Verizon Communications, Inc. v. Federal Communications Commission

PETITIONER:Verizon Communications, Inc.
RESPONDENT:Federal Communications Commission
LOCATION:Free Speech Coalition

DOCKET NO.: 00-511
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Eighth Circuit

CITATION: 535 US 467 (2002)
ARGUED: Oct 10, 2001
DECIDED: May 13, 2002

Donald B. Verrilli, Jr. – Argued the cause for the petitioners in 00-555, 00-587, and 00-590
Theodore B. Olson – Department of Justice, argued the cause for the federal petitioners
William P. Barr – Argued the cause for the petitioners in 00-511

Facts of the case

The Telecommunications Act of 1996 entitles new companies seeking to enter local telephone service markets to lease elements of the incumbent carriers’ local exchange networks and directs the Federal Communications Commission (FCC) to prescribe methods for state utility commissions to use in setting rates for the sharing of those elements. The FCC provided for the rates to be set based upon the forward-looking economic cost of an element as the sum of the total element long-run incremental cost of the element (TELRIC) and a reasonable allocation of forward-looking common costs incurred in providing a group of elements that cannot be attributed directly to individual elements and specified that the TELRIC should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration. FCC regulations also contain combination rules, requiring an incumbent to perform the functions necessary to combine network elements for an entrant, unless the combination is not technically feasible. In five separate cases, a range of parties challenged the FCC regulations. Ultimately, the Court of Appeals held that the use of the TELRIC methodology was foreclosed because the Act plainly required rates based on the actual cost of providing the network element and invalidated certain combination rules.


Does the Telecommunications Act of 1996 authorize the Federal Communications Commission 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? Does the Act require incumbents to combine such elements at the entrants’ request when they lease them to the entrants?

Media for Verizon Communications, Inc. v. Federal Communications Commission

Audio Transcription for Oral Argument – October 10, 2001 in Verizon Communications, Inc. v. Federal Communications Commission

Audio Transcription for Opinion Announcement – May 13, 2002 in Verizon Communications, Inc. v. Federal Communications Commission

William H. Rehnquist:

The opinion of the Court in No. 00-511 Verizon Communications, Inc. versus Federal Communications Commission and several related cases will be announced by Justice Souter.

David H. Souter:

These cases come to us on writ of certiorari of the United States Court of Appeals for the Eighth Circuit.

In the Telecommunications Act of 1996, Congress sought to promote competition in local telephone markets in part by requiring incumbent companies with local monopolies to list elements of their telephone networks to competitors.

To implement the Act, the FCC promulgated the regulations at issue which prescribed pricing of elements for lease and additionally requires incumbents to combine or connect the elements as necessary for the entrants to provide retail services.

The Eighth Circuit invalidated both the FCC’s pricing rule and its additional combination rule as inconsistent with the plain meaning of the Act.

The FCC’s pricing rule prescribes a forward-looking rate setting method on the basis of what it calls Total Element Long-Run Cost or TELRIC for short, and that refers to the most efficient technology and network configuration available at existing wire centers.

The Circuit of Court read Section 252(d)(1) of the Act which governs pricing to allow forward-looking methods of rate setting as a general matter but not TELRIC.

Because even though TELRIC did not resolve the confiscation of the incumbent’s property, it did not take into account the incumbent’s actual cost of leasing out an element.

The Eighth Circuit also invalidated the additional combination rules as plainly inconsistent with Section 251(c)(3) of the Act, which sets forth the general duty of incumbents to lease network elements.

We granted certiorari and in an opinion filed today with the Clerk of the Court, we affirm in part, reverse in larger part, and remand.

We affirm the Eighth Circuit’s holdings that the Act permits forward-looking rate setting methods and that TELRIC does not effect an unconstitutional taking of property, absent of showing of actual confiscatory rates.

We reverse, however, the Circuit’s invalidation of TELRIC and the additional combination rules.

Neither is foreclosed by the statutes plain meaning and each deserves deference as a reasonable interpretation of what the Act requires.

The word cost in plain language or in the technical vocabulary of public utility regulation is not limited to the actual historical cost incurred via providing incumbent.

For example, a merchant who is asked the cost of providing the goods he sells may reasonably quote the current wholesale market price not the price he paid for the particular items he happens to have on his shelves.

In concepts, such as reproduction cost and traditional rate making were similarly independent of actual cost.

Hence, the legitimacy of the FCC’s choice of a forward-looking not a rigidly historical pricing methodology, nor was it unreasonable for the FCC to pick TELRIC as the means to implement the Act’s goal of promoting local competition.

As a threshold matter, TELRIC does not make the assumption of a perfectly competitive market as the incumbent’s claim while it does make explicit allowance for adjustments of rates by state commissions in individual cases.

Although the incumbents have argued that TELRIC will discourage not promote investment in facilities by competitors entering the local markets.

Facts on the record are at odds with this claim.

The entrants of indicated in the incumbents do not dispute that the TELRIC regime has facilitated $55 billion in competitive capital spending in local telephone markets.

As for the additional combination rules, and the Section 251(c)(3) of the Act does not say that entrants must do any and all combining but rather that the incumbent shall provide unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide a telecommunication service.

The rules placing a limited obligation, nonetheless, on the incumbents to do some combining, a reasonable attempt to make the incumbents statutory duty to lease elements a practical one by giving entrants who are unable to make a connection of equipment that they need to do business, the option of paying incumbents to make the connection for them where that is technically feasible.

Justice Scalia joins part 3 of this opinion and Justice Thomas joins parts 3 and 4.

Justice Breyer has filed an opinion concurring in part and dissenting in part, part 6 of which Justice Scalia joins.