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.

Question

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?

Conclusion

Yes and yes. In an opinion delivered by Justice David H. Souter, the Court held that 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 and that the FCC can require incumbents to combine elements of their networks at the request of entrants. Because the incumbents did not meet their burden of showing unreasonableness to defeat the deference due the FCC, the Court reversed the Court of Appeals's ruling insofar as it invalidated TELRIC. "The job of judges is to ask whether the Commission made choices reasonably within the pale of statutory possibility in deciding what and how items must be leased and the way to set rates for leasing them. The FCC's pricing and additional combination rules survive that scrutiny," wrote Justice Souter, rejecting arguments that the FCC did not chose the best way to set rates. Justice Sandra Day O'Connor did not participate in this case.