Loyola Consumer Law Review

Volume 11 | Issue 3 Article 5

1999

Tearing Down a Fence That is Hog Tight, HorseHigh & (and) Bull Strong: The Supreme CourtReshapes Jurisdiction of Local Telephone MarketsT. Jason White

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Recommended CitationT. J. White Tearing Down a Fence That is Hog Tight, Horse High & (and) Bull Strong: The Supreme Court Reshapes Jurisdiction of LocalTelephone Markets, 11 Loy. Consumer L. Rev. 188 (1999).Available at: http://lawecommons.luc.edu/lclr/vol11/iss3/5

CASENOTE

Tearing Down a Fence that is Hog Tight, Horse High &Bull Strong: The Supreme Court Reshapes Jurisdiction

of Local Telephone Marketsby T. Jason White

I. INTRODUCTION

In a sweeping decision that shiftscontrol of local telephone markets fromthe states and their regulatory agenciesto the United States and the FederalCommunications Commission (FCC),the Supreme Court in AT&T v. IowaUtilities Board reshaped local telephonecompetition.' The Court ruled that theFCC has jurisdiction to regulatecompetition in local telephone marketsunder the Telecommunications Act of1996 (TCA).2 Once the Court dictatedthat the FCC had jurisdiction toregulate the TCA's mandates, itapplied the Chevron U.S.A., Incorporatedv. Natural Resources Defense Council,Incorporated3 standard to the FCC'sregulations of the TCA and found thatall but one were reasonableinterpretations of the statute.4

The TCA and Supreme Court'sdecision in AT&T has broadimplications to consumers. At firstglance, the Court's ruling appears tofollow the spirit of the TCA byaccelerating competition in localtelephone markets. A closer look,however, reveals that the decision andthe hawkish policies of the FCC do not

benefit consumers; instead, the FCC'sregulations create a marketplace withsimulated rather than real competition.Part II of this note discusses the historyof the telecommunications industry inAmerica and the goals of Congress inpassing the TCA. Part III discusses theAT&T decision. Part IV analyzes theAT&T decision as it interpreted theTCA and as it applied the Chevronstandard to the FCC regulations. Part Vdiscusses the implications that thedecision and the FCC regulations willhave on consumers.

II. BACKGROUND

A. History of Telecommunicationsin America

Alexander Graham Bellintroduced the telephone in 1876.Consequently, the American Telephone& Telegraph (AT&T) monopoly wasquickly established, consisting ofAT&T, the local Bell OperatingCompanies, and Western Electric.'AT&T had the long distance market,the local Bells had the local telephonemarket, and Western Electric had thetelephone equipment market. Congress

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enacted the Federal CommunicationsAct of 1934 in response to AT&T'smonopoly.' Under the 1934 Act,Congress transferred authority overinterstate communications from theInterstate Commerce Commission tothe newly created FCC.7 States,however, maintained control overintrastate communications based onSection 2(b), which states that "nothingin this chapter shall be construed toapply to or give the Commission [FCC]jurisdiction with respect to... charges,classifications, practices, services,facilities, or regulations for orconnection with intrastatecommunication service."'

In 1938, Congress amended theCommunications Act and granted theFCC general rulemaking authority,however, states maintained jurisdictionover local telephone markets.9 Thepertinent provisions of the 1938amendments are Sections 201(a) and201(b). Section 201(a) deals with"interstate or foreign communicationby wire and radio." Section 201(b)provides that "[tihe Commission mayprescribe such rules and regulations asmay be necessary in the public interestto carry out the provisions of thisAct."'" The 1934 Act and the 1938amendments proved ineffective inregulating the AT&T monopoly."

The United States Department ofJustice continued to battle with themonopoly and, in 1956, AT&T enteredinto a Consent Decree divesting itselfin Western Electric but maintaining itsmonopoly of the local and longdistance telephone markets. 2 Because

AT&T was able to hold onto the mostvaluable pieces of the monopoly,namely, the local and long distancetelephone markets, its monopolypower was unabated by the 1956consent decree.

The Department of Justicerenewed its battles with A&T in 1974.This resulted in the 1982 ModifiedFinal Judgment.13 The Modified FinalJudgment effectively ended themonopoly of AT&T by completelydivesting them of the local telephonemarket; it ended the collective reign ofthe twenty two Bell OperatingCompanies. 4 The Modified FinalJudgment allowed for seven survivingindependent Local Exchange Carriers(LEC), each maintaining a monopolyover a designated geographical area.For example, Ameritech was created asa provider of local telephone service inthe Midwest, US West providedservices in the Rocky Mountainregions, and the five other LECsdivided up the remainder of thecountry. 5

Until recently, the LECs were ableto maintain their monopolies becausethe industry was considered to be anatural monopoly. 6 The advent oftechnologies allowing multiplecompanies to use the sametelecommunication equipment andfacility eventually made the naturalmonopoly theory out-of-date.Responding to these technologicaladvancements, Congress passed theTelecommunications Act of 1996.

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B. The Telecommunications Act of1996

1. The CongressionalMandates of the TCA

The TCA is intended to "promotecompetition and reduce regulation inorder to secure lower prices and higherquality services for Americantelecommunications consumers andencourage the rapid deployment ofnew telecommunicationstechnologies."17 The TCA fundamentallyrestructures telephone markets to"establish a national policy frameworkdesigned to accelerate rapidly the privatesector deployment of advancedtelecommunications and informationtechnologies and services to allAmericans by opening alltelecommunications markets tocompetition ...... 18 Congress did notaddress in the TCA whether the FCChad jurisdiction to regulate themandates of the Act; however,Congress expressly directed that theTCA be inserted into the CommunicationsAct of 1934, which puts the TCA withinthe provisions of the 1934 Act and the1938 amendments. 19

The TCA binds the seven LECs,such as Ameritech and US West, to ahost of duties designed to spur growthby allowing competitors access to theirequipment.2 ° Competitors must use theLECs network and equipment becauseit is the only effective way for them toenter local telephone markets. Thealternative would be for a competitorto rewire a whole city with its own

equipment, a duplicative andtremendous waste of resources.Competitors can access the LEC's"network elements," which is definedunder the TCA as "a facility orequipment used in the provision of atelecommunications service. Such termalso includes features, functions, andcapabilities that are provided by meansof such facility or equipment ....

Once Congress defined the term"network element" it mandated underwhat circumstances a LECs "networkelement" should be made available to arequesting carrier. Section 251(d)(2)requires that the FCC consider twofactors in determining if a networkelement should be made available to arequesting carrier: (1) whether accessto the requested network element isnecessary; and, (2) whether failure toprovide access to the network elementwould impair the ability of therequesting carrier to provide theservices that it seeks to offer (the"necessary" and "impair" standards).22

Under the TCA, a requestingcarrier can obtain access to the LEC'snetwork in three ways: (1) bypurchasing local telephone services atwholesale rates for resale to end users;(2) by leasing elements of the LEC'snetwork on an unbundled basis; or (3)by interconnecting its own facilitieswith the LEC's network.3 A requestingcarrier and the LEC can negotiate anagreement without regard to the abovementioned duties. If negotiations fail,however, either party can petition thestate commission that regulates localtelephone service to mediate and

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arbitrate the matter, subject to the TCAand the FCC regulations.24

2. The FCC RegulationsImplementing the TCA

Six months after the 1996 Act waspassed, the FCC issued its First Reportand Order, which implemented thelocal competition provisions.25 TheFCC released rules that gave practicaleffect to the TCA mandates by furtherdefining terms used in the Act and byelucidating the "necessary" and"impair" standards of section 251(d)(2).Many of the rules implemented by theFCC are at issue in the AT&T case.

The FCC established the pricingsystem, known as Total Element LongRun Incremental Cost (TELRIC), thatLECs must use in charging requestingcarriers for interconnection andunbundled access to the LECsequipment.2 6 TELRIC pricing is basedupon the cost of operating ahypothetical network built with themost efficient technology available. 7

Additionally, the FCCprolumgated Rule 319, which listedspecific LEC services and equipmentsthat fall under the TCA's "networkelement" definition.28 Rule 319 defines"network element" to include operatorservices, directory assistance,operational support systems, verticalswitching functions such as caller I.D.,call forwarding, and call waiting."29 Inaddition to the broad definition of"network element," the FCC made iteasier for requesting carriers to enterthe local telephone market by failing to

adopt a facilities-ownershiprequirement. The facilities-ownershipdoctrine would have required arequesting carrier to establish its ownfacility and it could not have reliedsolely on the LECs equipment toconduct business.30

Rule 319 also clarified the"necessary" and "impair" standards ofsection 251(d)(2). Specifically, Rule 319states that the "necessary" standard ismet regardless of whether requestingcarriers can obtain network elementsfrom a source other than the LEC.3 1

Rule 319 states that the "impair"standard is met if the LEC's failure toprovide access to a network elementwould decrease the quality, or increasethe cost, of the service a requestingcarrier seeks to offer, compared withproviding the service with the LEC'snetwork.32

Another area addressed by theFCC was whether a LEC couldseperate already- combined networkelements before providing them torequesting carriers. For example,without a regulation a LEC couldseperate a vertical switching functionthat had already- combined caller I.D.,call forwarding, and call waiting intoone package because doing so wouldmake the requesting carrier re-combinethem. Rule 315(b) forbids LECs fromseperating any already-combinednetwork element.33 This is so becauseof Section 251(c)(3) of the TCA, whichestablishes the duty to provide accessto network elements onnondiscriminatory rates, terms, andconditions and in a manner that allows

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requesting carriers to combine theelements.34 The FCC interpretedSection 251(c)(3) to mean that LECscannot separate already-combinednetwork elements before providingthem to requesting carriers.

Finally, FCC adopted Rule 809,referred to as the "pick and choose"rule.35 This rule requires LECs to makeavailable to a requesting carrier anynetwork element it has made availableto another requesting carrier at thesame rates, terms, and conditions.36

Basically, requesting carriers can pickand choose from all the LECsagreements with other carriers onterms advantageous to them.

The FCC State utility commissionsand LECs attacked the First Report andOrder, arguing that the FCC had nojurisdiction to regulate local telephonemarkets. The numerous caseschallenging the FCC's regulations wereconsolidated in the United States Courtof Appeals for the Eighth Circuit.37 Thecourt held that the general rulemakingauthority conferred upon the FCC bythe Communications Act of 1934extended only to interstate matters,and that the FCC lacked the requisitespecific congressional authorizationneeded to implement provisions of the1996 Act addressing intrastatetelecommunications.38 The court foundnothing in the 1996 Act to overcomethe presumption that the states controlintrastate telecommunications, apresumption which it described as afence that is "hog tight, horse high, andbull strong, preventing the FCC fromintruding on the states' intrastate

turf.39

Beyond jurisdiction, the LECschallenged the substance of the FCC'sregulations. ° One of the regulationsthe LEC challenged, Rule 319, setsforth a minimum number of networkelements that LECs must makeavailable to requesting carriers.41 TheCourt of Appeals disagreed with theLECs and ruled that the FCC'sinterpretations were reasonable andhence lawful under Chevron.42

The Court of Appeals did rule infavor of the LECs on two issues otherthan jurisdiction.43 The court ruled thatRule 315(b) went too far in forbiddingLECs to separate network elementsbefore leasing them to competitors.44

The court also vacated the "pick andchoose" rule because, according to thecourt, it would deter the "voluntarynegotiated agreements" that the 1996Act favored.45

III. AT&T v. IOWA UTILITIESBOARD

In AT&T v. Iowa Utilities Board, theUnited States Supreme Court reversedthe Eighth Circuit on the jurisdictionalissue and ruled that the FCC does havejurisdiction to regulate local telephonemarkets. 46 The Court also held that theFCC did not effectively consider the"necessary" and "impair" standards of§ 251(d)(2). Additionally, the Court didagree with the Eighth Circuit that theFCC reasonably omitted a facilities-ownership requirement. Yet, the Courtreversed the Court of Appeals on Rule315, concluding that the FCC

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reasonably interpreted § 251(c)(3).Finally, the Court also reversed theCourt of Appeals on the "pick andchoose" rule.47

A. The AT&T Decision Relating toJurisdiction

1. The Majority Opinion

The Court relied on Section201(b), a 1938 amendment to theCommunications Act of 1934, in itsruling that the FCC has jurisdiction toregulate intrastate telecommunicationspursuant to the 1996 Act.' Section201(b) states that "[tihe Commissionmay prescribe such rules andregulations as may be necessary in thepublic interest to carry out theprovisions of this Act."4 9 The Courtfound that "[slince Congress expresslydirected that the 1996 Act, along withits localcompetition provisions, beinserted into the Communications Actof 1934... the Commission'srulemaking authority would seem toextend to implementation of the local-competition provisions. 50

The Court rejected the LEC'sargument that § 201(a) of the 1938amendment limits the generalrulemaking authority of § 201(b)because subsection (a) deals solely withinterstate and foreign matters.5

According to the Court, the qualifier"interstate or foreign," which limits theclass of common carriers with the dutyof providing communication service,reaches forward into the last sentenceof § 201(b) to limit the class of

provisions that the Commission hasauthority to implement.52

The Court was also unpersuadedby Section 152(b), a provision from the1934 Act. Section 152(b) states that,except for Sections 223 through 227 andSection 332, "nothing in this chaptershall be construed to apply or to givethe Commission jurisdiction withrespect to ... charges, classifications,practices, services, facilities, orregulations for or in connection withintrastate communication service...."I' The LECs pointed out that the localcompetition provisions of the 1996 Actare not identified in the except clausein section 152(b); therefore, the effect ofthe "nothing... shall be construed"provision is to require an explicitapplication to intrastate service and anexplicit grant of FCC jurisdiction.54

The Court rejected this argument,again relying on the generalrulemaking authority of section201(b)..5 The Court stated that "[floreven though 'Commission jurisdiction'always follows where the Act 'applies,'Commission jurisdiction (so-called'ancillary' jurisdiction) could exist evenwhere the Act does not 'apply."' 56

Accordingly, "[tihe term 'apply' limitsthe substantive reach of the statute...and the phrase 'or give theCommission jurisdiction' limits, inaddition, the FCC's ancillaryjurisdiction. 57

The LECs next argued that specificprovisions of the Act give statecommissions jurisdiction and thatseveral FCC rules should therefore bevoided.58 One such provision is section

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252(c), which states that "[in resolvingby arbitration under subsection (b) anyopen issues and imposing conditionsupon the parties to the agreement, astate commission shall ... establish anyrates for interconnection, services, ornetwork elements ... . 59The Courtadmitted that there is a "lack ofparallelism" between subsection (c)(1),which adds "including the regulationsprescribed by the Commissionpursuant to Section 251" whereassubsection (c)2) says nothing aboutCommission regulations applicable tosubsection (d).6 ° The Court explainedthis lack of parallelism by stating thatSection 251 specifically requires theCommission to promulgate regulationsimplementing Section 251, whereassubsection (d) of section 252 does not.61

The Court concluded that "lilt seems tous not peculiar that the mandatedregulations should be specificallyreferenced, whereas regulationspermitted pursuant to theCommission's section 201(b) authorityare not. 62

Finally, the Court reversed theCourt of Appeal's determinations thatthe FCC had no jurisdiction topromulgate rules regarding statereview of pre-existing interconnectionagreements between LECs and othercarriers. 63 The Court again relied on thegeneral rulemaking authority ofsection 201(b).

2. The Dissents

Justice Thomas and Justice Breyerdissented with respect to the

jurisdictional aspect of the majority'sdecision. Justice Breyer discussed howthe history of local telecommunicationsfrom the 1982 Modified Final Judgmentto the 1996 TCA demonstrates thatCongress intended for states toregulate local telephone markets.Justice Thomas' dissent discussed thewell established rules of statutoryconstruction that compel a contrarydecision. Taken together, the dissentsoffer a complete and persuasiveargument that jurisdiction of intrastatecommunications should remain withthe states.

Justice Breyer argued that the1996 Act does not give the FCCauthority to regulate local telephonemarkets because "(1) a century ofregulatory history establishes stateauthority as the local telephone servicerate making norm and (2) the 1996 Actnowhere changes, or creates anexception to, that norm." 64

According to Justice Breyer, theTCA attempts to establish localcompetition without wastefulduplication of facilities. The TCA doesnot, however, purport to explain howexactly to obtain that goal; the TCAsimply eliminates legal barriers to localcompetition.5 Justice Breyer concludedthat state regulatory commissions havea better understanding of each uniquelocal market and can effectivelyregulate the new competitive marketby establishing realistic rates,consequently, they should maintainjurisdiction.' Justice Breyer reasonedthat "local regulators have experiencesetting rates that recover both the

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immediate, smaller, added costs thatdemand for additional service imposesupon a local system, and also a propershare of the often huge fixed costs...and overhead needed to provide thedial tone itself. 67

Justice Breyer also explained thatthe experience of local regulators"along with the fact that the relevanttechnology changes rapidly, argue infavor of, not against, local rate-settingcontrol, including local rate-settingdifferences, for those differences canamount to the kind of'experimentation' long thought astrength of our federal system."" Onlyin light of the purposes of the TCA canan effective regime of cooperationbetween state and federal regulatorycommissions be created: "ITihe Act'slanguage more clearly foreseesretention, not replacement, of thetraditional allocation of state-federalrate-setting authority."69

Justice Thomas' dissent, in whichJustice Breyer and Chief JusticeRehnquist joined, relied on both thewell established principles of statutoryconstruction 7 and section 152(b), asection from the 1934 Act that limitsfederal jurisdiction to excludeintrastate matters. He concluded thatCongress intended for states tomaintain regulation of localtelecommunications.7'

Justice Thomas pointed out thatSection 152(b) has been closelyguarded by the Supreme Court becauseit is a codification of a "historicaljurisdictional division" of regulatorytelecommunications. 72 In Louisiana

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Public Service Commission v. FCC, theCourt held that section 152(b)precluded the FCC from preemptingstate regulations.7 3 The Court statedthat section 152(b) "fences off from theFCC reach and regulation intrastatematters-indeed, including matters inconnection with intrastate service" andthat the FCC could breach 152(b)'sjurisdictional fence only whenCongress used "unambiguous orstraightforward" language to give itjurisdiction over intrastatecommunications."74 Justice Thomasconcluded that the jurisdictionalchallenge contravenes the division ofauthority set forth in the 1996 Act anddisregards the 100-year tradition ofstate authority over intrastatetelecommunications. 75

B. The AT&T Decision Relating tothe FCC Regulations

Once the Court got over thejurisdictional hurdle, it analyzed theFCC's regulations relating to the TCAunder the Chevron standard ofreasonableness. Specifically, the Courtruled, first that the FCC's rulesgoverning unbundled access arereasonable, with the exception of Rule319; and second, that the FCC's "pickand choose" rule was reasonable.76

Justice Souter disagreed with the Courtthat Rule 319 was unreasonable and hefiled a dissent to that issue only.7 TheCourt did not address the merits of theFCC's TELRIC pricing system becauseit was not ruled on by the Court ofAppeals.78

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The first challenge to the FCC'sunbundling rules was that the FCCincluded features and services that donot meet the statutory definition of"network element." 79 The FCCincluded operator services, directoryassistance, operational supportsystems, caller I.D., call forwarding,and call waiting as services that fallunder the definition of "networkelements." 0

The Court ruled that the FCC'srule interpreting the definition of"network element" was reasonable inso much as a "network element" neednot be a physical facility orequipment.8 1 According to the Court,operator services and directoryassistance are "features, functions, andcapabilities" of a network element. 2

The Court turned next to FCCRule 319, which requires a LEC toprovide requesting carriers with accessto a minimum of seven networkelements; if a requesting carrier wantsaccess to additional elements it mustpetition the state commission. 3 Rule319 interprets Section 251(d)(2) of theTCA, which provides that indetermining what network elementsshould be made available, theCommission shall consider whether"access to such network elements... isnecessary" and "the failure to provideaccess to such network elements wouldimpair the ability of thetelecommunications carrier seekingaccess to provide the services that itseeks to offer."'

The Court ruled that Rule 319was unreasonable and vacated the rule

because it did not consider the"necessary" and "impair" standards ofSection 251(d)(2). 5 The Court reasonedthat Rule 319 read the two standardsout of the statute. For example, theFCC reported in its First Report andOrder that it would consider the"impair" standard met if "the failure ofan incumbent to provide access to thenetwork element would decrease thequality, or increase the financial oradministrative cost of the service arequesting carrier seeks to offer,compared with providing that serviceover other unbundled elements in theincumbent's LEC's network." 6 TheCourt disagreed: "Since any entrantwill request the most efficient networkelement that the incumbent has tooffer, it is hard to imagine when theincumbent's failure to give access tothe element would not constitute animpairment under this standard." 7

Notably, the Court expressly failedto adopt the "essential facilities"doctrine to the "necessary" and"impair" standards. 8 Adopting thatdoctrine would have requiredrequesting carriers to use only thosefacilities of the incumbent that areessential for it to conduct business,putting the onus on requesting carriersto seek out and establish facilitiesavailable elsewhere. 9

The Court next addressed the "allelements" rule, which allowscompetitors to provide local phoneservice relying solely on the elementsin an incumbent's network.' Theincumbents argued that to access theirnetworks, a requesting carrier must

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own its own facility.91 The Courtrejected this argument and concludedthat the TCA suggests that a requestingcarrier could rely solely on a LEC'sfacilities by "requiring in [Section]251(c)(3) that LECs provide access to'any' requesting carrier."92 Accordingly,the Court ruled that the FCC wasreasonable in not imposing afacilitiesownership requirement.

Next, the Court addressed FCCRule 315(b), which forbids LECs fromseparating alreadycombined networkelements before leasing them to acompetitor.93 The FCC explained thatthis rule is designed so that LECscannot "disconnect previouslyconnected elements, over the objectionof the requesting carrier, not for anyproductive reason, but just to imposewasteful reconnection costs on newentrants."94 The Court concluded thatthe FCC was reasonable because, in theabsence of Rule 315(b), incumbentscould impose wasteful costs on thosecarriers who requested less than thewhole network.95

Finally, the Court ruled that theFCC's "pick and choose" rule wasreasonable.96 The "pick and choose"rule requires the LEC to "makeavailable.., to any requestingtelecommunications carrier anyindividual interconnection, service, ornetwork element arrangementcontained in any agreement to which itis a party that is approved by a statecommission.., upon the same rates,terms, and conditions as thoseprovided in the agreement. 97 TheLECs argued that this rule threatens

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the give-and-take of negotiationsbecause every agreement they makewith one competitor must be availableto all others.98 A competitor willliterally be able to pick and chooseprovisions from each agreement thatbenefits it. Without getting to thesubstance of that argument, the Courtruled that the FCC's rule is reasonableunder Chevron.

To summarize, the Supreme Court,in AT&T v. Iowa Utilities Board, ruledthat the FCC has jurisdiction, based onSection 201(b) of the TCA, topromulgate rules effecting intrastatetelecommunications. The Courtvacated Rule 319, in as much as theFCC did not consider Section251(d)(2)'s "necessary" and "impair"standards. The Court ruled that all theother FCC's rules relating to the TCAwere reasonable, including omitting afacilities-ownership requirement;interpreting the definition of "networkelement" to include non-physicalelements such as call waiting anddirectory assistance; forbidding LECsto separate already-combined networkelements; and adopting a "pick andchoose" rule allowing competitors tohave access to any agreement the LECentered into with another carrier.'

IV. ANALYSIS

As Justice Thomas' dissenteffectively demonstrated, the Courterred in ruling that the FCC hasjurisdiction, under the TCA, to regulatelocal telephone markets. The Court,faced with the constrictions of Chevron,

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properly determined that the FCC'sregulations were reasonableinterpretations of the TCA; however,the FCC has promulgated rules that,left unrevised, will create a simulatedinstead of real competition in localtelephone markets.

A. Jurisdiction

Taken together, the Thomas andBreyer dissents present a strongargument that Congress neverintended to usurp state commissions'regulatory duties of intrastatetelecommunications. The Court itselfspoke convincingly of this matter inLouisiana Public Service Commission andestablished that the state'sjurisdictional fence could be breachedonly when Congress uses"unambiguous or straightforward"language to give it jurisdiction overintrastate communications.' 0 Thisposition is further verified by JusticeThomas' statutory constructionanalysis.

Section 201(b) states that "[t]heCommission may prescribe such rulesand regulations as may be necessary inthe public interest to carry out theprovisions of this chapter."'' As JusticeThomas points out, the statutoryconstruction principle of ejusdemgeneris that Section 201(b) only appliesto that which proceeded it. Ejusdemgeneris means that when a generalterm follows a specific one, the generalterm should be understood as areference to subjects akin to the onewith the specific enumeration.'02

Applying the ejusdem generisprinciple to this case, Section 201(b)does not announce a broadjurisdictional grant to the FCC on allmatters relating to the TCA.Specifically, Section 201(b) applies tomatters enunciated in Section 201(a),the immediately proceedingsubsection. That subsection refersexclusively to "interstate or foreigncommunication by wire or radio" andthe first sentence of 201(b) refers to"charges, practices, classifications, andregulations for and in connection withsuch communication service. 10 3

In addition, Section 152(b) iswritten in the disjunctive. As JusticeThomas states, "canons of constructionordinarily suggest that termsconnected by a disjunctive by givenseparate meanings, unless the contextdictates otherwise ... ."104 Applyingthat principle to 152(b), the majority'sinterpretation "necessarily implies thatCongress sub silentio rendered .. ." thestatute a nullity.

Indeed Section 152(b), which reads"nothing in this chapter shall beconstrued to apply to or to give theCommission jurisdiction with respectto (intrastate telecommunications)"becomes a dead letter because themajority gives the FCC jurisdiction, inSection 201(b) over all matters relatingto the TCA; therefore, applying themajority's holding to the TCA,Congress now must expressly givestate commissions jurisdiction.

B. The FCC Regulations

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Because, under Chevron, federalagency regulations will not be vacatedunless they are unreasonable, theCourt's rulings on the FCC regulationswere appropriate. Aside from judicialreview, the FCC regulations should beheld to the highest level of scrutinybecause there is not another modelavailable for comparison in real worldsituations. Unfortunately forconsumers, the FCC regulations do nothold up well. The "necessary" and"impair" standards of Rule 319 mustbe given more consideration and effectto properly provide for a realisticcompetitive marketplace. Also, the pickand choose rule should be vacatedbecause LECs lose the ability tonegotiate unique provisions andcontracts with requesting carriers. 10 5

Finally, although not before the Courtin AT&T, the FCC's TELRIC pricingscheme should be discarded andreplaced with a more realistic andhistorically-proven pricing system.

The TCA provides that indetermining what network elementsshould be made available to arequesting carrier, the FCC shallconsider whether access to the networkelement is necessary and whetherfailure to provide access to the networkelement would impair the ability of therequesting carrier to provide services itseeks to offer.10 6 The FCC, in Rule 319,gutted the "necessary" and "impair"standards and the Court correctlyvacated Rule 319. The Court failed,however, to adopt the "essentialfacilities" doctrine to the TCA 10 7 which

establishes liability on the monopolistwho denies a competitor access to aresource essential for competition in arelevant antitrust market. 10 8

By adopting the doctrine underthe TCA, the FCC could establish amechanism by which requestingcarriers can share necessaryequipment. It would be presumed thatcertain equipment under the control ofthe incumbent LEC would benecessary, thereby impairing arequesting carrier to enter the localtelephone market without it. Byadopting the essential facilitiesdoctrine, the FCC can effectivelyestablish what equipment thepresumption would apply to, and,consequently, eliminate needlessadministration and litigation. On theother hand, incumbent LECs wouldnot have to provide other equipment toa requesting carrier unless therequesting carrier could show why itneeded it under the "necessary" and"impair" standard.

The goal in adopting the essentialfacilities doctrine is to allow requestingcarriers access to equipment they couldnot, without wasteful reproduction, getotherwise. Conversely, requestingcarriers should not be able to rely onequipment and services of incumbentLECs that the competitor can getelsewhere, albeit at higher costs. Thedoctrine is not intended forcompetitors to enter a previouslymonopolized industry and reapartificial profits from a simulatedmarket designed only to appearcompetitive.

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The FCC should adopt a narrowessential facilities doctrine that impartson LECs to provide necessaryequipment to requesting carriers. TheFCC should strictly adhere to thisdoctrine in establishing only thoseservices and equipment necessary toconduct business in the local telephonemarket. Requesting carriers should not,however, be able to have access to anyequipment or service that they couldget in other ways. Unlike Rule 319,which allowed requesting carriersaccess to a significant portion of theLEC's equipment, the essentialfacilities doctrine creates realcompetition.

An additional way to create areality-based market is for the FCC tovacate its "pick and choose" rule.Currently, LECs must provide to anyrequesting carrier the same terms andconditions it provides other carriers. Inother words, a requesting carrier mayreview all agreements between theincumbent LEC and other carriers andpick and choose the ones that benefit it.LECs are placed in the awkwardposition of negotiating with arequesting carrier, knowing that anyagreement they reach will be availableto all other carriers. LECs will beunable to trade off network elementterms or services against provisionsunrelated to the TCA.

Companies in stronger positions toenter the local telephone marketshould be able to do so unimpeded byunnecessary barriers to entry. Asdiscussed previously, LECs cannotdiscriminate when it comes to essential

facilities; however, companies andLECs should have the freedom tonegotiate deals relating to otherequipment and services not deemedessential to entry in the local telephonemarket. These types of agreementsshould not only be allowed butencouraged. A LEC, knowing that itsmonopoly power has been eliminatedby the TCA, will want to secure thebest possible agreements inanticipation of decreased profits andwill begin to diversify into othermarkets. Companies entering the localtelephone market will want to usewhatever assets they have available toenter a market with monopolisticprofits. The exchange of assets betweencompanies and LECs would allow forquicker entry into the market withlimited regulatory interference.

Finally, the FCC should discardthe TELRIC pricing system.109 Asindicated earlier, the FCC requires thatLECs charge requesting carriers accessto their network elements based on"Total Element Long Run IncrementalCost." 110 TELRIC pricing is based uponthe cost of operating a hypotheticalnetwork built with the most efficienttechnology available."' The TELRICpricing scheme fails in that it does notconsider historical and realistic costs ofthe provided equipment or services.Incumbent LECs are essentiallypenalized for not maintaining the mostupdate equipment and not maintainingan efficient and streamlined operation.The FCC need not do this when marketforces will weed out weaker LECs. 2

For example, assume an

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incumbent LEC in Florida has failed toreinvest in equipment and services formany years. A requesting carrierwould have to pay the historical cost ofthat equipment and service, whichconceedingly, may be higher than whatanother requesting carrier is paying inCalifornia. The Florida LEC, if notreinvesting in equipment and services,probably does not do other things welleither, such as marketing and sales.The new entrant into the market will, ifaggressive, overtake the incumbentLEC through more innovativemarketing and higher services in otherareas. It is here that the LEC will bepenalized, through natural marketforces.

Conversely, a new market entrantthat receives artificially lower pricesbecause of TELRIC will be at anadvantage over LECs without havingto do the things that in other non-regulatory markets would be requiredfor success. By requiring the LEC toprovide equipment and services atlower than cost prices to the newentrant profits are being artificiallyshifted from the LEC to the newentrant. The consumer will bepenalized by the misguided TELRICpricing scheme because new entrantswill reap artificial profits and will nothave the incentive to invest in newerequipment or better services.

V. IMPACT

A recent article suggested Illinoisconsumers are overcharged $600million a year because of insufficient

competition in the local telephonemarket."3 The benefits of competitionas envisioned by Congress will not befelt by consumers for many yearsbecause of the Court's decision inAT&T and the policies of the FCC. Thenational restructuring of the localtelephone market will not have theadvantage of experimentation anddiversity inherent in cooperativefederalism regimes. Now the consumerwill be wholly reliant on the FCC, anagency too aggressive in its approachand unwilling to allow even asemblance of market forces to helpshape the newly-competitive localtelephone market.

Consumers will be adverselyaffected by the decision to shiftregulatory control from the states tothe federal agencies. Allowing thestates to regulate local telephonecompetition essentially creates manydifferent models and approaches invarying markets. A model that did notwork in California negatively effectsCalifornian consumers but the rest ofthe country is spared of the flawedapproach. Conversely, a model that isworking in one state can be imitated byother states. This trial and errorapproach has been used in other areasof law effectively.14

An approach of this nature callsfor cooperation between Congress,state regulatory agencies, and federalcourts. This cooperative federalismapproach to the TCA is more fullydiscussed by Philip Weiser in hisarticle, Chevron, Cooperative Federalism,and Telecommunications Reform.' 5 Mr.

Loyola Consumer Law Review * 2011999

Weiser wisely quoted the words ofJustice Jackson, dissenting in aSupreme Court decision that tookauthority away from the states toregulate utilities:

Congress may well have believedthat diversity of experimentationin the field of regulation has valueswhich centralization anduniformity destroy .... Long beforethe Federal Government could bestirred to regulate utilities,courageous states took the initiativeand almost the whole body ofutility practice has resulted fromtheir experiences .... It must beremembered that closer than anyfederal agency to those theyregulate and to their customers arethe state authorities, whosemechanisms are less cumbersomeand whose principles can muchmore quickly be adjusted to thechanging times. We should notutilize the centralizing powers ofthe federal judiciary to destroydiversities between states whichCongress has been scrupulous toprotect. If now and then some statedoes not regulate its utilitiesaccording to the federal standard, itmay be small price to pay forpreserving the state initiative whichgave us utilities regulation far inadvance of federal initiative."6

The appearance of competitiondoes not, in the long run, lower costs toconsumers. That can only be donethrough the creation of actualcompetition, which is created only

where competitors create their owncompany, with their own services,marketing plan, and sales staff and relyon the monopolist only for equipmentotherwise unavailable.

A simulated market is just that,artificial and fake, and requestingcarriers are not really competing in thelocal telephone market. A companyreaping profits from the ingenuity andentrepreneurial spirit of anothercompany will not bring added value tothat industry. Knowing the fruits of hisresearch and development are beingshared with other, less talentedcompanies, the monopolist will nolonger have the incentive to spendmoney and resources on that area of itsbusiness. It will, instead, spend moremoney on lobbying efforts to get lawspassed to protect itself. The unduetransactional and lobbying cost ofdoing business takes awayopportunities for companies to investin updated equipment and research.These types of investments benefitconsumers through added value inproducts, services, or lower prices.

Conversely, companiesbootstrapping on to monopolists neverhad the incentive to spend money onresearch and development in the firstplace: they relied on the monopolist'sresearch and development. Newcompanies will not be offeringanything to the newly opened industryexcept for the appearance ofcompetition. A market simulated tohave competition is no better off than amonopoly market that is highlyregulated. Indeed, a simulated market

202* Loyola Consumer Law Review Volume 11, number 3

is arguably worse because themonopolist invests less in its industry.

VI. CONCLUSION

The Supreme Court, in AT&T v.Iowa Utilities Board, failed to adopt acooperative federalism regime for theTelecommunications Act of 1996.Instead, the FCC will have regulatorycontrol on matters relating tocompetition in local telephone markets.Justice Breyer and Justice Thomasdemonstrate that Congress did notintend for this result. The opportunityfor state agencies to regulate the TCA'smandates would have allowedexperimentation and diversity so thatmodels and approaches could havebeen tried in smaller markets beforeexposing the nation's consumers tothem.

The FCC's hawkish policies, asreflected in the regulations relating tothe TCA, demonstrate that consumerswill benefit from the TCA only whenregulatory subsidies are eliminatedand, as in other industries, marketforces dictate which companiessurvive. Now that technology allowsfor competition in local telephonemarkets, governmental policies shouldallow a natural progression of newentrants who rely on good business togain marketshare. New entrants shouldbe allowed access to only the LECequipment and services that areessential to conduct business. The pricecharged for the equipment and servicesshould reflect historical and actualcosts. In short, consumers will benefit

from real competition and will pay forsimulated competition.

Endnotes

1 119 S.Ct. 721 (1999).

2 Although beyond the scope of this paper,

section 332 of the TCA creates certain dutiesof municipalities to accommodate providersof wireless communications to placepersonal wireless service facilities in theirlocalities. See 47 USC § 332 (7)(A).Importantly, federal courts now have thepower to order municipalities to issuespecial use permits to providers of wirelesscommunications, which is another exampleof the broad federalism that the TCA appearsto create. See, e.g., Illinois RSA No. 3, Inc., 963F. Supp. at 745; AT & T Wireless PCS, Inc., 979F. Supp at 430; Western PCS II Corp. v.Extraterritorial Zoning Auth. Of Sante Fe, 957F. Supp. 1230 (D.N.M. 1997). But see PrimecoPersonal Communications, L.P. v. Village of FoxLake, 26 F. Supp.2d 1052 (N.D. Ill.1998)(remanding to Village Trustees to eithergrant special use permit or conduct furtherevidentiary hearings and decide the issueanew).

3 467 U.S. 837 (1984). The Supreme Courtruled that when "a court reviews an agency'sconstruction of the statute which itadministers, it is confronted with twoquestions. First, always, is the questionwhether Congress has directly spoken to theprecise question at issue .... If, however, thecourt determines Congress has not directlyaddressed the precise question at issue, thecourt does not simply impose its ownconstruction on the statute... [tihe questionfor the court is whether the agency's answeris based on a permissible construction of thestatute." Id. at 843. The Court thenestablished a two-tier reviewing standard forregulatory interpretations. First, if Congress

Loyola Consumer Law Review e 2031999

has explicitly left a gap for the agency to fill,the Court will apply a arbitrary, capricious,or manifestly contrary to the statutestandard of review. See id. at 844. If thedelegation to the regulatory agency isimplicit, that is, if Congress is silent on thequestion at issue, the court may notsubstitute its own construction of a statutoryprovision for a reasonable interpretationmade by the agency. See id. For a discussionof the policy reasons for judicial deference toadministrative agencies, see Philip J. Weiser,Chevron, Cooperative Federalism, andTelecommunications Reform, 52 VAND. L. REV. 1(1999).

4 See AT&T, 119 S.Ct. at 721-740.

s John T. Soma, David A. Forkner, & BrianP. Jumps, The Essential Facilities Doctrine in theDeregulated Telecommunications Industry, 13BERKELEY TECH. L.J. 565, 568 (1998).

6 Soma, Forkner & Jumps, supra note 5, at

568.

7 See 47 U.S.C. 151 (1994).

8 47 U.S.C. S 152(b); The Supreme Courtdiscussed section 2(b) of the 1934 Act and the1938 amendments in Louisiana Pub. Serv.Comm'n v. FCC. In Louisiana, the Court heldthat 2(b) precluded the FCC form pre-empting state regulations and that section2(b) ":fences off from the FCC reach orregulation intrastate matters." The Courtfurther stated that FCC could breach section2(b)'s jurisdictional fence only whenCongress used unambiguous orstraightforward language to give itjurisdiction over intrastate communications.See Louisiana Pub. Serv. Comm'n v. FCC, 476U.S. 355 (1986).

9 See 47 U.S.C. § 201 (1938).

10 47 U.S.C. § 201(b).

11 For a discussion on the 1934 Act, seeRobert B. Friedrich, Regulatory and AntitrustImplications of Emerging Competition in LocalAccess Telecommunications: How Congre.ss andthe FCC Can Encourage Competition andTechnological Progress in Telecommunications,80 CORNELL L. REV. 646 (1995).

12 See United States v. American Telephone

& Telegraph Co., 552 F. Supp. 131 (D.D.C.1982).

13 See id. at 225.

14 See id. at 160-225.

15 See United States v. American Telephone

& Telegraph Co., 569 E Supp. 990 (D.D.C.1983).

16 For a discussion of natural monopoly, see

Soma, Forkner, & Jumps, supra note 6.

17 The Telecommunications Act of 1996, Pub.

L. No. 104-104, 110 Stat. 56 (1996); see also JonVan, Ameritech Customers overpay, group says,CHICAGO TRIBUNE, March 23, 1999, at § 3(reporting that a consumer group analysisconcluded that Illinois customers were beingovercharged by at least $600 million a year).

S 5. 652, 104th Cong. § 4 (1995).

19 See 110 Stat. 56 (codified as 47 U.S.C. §§

251, 252 (1996)).

20 Among other duties, an LEC has the duty

to 1) negotiate in good faith, 2) provide forthe facilities and equipment of anyrequesting telecommunications carrier, 3)provide access to network elements on anunbundled basis at any technically feasiblepoint on rates, terms, and conditions that arejust, reasonable, and nondiscriminatory, and4) offer for resale at wholesale rates anytelecommunications service that the carrier

204. Loyola Consumer Law Review Volume 11, number 3

provides at retail to subscribers who are nottelecommunications carriers. See 47 U.S.C. §251(c) (1994, Supp. 11).

21 47 U.S.C. § 153(29).

See 47 U.S.C. § 251(d)(2).

2 See 47 U.S.C. § 251(c); see also AT&T, 119S.Ct. At 726.

24 See 47 U.S.C. § 252(a)(1).

21 See In re Implementation of the Local

Competition Provisions in theTelecommunications Act of 1996, 11 FCC Rcd15499 (1996).

26 See id.

27 See id.

28 See 47 C.ER. § 51.319 (1997).

29 47 C.F.R. § 51.319.

30 See AT&T, 119 S.Ct. at 736.

31 See 47 C.ER. § 51.319.

32 See 47 C.ER. § 51.319.

3 See 47 C.ER. § 51.319.

14 See 47 C.ER. § 51.315(b) (1997).

31 See 47 C.ER. § 51.809 (1997).

36 See id.

37 Iowa Utilities Board v. FCC, 120 F. 3d 753,805-806 (8th Cir. 1997).

3 See id. at 795.

39 See id. at 800.

40 See 47 U.S.C. § 251(c)(3).

41 See 47 C.F.R. § 51.319 (1997).

42 See Iowa Utilities Board, 120 F. 3d at 809-

810.

43 See id. at 801-813.

44 See id. at 813.

41 See id. at 801.

41 See AT&T, 119 S.Ct. at 723-733.

47 See Iowa Utilities Board, 120 F. 3d at 809.

48 See id. at 729.

49 See 47 U.S.C. § 201(b).

5o Id. at 729.

" See id. at 729; see also 47 U.S.C. § 201(a)

(stating that it is a "duty of every commoncarrier engaged in interstate or foreigncommunications .... ) (emphasis added).

52 See id. at 729.

13 See 47 U.S.C. § 152(b).

-4 See AT&T, 119 S.Ct. at 730.

51 See id.

-% Id.

57 Id.

8 See id. at 732.

51 See 47 U.S.C. § 252(c).

I See AT&T, 119 S.Ct. at 732 (quoting 47U.S.C. § 252(c)(1) & (2)).

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61 See id. at 732.

62 See id. at 733. There seems to be a lack of

parallelism in the Court's logic here.Subsection 201(b) was promulgated in 1938when legislatures were not contemplatingintrastate telecommunication jurisdiction ofthe FCC, however, over sixty years later,subsection 201(b) is a repository of FCCjurisdictional powers over intrastatetelecommunications in all cases except wherethe TCA gives states express jurisdiction. TheCourt was correct in stating that "[t]here isundeniably a lack of parallelism here ..

63 See id. at 733.

61 See id. at 746.

65 See id.

66 See id.

67 Id. Justice Breyer's opinion becomes

particularly poignant in analyzing the FCC'sTELRIC rate system in Part IV & V of thisnote.

68 Id. at 748. The cooperative federalismregime that Justice Breyer advocates for theTCA is explored in detail in a recent lawreview article. See Philip J. Weiser, Chevron,Cooperative Federalism, and TelecommunicationsReform, 52 VAND. L. REV. 1 (1999).

69 Id.

70 See id. at 743.

71 See id.; see also 47 U.S.C. § 152(b).

72. See id. at 742 (citing Louisiana Pub. Serv.Comm'n v. FCC, 476 U.S. 355, 106 S.Ct. 1890,90 L.Ed.2d 369 (1986)).

73 See id.

74 Id. (quoting Louisiana Pub. Serv. Comin'n,476 U.S. at 377.

71 See id. at 743.

76 See AT&T, 119 S.Ct. at 730.

7 See id. at 738.

78 See id. at 728.

79 See id. at 733.

80 See 47 C.F.R. §§ 51.319(f)-(g).

81 See AT&T, 119 S.Ct. at 734.

82 See id.

83 See id.; see also 47 C.F.R. § 51.319 (1997).

8 See 47 U.S.C. § 251 (d)(2).

85 See AT&T, 119 S.Ct. at 735.

86 Id.

87 Id. Justice Souter dissented on this point.

He argued that the words "impair" and"necessary" are ambiguous and undefined inthe TCA and are susceptible to a fairly widerange of meanings, and the FCC's meaningsare reasonable. See id. at 739.

8 See id. at 734.

89 For a discussion on the "essentialfacilities" doctrine, see Areeda &Hovenkamp, Antitrust Law, 771-773 (1996).

90 See AT&T, 119 S.Ct. at 736.

91 See id. The LECs argued that a facilities-ownership requirement should be imposedon requesting carriers pursuant to section251(c)(3).

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92 Id.

13 Id; see also 47 C.F.R. § 51.315(b) (1997).

91 Id. at 737.

91 Id. The LECs argued that if Rule 315(b) isadded to the rules already in place then acompetitor can lease a complete,preassembled network at (allegedly verylow) cost-based rates.

96 Id. at 738.

17 See 47 C.F.R. § 51.809 (1997).

98 See AT&T, 119 S.Ct. at 738.

99 See id.

,10 See Louisiana Pub. Serv. Comm'n, 476 U.S.at 370.

101 See 47 U.S.C. § 201(b).

102 See AT&T, 119 S.Ct. at 744; see also Neal v.

Clark, 95 U.S. 704, 708 (1877) (Justice Harlanobserving that "[it is a familiar rule in theinterpretation of... statutes that a passagewill be best interpreted by reference to thatwhich precedes and follows it").

103 See AT&T, 119 S.Ct. at 744.

ll Id. (quoting Reiter v. Sonotone Corp., 442U.S. 330, 339, 99 S.Ct. 2326 (1979)).

105 FCC Rule 315(b) is not addressed in this

section. Forbidding LECs to separatealreadycombined network elements beforeleasing them to competitors, is appropriateand cost effective.

106 See 47 U.S.C. § 251 (d)(2).

108 See John T. Soma, David A. Forkner, andBrian P. Jumps, The Essential FacilitiesDoctrine in the Deregulated TelecommunicationsIndustry, 13 BERKELEY TECH. L.J. 565, 580 (1998)(citing to A.D. Neale, The Antitrust Laws of theUnited States of America: A Study ofCompetition Enforced by law 67 (2d ed. 1970)("The Sherman Act requires that wherefacilities cannot practicably be duplicated bywould-be competitors, those in possession ofthem must allow them to be shared on fairterms. It is illegal restraint of trade toforeclose the scarce facility").

109 See 47 C.F.R. §§ 51.503, 51.505 (1997).

110 See id.

"I See id.

112 For a discussion on FCC pricing under

the TCA, see Sidak and Spulder, The Tragedyof the Telecommons: Government Pricing ofUnbundled Network Elements Under theTelecommunications Act of 1996, 97 COLUM.L.REV. 1081 (1997).

113 See Jon Van, Ameritech Customers overpay,group says, CHICAGO TRIBUNE, March 23, 1999,at§3.

114 See, e.g., Wilson v. Garcia, 471 U.S. 261

(1985)(concluding that state law provides thestatute of limitations for civil laws); YamahaMotor Corp. v. Calhoun, 516 U.S. 199(1996)(allowing state law a "wide scope" toapply federal admiralty law).

115 52 VAND. L. REV. 1 (1999).

116 Federal Power Comm'n v. East Ohio Gas

Co., 338 U.S. 464, 488-89 (1950)(Jackson, J.,dissenting).

107 See AT&T, 119 S.Ct. at 734.

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