a competitor to chose the more favorable cost-based pricing method, effectively gutting the statutory distinction and guaranteeing that non-facilities-based carriers can make money by undercutting the incumbent's price for any offering that the incumbent must -- under state regulatory policies -- price above cost. As long as they can accumulate risk-free profits with minimal investment, competitors will not build their own networks to provide competing services.

The Commission's establishment of unbundling rules that act as a substitute, rather than an alternative, for purchasing retail services at wholesale rates slants competition in another way as well.

Congress was aware that it would be unfair and anticompetitive to allow the major long distance carriers to market resold local service with their own long distance service where the local telephone company (which provides the local service) cannot sell long distance. Section 271(e)(1) thus provides, in substance, that if AT&T, MCI, and Sprint want to sell packages of local and long distance services before the local exchange carrier can do the same, they must build a local network of some sort. Under the FCC's approach, however, a company like AT&T can obtain all the unbundled network elements it needs to sell local service with its long distance service, without having a single foot of local telephone wire of its own. See Order  328.

This unfairness is compounded by the specific pricing rules developed by the Commission. As already explained,  252(d)(1) of the Act instructs state arbitrators to set prices for interconnection and access to network elements based on the incumbent's "cost" plus "a reasonable profit." The Order, however, instructs state commissions to set prices based on a hypothetical "incremental cost" that would be incurred if the incumbent were using an ideally efficient network. 47 C.F.R.  51.505(b)(1).

Congress meant what we all understand "cost" to mean, i.e., the amount actually paid for something. Furthermore, the Commission's approach of deriving prices from a hypothetical incremental cost would in many cases push prices even below the "actual cost" standard that Congress rejected as too low because it did not include a "reasonable profit." New competitors, who could obtain access to the incumbent's facilities below actual cost, would not build any of their own. And incumbents, lacking any incentive to incur additional construction costs that could not be recovered, would neglect their networks.

The FCC's Order likewise undermines the intent underlying  252(d)(3), which governs resold local services and instructs the states to fix wholesale prices at the retail rate less the costs that "will be avoided." Again, the decision to subtract only those costs that actually "will be avoided" was deliberate. Congress wanted to be sure that -- whether local regulators set the retail rate at, above, or below cost -- at least the incumbent will receive the same amount of profit or loss on the wholesale service as it would on the regulated retail service. The conferees thus rejected proposed language that would have set the statutory standard at retail rates minus "avoidable" costs, thereby altering the relationship between price and cost that state regulators built into the retail rate.

Yet the Commission set wholesale prices at the retail rate less any costs that the state determines "can be avoided." 47 C.F.R.  51.609. It re-opened debate on the rejected "avoidable costs" proposal and then adopted it. See Order  884, 911. The Commission has eviscerated the Act's guarantee that incumbent carriers will receive enough from wholesale transactions so that they are no worse off than they would be under the retail rates, and can fulfill their obligation to provide subsidized services.

Finally, Congress specified that, when drafting rules regarding what network elements must be unbundled, the FCC should consider whether access to a particular proprietary element is "necessary." 47 U.S.C.  251(d)(2). This provision was designed to reflect the "necessary" standard found in proposed  251(b)(2) of the Senate bill. S. 652,  101(a). Yet the Commission has run around the plain language of the Act, by saying that access to an incumbent's proprietary network elements may be "necessary" even if the competitor can obtain the same elements elsewhere. Order  283. The Commission reasoned that applying the statute as written might raise competitors' costs somewhat, even if it did not actually prevent competition. Congress, however, wanted to encourage construction of competitive networks, not to set up a system whereby new entrants live indefinitely off of the incumbent's investment.

These examples all reflect the same problem. The Commission has adopted proposals Congress specifically rejected and that will slow the very "private sector deployment of advanced telecommunications and information technologies and services" that Congress meant to "accelerate." S. Rep. No. 230, at 1. We think the Commission is wrong about sound policy, as well as about the law. Its approach will reduce employment and economic growth. But if Congress did make policy mistakes, they are for Congress to fix. The Commission may not override our legislative judgments.

Apparently the Chairman of the Commission doesn't even believe that Commission decisions should be subject to judicial review. At a press conference in October, he likened this Court's Order Granting Stay Pending Judicial Review to the "imperial sovereignty" exercised by the Chinese emperors.

But under our system, agencies aren't free to substitute their own judgments for those of the Congress. They must obey the law. This Court should strike down the local pricing provisions of the Order as beyond the FCC's jurisdiction and direct the Commission to respect carefully crafted statutory restrictions on resale of incumbents' services and unbundling of local networks.

Respectfully submitted,

The Honorable W.J. (Billy) Tauzin
Member of Congress, Louisiana
U.S. House of Representatives
Washington, D.C. 20515
(202) 225-4031

The Honorable Rick Boucher
Member of Congress, Virginia
U.S. House of Representatives
Washington, D.C. 20515
(202) 225-3861

The Honorable John D. Dingell
Member of Congress, Michigan
U.S. House of Representatives
Washington, D.C. 20515
(202) 225-4071

The Honorable Dennis Hastert
Member of Congress, Illinois
U.S. House of Representatives
Washington, D.C. 20515
(202) 225-2976

November 15, 1996

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