Verizon Communications Inc. v. FCC,
535 U.S. 467 (2002)

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No. 00-511. Argued October 10, 200l-Decided May 13,2002*

In order to foster competition between monopolistic carriers providing local telephone service and companies seeking to enter local markets, provisions of the Telecommunications Act of 1996 (Act) entitle the new entrants to lease elements of the incumbent carriers' local-exchange networks, 47 U. S. C. §251(c), and direct the Federal Communications Commission (FCC) to prescribe methods for state utility commissions to use in setting rates for the sharing of those elements, § 252(d). Such "just and reasonable rates" must, inter alia, be "based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the ... network element." § 252(d)(1)(A)(i). Regulations appended to the FCC's First Report and Order under the Act provide, among other things, for the treatment of "cost" under § 252(d)(1)(A)(i) as "forward-looking economic cost," 47 CFR § 51.505, something distinct from the kind of historically based cost previously relied on in valuing a rate base, see, e. g., FPC v. Hope Natural Gas Co., 320 U. S. 591, 596-598, 605; define the "forward-looking economic cost of an element [as] the sum of (1) the total element long-run incremental cost of the element [TELRIC,] and (2) a reasonable allocation of forward-looking common costs," § 51.505(a), "incurred in providing a group of elements that "cannot be attributed directly to individual elements," § 51.505(c)(1); and, most importantly, specify that the TELRIC "should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration, given the existing location of the incumbent['s] wire centers," § 51.505(b)(1). The regulations also contain so-called "combination" rules requiring an incumbent, upon request and compensation, to perform the functions necessary to combine network ele-

*Together with No. 00-555, World Com, Inc., et al. v. Verizon Communications Inc. et al., No. 00-587, Federal Communications Commission et al. v. Iowa Utilities Board et al., No. 00-590, AT&T Corp. v. Iowa Utilities Board et al., and No. 00-602, General Communications, Inc. v. Iowa Utilities Board et al., also on certiorari to the same court.


ments for an entrant, unless the combination is not technically feasible. §§ 51.315(b)-(f). Challenges to the regulations, mostly by incumbent carriers and state commissions, were consolidated in the Eighth Circuit, which initially held, inter alia, that the FCC had no authority to control state commissions' ratesetting methodology and that the FCC misconstrued § 251(c)(3)'s plain language in implementing the combination rules. Reversing in large part in AT&T Corp. v. Iowa Utilities Bd., 525 U. S. 366, 384-385, this Court, among its rulings, upheld the FCC's jurisdiction to impose a new rate setting methodology on the States and reinstated the principal combination rule, Rule 315(b), which forbids incumbents to separate currently combined network elements before leasing them to entrants who ask for them in a combined form. On remand, the incumbents' primary challenge went to the FCC's ratesetting methodology. The Eighth Circuit understood § 252(d)(1) to be ambiguous as between "forward-looking" and "historical" cost, so that a forward-looking ratesetting method would presumably be reasonable, but held that § 252(d)(1) foreclosed the use of the TELRIC methodology because the Act plainly required rates based on the actual, not hypothetical, cost of providing the network element. The court also invalidated the additional combination rules, Rules 315(c)-(f), reading § 251(c)(3)'s reference to "allow[ing] requesting carriers to combine ... elements" as unambiguously requiring requesting carriers, not providing incumbents, to do any and all combining.


1. The FCC can require state commissions to set the rates charged by incumbents for leased elements on a forward-looking basis untied to the incumbents' investment. Because the incumbents have not met their burden of showing unreasonableness to defeat the deference due the FCC, see Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 843-845, the Eighth Circuit's judgment is reversed insofar as it invalidated TELRIC. Pp. 497-528.

(A) This Court rejects the incumbents' argument that "cost" in § 252(d)(1)'s requirement that "the ... rate ... be ... based on the cost ... of providing the ... network element" can only mean, in plain language and in this particular technical context, the past cost to an incumbent of furnishing the specific network element actually, physically, to be provided, as distinct from its value or the price that would be paid for it on the open market. At the most basic level of common usage, "cost" has no such clear implication. A merchant asked about the "cost" of his goods may reasonably quote their current wholesale market price, not the cost of the items on his shelves, which he may have bought at higher or lower prices. When the reference shifts into

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