FOR THE
Argued
No. 00-1012
Petitioners
v.
Federal
Communications Commission and
Respondents
Bell Atlantic
Telephone Companies, et al.,
Intervenors
Consolidated with
01-1075, 01-1102,
01-1103
---------
No. 00-1015
Petitioners
v.
Federal
Communications Commission and
Respondents
AT&T Corporation,
et al.,
Intervenors
Consolidated with
00-1025
On Petitions for
Review of Orders of the
Federal
Communications Commission
Michael K.
Kellogg argued the cause for petitioners and supporting intervenors
in 00-1012 & 00-1015. With him on
the briefs in 00-1012 were Mark L. Evans, Sean A. Lev, James D. Ellis, Paul K.
Mancini, Roger K. Toppins, Gary L. Phillips, Lawrence
E. Sarjeant, Linda L. Kent, Keith Town-send, John W.
Hunter, Julie E. Rones, William P. Barr, Michael E.
Glover, Edward H. Shakin, John P. Frantz, Richard M. Sbaratta, and James G. Harralson. With him on the briefs in 00-1015 were Mark
L. Evans, Sean A. Lev, David L. Schwarz, Lawrence E. Sarjeant,
Linda L. Kent, Keith Townsend, John W. Hunter, Julie E. Rones,
Sharon J. Devine, Robert B. McKenna,
Laurence N.
Bourne, Counsel, Federal Communications Commission, argued the cause for
respondents in 00-1012. With him on the
brief in 00-1012 were Charles A. James, Assistant Attorney General, Daniel M.
Armstrong, Associate General Counsel, John E. Ingle, Deputy Associate General
Counsel, James M. Carr, Counsel, Catherine G. O'Sullivan and Nancy C. Garrison,
Attorneys, U.S. Department of Justice. Lisa S. Gelb, Counsel, Federal
Communications Commission entered an appearance in 00-1012.
Richard K. Welch,
Counsel, Federal Communications Commission, argued the cause for respondents in
00-1015. With him on the briefs in
00-1015 were Charles A. James, Assistant Attorney General, Daniel M. Armstrong,
Associate General Counsel, John E. Ingle, Deputy Associate General Counsel,
Laurence N. Bourne and James M. Carr, Counsel, Catherine G. O'Sullivan and
Nancy C. Garrison, Attorneys, U.S. Department of Justice. Lisa S. Gelb, Counsel, Federal Communications
Commission, entered an appearance in 00-1015.
Jonathan Jacob
Nadler argued the cause for intervenors AT&T
Corp., et al. in 00-1012. With him on the brief in 00-1012 were David W.
Carpenter, Peter D. Keisler, James P. Young, Mark C. Rosenblum, Lawrence J. Lafaro,
Richard H. Rubin, Donald B. Verrilli, Jr., Maureen F.
Del Duca, Michael B. DeSanctis,
Thomas F. O'Neil III, William Single, IV, Theresa K. Gaugler,
Charles C. Hunter, Catherine M. Hannan, Albert H.
Kramer, Robert McDowell, Jay C. Keithley and H.
Richard Juhnke.
John J. Heitmann, Jonathan E. Canis and Roy E. Hoffinger
entered appearances in 00-1012.
David W. Carpenter
argued the cause for intervenors AT&T, Corp., et
al. in 00-1015. With him on the brief in
00-1015 were Peter D. Keisler, James P. Young, C.
Frederick Beckner III, Mark C. Rosenblum,
Lawrence J. Lafaro, Richard H. Rubin, Donald B. Verrilli, Jr., Maureen F. Del Duca,
Michael B. DeSanctis, Thomas F. O'Neil III, William
Single, IV, Rodney Joyce, Christy C. Kunin, Russell
I. Zuckerman, Francis D.R. Coleman, Richard E. Heatter,
Marilyn H. Ash, Douglas G. Bonner, Albert H. Kramer, Charles C. Hunter and
Catherine M. Hannan. Roy E. Hoffinger,
Lawrence G. Acker, John J. Heitmann and Jonathan E. Canis entered appearances.
Before: Edwards and Randolph, Circuit Judges, and
Williams, Senior Circuit Judge.
Opinion for the
Court filed by Senior Circuit Judge Williams.
Williams, Senior
Circuit Judge: Petitioners in these two
cases--certain incumbent local exchange carriers ("ILECs")
and the U.S. Telecom Association, representing approximately 1200 such
carriers--seek review of two rulemaking orders of the Federal Communications
Commission. One order requires ILECs to lease a variety of "unbundled network
elements" ("UNEs") to competitive
local exchange carriers ("CLECs"), and the
other unbundles a portion of the spectrum of local
copper loops so that CLECs can offer competitive
Digital Subscriber Line ("DSL") internet access. We grant both petitions, and remand both
rules to the Commission.
I. Background
Congress passed
the Telecommunications Act of 1996, Pub. L. 104-104, 110 Stat. 56, codified at
47 U.S.C. § 151 et seq. (the "1996 Act" or the "Act"), to
"promote competition and reduce regulation in order to secure lower prices
and higher quality services for American telecommunications consumers and
encourage the rapid deployment of new telecommunications
technologies." 1996 Act,
preamble. In pursuit of that goal, § 251
of the Act requires that ILECs "unbundle" their network elements--that is, provide
them on an individual basis to competitive providers on terms prescribed by the
Commission. 47 U.S.C. § 251(c)(3). To guide the Commission in deciding which
network elements are to be unbundled, the Act goes on to specify:
(2) Access standards
In determining what
network elements should be made available for purposes of subsection (c)(3) of
this section, the Commission shall consider, at a minimum, whether--
(A) access to such network elements as are proprietary in
nature is necessary; and
(B) the failure to provide access to such network elements
would impair the ability of the telecommunications carrier seeking access to
provide the services that it seeks to offer.
47 U.S.C. § 251(d)(2) (emphasis added).
In its first
effort at implementation, Implementation of the Local Competition Provisions in
the Telecommunications Act of 1996, First Report and Order, CC Docket No.
96-98, 11 FCC Rcd 15499 (1996) ("First Local
Competition Order"), the Commission gave this section the following
reading:
The term "impair" means "to make or cause to
become worse; diminish in
value." We believe, generally, that
an entrant's ability to offer a telecommunications service is "diminished
in value" if the quality of the service the entrant can offer, absent
access to the requested element, declines and/or the cost of providing the
service rises. We believe we must
consider this standard by evaluating whether a carrier could offer a service
using other unbundled elements within an incumbent LEC's
network.
In Iowa Utilities
Board, the Supreme Court also addressed the Act's provisions on rates for UNEs, reversing the Eighth Circuit's holding that the
Commission had no authority to set such rates.
Following the
Supreme Court's remand on the "impairment" standard, the Commission
again tackled that issue in the rulemakings now on review. In what we will call the "Local
Competition Order," Implementation of the Local Competition Provisions of
the Telecommunications Act of 1996, Third Report and Order and Fourth Further
Notice of Proposed Rulemaking, 15 FCC Rcd 3696
(1999), it revised its definition of "impair" so as to require
unbundling if, "taking into consideration the availability of alternative
elements outside the incumbent's network, including self-provisioning by a
requesting carrier or acquiring an alternative from a third-party supplier,
lack of access to that element materially diminishes a requesting carrier's ability
to provide the services it seeks to offer." Local Competition Order, 15 FCC Rcd at 3725, p 51 (emphasis added); 47 C.F.R. § 51.317(b)(1). In weighing the availability of alternative
network elements, the Commission noted that it would examine five factors--cost,
effect on timeliness of entry, quality, ubiquity, and impact on network
operations. Local Competition Order, 15
FCC Rcd at 3731, p 65, 3734-45, p p
71-100; 47 C.F.R. § 51.317(b)(2). Finally, it said that beyond looking simply
to "impairment," it would consider five factors that it believed
would further the Act's goals, namely whether unbundling would lead to
"rapid introduction of competition in all markets," promote
"facilities-based competition, investment, and innovation," reduce
regulatory obligations, promote certainty in the market, and be
administratively practical. 15 FCC Rcd at 3745-50, p p 101-16; 47 C.F.R. § 51.317(b)(3).
Of particular importance to this case, the Commission decided to make its unbundling requirements (except for two elements) applicable uniformly to all elements in every geographic or customer market. We return in detail to this issue after a survey of the elements unbundled by the Local Competition Order:
. Local
loops, defined as "all features, functions and capabilities of the
transmission facilities, including dark fiber and attached electronics (except
those used for the provision of advanced services, such as DSLAMs
[DSL Access Multiplexers]) owned by the incumbent LEC, between an incumbent LEC's central office and the loop demarcation point at the
customer premises." 15 FCC Rcd at 3772, p 167;
47 C.F.R. § 51.319(a)(1). The
Commission also required that incumbent LECs
"condition" loops so as to allow CLECs to
offer advanced services. 15 FCC Rcd at 3775, p 172;
47 C.F.R. § 51.319(a)(3).
Conditioning, for these purposes, means removing devices such as bridge
taps, low-pass filters, range extenders, etc., that improve voice transmission
but may decrease a loop's advanced services capabilities.
. Subloops, i.e., those "portions of the loop that can
be accessed at terminals in the incumbent's outside plant." 15 FCC Rcd at 3789,
p 206; 47 C.F.R. § 51.319(a)(2). Points of access might include the pole near
the customer's premises, the network interface device ("NID"), and
the feeder distribution interface (where the trunk line from the central office
interfaces with the distribution line to the subscribers). 15 FCC Rcd at
3789-90, p 206.
. Network
Interface Devices, which include all "features, functions, and
capabilities of the facilities used to connect the loop distribution plant to
the customer premises wiring, regardless of the particular design of the NID
mechanism."
. Circuit
switching, defined as the "basic function of connecting lines and trunks,"
including "all the features, functions and capabilities of the
switch."
. Packet
switching under some circumstances.
Packet switches perform "the function of routing individual data
units based on address or other routing information contained in the
units." 15 FCC Rcd
at 3833, p 302; 47 C.F.R. §
51.319(c)(4). The Commission for the
most part denied unbundling for packet switching, requiring it only where the
ILEC has used digital loop carrier systems, placing a DSLAM at a remote
terminal and refusing to allow the competitor to collocate its own DSLAM at
that remote terminal. 15 FCC Rcd at 3838, p 313.
That is, if the loop is such that a remote DSLAM is necessary to provide
DSL service at all, and the ILEC has denied the CLEC the right to collocate a
DSLAM remotely, then unbundling the packet switching (i.e., the ILEC's own DSLAM) would be the only way to allow the CLEC
to provide DSL service.
. Dedicated
transport, defined as "facilities dedicated to a particular customer or
carrier that provide telecommunications between wire centers owned by incumbent
LECs or requesting telecommunications carriers, or
between switches owned by incumbent LECs or
requesting telecommunications carriers."
. Shared
transport, defined as "transmission facilities shared by more than one
carrier, including the incumbent LEC, between end office switches, between end
office switches and tandem switches, and between tandem switches in the
incumbent LEC's network." 15 FCC Rcd at 3862,
p 370; 47 C.F.R. § 51.319(d)(1)(iii).
. Signaling
networks and call-related databases. Signaling
networks include signaling transfer points, to which each local switch must be
connected. 15 FCC Rcd
at 3868, p 384; 47 C.F.R. §
51.319(e). Call-related databases are
"used in signaling networks for billing and collection or the transmission,
routing, or other provision of telecommunications service." 15 FCC Rcd at 3875,
p 403. The databases specifically
unbundled include the calling name database, the 911 database, the toll free
calling database, and several others.
. Operations
support systems. These are the
"functions supported by an incumbent LEC's
databases and information," including "pre-ordering, ordering,
provisioning, repair and maintenance, and billing." 15 FCC Rcd at 3884,
p 425; 47 C.F.R. § 51.319(g).
So far as we
understand, this list is narrower than that which the Court reversed in Iowa
Utilities Board only in its exclusion of some circuit switches, as well as of
operator services and directory assistance.
See 15 FCC Rcd at 3822-31, p p 276-98, 3890-92, p p 438-42. In other areas, the Commission's list has
actually been expanded, now including high-capacity loops, id. at 3777, p 176,
3780, p 184, dark fiber, id. at 3785, p 196, 3843-46, p p
325-30, subloops, id. at 3788-89, p p 202-05, and packet switches in a few circumstances, id.
at 3832-35, p p 300-06.
In what we call
the "Line Sharing Order," In the Matters of Deployment of Wireline Services Offering Advanced Telecommunications
Capability and Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, Third Report and Order in CC Docket No. 98-147
and Fourth Report and Order in CC Docket No. 96-98, 14 FCC Rcd
20912 (1999), the Commission refined unbundling further. Copper loops have a range of spectrum in
which the transmission of information is possible. Analog telephone service uses only the lower
frequencies of that spectrum (typically 300 to 3400 hz),
leaving higher frequencies unused.
Recent technological development allows the provision of DSL high-speed
internet access over the high-frequency (i.e., 20,000+ hz)
spectrum.[1] By fitting the loop with splitters (which
split apart voice and digital signals) and DSLAMs
(Digital Subscriber Line Access Multiplexers) (which send voice traffic to the
circuit-switched telephone network and data traffic to the packet-switched data
network), local carriers can provide both plain old telephone service and DSL
internet access at the same time.
In the "Line
Sharing Order" the Commission decided that the high frequency portion of
copper loop spectrum should be unbundled as to those loops on which ILECs are currently providing telephone service. The Commission defined the "high
frequency" portion as simply any frequency "above the voiceband on a copper loop facility used to carry analog
circuit-switched voiceband transmissions." Line Sharing Order, 14 FCC Rcd at 20926, p 26;
47 C.F.R. s 51.319(h)(1).
Such unbundling
means, of course, that CLECs and ILECs
would share the same copper loop to provide two different services at
once. See, e.g., 14 FCC Rcd at 20923, p 17.
The Commission clarified that the unbundling obligation extends to only
one competitor per line.
The Commission
also required ILECs to condition loops, that is, to
remove loading coils, bridge taps, and other voice-band transmission enhancing
equipment that tends to interfere with DSL service.
II. The Local
Competition Order
We note at the
outset the extraordinary complexity of the Commission's task. Congress sought to foster competition in the
telephone industry, and plainly believed that merely removing affirmative legal
obstructions would not do the job. It
thus charged the Commission with identifying those network elements whose lack would
"impair" would-be competitors' ability to enter the market, yet gave
no detail as to either the kind or degree of impairment that would
qualify. We review the two orders with
this in mind.
A. Unvarying Scope
As to almost
every element, the Commission chose to adopt a uniform national rule, mandating
the element's unbundling in every geographic market and customer class, without
regard to the state of competitive impairment in any particular market. As a result, UNEs
will be available to CLECs in many markets where
there is no reasonable basis for thinking that competition is suffering from
any impairment of a sort that might have the object of Congress's concern.
One reason for
such market-specific variations in competitive impairment is the
cross-subsidization often ordered by state regulatory commissions, typically in
the name of universal service. This
usually brings about undercharges for some subscribers (usually rural and/or
residential) and overcharges for the others (usually urban and/or
business). Petitioners' opening brief in
the Local Competition Order case cites testimony of a former FCC Chairman for
the proposition that 40% of telephone service is charged below cost,
Petitioners' Br. at 35 & n.16, and the Commission and its supporting intervenors do not demur.
See also, e.g., Robert W. Crandall & Thomas W. Hazlett,
Telecommunications Policy Reform in the
Competitors will
presumably not be drawn to markets where customers are already charged below
cost, unless either (1) the availability of UNEs
priced well below the ILECs' historic cost makes such
a strategy promising, or (2) provision of service may, by virtue of economies
of scale and scope, enable a CLEC to sell complementary services (such as long
distance or enhanced services) at prices high enough to cover incomplete
recovery of costs in basic service. The
Commission never explicitly addresses by what criteria want of unbundling can
be said to impair competition in such markets, where, given the ILECs' regulatory hobbling, any competition will be wholly
artificial. And, although it offers an
explanation as to why it is desirable as a general matter that CLECs should have "ubiquitous" unimpaired access
to network elements, see Local Competition Order, 15 FCC Rcd
at 3744, p p 97-98, it never explains why the record
supports a finding of material impairment where the element in question--though
not literally ubiquitous--is significantly deployed on a competitive basis in
those markets where there is no reason to suppose that rates are artificially
low, compare id. at 3847, p 335 (finding that 47 of the top 50 areas have 3 or
more competitors providing interoffice transport), with id. at 3849, p 340
(finding absence of requisite ubiquity for such transport).
But it is in the
other segments of the markets, where presumably ILECs
must charge above cost (at least above average costs allocated in conventional
regulatory fashion) in order to offset their losses in the subsidized markets,
that the gap in the Commission's reasoning is greatest. In finding that the CLECs'
lack of access to each of the many elements "materially diminish[ed]"
their ability to provide service, the Commission nowhere appears to have
considered the advantage CLECs enjoy in being free of
any duty to provide underpriced service to rural
and/or residential customers and thus of any need to make up the difference
elsewhere. As a matter of pure language,
perhaps, one might regard as an "impairment" any cost disadvantage
that the CLECs suffer in markets where ILECs are hampered by regulatory redistribution, even if
the disadvantage is fully offset by the exigencies faced by ILECs. But the Commission has never explained why
such a view makes sense. Indeed,
pointing to evidence of considerable investment by CLECs
in facilities for service in what are evidently the relatively overcharged
markets, see, e.g., Petitioners'
We now turn to
the reasons offered by the Commission for adopting an undifferentiated national
rule for each element (with narrow exceptions).
Having found legal authority to adopt such a rule, it said that it would
help achieve the goals of the Act, to wit:
(1) rapid introduction of competition, (2) promotion of facilities-based
competition, investment and innovation, (3) certainty in the marketplace, (4)
administrative practicality and (5) reduced regulation. See Local Competition Order, 15 FCC Rcd at 3754-62, p p 124-143; see also 47 C.F.R. § 51.317(b)(3)
(identifying same five factors as guiding Commission decision whether to unbundle a network element).
We first address
the third and fourth justifications, both of which seemingly turn on how clear
any non-universal rule can be. The
Commission appears simply to assume that any such rule would be unpredictable
and hard to apply. Yet the Commission
itself, in regard to circuit switches, chose a partial rule, denying unbundling
for local circuit switches serving customers with four or more lines in the
highest-density zone in any of the top 50 Metropolitan Statistical Areas
("MSAs").
See Local Competition Order, 15 FCC Rcd at
3823-31, p p 278-99.
The Commission's order has no explanation of why comparable
differentiation was not available for other elements.
As to reduced
regulation, the Commission says that a national list "will result
immediately in reduced regulation."
Reduced regulation will occur as we remove elements from the
list as requesting carriers are no longer impaired without access to those
elements, and it otherwise does not further the goals of the Act to continue requiring
incumbent LECs to unbundle
them.
This leaves the
more substantive justifications--the ideas that universal rules would promote
the goals of the Act by leading to rapid introduction of competition, Local
Competition Order, 15 FCC Rcd at 3754-57, p p 125-33, and to promotion of facilities-based competition,
investment, and innovation, id. at 3757-60, p p
134-39. Using certain definitions, the
first point--more rapid introduction of competition--indeed follows
automatically. If competition performed
with ubiquitously provided ILEC facilities counts, the more unbundling there
is, the more competition. The Commission,
here in unison with the ILEC petitioners, evidently assumes that the
Commission-imposed prices are highly attractive to CLECs; on that assumption, universal rules
encompassing as many elements as possible would indeed generate a rapid spread
of "competition."
But the Commission never makes the argument
in quite so stark a form, unwilling to embrace the idea that such completely
synthetic competition would fulfill Congress's purposes. Thus it turns to the argument that universal
rules promote investment and facilities-based competition.
The Commission
says that "adoption of a national list" will "facilitate the
deployment" of competitive facilities.
On the other
side, the petitioners argued before the Commission that mandatory unbundling at
Commission-mandated prices reduces the incentives for innovation and investment
in facilities. Their reasoning, of
course, is that a regulated price below true cost will reduce or eliminate the
incentive for an ILEC to invest in innovation (because it will have to share
the rewards with CLECs), and also for a CLEC to
innovate (because it can get the element cheaper as a UNE). Indeed, many prices that seem to equate to
cost have this effect. Some innovations
pan out, others do not. If parties who
have not shared the risks are able to come in as equal partners on the
successes, and avoid payment for the losers, the incentive to invest plainly
declines.[2] See Iowa Utilities Board, 525
The Commission's
only response is to point to evidence that both CLECs
and ILECs have built facilities since passage of the
1996 Act (the same evidence invoked by the ILECs to
show the existence of many markets where unbundling is unneeded), despite the
Act's obviously having created a prospect of unbundling. Local Competition Order, 15 FCC Rcd at 3758-59, p p 135-38. But the existence of investment of a
specified level tells us little or nothing about incentive effects. The question is how such investment compares
with what would have occurred in the absence of the prospect of unbundling,
compare Sugar Cane Growers Cooperative of Florida v. Veneman,
No. 01-5335, 2002 Westlaw ----, slip op. at 7 (D.C. Cir.
In the end, then,
the entire argument about expanding competition and investment boils down to
the Commission's expression of its belief that in this area more unbundling is
better. But Congress did not authorize
so open-ended a judgment. It made
"impairment" the touchstone.
The Commission argues that § 251(d)(2), directing it to consider necessity
and impairment "at a minimum," clearly allows it to consider other
elements. We assume in favor of the Commission
that that is so. But to the extent that
the Commission orders access to UNEs in circumstances
where there is little or no reason to think that its absence will genuinely
impair competition that might otherwise occur, we believe it must point to
something a bit more concrete than its belief in the beneficence of the widest
unbundling possible.
Besides the
analysis described above, the Commission addressed the question whether Iowa
Utilities Board precluded its adoption of universal rules for each network
element. It concluded that nothing in
that opinion would require it "to determine, on a localized state-by-state
or market-by-market basis which unbundled elements are to be made
available." Local Competition
Order, 15 FCC Rcd at 3753, p 122. We certainly agree that the Court's brief
passage reversing the Commission on the impairment issue contained little
detail as to the "right" way for the Commission to go about its work. But the Court's point that if "Congress
had wanted to give blanket access to incumbents' networks," it "would
simply have said (as the Commission in effect has) that whatever requested
element can be provided must be provided," Iowa Utilities Board, 525 U.S.
at 390, suggests that the Court read the statute as requiring a more nuanced
concept of impairment than is reflected in findings such as the
Commission's--detached from any specific markets or market categories.
B. Kinds of Cost
Disparities
Petitioners complain that the Commission myopically focused on "cost differences," thereby skewing its inquiry to produce the maximum unbundling.
Of course any
cognizable competitive "impairment" would necessarily be traceable to
some kind of disparity in cost. Indeed,
the ILECs argued before the Commission and the
Supreme Court that Congress intended that the impairment standard embody the
criteria of the "essential facilities" doctrine, see Iowa Utilities
Board, 525
Petitioners'
position here is fundamentally that the Commission relied on cost disparities
that, far from being any indication that competitive supply would be wasteful,
are simply disparities faced by virtually any new entrant in any sector of the
economy, no matter how competitive the sector.
See Petitioners'
For example, in
the discussion of local switching, the Commission notes that there are
economies of scale in switches, Local Competition Order, 15 FCC Rcd at 3812-13, p 259, and that it is cheaper to buy a
20,000-line switch than four increments of 5000 lines each, id. at 3813, p
260. The Commission refers explicitly to
a CLEC's probable inability to enjoy scale economies
comparable to ILECs' "particularly in the early
stages of entry."
The Commission of
course has recognized that marketplace changes and increases in competition may
justify later reductions in unbundling mandates. See, e.g., Local Competition Order, 15 FCC Rcd at 3704, p 15.
But this acknowledgement doesn't respond to the analytical problem. To rely on cost disparities that are
universal as between new entrants and incumbents in any industry is to invoke a
concept too broad, even in support of an initial mandate, to be reasonably
linked to the purpose of the Act's unbundling provisions.
Each unbundling
of an element imposes costs of its own, spreading the disincentive to invest in
innovation and creating complex issues of managing shared facilities. See Iowa Utilities Board, 525
Petitioners here
do not explicitly attack the Commission for its refusal to incorporate the
essential facilities doctrine, and we do not intend to suggest that the Act
requires use of that doctrine's criteria.[4]
But what we do say is that cost comparisons of the sort made by the Commission,
largely devoid of any interest in whether the cost characteristics of an
"element" render it at all unsuitable for competitive supply, seem
unlikely either to achieve the balance called for explicitly by Justice Breyer or implicitly by the Court as a whole in its
disparagement of the Commission's readiness to find "any" cost
disparity reason enough to order unbundling.
The Commission's addition of a materiality notion, see Local Competition
Order, 15 FCC Rcd at 3725, p 51 (finding impairment
in any case where lack of access to an element "materially"
diminishes ability to provide services), submits to the Court's ruling in a
nominally quantitative sense (though the reality of such acquiescence cannot be
measured and may be belied by the virtual identity of the old and new
orders). More important, adding the
adjective "material" contributes nothing of any analytical or
qualitative character that would fulfill the Court's demand for a standard
"rationally related to the goals of the Act."
Because the
Commission's concept of "impairing" cost disparities is so broad and unrooted in any analysis of the competing values at stake
in implementation of the Act, we cannot uphold even the two non-universal
mandates adopted by the Commission (for circuit switches and packet switches).
Petitioners also
attack the rules on specific elements.
Some of these attacks parallel the universality and cost-disparity
issues already discussed. Petitioners'
critique as to advanced services equipment coalesces with the issues they raise
about the Line Sharing Order (see below).
This leaves two issues, neither of which we need address here. First, petitioners attack the Commission's
requirements of certain information disclosure and "loop
conditioning." After remand, these
issues may well be moot, and if they recur will do so in a different
context. Second, petitioners argue that
the "enhanced extended link" condition to the exception to the switch
unbundling mandate is in reality a mandate to combine otherwise uncombined
network elements, and is therefore invalid.
The Supreme Court appears to have definitely removed the basis of this
claim, holding that the Commission has authority to require such combinations,
affirmatively--that is, not merely as a condition to an unbundling
exception. See Verizon,
slip op. at 58-68. If any comparable
claim somehow survives, it too can be raised in the remand proceedings.
III. The Line Sharing Order
Petitioners
primarily attack the Line Sharing Order on the ground that the Commission, in
ordering unbundling of the high frequency spectrum of copper loop so as to
enable CLECs to provide DSL services, completely
failed to consider the relevance of competition in broadband services coming
from cable (and to a lesser extent satellite).
We agree.
The Commission's
own findings (in a series of reports under § 706 of the 1996 Act) repeatedly
confirm both the robust competition, and the dominance of cable, in the broadband
market. The first § 706 report found
that "[n]umerous companies in virtually all
segments of the communications industry are starting to deploy, or plan to
deploy in the near future, broadband to the consumer market," including
"cable television companies, incumbent LECs,
some utilities, and 'wireless cable' companies." In the Matter of Inquiry Concerning the
Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable
and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant
to Section 706 of the Telecommunications Act of 1996, 14 FCC Rcd 2398, 2404 p 12 (1999).
The Commission also noted that the "most popular offering of
broadband to residential consumers is via 'cable modems'...." id. at 2426,
p 54, that "no competitor has a large embedded base of paying residential
consumers," id. at 2423, p 48, and that the "record does not indicate
that the consumer market is inherently a natural monopoly," id. The most recent § 706 Report (not in the
record of this case) is consistent: As
of the end of June 2001, cable companies had 54% of extant high-speed lines,
almost double the 28% share of asymmetric DSL.
Third Report Pursuant to § 706, 2002 FCC LEXIS 655, at p p 44, 48 (
Relying on the
Commission's repeated findings, petitioners argue that it is "antithetical
to the 1996 Act's language and deregulatory objectives" to mandate
unbundling in a market that "already has intense facilities-based
competition." DSL Petitioners'
The Commission's
response to this argument is to say that it was "merely adhering" to
the letter of the statute: Thus it
quotes the instruction of § 251(d)(2)(B) that it consider whether "failure
to provide access to such network elements would impair the ability of the
telecommunications carrier seeking access to provide the services that it seeks
to offer." DSL Respondent's
The Commission's
inference from § 251(d)(2)(B)'s allusion to the services the requester
"seeks to offer" strikes us as quite unreasonable. See Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467
Accordingly, the
Line Sharing Order must be vacated and remanded. Obviously any order unbundling the high frequency
portion of the loop should also not be tainted by the sort of error identified
in our discussion of the Local Competition Order and identified by petitioners
here as well.
Petitioners also
claim that the Commission without explanation reversed a prior decision that a
portion of the spectrum of a loop cannot qualify as a "network
element." The Commission urges that
any language suggesting such a view is explicable as simply reflecting a
judgment on technical feasibility, which it here reversed on the basis of a
reexamination of the facts. Line Sharing
Order, 14 FCC Rcd at 20942-43, p 63. We think the Commission's view is convincing.
Finally,
petitioners attack the Commission's pricing rule, which limited an ILEC's charges for access to the high frequency portion of
the loop to the value the ILEC "allocated to [asymmetric] DSL services
when it established its interstate retail rates for those services," even
where this rule would reduce the charges below the level derived from the
Commission's general UNE pricing principles.
Line Sharing Order, 14 FCC Rcd at 20975-76, p
139. As in the case of the
element-specific claims raised in the Local Competition Order case, we think
the possible mootness, and certainty that any
recurrence will be in a different context, warrant deferring the issue to another
day.
* * *
We grant the
petitions for review, and remand both the Line Sharing Order and the Local
Competition Order to the Commission for further consideration in accordance
with the principles outlined above.
So ordered.
[1] There are numerous types of DSL technology: ADSL (asymmetric DSL, in which upstream transmissions are much slower than downstream), HDSL (high-speed DSL), UDSL (universal DSL), VDSL (very-high-speed DSL), and RADSL (rate-adaptive DSL). See Line Sharing Order, 14 FCC Rcd at 20915 n.5. The Commission here and elsewhere refers to these technologies collectively as "xDSL," the "x" serving as a generic identifier. In the interests of judicial economy, we shall simply use "DSL" as the generic term.
[2] The
Commission's standard for deciding that a network element should be
unbundled--whether lack of access to it "materially diminishes" the
requesting carrier's "ability" to provide the services in
question--implicitly builds in a relation to the prices at which CLECs get access to UNEs. (The Commission is rarely clear on precisely
what costs are being compared, but in saying that lack of access to unbundled
elements would cause a material increase in cost it often uses terms implying
that the comparison is to the Commission-mandated price of unbundled elements,
i.e., at present TELRIC. See, e.g., 15
FCC Rcd at 3815, p 263; id. at 3864, p 375.) Lack of access would not diminish the
requester's ability at all if it could secure the function more cheaply on its
own. Thus, the closer the Commission's
pricing principle is to the low end of what it may lawfully set, the greater
the probability that lack of access would cause "material
diminution." As a result low UNE
prices would not only have the direct effect mentioned in the text, but would
inherently tend to expand the sphere of these effects. As the "price squeeze"
jurisprudence shows, even prices that are set within the band of what is
lawfully permissible may have perverse effects, and the Commission may be
obligated to consider them. Cf. FPC v.
Conway Corp., 426
2001).
[3] Compare William J. Baumol, On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry, 67 Amer. Econ. Rev. 809 (1977) (proposing concept of "subadditivity" for ascertainment of natural monopoly), and William W. Sharkey, The Theory of Natural Monopoly (1982) (further development of subadditivity).
[4] We note that scholars have raised very serious questions about the wisdom of the essential facilities doctrine as a justification for judicial mandates of competitor access, and accompanying judicial price setting. See, e.g., Areeda & Hovenkamp, supra, at p 771c. But a doctrine that is inadequate for that purpose may nonetheless offer useful concepts for agency guidance when Congress has directed an agency to provide competitor access in a specific industry.