Cases by Issue - Telephone Company Regulation

Verizon Communications v. FCC - Oral Argument

Fri, 09 Jan 2009 14:50:27 +0000

Case:

Verizon Communications v. FCC

Media File:

00-511_20011010-argument.mp3

Related Transcript:

transcript.xml

Transcript:

ORAL ARGUMENT OF WILLIAM P. BARR ON BEHALF OF THE PETITIONERS IN NO. 00-511

Chief Justice Rehnquist: We'll hear argument next in No. 00-511, Verizon Communications v. FCC; Worldcom v. Verizon; FCC v. Iowa Utilities Board; Iowa Utilities Board v. General Communications.

Mr. Barr.

Mr. Barr: Mr. Chief Justice, and may it please the Court:

I'd like to start with a brief illustration that I think will help crystalize the legal issues, both the so-called forward-looking issues and the historical cost issues.

The illustration itself starts with a forward-looking perspective.

Now, any firm that operates and builds a network incurs three costs going forward.

Let's say I, the hypothetical new entrant capable of coming in today and instantaneously deploying the most efficient network possible today, I would have to expend my baseline facility costs.

And let's say the FCC is right.

Let's say that costs about $180 billion to reproduce the system today from scratch.

Then I would face my operating costs that are dictated by the network that I just built.

Let's say those are $75 billion a year.

And then I would face the incremental capital investment that I would make each year to upgrade and expand the network.

Let's say that's $30 billion a year.

Now, let me show why under TELRIC no firm that actually makes expenditures can recover them.

Mr. Verrilli Jr.: What... what was your second cost, the 75?

Mr. Barr: The 75 is operating costs dictated by the network that I've deployed.

Mr. Verrilli Jr.: Per year?

Mr. Barr: Per year, which is how much our operating costs are per year.

Mr. Verrilli Jr.: And the first was... was the... the--

Mr. Barr: Building the network from scratch.

Mr. Verrilli Jr.: --Just... not the... not the debt... debt service on building it?

Mr. Barr: No.

Mr. Verrilli Jr.: But the building it.

Mr. Barr: Yes.

Mr. Verrilli Jr.: That's a... that's a one-time cost.

Mr. Barr: Yes.

Mr. Verrilli Jr.: Not an annual.

Mr. Barr: That's the sunk capital cost.

Mr. Verrilli Jr.: But you're using the depreciated figure, the 180--

Mr. Barr: No.

I'm starting... I'm starting... yes.

That's the... that's the initial construction.

I'm... I'm not talking about me as the incumbent.

I'm talking about someone new coming in today.

Mr. Verrilli Jr.: --You... you presented three questions.

Is... is your illustration and what you're about to discuss devoted to all three questions or to one in particular?

Mr. Barr: I'm going to show... it's devoted to all three, and I'm going to show how TELRIC does not, going forward, permit the recovery because it bases compensation, for someone who has already expended money on the network, on the imaginary cost structure of a hypothetical entrant who can be unconstrained and who's capable, at any given time, of instantaneously deploying and ubiquitously deploying a brand new network that's the most efficient at that point.

Now, if you look at my $180 billion that I've just spent on building this network, in the world of TELRIC, I now face the prospect of people springing up on a daily basis who are capable of taking advantage of any new technology and any change in demographics and configuration to beat the efficiency of my network.

And my... and... and with that hypothesis, I won't be able to recover my costs unless I have a high rate of return and fast depreciation.

Mr. Verrilli Jr.: But we've said in... in a number of cases, going back 50 years, that if you're talking about an unreasonable rate of return or a taking or something that has constitutional implications, you... you can't attack the method because different methods can work out differently.

You have to point to some unjust final result.

And there hasn't been any final result here.

Mr. Barr: Well... well, Your Honor, I think that what the Court has done is made distinctions between ends and means.

Now, there can't be discretion under the Constitution as to how much is due.

That can't be discretionary or else there's... that eviscerates the Just Compensation Clause.

What... our view is that when you have a regime of compelled service, where the Government says, you got to spend the money to provide a mandated service, the taking occurs at the point of expenditure.

And that means the Government has to give me a chance to get that... a fair opportunity to get that money back.

Now, what the Government has discretion over is the means as to get me that money back.

Mr. Verrilli Jr.: They're probably going to be set by State commissions, are they not?

Mr. Barr: Excuse me, Your Honor?

Mr. Verrilli Jr.: Aren't... aren't these costs and fees going to be ultimately set by State commissions applying the FCC rules?

Mr. Barr: The rates themselves will be set by... by the State commissions, implementing a methodology, and we are complaining about the methodology because--

Mr. Verrilli Jr.: Well, but that's just what the cases say you can't do, it seems to me, going back to the Stone's opinion 50 years ago, the opinion of the Court in Duquesne, that you can't attack the methodology unless you can point to something wrong in the actual fee that you're allowed or the rate that you're allowed.

Mr. Barr: --Well, Your Honor, I think that the Court has always reviewed methodologies.

Now, sometimes rates can be evidence of a defect in a methodology, but it doesn't have to be.

And in the Duquesne itself, the Court said if the methodology is not compensating you for a methodological risk to which you are exposed, that's a problem today, and that is our claim, that the methodology itself exposes us to a risk of not recovering what we spend.

And... and we are entitled to compensation for that risk.

If the taking--

Mr. Verrilli Jr.: Excuse me.

Just a risk?

It's... I mean, but there's always a risk, I suppose, until you get the final determination by whoever the ratemaker is.

I thought our prior cases held that so long as... so long as it's possible under the... under the rate structure for you to be compensated fully, you have no complaint until... you know, until the final... the final rate is determined.

At that point, you can come in and complain, but the mere possibility that they may pick the wrong rate surely is not enough to give you a takings claim.

Mr. Barr: --Well, if... if we are correct that we are entitled to a fair opportunity to recover our costs and the Government decides that they're going to spin a roulette wheel, I can't come in and say that's a problem?

That exposes me to risk?

The reason we have... why do we have methodologies set in the first place instead of later... instead of later proceedings?

We have them to set up front a promise to pay that sets investor expectations and ensures that the users, not the Government, is going to end up footing the bill.

That's why we have ratemaking.

And this Court has always reviewed methodologies to determine whether or not they comport with the constitutional standard and whatever Congress has directed in the statute.

Now, it's very important that we focus on the difference between the ends and the means.

What is it... what do you mean when you say, well, the Government has discretion over methodology?

It can't mean that they have discretion as to how much is ultimately due.

That takes the Court out of the business and just eviscerates the Just Compensation Clause.

What it means is that once it's determined that I have an... I should get an opportunity to get my costs back, the Government can expose me to risks.

The Government doesn't have to guarantee it and sign me a check.

They can measure my recovery with some other formula, as you pointed out in your concurrence opinion in Duquesne, Justice Scalia.

They can formulate the methodology in... in another way.

But when you formulate it in another way, when you untether recovery from historical costs or my expenditure, that creates a risk.

Now, sometimes it may create an opportunity in an... in an age of inflation.

In an age of deflation, it may cause a risk.

Mr. Verrilli Jr.: But numerous cases have said that the ratemaking agency is not required to follow... to adopt historical costs as the method of fixing rates.

Mr. Barr: That's the method, but the objective has to be an opportunity of getting me back my costs.

What... when... when I am required to spend money by the Government... when I'm required to spend money by the Government... let's say it would cost the Government a billion dollars today to provide a public good and service.

And the Government, instead of spending that today, which anyone would have to spend, comes to me and conscripts my private capital into building this thing for a billion dollars, and then later says, well, I don't have to worry about getting you back a billion dollars.

That's not my business.

I have discretion over a methodology.

The question... what is meant by discretion on a methodology is that the Government can expose you to risk as long as it compensates you for the risk.

And that's exactly what Duquesne said.

Mr. Verrilli Jr.: Now, you say this case is different from previous rate cases.

In the previous rate cases, the expenditure has been made and the question is fair compensation, just compensation.

You say here you're being asked to expend an additional out-of-pocket sum, and you're entitled to know what the methodology is at the outset.

Is that--

Mr. Barr: No.

I'm saying that all the--

Mr. Verrilli Jr.: --Is that your point?

Mr. Barr: --No.

My... my point is that all methodologies are the Government's promise to pay at the time it takes the property.

The Government takes a property in a forced... in... in a regime of compelled service, the taking occurs when I spend the money.

If I have $1,000--

Mr. Verrilli Jr.: But that's true in any ratemaking case.

Mr. Barr: --Right.

Mr. Verrilli Jr.: And... and the Chief Justice and Justice Scalia are saying our cases say we have to wait to see what the rate is.

I thought your position was, well, this is different because we have an initial outlay that we're required to make now.

I'm not trying to... maybe I misunderstand your argument.

Mr. Barr: Well, no, that's right.

The reason we have methodologies and the reason I'm entitled to know that I have a fair opportunity to recover it is that I shouldn't be forced to spend money, to lay out money unless have a fair opportunity to get it back.

Mr. Verrilli Jr.: No.

But your whole argument is assuming that by adopting this particular methodology, it is some kind of a necessary conclusion that at the end of the day, you're going to be getting less of a return than you would have gotten if an historic cost methodology had... had been employed.

And that simply is not true.

We don't know whether that is so or not.

Mr. Barr: Well, actually, you know, we do know whether it's so.

I was just about to explain on the forward-looking basis.

But... but--

Mr. Verrilli Jr.: Then... then why haven't you come in telling us about rates that you were getting that in fact are bleeding you dry.

You haven't made that argument.

That's not your case.

Mr. Barr: --Well, because I'm not... well, there are two reasons.

One, we're not complaining about a rate.

A rate is evidence of a defect.

It is not an... we're not... we're not complaining about a specific application.

We're complaining about a systemic defect in the methodology.

Mr. Verrilli Jr.: And... and I could understand your argument if that systemic defect had a... by... by some logical necessity, the conclusion of compensating you for what, on traditional standards of review, would be a confiscatory rate.

Mr. Barr: Yes.

Mr. Verrilli Jr.: But there is no such necessity that I can find in your argument.

I just don't see where that step comes in.

Mr. Barr: There are--

Mr. Verrilli Jr.: You don't concede that necessity, do you?

Mr. Barr: --No, I don't.

Mr. Verrilli Jr.: Otherwise, you would think that a... that spinning a... spinning a wheel of fortune would be an adequate methodology.

Mr. Barr: Right.

Rates--

Mr. Verrilli Jr.: No.

You wouldn't.

You wouldn't concede that.

I... I agree with you that... that we would not accept a spinning wheel as... as being adequate, although spinning a wheel might give you compensation.

it might not give you compensation.

Who can say?

Mr. Barr: --In... in the Duquesne case, the Court said even a small shift in methodology warrants an increase in the risk of premium because you are always entitled to get pay for... to whatever risk you're exposed to.

That's what methodological risk is.

There are two things on the face of this order--

Mr. Verrilli Jr.: And where... and where does the increase in the premium take place?

It takes place in State ratemaking, doesn't it?

Mr. Barr: --The problem here... the problem here in this order... there are two--

Mr. Verrilli Jr.: But that is correct, isn't it?

That's... that's where the--

Mr. Barr: --No.

The... the decision took place in the Federal proceeding, and it took place in paragraph 688 and 702 of the order.

And if we could look at those paragraphs, we pointed out--

Mr. Verrilli Jr.: --Where... where do we find them?

Mr. Barr: --Joint appendix 385-386 and joint appendix 395.

We pointed out that if you're going to make up a world in which our compensation is constrained as if we had intense competition today, then you should use the same methodology in imputing what the rate of return and what the depreciation would be.

You can't imagine I'm in a world of turbo-charged technological risk and not give me that rate of return.

On page... at paragraph 688, the Government said, well, you know, you might be entitled to... we understand your argument about a higher rate of return, but you don't have that competition today.

And our point is you've created a dichotomy between two different worlds, a world that you say is intensely competitive, in fact, in which our network is a commodity, and a world in which you say competition will be gradual and we're still a bottleneck.

They've created a dichotomy.

Then they say, you get your costs back, your direct costs back, as if you were in a world of intense competition.

But when it comes to making the... that exposes us to a methodological risk.

The risk of investing a dollar in a world where you... where you have a historical cost methodology and investing it under TELRIC is a different risk.

When... when it comes to making that adjustment, they say, you can't do that.

We're going to flip-flop.

We're going to pretend you're in a world of gradual competition, and that's on paragraph 702 where they say, you start with your existing closed market rate of return and your closed market depreciation, and the only time you can make an adjustment is to adjust for actual competition.

Well, actual competition is a different risk because I'm being exposed to imaginary competition.

Mr. Verrilli Jr.: If all of that is true and you're exposed to so much greater risk, I assume that your costs of capital will be much higher.

It will be much harder to borrow money.

And so all of those risks will ultimately be reflected in the amounts that the State ratemaking agencies will have to allow you for cost of capital.

Mr. Barr: The States... the issue here is the cost of capital in the UNE business, our wholesale business.

Paragraph 702 prohibits the States from taking into account our historical costs, and it says you have to set the rate of return without a view toward recovering those costs.

You cannot adjust for the risk.

The rule itself, rule 505, and paragraph 702... the whole point of a methodology is to say if... if I'm going to shift to some other basis of compensation other than historical--

Mr. Verrilli Jr.: I don't really read 702 as saying what you say it says, Mr. Barr.

Maybe I'm missing something.

Mr. Barr: --Well, Your Honor, it... it does say that you use... you start with the current rate of return and the current depreciation.

Mr. Verrilli Jr.: Correct.

Mr. Barr: It says that we bear the burden in the State proceedings of showing a business risk, and then it goes on to say that the business risk relates to actual competition.

And... and, indeed, in the universal service proceeding, paragraph 254 and 5--

Mr. Verrilli Jr.: But it also makes the very point Justice Scalia made, that we recognize the incumbent LEC's are likely to face increased risks by reason of the increased cost of capital.

It does refer to--

Mr. Barr: --Yes.

They're talking about economic costs of capital.

And the key question is, which economy in this hypothetical world?

Is it the real economy, or is it your hypothetical world?

Their rule says, increases in rate of return are based on actual competition.

We are being exposed today to our pricing as if we lived in a world of intense competition, in which our product is a commodity, where we would need a very high rate of return.

And in their universal service proceeding where the FCC applied this methodology, it applied existing closed market rate of return and existing depreciation schedules.

In its opening brief on page 8, it said, we are authorizing the States to change the rate of return based on actual levels of competition, but the methodological risk is not actual competition.

The methodological risk is their cost recovery rule.

They're mimicking an intensely competitive market.

We gave examples in our brief where Massachusetts tried to make different rates of return and they castigated them for using a different rate of return in the wholesale business than in the retail business.

In the retail business, we are exposed to actual competition.

In the wholesale business, we are exposed to hypothetical intense competition where our network is deemed to be a commodity, and that's the only price we can derive.

If we sell a product in the retail market, we get an opportunity to get our historical costs.

If we sell it in the wholesale market, we're deprived of that because the... the cost is brought down without a corresponding increase.

There are two things on the face of the order... two things on the face of the order that are blatantly illegal... on their face, without looking at a rate.

The first is it says, we are creating a methodological risk, and we're not going to allow an adjustment of the rate of return to reflect that methodological risk.

We will not even let you look at the delta, the risk of a delta between your historical costs and whatever this comes out to be.

The whole point of a methodology is you have to look at the delta.

Even Smyth v. Ames said you just don't look at a reproduction cost.

You have to look at in relation to historical cost.

So, number one, in the rule itself they say you cannot look at historical costs.

You can't say, you know, what's the risk here between one and the other and adjust.

The second thing that is facially illegal and again has nothing to do with rates is how do they value our input.

If we're right that the taking occurs at the point of dedication, at the point of expenditure, then we have a right to have our property valued when we spend it.

When I spend operating costs, I have a right to a fair opportunity to get those back.

Mr. Verrilli Jr.: --But that's true of any utility in those cases that we've... we've decided over the--

Mr. Barr: And they don't.

They don't.

What they say is when they value our expenditure, they apply... their--

Mr. Verrilli Jr.: --Just... who is they?

Mr. Barr: --The FCC rule.

Mr. Verrilli Jr.: Okay.

Mr. Barr: Okay.

The FCC rule values our expenditures based on TELRIC, but TELRIC is the efficiency that can be achieved by someone who doesn't have a sunk network and therefore has no path dependencies and therefore whose incremental cost is going to be lower than ours.

And... and what they say is, you spend $75 billion for operating expense?

Well, our TELRIC guy... you know, he could do it for $50 billion.

So, you're getting credit for $50 billion.

And then on my incremental expenditures, if I... once I build a network and I have it in the ground, I'm path-dependent.

If I build a set of telephone poles to this subdivision, and the next year a subdivision opens up over here, okay, the most efficient way for me to provide it is to maybe do a nice, big, long line over there, and that might cost me $10 million.

The FCC says, we don't care because at that point in time, we're going to hypothesize that someone can build a blank slate network and do it for 5 because they have the luxury of building it to meet that capacity on a blank slate.

Mr. Verrilli Jr.: Is the Government going to tell us that there are other ways you can recover that cost through depreciation or--

Mr. Barr: No, because the thing they're... the thing they're depreciating is the TELRIC price.

This is... this is the weirdness of the Government's rule.

I spend $10 billion.

It's necessary, prudent.

It's the most efficient way for me to produce.

Mr. Verrilli Jr.: --Are they going to tell us you get it back on the cost of capital?

Mr. Barr: No.

Mr. Verrilli Jr.: Or is your answer the same because it's just the capital based on the TELRIC--

Mr. Barr: Their briefs talk about cost of capital.

Here's the... here's the rub.

When they say, well, we're going to value that as if it's 5 because someone else could be more efficient, a hypothetical person in a perfect market could be more efficient, so we're going to give you 5.

But don't worry.

Something might happen to the rate of return.

The rule itself says you cannot adjust the rate of return to recover the historical cost.

You can't.

And the rate of return they're going to give us is on the 5, not on the 10, and the depreciation is of the 5, not on the 10.

There are two defects here.

We're entitled to... to the value of what we have to spend.

What they do is they take--

Mr. Verrilli Jr.: --What about costs of capital?

Mr. Barr: --Excuse me?

Mr. Verrilli Jr.: Can you get it back in costs of capital?

What costs of capital do they allow you?

Mr. Barr: They allow the cost of capital that exists in a closed market.

The pricing that they give us is the pricing that they say would exist if our network were a commodity.

They don't change for the risk.

In other words, if today I spend $10 billion and that's prudent and necessary, and I... I'm in a closed market or a market that's just been opened and I get 15 percent or 12 percent, that's scenario one.

Then they turn around and say, these same facilities you're now going to have to sell to somebody else, not in the retail market where you get 15 percent on $10 billion.

Now you have to sell them to your competitors, and there you're going to get 15 percent on $7 billion.

And... and the point is that the risk now that my stuff is going to be valued at 7 instead of 10 is a risk, and the only way I can get compensated is by a higher rate of return.

Mr. Verrilli Jr.: But your point there... the answer to Justice Scalia's question, I take it, was forgetting your first problem... that's your first problem.

Right?

The one you brought up at the beginning.

Mr. Barr: Correct.

Mr. Verrilli Jr.: The fact that they're pretending actual competition is what makes the difference, but what the problem arises out of is the fact that they're pricing on a hypothetically perfectly competitive market.

Mr. Barr: Right.

Mr. Verrilli Jr.: That's your first point.

Mr. Barr: Right.

Mr. Verrilli Jr.: If that point were wrong, then the answer to Justice Scalia, I take it, would be, there's no other problem.

I mean, if they did that right and they lowered your new investment from $10 million to $5 million because that was TELRIC, in principle, they could get the money back for you by giving you a higher rate of return on your... on your TELRIC estimated cost of capital.

Mr. Barr: The rule says no.

But... but if you change the rule, you theoretically could do a high enough rate of return.

But it doesn't solve the problem.

Mr. Verrilli Jr.: Where does the rule say no?

Give us the... the exact text where the rule says no.

Mr. Barr: Okay.

Paragraph 702 of... of the order.

Mr. Verrilli Jr.: 395?

Mr. Barr: And it also asks... it's not in the record.

It's a separate ruling, but the universal service proceeding, paragraph--

Mr. Verrilli Jr.: This is... this is on... this is at 395 of the joint appendix?

Mr. Barr: --Yes.

And this is how it has been implemented by the FCC--

Mr. Verrilli Jr.: And... and can you show us the language there?

Yes.

Where?

What's the language?

Mr. Barr: --That the... that the existing rate of return and existing depreciation are reasonable starting points.

Mr. Verrilli Jr.: Starting points.

Yes, starting points.

Are you talking about rule 707?

That's right.

702.

Mr. Barr: 702.

Mr. Verrilli Jr.: Page 395.

Mr. Barr: This is not a calculation starting point.

This is what's in effect.

Then we have the burden of showing actual competition... actual competition.

It is not a reasonable starting point even if it was a temporal exercise because we are being exposed today to intense competition through the rule.

Mr. Verrilli Jr.: Now, but you're saying rule 702 prevents you from getting back what you otherwise should have through capital costs?

Mr. Barr: Yes.

In fact, they've admitted it in their brief.

Mr. Verrilli Jr.: And where... and where... what language in rule 702 are you relying on?

Mr. Barr: I'm relying on the... on the whole first half of that paragraph where they say, you start with existing.

We have the burden of showing business risk, and then the remainder of that paragraph talks about actual competition.

It's not in the record, but it is a separate order.

Mr. Verrilli Jr.: Okay.

But I... since you're... you're relying on it heavily for a particular proposition, I think you ought to be able to come closer than you have to point out exactly what language supports your position.

Mr. Barr: We recognize that incumbent LEC's are likely to face increased risks given the overall increases in competition in the industry, which might warrant an increased cost of capital.

That's the standard, whether there's actual competition.

That's what they say in paragraph 688.

We said, look, in the TELRIC world, we need a higher rate of return.

They say USTA's argument unrealistically assumes that competitive entry would be instantaneous.

The more reasonable assumption of entry occurring over time will reduce the costs associated with sunk investment.

Our point is entry is instantaneous under TELRIC because that's the hypothesis.

We're priced as if there's instantaneous entry.

Mr. Verrilli Jr.: At the bottom of page 83a, toward the end of rule 702, it says, States may adjust the cost of capital if a party demonstrates to a State commission that either a higher or lower level of cost of capital is warranted without the commission conducting a rate of return or other rate-based proceeding.

That would seem to allow the State commissions to... to do what you want done.

Mr. Barr: That paragraph... I think a fair reading of that paragraph and the way it is read and applied including--

Mr. Verrilli Jr.: What about the language I just quoted to you?

How do you distinguish that if you don't... if you don't agree with me?

Mr. Barr: --I would distinguish it by then looking at the rule, which is rule 505, and that's on joint appendix 51 and 52.

And it tells you what you cannot consider in setting forward-looking costs, including forward-looking cost of capital.

And (d) says... page 52... the following factors shall not be considered in a calculation of the forward-looking economic cost of an element.

Embedded costs.

Now, cost of capital under (b)(2) is the cost of capital to recover the TELRIC price, not your historical price.

How can--

Mr. Verrilli Jr.: But isn't... isn't--

Mr. Barr: --(d)(1) on its face... excuse me, Your Honor.

Mr. Verrilli Jr.: --No.

I just want to go back to something I don't understand.

Isn't (d)... I'm sorry.

Yes.

Isn't (d)(1) simply talking about the TELRIC method as opposed to the ultimate ratemaking methodology?

In... in... I'm sorry.

As opposed to the ultimate determination of what would be an appropriate rate using TELRIC valuation.

Mr. Barr: That's right, and that's a directive to the State.

Mr. Verrilli Jr.: Okay.

Mr. Barr: That's a directive to the State.

The States cannot--

Mr. Verrilli Jr.: But that is not... if... if you understand by the distinction what I understand by the distinction, it is not a directive to the State which binds them in the ultimate rate that they can set.

Mr. Barr: --It binds... yes, it does bind me.

The rate... the rate cannot--

Mr. Verrilli Jr.: Then I don't understand it.

Mr. Barr: --They cannot consider in... in setting the cost of capital historical costs.

Mr. Verrilli Jr.: Well, but they don't have to consider it if they give you a high enough rate on your TELRIC costs.

Let's assume they have--

Mr. Barr: How do they determine what's high enough, Your Honor?

Mr. Verrilli Jr.: --Let's assume that your past costs were, indeed, $10 million, and they're saying, well, it's just 5 because somebody else could do it for 5 if they came in right now.

So long as they give you a higher percentage on that 5, you're going to be in just as good shape as if they were giving you your 15 percent on the 10.

Mr. Barr: And how do they determine what's high enough unless you have a standard?

Mr. Verrilli Jr.: They can determine on the basis of what your risk is.

And... and--

Mr. Barr: The risk of what?

Mr. Verrilli Jr.: --it's very... it's... your risk of continuing to put in capital which will... which will not... which you will not be able to have taken into account in setting the rate.

Mr. Barr: Well, I think, you know, your concurrence in... in Duquesne, Justice Scalia, made a very fundamental point, which is you can't talk about return on risk without implying a standard.

What's the risk you're compensating me for?

It's the risk I'm not going to be able to recover my capital.

Mr. Verrilli Jr.: But now--

Mr. Barr: How... how can you figure that out without looking at what my capital is in relation to what you're allowing me?

Mr. Verrilli Jr.: --Right.

That may all be true, and I have only one question to ask, and I'm asking it.

I don't know the answer, and I... it may help or not help.

But when I read the briefs, I noticed you started with the valuation of the capital base of around $340 billion to $350 billion.

And then when we look at the depreciated base, it comes to around $140 billion to $150 billion across the country.

And I got the impression from the brief, that if... if that's the valuation... mirabile dictu my Latin professor used to say.

The rate of return is okay.

That... that however miraculously they've come to this... to this result... and I've read the criticisms.

They give you a quarter of the telephone pole.

They... they deduct 22 percent for there being competition.

They assume that the most efficient firm has the administrative costs of all the firms.

They do all the things on depreciation that you say.

They do the same thing on capital.

And yet, somehow the result seems to be that you're earning a fair rate of return on the depreciated value of the capital, namely $140 billion to $150 billion to $160 billion, in that range.

Now... now I'm asking a question to get an answer.

Mr. Barr: That was mixing the apples and oranges.

The... that... that's mixing the original cost of the hypothetical network with the depreciated value of our network.

What's relevant is what's our capital charge that's allowed or our depreciation expense.

Before TELRIC came along, I was recovering, let's say, $340 billion over 10 years, and I'm halfway through, generally.

So, I have about 170 to go in 5 years.

They come along and say under your new network, you're going to get 170 because that's how much a new network would cost, not one that's half depreciated, and you get to recover that over 10 years.

So, now my depreciation expense has been halved.

Mr. Verrilli Jr.: So, what you're saying is in response to what I said, that I am wrong in saying that the TELRIC-set depreciation, capital return, and other numbers... I am wrong in saying that they will earn you a fair rate of return on $140 billion.

To the contrary, they will earn you only half the return you're entitled to on that 140.

Mr. Barr: Correct.

Mr. Verrilli Jr.: And I can find that in the... is there anything on that in the record?

Mr. Barr: There's a... well--

Mr. Verrilli Jr.: No.

Mr. Barr: --Well, by using the same depreciation schedule and hypothesizing a new network, that reduces my... that reduces my capital charge.

Now, we have shown--

Mr. Verrilli Jr.: The capital charge will fall from $140 billion.

A TELRIC valuation of those FCC numbers which are on the two pages that they have all... a TELRIC valuation of that will not end up with the number 165, 7... 70 billion approximately.

It will end up with the number 70 or 80.

Mr. Barr: --No.

They will end up... they will say we're going to imagine you have a new network and can depreciated it over the next 10 years, when in fact I have a network that I have 5 more years to depreciate 170 on.

The effect of that is to half my recovery because in 5 years I have to buy a new switch, and I strand what I haven't yet recovered.

Mr. Verrilli Jr.: But you're saying the commission sets the depreciation period and binds the State commissions by that?

Mr. Barr: The State... well, yes.

They... the... the commission tells the States what to do.

Mr. Verrilli Jr.: And the commission says, 5-year depreciation... 10-year depreciation, not 5, or 5 not 10.

That's... the commission forces that on the States?

Mr. Barr: Yes.

The commission says--

Mr. Verrilli Jr.: Can... can--

Mr. Barr: --economic depreciation--

Mr. Verrilli Jr.: --Okay.

Can you point to a... a commission statement to that effect?

Mr. Barr: --Yes.

This is... this is a separate proceeding, but it's their application of TELRIC.

Mr. Verrilli Jr.: Okay.

Mr. Barr: In the universal service.

They say the rate of return must either be--

Mr. Verrilli Jr.: What are you reading from?

Mr. Barr: --Paragraph 250 of that order.

It's a... it's a published opinion, but it's not part of the record.

Mr. Verrilli Jr.: It's not in the record?

Mr. Barr: It's not in the joint appendix, but it's a... it's the parallel proceeding to this where they were setting TELRIC for our universal service prices.

The first sentence of paragraph 4: The rate of return must be either the authorized Federal rate of return on the interstate or the State-prescribed rate.

In other words, they're saying it has to be... the same rate of return as you have in the retail business has to be in the wholesale business.

Mr. Verrilli Jr.: Or... or the State... was this last part, or the State-prescribed rate?

Mr. Barr: Retail rate.

The retail rate.

Mr. Verrilli Jr.: Well, but would you read again the sentence?

Mr. Barr: Yes.

It has to be either the Federal interstate... that's a retail rate.

Okay?

And the only risk there--

Mr. Verrilli Jr.: Let's not intersperse.

Let's just read it.

Mr. Barr: --Or the State's prescribed rate of return for intrastate... intrastate services.

These are retail rates based on the--

Mr. Verrilli Jr.: These are... these are rates of return.

Now, tell me how it is that that... those statements with respect to rates of return determine a depreciation period.

Mr. Barr: --Well, the next paragraph, paragraph 5, says that we agree with those commentators that argue that currently authorized lines should be used because the high cost areas are unlikely to face a serious competitive threat.

Again, they are using existing depreciation based on a world of gradual competition in our retail business and they are applying it to prices that they are formulating based on the hypothesis of radical competition that has commoditized our product and reduced our direct cost by half.

Now, the fact is this is a bifurcated proceeding.

The Feds set the methodology.

The States set the rates.

The Federal Government has told the States what to do, and you'll see in our brief that example where the State tries to use a different rate of return, the FCC slaps them down.

It's very clear.

Now, they've made an admission in their own brief on page... on their reply brief, which... on... on page 12, note 8.

And they say that the... the risk is not just the... this is footnote 8.

It says, the risk is not just the risk of actual competition, but obviously you have to have a methodological risk adjustment.

Mr. Verrilli Jr.: What part of footnote 8 are you relying on?

Mr. Barr: That second consideration is notwithstanding the incumbent's contrary suggestion implicit in any determination of the true economic cost of capital.

Our problem is that's not what the order said.

That's a post hoc brief.

And if this Court were to rule that the rate of return has to be adjusted based on the hypothesis of actual competition, that takes care of part of the problem.

But that's not what the rule says.

It's not what it was implemented as, and now they are making this concession in their brief.

Now, that's only part of the problem.

The other problem under forward-looking is they're using it to value our network at the time of dedication, and our expenditures... as I explained, when we spend money, they act as if we're not really spending that amount of money.

We're somebody else.

And what they're using is the Government coming up and taking someone's property and saying I'm going to mimic away your opportunity to recover it.

I'm going to imagine it in a world in which you do not have the opportunity of recovering your property.

If that... if that is the principle, that the Government can take property and then in the name of mimicking competition, say, you're not going to have the opportunity recover it, what's the limiting principle of that rule?

You can mimic... when I put in $1,000, I need the opportunity to get it back.

That's what I'm surrendering, to deploy it, to redeploy it, to use my wits to enhance and preserve its value.

When I expend the money into a regime of compelled service, that's when those opportunities go away.

And that's the point of the taking.

I'm locked into spending the money.

The Government tells me who to serve, what to charge, what quality to provide, and I can't redeploy it elsewhere.

In that circumstance, the Government can't say, now I'm going to define your opportunity in this business as an opportunity that doesn't give you the opportunity to recover your cost.

Because then that's just a roving license to go around, take property, and say, now I'm going to imagine you don't have the opportunity to recover it.

The Just Compensation Clause says, if you take away $1,000, you're taking my opportunity as to that $1,000.

You have to give me back an opportunity as to $1,000.

And if this is... if this is how you value property... I mean, this Court has been very clear, if you're going to invoke a market, it better be a real market.

You have to have a real observable market.

And this Court has held that when the Government comes along and takes assets like this, it's the opportunity cost.

This case is just like Monongahela.

There the State gave a company a franchise to build a lock and dam and gave it tolls to recoup its costs.

So, it had a franchise, a State franchise with tolls.

The Federal Government said, we think this thing is worth X, appropriated the money, and took the lock and dam.

The Court said, well, wait a minute.

You've come and taken this lock and dam.

Opportunity costs.

You can't just make up a value for it.

Mr. Verrilli Jr.: But here... here no property is taken in the condemnation sense of the word.

That was a condemnation proceeding.

Just compensation.

No property of yours is actually taken here in that sense, is it?

Mr. Barr: No, that's wrong in two respects.

First, there's actual occupation of our facilities to our exclusion.

They can occupy and exclude us from use of our facilities.

Mr. Verrilli Jr.: Well, have they done so?

Mr. Barr: Yes, 6 percent of our lines have been taken in this respect.

Now, but in any event, we have an... I mean, this is a utility case.

This is not a regulatory taking.

And the quid pro quo for us having spent all this money is an expectancy.

That creates an expectation interest.

Mr. Verrilli Jr.: Yes, but I don't think it comes under the Just Compensation Clause.

The cases involved... you know, go back to Smyth against Ames... have not talked in terms of just compensation.

They've talked in terms of fair return and due process.

There is a constitutional principle involved, but I don't think it's the Just Compensation Clause.

Mr. Barr: Well, Your Honor, I respectfully disagree because I think the reason... when you dedicate property and there's a taking, the reason the Government has to come up with a methodology to pay is precisely because it has to promise to pay at the point of the dedication.

The methodology is the promise to pay.

It's saying, you put this in, here's how you're going to get your money back.

That's why we have ratemaking.

It is the Government's promise to pay.

It creates an expectation.

And here they promise... and this takes us--

Mr. Verrilli Jr.: You're saying every... every breach of contract by the Government is a taking.

I mean, that... that's a little extreme, isn't it?

I mean, every time--

Mr. Barr: --This Court has recognized--

Mr. Verrilli Jr.: --Every time the Government enters a contract, it creates an expectation, and whenever the Government breaks a contract, it's a... it's a taking.

Mr. Barr: --It's not a contract, Your Honor.

This is a dedication by a utility, and there are three things going on here, which this Court has always recognized create a property interest, such as in... in Russell v. Sebastian.

Number one, the Government requires us to serve.

This is compelled.

Okay?

Number two--

Mr. Verrilli Jr.: Compelled because you agreed to it.

That was part of the contract.

You put up the money and you'll... you'll have to serve and we'll provide you with a reasonable rate of return.

That was the deal.

Mr. Barr: --A return in order to give us a fair opportunity to get our money back.

And in determining what the methodology was for our initial investment, the Government said, okay, guys, you put in all this money... and now I'm shifting to the historical part of the case.

You put in all this money, and here's the deal.

You will be... you will not have the risk of devaluation, and therefore, we're not going to pay you a high rate of return.

So, we got low rates of return for all these years.

And now they're retroactively saying, we're changing our mind.

We're going to... we're going to start revaluing your property and we're going to apply that against your historical cost.

Mr. Verrilli Jr.: Mr. Barr, may I ask... one piece of this case is you made this investment for your local telephone business.

That... that continues.

That's not touched by anything we're talking about now.

You get that rate on your... what is the vast majority of your business.

That investment... you get that rate set by the local public utility commissions as... as always.

Isn't that so?

So, your telephone service business isn't touched by any of this.

Mr. Barr: These use the same facilities.

So, this is occupying the facilities we use for our retail, and then it deprives us of using--

Mr. Verrilli Jr.: But you're getting back the lion's share.

Mr. Barr: --Well, yes, but that's like going to GM and saying give away your Chevys because you're still making money.

Mr. Verrilli Jr.: And then there's another piece of it that I'd like you to tell me how it fits in, and that is the quid pro quo of you can get into for the first time a new business, that you can get into the long distance business.

Doesn't that have some kind of value?

Mr. Barr: No.

I think if there was going to be some quid pro quo in the statute, Congress has to define it.

Otherwise the Government agency can go up to someone and say, you know, we waived some procedure for you in the INS, and therefore now we're going to take away your car.

Their quid pro quo has to be spelled out by Congress.

But in any event, we didn't get a special favor.

It said, once you purge yourself of any defect, you can act like everybody else.

One final point that's very critical here, which is the language in the statute in 252, which goes on... it doesn't say just... just and reasonable in 251(c).

It says just and reasonable.

This says something else in addition as opposed to Hope where the Court said there was no further specification of how rates were to be determined.

It says, here determinations of rate have to be based on the cost of providing.

That provision can only make sense and only has an office in the statute if it is somehow delimiting how just and reasonable rates are to be determined.

The Government's view is, just and reasonable, that gives us all the discretion in the world.

There's other language here, and that can only be reasonable... reasonably--

Mr. Verrilli Jr.: Well, no.

It also argues that the word cost is ambiguous.

Mr. Barr: --Not in the context... you have cost and you have value methodologies.

If the office of that statute... of that provision is to delimit discretion as to what kind of methodology... the... cost on its face refers to a cost-based methodology, not a value methodology.

I reserve the balance of my time.

Mr. Verrilli Jr.: Very well, Mr. Barr.

General Olson, we'll hear from you.

ORAL ARGUMENT OF THEODORE B. OLSON ON BEHALF OF THE FEDERAL PETITIONERS

Mr. Olson: Mr. Chief Justice, and may it please the Court:

The colloquy that we have just heard illustrates why this Court has said over and over again in the context of ratemaking, in precisely the context we're talking about here, that the Court evaluates results not methodologies; impacts, not means; and consequences, not techniques.

Mr. Verrilli Jr.: Do you think that really means that you could come up here with a... with a... with an FCC scheme that says we're going to spin a wheel, and if it lands in the right place, you're going to get a good rate, if it lands in another place, you're going to get a bad rate?

Mr. Olson: Well, there might be--

Mr. Verrilli Jr.: We couldn't say that that is irrational and... and... does... is not designed to provide a fair rate of return?

Don't you have the burden of showing that this is at least designed to... to provide a fair rate of return?

Mr. Olson: --This Court has said that the challenger of a rate has a heavy burden to make a convincing case that the outcome is confiscatory.

Now, that burden can't be achieved... Justice Ginsburg's questions at the end of this colloquy illustrate that there are a number... and... and the questions about depreciation and cost of capital illustrate all of the things that... the reasons why this Court has avoided deciding whether a methodology is acceptable or not.

Mr. Verrilli Jr.: You... you can't meet that burden with a wheel.

You can't meet that burden with a wheel.

You're really saying that you can come up with a wheel and just say, well, you know, you can't prove that you're not going to get a fair return.

That can't be right.

Mr. Olson: Well, the... the person who challenges the way the commission is setting rates has to... has to present to this Court an explanation for why that the system that's developed, whether it's spinning a wheel or whatever... and I... I won't engage in that hypothetical because we've got a several hundred page record that looked into various different arguments with respect to various different methods of recovery.

It listened to various... the FCC listened to various different experts.

It listened to the incumbent local exchange carriers' various different theories.

It has explained why it did.

It developed a forward-looking technology, a method of evaluating the entry fees that would be based upon the statute.

Mr. Verrilli Jr.: But it... it seems to me that necessarily a hypothetically most efficient market will invariably, necessarily result in a rate that is less than their actual cost.

Mr. Olson: Well, no, I don't agree.

Mr. Verrilli Jr.: I mean, it just... that just has to be.

Mr. Olson: No, it does have to be.

And this Court should wait to see whether that really happens or not.

In the first place, this Court has said over and over again that the ratemaker has the responsibility and obligation and right under the Constitution to consider the goals of the statute, different theories, mixed... mixed methodologies, and all of those things so that the Court... we can't determine... there's a lot of allegations in the briefs and in this entire case about the draconian impact of this methodology.

But as the colloquy that took place here with respect to both depreciation and return of capital illustrated, in the precise paragraphs that my opponent cited with respect to these things illustrate the point.

Once the forward method... forward-looking technology method is applied, the State... the States are determining the rates which these carriers will receive for the elements.

And they may be only elements of the system.

They get to continue to operate the system, to make profit, to reimburse themselves for whatever costs they've embedded.

They've said that they're not challenging the rates.

They're not challenging the outcome because once the forward-looking technology that the FCC specified in detail after long, detailed, methodical consideration... said that then the States will look at questions of depreciation and cost of capital.

The paragraph that you read back, Mr. Chief Justice, the sentence in paragraph 702, which is on page 396 of the joint appendix, specifically says, States may adjust the cost of capital if a party demonstrates to a State commission that either a higher or lower level of cost of capital is warranted, et cetera, et cetera.

Mr. Verrilli Jr.: Warranted by what standard?

Mr. Olson: By the circumstances and... and the constitutional obligation to set a reasonable rate under the statute considering this methodology and limited by the constitutional standard that this Court has articulated as the lowest reasonable rate, a rate that is not confiscatory.

Mr. Verrilli Jr.: Are actual... are actual costs relevant in determining--

Mr. Olson: Well, this Court--

Mr. Verrilli Jr.: --what's ultimately reasonable?

Mr. Olson: --Well, this Court has repeatedly said that it has refused to constitutionalize the embedded cost or historical cost formulation.

Most recently it said that in the Duquesne case.

Mr. Verrilli Jr.: But warranted must have some specific standard.

There must be some principle by which we can see if it's warranted.

And... and their contention is that when you automatically guarantee them a lower than... than cost... than cost recovery, it must necessarily be unwarranted.

Mr. Olson: That argument is made, but it's not substantiated by anything in the record in... in this long, elaborate TELRIC articulation of... of numerous standards, both with respect to cost of capital and depreciation because the very next paragraph--

Mr. Verrilli Jr.: Never mind the next paragraph.

What about the end of that sentence that... that you didn't read?

Mr. Olson: --Well, but that says--

Mr. Verrilli Jr.: --a higher or lower level of cost of capital is warranted without that commission conducting a rate-of-return or other rate-based proceeding.

And the argument is made... and it seems to me a reasonable one... that that, in effect, says, without looking at embedded costs because that's what a rate-based proceeding has... has traditionally been.

In other words, that... that sentence suggests that you cannot set the... the higher level... higher or lower level cost of capital on the basis of how much embedded cost the utility has.

Mr. Olson: --Well, it must say that because that's precisely what it said in the statute.

Section 47 U.S.C. 252(d)(1), which is replicated on the joint appendix at pages 21 to 23.

Congress specifically said now that based upon the cost... and by the way, it is cost of providing, not cost.

It says cost of providing... parentheses, determined without reference to a rate-of-return or other rate-based proceeding.

So, the fact that the FCC put that in its calculation of cost of capital was required by the statute.

Mr. Verrilli Jr.: I don't care if it's required by the statute or not.

I care whether it... it gives these people any shot at getting back the... the capital that they've invested, with a promise by the Government, that they'd be able to get a fair return on it.

I don't care if it's required by the statute or required by the FCC.

Mr. Olson: Well, you may not, Justice Scalia, but the... but the cases presented on alternative bases... the heavy burden that the local exchange carriers must carry here is proving that the embedded cost, historic cost requirement is either in the statute or in the Constitution.

We demonstrate in our briefs... and it's relatively clear that it's not required by the statute, and we submit it's not required by the Constitution either because--

Mr. Verrilli Jr.: You're saying it doesn't matter if they... if they end up not getting a fair return on billions of dollars that have been invested with the Government's assurance that they... that they get a fair return.

Is that what you're saying?

It doesn't matter.

Mr. Olson: --I'm not saying that.

I'm saying that ultimately this Court may have to decide whether it gets a fair rate of return for what it is losing, the detriment it gives up when it allows competition to utilize some small portion of their networks under various different, carefully calibrated circumstances.

They cannot make that case yet.

And by the way, this TELRIC system has been in effect for several years already.

It has been applied with depreciation rates.

And I was going to point out that there is latitude in the State commissions to set a depreciation rate... this is in paragraph 703... that reflects the true changes in economic value of an asset and a cost of capital that appropriately reflects the risks incurred by an investor, and so forth.

Once you've seen the application of that, then you can determine whether or not there's been anything lost.

This is... and Justice Ginsburg's point I have to return to.

This is for use in certain markets by certain competitors of certain elements of the incumbent exchange system.

If they're interested in recovering whatever the number is of $120 billion or $150 billion worth of embedded costs, are they expected... do they have a reasonable right to expect that they will recover that out of the... the fees paid for the elements that are used in a system that is intended to fulfill the congressional goals... and if these are unconstitutional, that's a separate question, but the congressional goals that the commission was required to dedicate itself to is to promote competition, reduce regulation, lower prices, and encourage the rapid deployment of new telecommunications technologies.

This Court has said over and over again that when the ratemaker--

Mr. Verrilli Jr.: And not compensate investors.

Since it spelled out those four and said nothing about compensating investors, that doesn't have to be taken into account.

Mr. Olson: --It... it... that's correct.

The statute says nothing about compensating investors.

It says a just and reasonable and nondiscriminatory rate based upon the... the various factors of the cost of providing the service.

Now, the Eighth Circuit looked at that and said something to the effect that, well, the... the cost of carrying the extra load with respect to these elements... that would be an... something called an incremental cost or a marginal cost.

It might be considerably lower.

It might reimburse them in some way for some portion of their capital costs.

And by the way, Congress does know how to deal with this issue when it... when it's necessary.

In the Pole Attachments Act, which is 47 U.S.C. 224 I think, that the Court considered last week, the... the statute specifically refers to an allocation for a cost of capital of the telephone pole or the conduit or the right-of-way.

It didn't say that in this statute.

It said, costs of providing the service.

And then it had that exclusion that you mentioned, Justice Scalia, about rate of return, suggesting that the traditional embedded cost rates, to the extent that they are often used in ratemaking, wasn't necessarily what the Congress had in mind.

What this Court said in its decision, when it visited this case 4 years ago, is that this statute is in some respects a model of ambiguity, and the Court went... went on pointedly to say, at the end of that decision, Congress well knows what it's doing when it writes ambiguous provisions.

And the word cost, and the word value, and the word rate of return, and things like that in ratemaking cases are ambiguous, and they mean lots of different things under lots of different circumstances.

Those ambiguities will be clarified and implemented and filled out by the regulators to whom authority has been given.

What happened in this case, I submit, is what Congress properly did.

What this Court said in... I think it was in the Duquesne case... that these are hopelessly complex calculations that have to go into making rates and deciding what is a fair, just, reasonable, nondiscriminatory rate of return in the ratemaking context.

Especially something as complicated as this, especially where you're trying to bring in new competition in a regulated market, especially when you're giving in exchange in part in the statute for allowing competitors to come into the local telephone markets, giving the local telephone companies, which up to that point had been precluded from being in the long distance market and they were being precluded from competing from other local carriers, they were given access to those two markets in exchange, when all of those complexities are taken into consideration, Congress was not going to be... able to resolve all those things.

So, what it did is it turned it over to an expert agency which exists for the very purpose of solving these problems, just like State commissions have the authority.

In this case a methodology was developed by the FCC doing exactly what it should have done, listened to the experts, listening to the competing concerns, and the developed a methodology which is forward-looking, which this Court... Court has never rejected.

In fact, in the Duquesne case, in footnote 10 at the very end of the Duquesne case, the Court suggested that that may be an entirely appropriate methodology.

In footnote--

Mr. Verrilli Jr.: Sure, depending on how it's applied.

General Olson--

Mr. Olson: --Yes.

Mr. Verrilli Jr.: --assume... assume... and I'm sure you... you don't agree with it, but assume that I... that I think this system has to not just be the spinning of a wheel, but it has to contain in it some... some assurance that they'll get a fair rate of return on money that they have invested, with the Government's assurance that they get a fair rate of return.

Assuming that that's the case, what is there in this... in this methodology that enables them to get a fair rate of return on their sunk capital?

Mr. Olson: The problem, Justice--

Mr. Verrilli Jr.: Just point to me the provision that shows--

Mr. Olson: --The problem is--

Mr. Verrilli Jr.: --where that will be taken into account--

Mr. Olson: --a fair--

Mr. Verrilli Jr.: --at all.

Is it ever anywhere taken into account?

Mr. Olson: --It is not taken into account what their embedded costs are with respect to portions of their network that may or may not have anything to do with the provision of the service or the network element involved here.

We're talking about loops.

We're talking about telephone numbers.

We're talking about information used for billing.

Whether or not those facilities or those network elements have anything to do with an embedded cost for a plant that was built 30 years ago for X billion dollars is something that's not discernible at the time the statute is written.

Mr. Verrilli Jr.: Well, you're saying some of the costs shouldn't be counted.

Let's just take the costs that you agree should be counted.

Let's just take the embedded costs that do relate... that do relate to these services.

Mr. Olson: Well, I can't determine what those are.

I don't know how the telephone companies have been allocating those costs on their books.

I suspect that they do not allocate those costs on an element-by-element basis on their books with respect to this thing.

At the end of the day--

Mr. Verrilli Jr.: That's always been the case.

Mr. Olson: --That has always been the case, and that--

Mr. Verrilli Jr.: It's always been the case with ratemaking methodology.

So, you... you can come up now and say, it's always been so difficult.

We've done it pretty badly.

So, we're going to solve the problem by just forgetting about giving--

Mr. Olson: --No, Justice Scalia.

You said in your concurring opinion in the Duquesne case, we look at... we look at consequences, not techniques.

The balance of the Court said in that case, we look at the impact, not at the methodology.

We don't know what the consequences are yet.

We don't know what the... what the impact on the local exchange--

Mr. Verrilli Jr.: --Now you're back to spinning a wheel.

You... you've departed from my... from my hypothesis, assuming that I don't believe that spinning a wheel is okay.

What you're telling me is spinning a wheel is okay.

Mr. Olson: --No, I'm not saying that spinning a wheel is okay.

What I'm saying is that neither the Constitution nor the statute put prudent investment... prudent investment rule in this ratemaking statute or the statute that authorized ratemaking and--

Mr. Verrilli Jr.: We refused to adopt that in Duquesne.

Mr. Olson: --Precisely.

In fact, that's why I was going to say... and put in a footnote, which I think is extremely footnote... footnote 10 said, constitutionalizing the prudent investment rule would foreclose a return to some form of the fair value rule, just as its practical problems may be diminishing.

Now, TELRIC is a version of the fair market rule.

The emergent... as the Court went on to say in the Duquesne case, the emergent market for wholesale electric energy could provide a readily available, objective basis for determining the value of utility assets.

In other words, the Court was foreseeing in a way the same argument that we were having today.

That's why the Court rejected constitutionalizing the prudent investment rule, and that's why the Court signaled that there were other methods that would be available, including fair market methods that... that might, in fact, be very practical and functional.

This is a situation where I... I... and I want to emphasize that we're dealing with a statute that didn't require the prudent investment rule.

We're dealing with decisions that go... by this Court that go back 100 years that have said, don't constitutionalize any particular methodology.

But that is precisely what the... the local exchange carriers are arguing for.

There are a number of premises in their argument to you--

Mr. Verrilli Jr.: To say that you don't constitutionalize the prudent investment rule is not to say that any methodology will go, even one that does not enable somebody who has made investments under a commitment from the Government to allow a fair return, to recover that fair return.

I mean, the... the two are not... are not mutually exclusive.

Mr. Olson: --Well, that... that's one of the things that I was... that Mr. Barr said that I think the Court would take issue with.

And I think one of the Justices in a question did.

I think it may have been you, Justice Scalia.

They weren't required to spend the money.

They were given an opportunity to invest in an industry, in exchange for which they received a monopoly for a long period of time.

Now, the Congress of the United States has decided that we have to have competition, it would be wise to have competition in the local telephone market.

They were never promised in any constitutional sense or any contractual sense... and they don't even allege that, and Mr. Barr said he didn't allege that there was a contract... that they would recover every nickel of their investments.

In the Duquesne case, for example, the argument was made these were reasonable and these were prudent investments in nuclear facilities, and yet the State of Pennsylvania developed a system that did not allow them to recover those prudent investments unless they were actually being used in the delivery of energy products.

And the argument was made we have a promise or you have a constitutional obligation or you have some sort of requirement to allow us to recover those costs.

The State of... the Supreme Court of Pennsylvania said no.

Mr. Verrilli Jr.: Well, what is the baseline standard that the utilities are entitled to rely upon?

Mr. Olson: They're--

Mr. Verrilli Jr.: It's not like telling GM to give away Chevrolets.

We know... we know that.

A utility is different.

Why is it different and what is the baseline constitutional standard that they are... or fair compensation standard that they are entitled to rely upon?

Mr. Olson: --The baseline constitutional standard, at the end of the day, once you can look at the results, is this a non-confiscatory result.

Is the lowest... this Court has said... it's the Hope Natural Gas case, a number of cases before that, a number of cases after that.

It's in the Smyth case.

In... in that the ultimate outcome is a... the lowest reasonable rate which is the lowest non-confiscatory rate.

That is what they are entitled to in the Constitution under the decisions of this Court.

Now, what the Court also--

Mr. Verrilli Jr.: Why isn't it confiscatory to say that we're going to make you use your capital plant, which costs $140 billion, and we're going to allow you to depreciate it as though it were only $70 billion?

Why isn't that confiscatory?

Mr. Olson: --Or the Court... the Congress might have said, with respect to a transportation company, you had it... you've had the taxi service all to yourself for all these many years and now we're going to allow other... some competition in there, and... and you've got some monopolistic facility, and we're going to let your competitors use some piece of it.

Now, you're not going to be... and... and we can determine what the value of that is in a competitive market, and we're going to allow you to recover some portion of the value.

This Court has repeatedly said under the Fifth Amendment, to the extent that that is applicable... and I believe it is fundamentally... to the ratemaking cases and the utility cases... that it's a fair market value at the time of the taking.

Mr. Barr says the taking occurs is... when we were required to expend the money.

Now, that is not when the taking occurs.

The taking occurs, if at all, when they have to surrender some portion of their system to allow someone else to use it.

Mr. Verrilli Jr.: I want to be... I want to be sure I have a chance to ask you a different question.

I want to know what, in your opinion, the FCC was driving at when it chose this particular methodology.

What in your opinion... after all, they had four of five possibilities.

What basic economic question were they trying to answer when they chose this one as opposed to a different one?

Mr. Olson: What they wanted to do with the... they wanted to accomplish a number of goals, which are set forth in the preface of the statute, which I alluded to before, which is to reduce prices, to inspire competition--

Mr. Verrilli Jr.: I don't want... I... I would like a little bit less generality than that, if... if you can give it to me.

What was their object?

What did they hope that the rates set this way, rather than set, for example, another way, would achieve?

Mr. Olson: --Well, they... they explained that one of the important considerations... and it's hard to not deal in some generality--

Mr. Verrilli Jr.: Yes.

Mr. Olson: --this area does.

But one of the important objectives that they hoped to achieve was to develop a pricing methodology that would encourage new entrants to come into the market and pay fees that would allow them to enter the market at competitive rates and encourage them to develop new technologies--

Mr. Verrilli Jr.: All right.

If that's basically the objective, to get them to enter when they should enter... is that fair?

To get them enter when economically they should enter, not when economically it'd be wasteful for them to enter.

Mr. Olson: --Yes, I think that's a fair premise.

Mr. Verrilli Jr.: All right.

If that's a fair premise, why wouldn't they choose a system that would give them the following answer?

Price.

Look at the service that the newcomer wants to buy from the incumbent.

Try to charge a price so that it reflects the real resources that that incumbent will have to spend... him, not some hypothetical person... to provide that service.

Perfect answer because if you can get it, then obviously if that number is higher than it will cost the incumbent in real resources to provide it, he'll build it himself.

And if it's lower, he'll buy it.

The perfect economic answer.

Why would they not try, at least, to answer that question?

Mr. Olson: Well, it seems to me that they did try to answer that question, Justice Breyer.

Mr. Verrilli Jr.: Fine.

Okay.

Then you're right where I think you--

Mr. Olson: All right.

But as you pointed out in your... in your dissent, your partial dissent in the other... the other time this case was before this Court, there are a variety of different methodologies that various different economists look at and think that they can accomplish those kind of objectives.

But this Court has said that we leave that to the regulators to do, and if at the end of the day, there's some level of confiscation, then we can adjudicate that.

Mr. Verrilli Jr.: --I'm not worried about confiscation.

Mr. Olson: All right.

Now--

Mr. Verrilli Jr.: I'm worried about the following.

If that's what they're trying to do, then how could it possibly do that, to write an order that says the depreciation rate and the rate of return that you are going to charge is going to be based upon not what it will cost you, but rather, what it will cost some hypothetical firm that isn't there, let alone saying the same thing in respect to telephone poles, in respect to wires, in respect to efficiency of administration, in respect to a 22 percent discount for a competition that doesn't exist?

In other words, how did it even come close to answering that question to look not at the cost of this firm, but at the cost of some hypothetical firm that by definition doesn't exist?

Mr. Olson: --Well, in the first place, we're not talking about replicating an entire firm.

We're talking about replicating particular elements that are available to the... to the firms that wish to interconnect.

And the FCC made it clear that we're not talking about... we're not talking about hypotheticals any more than the embedded cost system would require allocating hypothetical portions of something that happened 30 years ago to a rate for... for a particular small portion of a product that may have nothing to do with that.

What the FCC's order does... and it explains this in relatively elaborate detail that it's talking about a reasonably available, efficient product in the marketplace that's comparable that can perform a service that's equivalent to the... the element that may have been built 5 years ago and may be obsolete today or partially obsolete today and may not be efficient.

Because if we don't do it that way, we will encourage non-competition or... or prices that are inefficient based upon old services.

And this was actually addressed by Justice Brandeis in the... in the famous concurring opinion.

And he says at the very end of his... his opinion, he says that... that surely the cost of an equally efficient substitute must be the maximum of the rate base if prudent investment is to be rejected as a measure.

Now, what the FCC did in this case, it made a compromise.

It took the wire centers as they existed, and they used the other elements based upon these reasonably efficient, effective, available alternatives.

Now, the FCC has been criticized.

Well, you're... you're theoretically inconsistent.

You should have done it all this way or all that way.

The fact is that this Court has said again and again that the ratemaker may make compromises, may have to balance one benefit to the incumbent with one benefit for the competitors.

It may... it doesn't have to be... the Duquesne case and I think the Hope case involved challenges of methodological inconsistency, and the Court brushed right past that properly because the ratemakers, to solve this hopelessly complex problem, might have to pick something from column A and column B.

Now, at the end of the line, I want to make one important point, that even after the State commissions get finished with the process, the FCC included in its order a provision... it's paragraph 739... that specifically said... and this is page joint appendix 422.

This is after the application of TELRIC and after reasonable depreciation rates are set.

And they haven't been... so they have been set in some places, and they haven't been set in others.

And there have been takings... cases brought by the... the incumbent carriers.

No court, as far as I know, has upheld a taking yet.

And costs of capital.

There's lots of flexibility.

At the end of the day, paragraph 739 says, incumbent local exchange carriers may seek relief from the commission's pricing methodology if they provide specific information to show that the pricing methodology, as applied to them, will result in confiscatory rates.

So, TELRIC and the FCC's regulation provided lots of opportunities to get to the end of the day the right result in a manner that achieved these various conflicting goals of Congress.

It did it in a way which might not be the best way, although it looks to me like a very conscientious effort to import competition, bring down prices, and to promote technology.

But at the end of the day, after the commissions do their job, the expertise that you were talking about in your dissenting opinion... at the end of the day the incumbent commission... exchange carriers can come to court and say it was confiscatory, and they have a remedy.

Or before that, they may go to the FCC and they have an opportunity to present their case to the FCC.

This, it strikes me, is the way it should be done.

It may not be perfect.

But in this ratemaking area, this is the way it should be done.

The expertise was given to the agency that has the expertise, and they were given an opportunity to fulfill the goals of Congress under the constitutional standards set by this Court.

Thank you.

Mr. Verrilli Jr.: Thank you, General Olson.

Mr. Verrilli, we'll hear from you.

ORAL ARGUMENT OF DONALD B. VERRILLI, JR. ON BEHALF OF THE PETITIONERS IN NOS. 00-555, 00-587, AND 00-590

Mr. Verrilli Jr.: Mr. Chief Justice, and may it please the Court:

I'd like to begin by trying to answer Justice Breyer's question as to why TELRIC was a sensible policy choice by the FCC, and in so doing, I hope also to be able to address Justice Kennedy's concern about whether TELRIC underestimates the cost that a company will face going forward.

And then if I... if I can, I'd like to turn to Justice Scalia's question about whether TELRIC offers a fair opportunity to recover embedded costs.

Paragraph 679 of the local competition order is where the FCC spells out in detail what its rationales were.

And what the FCC said in paragraph 679 is that it wanted to adopt TELRIC to send... to send the right signals to new entrants about when to buy and when to build and to prevent anti-competitive behavior by the incumbent with respect to the pricing of network elements.

And that's critical from our perspective.

As a retail matter, the incumbents have every right, under the State law and Federal antitrust laws, to price their retail offerings in these new competitive markets at their long-run incremental costs.

That's what the State laws say.

That's what the antitrust laws say.

And therefore, if they could charge us the historical costs for these key inputs... the historical costs for key inputs, when they can charge retail based on their long-run incremental costs, we could never compete using--

Mr. Verrilli Jr.: My question is, by the way, blank slate.

I wasn't doubting that they could charge forward-looking costs.

I was doubting... I find it difficult to reconcile what the State... and I think this for me is the issue.

I mean, in 679, they have a correct statement of the goal, and... and then all these criticisms, which you're well aware of, suggest that by choosing blank slate, rather than this company's, this incumbent company's long-run incremental costs, they've departed so far that... give them all the expertise you want... it's still awfully hard to uphold them.

I mean, that's basically the argument.

And if you're going to--

Mr. Verrilli Jr.: --Yes, thank you.

And... and that's just not right.

And their own experts, Professor Kahn, in particular... and this is at page 155 of the joint appendix... concedes that that's not right, that if you set the depreciation and cost of capital appropriately to reflect the risks of... existing in the TELRIC world, then TELRIC will provide the full compensation.

Now, Professor Kahn concedes that.

I believe Mr. Barr acknowledged that at the beginning of his argument.

It all comes down to what those depreciation rates and costs of capital are.

And what the FCC said very clearly is that the States set depreciation rates.

That's in paragraph 29.

The regulation itself says that they must be economic depreciation.

That means they must account for the full loss in value as a result of technological change.

And in paragraph 702 of the order, the FCC said we expect States to set depreciation rates that take this into account, that take this risk into account.

Mr. Verrilli Jr.: --But my question... I don't want to distract you because others had a different question... had nothing to do with confiscation.

My question was based... I'm leaving that totally to the side.

Phrase, wildly incorrect set of economic signals to achieve the 739 goals, for the reasons that you've heard and are listed in the briefs.

Mr. Verrilli Jr.: But if depreciation and cost of capital are set right, it won't do that, Justice Breyer, and I believe that is what Professor Kahn conceded, their expert.

And that is why, Justice Kennedy, the rate going forward, the TELRIC rate going forward, will not necessarily be lower than the cost that the incumbents incurred going forward, because a rate, after all, is a product of three things: the cost structure, the depreciation rate... in other words, how few years you recover it... and the cost of capital... in other words, what the risk adjustment is.

So, it could well be that the rates would be the same or higher depending on how depreciation and cost of capital are set.

Mr. Verrilli Jr.: You're... you're not asserting that the States can... can kick up the cost of capital rate on the basis of... of the fact that the utility is not... is not getting depreciation on its sunk costs.

Mr. Verrilli Jr.: It... the... the... separate two questions out.

I think there's two... two points to be made in there, Justice Scalia.

With respect to what... what the cost of capital ought to be set at, under the regs and under the FCC's order, is to reflect the risks of operating in the system.

Mr. Verrilli Jr.: Right.

Mr. Verrilli Jr.: So, I think it does do what Mr. Barr claims it doesn't do.

I think it very clearly does do that.

Now, with respect to their sunk or embedded costs, I think it's a different question because the issue here is whether the TELRIC in operation will produce rates and returns, then in operation don't cover the... the undepreciated costs still on their books.

And the FCC made a specific finding... that ultimately, Justice Scalia, is a much more empirical than a methodological question.

It is possible, as a matter of logic and methodology, for TELRIC to do so, depending on how the inputs are set.

And therefore, it is an empirical question whether it will, in fact, do so.

The FCC in the notice of proposed rulemaking in this case specifically asked the incumbents for evidence as to what that gap would be.

The incumbents produced nothing.

Nothing.

The FCC made a finding in paragraph 707 of the order that there was no evidence in the record to support the proposition that the adoption of TELRIC would result in significant stranded costs.

But the FCC did more than that.

It extended an invitation to the incumbents to come back with proof that there would, indeed, be significant stranded costs.

That invitation has been outstanding for 5 years now.

The incumbents have come back with nothing.

But that's not all.

The way this statute operates is the FCC produced a methodology, which is then applied in the States, in the States according to these rules, setting depreciation rates, setting costs of capital.

Every State in the Union has had a proceeding of that kind.

This statute in section 252(b)(6) makes those proceedings reviewable in Federal district court.

Therefore, in every State in the Union, the incumbents have had the opportunity to demonstrate that in application TELRIC will produce rates that don't recover significant amounts of stranded cost.

They have not succeeded anywhere in the country.

Indeed, in the vast majority of States, they haven't even tried.

And the reason is because there isn't a big gap.

Mr. Verrilli Jr.: If... if that... assuming that, his... Mr. Barr's argument, I take it, was that paragraph 702 put... read in any disclaimers you want, and they have loads of them.

But it says the starting point is existing depreciation rates and capital rates, and that couldn't be right.

And in addition, it strongly suggests if it doesn't state... and it does state... that you change those in respect to new competition coming in while the correct statement would be change it from the beginning because whether new competition comes in or not is beside the point.

You're setting in TELRIC the imaginary rate that would be set by new competition, and therefore, obviously you can't have existing depreciation rates.

I mean, I take it I may not have paraphrased it correctly, but I think that's basically his point.

Mr. Verrilli Jr.: No, I think it's right.

That is his argument.

But it's not what paragraph 702 says and it's not what happened in operation.

The States have set depreciation rates that are downward departures.

California, for example, cut the switching depreciation rates in half.

So, it's just not the case that that's what's happened out there in the real world.

And there are dozens of... there have been dozens of opportunities for this case to be proven on the basis of a real rate in Federal district court.

And there... as I said, in the few cases where it has even been attempted, it has been rejected, and most of the time it hasn't even been tried.

And if... let me try to get back, if I could, to that 340/180 comparison that's in the briefs and we've had some discussion about.

Here's why TELRIC doesn't produce the kinds of results that... that example suggests.

It's because the 340 is way, way too high.

The 340 is everything in the entire network and the entire corporate superstructure that goes with it.

And that is not all devoted to the production of local telephone service.

It's... there are... tens of billions of dollars of that are devoted to creating capacity for long distance service.

Billions and billions of dollars additionally are devoted to capacity for video service, for CENTREX service, for other services that wouldn't be reflected in TELRIC rates.

There are just... you'd have this huge allocation problem if you take this.

And this I think shows why TELRIC is the practical answer here as well as the fair one.

You would have a massive allocation problem if you took that 340 because, first of all, you'd have to figure out how many tens and tens of billions of dollars got taken out for all these services that have nothing to do with providing local telephone service.

Then of the $45 billion in that 342 that's devoted to corporate overhead, you would need to figure out how much of that is appropriately devoted to... to the local telephone service.

Mr. Verrilli Jr.: And that used to be done all the time, of course, to decide between local and... and long distance phone rates.

Right?

Mr. Verrilli Jr.: Well, no, but there's a--

Mr. Verrilli Jr.: I mean, it's not as though--

Mr. Verrilli Jr.: --I'm sorry, Justice Scalia.

Mr. Verrilli Jr.: --It is not as though we didn't... haven't been pretending to do that for years and years.

Mr. Verrilli Jr.: But... but, Justice Scalia, a significant amount of that goes to retail which can't be allocated here.

And then when you get done with all that, then you've got to take out the billions of dollars in phantom assets that the FCC's most recent audit of their books identified.

And then when you get done with that, then you've got to decide how much of that was actually prudently incurred.

And when you get done with that very long process, that number is going to come way, way down.

Now, on the other side, the 180 is too low.

And the FCC specifically said it was too low and warned against using it for exactly the comparison that Mr. Barr used it for because it's designed to calculate universal service subsidies at the very most basic low level.

So, that comparison just doesn't hold up.

And so, the undepreciated part of the comparison, Justice Breyer, doesn't hold up either because the number is not going to be... the undepreciated number of everything is $140 billion to $150 billion.

But the undepreciated part of what they entitled to recovery under TELRIC is going to be a much smaller number than that number because you'd have to take out everything I just described.

So, it just doesn't wash.

There may be some difference with respect to some of the elements.

Switching costs have come down.

Of course, loop costs have not come down, and the loop costs are 48 percent, according to the FCC in this order, of the overall cost of providing service.

And those have been stable over time.

So, the fact is you just don't have a huge problem.

You don't have a big gap.

And that's why, Justice Scalia, when you adopt one methodology, when you adopt this methodology here, given the fact that it is an empirical matter, there's no reason to think there's a huge gap.

There's no reason to think that the outcome will necessarily preclude them the opportunity of earning a fair return.

And that's why I think this case is an easier one than Duquesne because at least in Duquesne, you knew how much wasn't going to be recovered as a result of the switch in methodology.

Here, you don't know how much isn't going to be recovered, but what you do know, based on the facts that I've just conveyed to the Court, is that it's not going to be a very big number, even if you assume that all elements are leased.

And of course, as Justice Ginsburg's question pointed out, only 3 percent... it's not 6 percent.

The FCC's most recent figures are 3 percent... 3 percent... of the local network is being leased.

Which leads me to a practical point here, that if the world were the way the incumbents were describing it, it would be a very different place in fact than it is.

We would be making all the money.

They would be in trouble.

The reality is--

[Laughter]

--they are making all the money and we are in trouble.

And the reason for that... and... and, indeed, they would be derelict in their responsibilities to their shareholders if they weren't taking advantage of this gigantic regulatory arbitrage opportunity to go into each other's local markets and take away all the customers.

But they're not doing that.

The reason they're not doing that is because the opportunity doesn't exist.

This... the thing that's a fantasy, the thing that's hypothetical in this case is the claims they are making about what this system is and the way it works.

Thank you.

Mr. Verrilli Jr.: Thank you, Mr. Verrilli.

Mr. Barr, you have a minute remaining.

REBUTTAL ARGUMENT OF WILLIAM P. BARR ON BEHALF OF THE PETITIONERS IN NO. 00-511

Mr. Barr: The Constitution doesn't dictate a methodology, but what it does say is that whatever methodology is selected, it ultimately has to be judged by this Court as to whether it provides us a fair opportunity to recover our costs.

And therefore, if it creates a methodological risk, it has to compensate us for a methodological risk.

We did show rates.

And the Government's position here is because this is a bifurcated proceeding, we have challenged rates.

The Government has taken the position... the Fourth Circuit has held... we cannot challenge a methodology.

We can only challenge whether the rate conforms to the Federal methodology.

This is the only place we can get review of the underlying problem, which is the methodology.

This is an Ashwander case, and the Government itself in paragraph 705 says that our interpretation of based on the cost of providing is permissible.

What we're saying is the statute dictates the methodology here and avoids the constitutional problem.

But even if you didn't find that, this rate... this methodology does create a methodological risk, and we have shown that we're not compensated for it.

We have shown rates in our... in our... in the record that halve our recovery, halve our revenue.

That is the typical instance.

They've had 5 years to show one State... and, you know, it doesn't matter if there's one State.

The question is what's the risk of any State that comes close to allowing us to recover our prudent investment.

And you can look through the record and you can't find one.

We have shown in Virginia and New York... New York is a classic.

Our loop rate... our cost is $33.

Chief Justice Rehnquist: Thank you, Mr. Barr.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

AT&T v. Iowa Utilities Board - Oral Argument

Fri, 09 Jan 2009 14:50:11 +0000

Case:

AT&T v. Iowa Utilities Board

Media File:

97-826_19981013-argument.mp3

Related Transcript:

1998_97_826_argument.xml

Transcript:

CHIEF JUSTICE WILLIAM H. REHNQUIST: We'll hear argument now in a number of consolidated cases, 97-826, AT&T Corporation v. Iowa Utilities Board, et cetera, et cetera.(Laughter.)

And we'll have an hour for the jurisdictional argument. Then we'll take a very brief pause while counsel adjust their seatings at the table, and then we'll go on for the next hour of argument. General Waxman.

MR. SETH O. WAXMAN: Mr. Chief Justice, and may it please the Court: In 1996, Congress enacted general standards designed to bring competition to local telecommunications markets rapidly and throughout the country. In doing so, it expressly extended Federal law to cover the rates, terms, and conditions under which incumbents must provide new entrants access to their facilities. No one doubts that the FCC has authority to promulgate some rules interpreting these provisions. The jurisdictional issue presented in this case is whether in certain specific respects, principally regarding the methodology for setting lease rates for network elements, Congress has for the first time denied the FCC rulemaking authority with respect to a substantive provision of the Communications Act.

The answer is no. The 1996 amendments preserved the Commission's existing authority under section 201(b) to prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions of this act.

CHIEF JUSTICE REHNQUIST: But, General Waxman, 201(b) -- you find before that, of course, naturally 201(a), and there it says, it shall be the duty of every common carrier engaged in interstate or foreign communication by wire or radio. So, don't you think the rule -- the rulemaking provision is limited to that kind of things?

MR. WAXMAN: No, I don't, Mr. Chief Justice, and for a variety of reasons. First of all, section 201(b), in which the relevant rulemaking grant is not so limited -- and we think that in any event, the specific sentence in 201(b) that I quoted should be interpreted according to its plain meaning. Moreover, in the --

CHIEF JUSTICE REHNQUIST: But you think its plain meaning means it should extend beyond the section in which it's found?

MR. WAXMAN: I think that it means -- section 201(a) is -- itself is limited to intrastate and foreign commerce. The last sentence of section 201(b) is not so limited.

CHIEF JUSTICE REHNQUIST: Yes, but --

MR. WAXMAN: And I think it should be interpreted according to its terms.

CHIEF JUSTICE REHNQUIST: But, you know, if this were a general thing that were to extend throughout the Federal communications statutes, why would you find it tucked away here at the very end of section 201(b)?

MR. WAXMAN: Well, Mr. Chief Justice, two responses. First of all, in -- in I think what can only be described as belt and suspenders, the Commission has other statutory provisions that granted the same plenary rulemaking authority, 47 U.S.C., section 154(i) and section 303(r).

CHIEF JUSTICE REHNQUIST: Well, but doesn't that suggest that each of those grants is limited to the sections in which they're found?

MR. WAXMAN: I don't think it does, and moreover, with respect to 201(b), it's clear that Congress in 1996 had this section specifically in mind because section 251(i) of the 1996 amendments, which is entitled Savings Provision, specifically says that nothing in this act shall be deemed to limit -- nothing in section 251 shall be deemed to limit or impair the applicability of the provisions of section 201. So, we think it -- Congress had it in mind and wanted it to be interpreted according to its plain meaning, but --

CHIEF JUSTICE REHNQUIST: But -- but if shall not be deemed to impair 201, 201 contains (a) as well as (b).

MR. WAXMAN: That's true.

CHIEF JUSTICE REHNQUIST: And it could be read as a limitation on (b).

MR. WAXMAN: I do think, with respect, Mr. Chief Justice, first of all, that that would require you to read the sentence, the rulemaking provision in 201(b), not in accordance with its plain meaning. And secondly, the 1996 act itself, in any event, in section 251(d)(1) mandated the FCC within 6 months to promulgate rules, quote, as necessary to implement the requirements of this section, and that section requires incumbents to provide access to network elements at rates that are just, reasonable, and in accordance with the terms of section 252. The fact that section 252 itself directs State commissions in arbitration proceedings to set the specific rates charged by a particular carrier in a particular market for a particular element is completely consistent with the FCC's authority to prescribe the general methodology by which those rates should be set. In fact --

JUSTICE ANTHONY KENNEDY: Staying with 201(a) for just a minute, if the suggestion by the Chief Justice were one we thought correct, and the first sentence in (a) was a limitation on the rule -- the last sentence in the rulemaking authority in (b), do you have a fall-back position with, oh, we're really talking about interstate commerce anyway?

MR. WAXMAN: Well --

JUSTICE KENNEDY: Or -- or is --is -- would -- would your case necessarily founder if we accepted the Chief Justice's --

MR. WAXMAN: It -- my case would --

JUSTICE KENNEDY: -- suggestion?

MR. WAXMAN: My case wouldn't founder at all for three reasons. First of all, section 154(i) of the act provides in a general provision that's not limited to radio or cable or anything else, similarly provides the Commission with broad rulemaking authority to implement for any provisions of the act. Second of all, section 251(d) is an express jurisdictional mandate to promulgate rules implementing the provisions of 251 which includes the requirements that rates be reasonable and in accordance with section 252.

And finally, if your question is directed at the operation, I guess, of section 2(b) of the act, we think that section 2(b) of the act, which is a rule of construction, is inapplicable to this case because sections 251 and 252 apply Federal law to facilities that are used interchangeably for both interstate and intrastate calls. Just like the telephone handset that we use every day, the local telephone network is neither an intrastate or an interstate facility. It's both.

JUSTICE ANTONIN SCALIA: Well, if you applied that argument, then 2(b) wouldn't have kept -- wouldn't have kept the FCC out of intrastate phone rates, even -- even before the 1996 act. I mean, doesn't that prove too much?

MR. WAXMAN: No, it doesn't prove too much because before the 1996 act -- well, first of all, before the 1996 act, the FCC did regulate how local incumbents charge other carriers for use of their network, for example, in the cases involving exchange access or private lines or customer provided equipment.

JUSTICE SCALIA: But only with regard to interstate calls.

MR. WAXMAN: No, with respect to both. All of the court of appeals' rulings upholding the jurisdiction of the FCC with respect to private lines and customer premises equipment were premised on the fact that these are used inextricably for both.

And since the FCC clearly has rulemaking authority with respect to the interstate component, under footnote 4 of this Court's decision in Louisiana Public Service Commission, they had authority to regulate the use of all of the uses, interstate and intrastate, of those elements because they could not be, quote, separated. And, moreover, the section 2(b) does not apply to this case for two independent reasons.

First, because no construction of any provision of the law is required. The local competition provision, sections 251 and 252 indisputably apply to intrastate matters, and sections 201(b) and 2 --

JUSTICE KENNEDY: Well, you mean they're parts of the act that don't have to be construed?

MR. WAXMAN: Well, I don't think --

JUSTICE KENNEDY: Is that the gravamen of your argument?

MR. WAXMAN: I -- no, I think the import of section 2(b), as this Court announced in Louisiana Public Service Commission, is that an -- a provision of the Communications Act won't be understood to apply to a purely interstate matter unless it clearly does. It's not a rule that says disregard what everybody agrees the act does.

JUSTICE SCALIA: Don't you think 2(b) has been repealed by the -- it is impossible, is it not, after the 1960 -- 1996 act, to give effect to 2(b)?

MR. WAXMAN: Oh, I don't think so at all.

JUSTICE SCALIA: Why? How is it possible to -- not to construe any provision of the act to apply to intrastate communications?

MR. WAXMAN: Well, I think it is not possible to apply any provisions of the -- or certainly the provisions that we're dealing with here, 251, 252, 253, 254, 271, as dealing inextricably with interstate and intrastate matters. But the -- there is nothing in the act, for example, that would permit the FCC to impose or to take away the State commissions' authority to set maximum retail rates for -- for customers. And, in fact, if Congress had repealed section 2(b) or made section 2(b) inapplicable to these sections -- I don't know whether it would have, but the FCC could have said, well, we've now got ancillary jurisdiction to take over the State's retail ratemaking function.

JUSTICE SCALIA: But 2(b) has its exceptions written in, except as provided in sections 223 through 227, inclusive, and section 332, and subject to 301 in title 6.

Nothing in this act shall be construed to apply or give the Commission jurisdiction with respect to, blah, blah, blah, blah, blah. It's just impossible to apply that anymore.

MR. WAXMAN: Well, we think that it is, in fact, impossible to apply it to the local competition provisions in this case, first, because those provisions plainly do apply to interstate matters, and the FCC has statutory authority to implement them.

And second -- and this is a fundamental, independent point -- even if 2(b) applied under the rule expressed in footnote 4 of Louisiana Public Service Commission, because there is also no doubt that 251 and 252 also apply inextricably to interstate matters over which the Commission has unquestioned jurisdiction.

JUSTICE KENNEDY: As to your first argument, are you saying that the act has changed the boundaries between what's local and what's interstate?

MR. WAXMAN: No.

JUSTICE KENNEDY: The 1996 --

MR. WAXMAN: No.

JUSTICE KENNEDY: I thought that you could say that --

MR. WAXMAN: Well, what it --

JUSTICE KENNEDY: -- that it -- that it has made what was previously thought to be local now interstate. So, the act -- so the prohibition of 2(b) is irrelevant.

MR. WAXMAN: I think, Justice Kennedy, rather than say change the definition, the definitions were already becoming quite blurred, as I've indicated, by the decisions involving private lines and private branch exchanges and exchange access.

CHIEF JUSTICE REHNQUIST: Are those decisions of this Court?

MR. WAXMAN: They're all decisions of the FCC that were -- that were approved on appeal without -- without exception by the courts of appeals.

CHIEF JUSTICE REHNQUIST: By courts of appeals?

MR. WAXMAN: And some of those decisions, Mr. Chief Justice, are referred to or referenced in footnote 4 of this Court's opinion in Louisiana Public Service Commission. What the -- Justice Kennedy, what the act did, if you look at sections 251 and 252, it doesn't even use the words interstate or intrastate because Congress recognized that the use of network elements is -- is inextricably entwined with both, and what it --

JUSTICE KENNEDY: So, then Justice Scalia is right, that 2(b) is just not really applicable anymore.

MR. WAXMAN: We think that it is not applicable with respect to these provisions, and to the extent that it did apply, the exception for inseverability would nonetheless give the FCC the authority to promulgate rules about this methodology.

JUSTICE STEPHAN GERLAD BREYER: But what about using 2(b) in what I think is a rather difficult statutory problem, which is to reconcile -- assuming there is rulemaking authority, reconcile the word rates, you know, in 251 where it talks about unbundled access.

It says there's a duty to provide unbundled access, you know, at rates that are just and reasonable. And then when you get over to 252, it says that State commissions will establish rates, and they have to be just and reasonable. Now, why wouldn't 2(b) come in right there, trying to interpret and reconcile those two words? Rates in both --

MR. WAXMAN: Right. There's --

JUSTICE BREYER: -- reconciling them by saying --

MR. WAXMAN: There's nothing --

JUSTICE BREYER: -- look at history and look at the extent to which a rate is traditionally up to the carrier for State regulation, look at it traditionally Federal regulation, and say that's what we look to, and that's what the difference between the rates in the two sections means. Why wouldn't we use 2(b) as a guide there?

MR. WAXMAN: Because there is nothing irreconcilable about -- about section 252(b), (c), and (d) and the requirement you pointed out in section 251(c)(3) that rates be just, reasonable, and in accordance with section 252. 251(c) incorporates expressly the right -- the requirements and the standards of 252(d), and in 252 -- 252(b) gives the State commissions jurisdiction and the mandate to resolve open issues in arbitration between carriers. And it tells them in (c) that in resolving any open issue, which surely includes open issues about rates, that they must -- that they must resolve any open issue and ensure that such resolution and conditions meet the requirements of section 251, including the regulations prescribed by the Commission pursuant to section 251. Now --

JUSTICE BREYER: Yes.

MR. WAXMAN: Now, if you were to -- a reading that says that the references to what State commissions do in arbitration ousts the Federal -- Federal Communications Commission with respect to any matter -- any reference to or any responsibility with respect to carrier-to-carrier rates, you are required to -- you -- you encounter a half-dozen or more irreconcilable interpretive anomalies elsewhere in the statute. And I'll point you just to the most significant one. This act has two principal provisions. Provision number one, which is reflected in 251, means that the local incumbents have got to give new entrants access to their markets for local competition. And section 271 is the provision that lets the local incumbents, once they have satisfied certain conditions to the FCC's satisfaction, to enter into competition in the long-distance markets from their home regions. We have a cert petition pending with respect to another decision of the Eighth Circuit interpreting 271. But the point is this. Section 271 -- under section 271(d), the FCC must determine on its own -- it must find on its own and without deference to State commissions, but after giving, quote, substantial weight to the views of the Attorney General, that the Bell operating companies have satisfied the terms of section 251 and 252, including the pricing terms. And if section 251 is given its plain meaning, we must be right about the Commission's ability to issue general, methodological rules on ratemaking under 251 --

JUSTICE BREYER: Yes.

MR. WAXMAN: -- and 252.

JUSTICE BREYER: General, methodological rules, yes.

MR. WAXMAN: Okay.

JUSTICE BREYER: But not rules that take 75 years of ratemaking and turn them on their heads --

MR. WAXMAN: Well --

JUSTICE BREYER: -- preventing commissions, State commissions, in effect, should they so wish, to permit a local monopolist to recover his fixed costs. For example, someone who follows these rules sees in them 1,000 pages of detail, and therefore, using 2(b) one would say the Commission would lack the power to write rules with 1,000 pages of detail such that they, in effect, become a system called TELRIC, the like of which has not been known previously. And it seems inconsistent with State regulation.

MR. WAXMAN: Justice --

JUSTICE BREYER: Now, I'm trying to summarize their argument in like one sentence, but that's what I've tried to do.(Laughter.)

MR. WAXMAN: Justice Breyer, what -- this act does not take away the State commissions' historical ratemaking role. Historically they made rate -- they determined retail rates and they still do that. What this act has done --

JUSTICE BREYER: That part was what I didn't get because I read through these over the summer, and I don't see how the State maintains a significant rate-setting role. And I don't know that -- that was what was bothering me.

MR. WAXMAN: The role that the State commissions have always had is to determine the maximum rates that the telephone company can charge retail and wholesale customers, and they still have that.

What the act does was create something new, that is, the ability to set rates between competitors, carrier-to-carrier rates, for elements, and it -- and the act makes that a Federal standard, but doesn't reserve all the responsibilities to the FCC. It gives the FCC rulemaking authority and gives the State commissions the authority to apply those rules and determine those standards.

JUSTICE RUTH BADRER GINSBURG: General Waxman, may I -- do I have it right, that the validity of TELRIC would be -- if you prevail on the jurisdictional question, that's open.

MR. WAXMAN: That's --

JUSTICE GINSBURG: That hasn't been considered yet.

MR. WAXMAN: That's right. And TELRIC -- it's not fair to say that there's a thousand pages applying rules. TELRIC is contained in a specific, discrete regulation. The Commission was required to deal with tens of thousands of pages of comments, and it did so.

JUSTICE BREYER: You're right. I think I overstated that. But I think several hundred is fair.

MR. WAXMAN: But there are explanations of this carrier wanted this, this commenter wanted that. The specific rules can be succinctly stated. May I reserve the balance of my time, please?

CHIEF JUSTICE REHNQUIST: Yes, you may, General Waxman. Mr. Ennis, we'll hear from you.

MR. BRUCE J. ENNIS: Mr. Chief Justice, and may it please the Court: I would like to make two points. The potential competitors have challenged the Eighth Circuit's jurisdictional ruling because the inevitable and now demonstrated effect of that ruling has been to severely undermine the prospects for rapid competition, which was the principal purpose of this act. Because State commissions had first to determine the meaning of the Federal rate requirements before they could establish particular rates, they failed to meet the 9-month deadline for establishing rates required by Congress. Moreover, there are already hundreds of Federal district court challenges to the State arbitration decisions, and the vast majority of them specifically challenge the rate methodologies employed by the States.

Until all of those challenges are finally resolved after appeals, potential competitors cannot even know how much they would have to pay for access and interconnection. This already substantial delay, and the delays still ahead regarding multi-billion dollar investment decisions, has seriously frustrated the act's central purpose. A construction of the act that so frustrates the principal purpose of the act cannot be right.

JUSTICE GINSBURG: Mr. Ennis, one of the briefs said that most of the Sate commissions on their own have adopted TELRIC. Is that true?

MR. ENNIS: The great majority of the State commissions on their own have adopted TELRIC or some other forward-looking cost scheme rather than historical embedded costs, but not all have. And those State decisions have been challenged in Federal district courts. They could be reversed. Until that whole process is over, the process of rapid competition is on hold.

JUSTICE BREYER: But how do I vote? This is -- this is what's actually bothering me. How would I decide this case if I thought, well, yes -- and I'm -- just for the sake of argument, assume yes, I accept that the FCC has the power to set some rules in respect to rates.

But suppose I'm worried about this particular set of rules and really not because of their detail, but rather because of their content, which is a system that the State might be free to adopt on its own.

But it seems by telling the State what system to adopt to over -- to go too deeply into the matters that 2(b) seemed, historically speaking, to reserve to States -- suppose I thought that. How should I decide this case?

MR. ENNIS: Justice Breyer, let me respond to that by saying, first, Congress has itself expressly in the statute taken away from the States their historic function of deciding rates based on rate of return proceedings. The statute says that itself.

Congress has already overturned State prerogatives and has preempted the State laws that barred local competition. Second, the issue of the TELRIC method is not presently before the Court. The merits of that have not been reached because of the court -- Eighth Circuit's jurisdictional ruling.

Third, if it were before the Court, the TELRIC method leaves the States very substantial discretion. It allows them to determine depreciation methods, which this Court in Louisiana said was a very significant component of the ratemaking process. It allows the States to determine joint and common cost allocation issues. It allows the States to determine the level of profit on those costs. In fact, TELRIC itself --

JUSTICE SCALIA: TELRIC does, but -- but if -- if your interpretation of the statute is correct, you would say the FCC could prescribe those things as well.

MR. ENNIS: Justice Scalia, as far as FCC's jurisdiction is concerned, that's correct. Then there would be the question whether the exercise of that jurisdiction on the merits went too far, it so interfered with the clear intent of Congress, that the States have a parallel role in this process, that it would violate the clear language of the statute.

JUSTICE SCALIA: Well, why -- why suddenly be worried about that at that point? Why not be worried -- worried about it earlier?

MR. ENNIS: Well, in fact --

JUSTICE SCALIA: That's a point of whether the FCC can adopt TELRIC at all.

MR. ENNIS: In fact, Justice Scalia, I think your point about earlier and later is a very important point, but I see it a little differently. Solicitor General Waxman made the point that section 271 requires the FCC itself to determine whether 252(d) has been fully implemented.

252(d) relates only to rates. Clearly Congress understood that, at least at the back end, the FCC had the authority to determine the meaning of the Federal rate requirements.

Why would Congress give the FCC that authority at the back end, but withhold that very same authority at the front end when FCC interpretations could meaningfully speed the negotiation and arbitration process and thereby further the principal purpose of the act?

JUSTICE SCALIA: That makes good sense, but artificially limiting it the way you were a moment ago doesn't make good sense it seems to me --

MR. ENNIS: Well --

JUSTICE SCALIA: -- by saying that, well, you know, if and when the FCC goes further and doesn't even let the States make these determinations as to proper allocations and so forth, then we can worry about those. It seems to me if we come out the way you want us now, we would come out the same way on those issues later on. I don't see -- I don't see --

MR. ENNIS: Well, I wouldn't want to prejudge how the Court would come out on the merits, Your Honor, but let me --

JUSTICE SCALIA: Give me a good reason for -- from separating the one from the other.

MR. ENNIS: I think the reason is the reason I just gave.

JUSTICE SCALIA: Which was? I didn't hear it.

MR. ENNIS: Well, perhaps I didn't understand your question, Justice Scalia. The point I was trying to make is that section 271 and, in fact, section 252(e)(6) and section 160 and numerous sections of the act plainly require the FCC itself, at some point in the process, to determine the meaning of the Federal rate requirements, a traditional authority for a Federal agency interpreting Federal law that is supposed to be, as the conference report says, nationally uniform. Why would Congress want to give that -- that very clear authority to the FCC at the back end of the process and withhold it at the beginning?

JUSTICE SCALIA: I can't imagine, but why -- but why -- the argument you were making was that, look it, TELRIC doesn't go all the way. It has reserved certain important questions to the States.

And my point is, well, that's out of the grace of the FCC. But the logic of your argument is that the FCC wouldn't have had to reserve those questions to the States.

MR. ENNIS: Well, not as a matter of jurisdiction.

JUSTICE SCALIA: Right.

MR. ENNIS: But then under Chevron deference, whether on the merits that was appropriate or not is exactly the question that this Court is going to decide in the second hour of the argument. The FCC has --

JUSTICE DAVID H. SOUTER: But I take it it's your position that the FCC has no -- has no discretion about reserving the adjudicatory jurisdiction to the States.

The FCC could not say in a non-default situation, we're going to make all the rates too. The FCC has no authority over that under -- under your argument, does it?

MR. ENNIS: Justice Souter, I think the FCC, as a jurisdictional matter, would have the authority to set particular rates if he thought -- if it thought that was necessary in order to ensure local competition, just as it has the authority under --

JUSTICE SOUTER: Would it do -- would it have that authority at the front end as well as at the back end?

MR. ENNIS: Yes, it would, Your Honor. At the back end, it clearly has it. Under 253, if the States set rates that the FCC concludes are anti-competitive rates, it can squarely preempt those rates, and I think it would have the same jurisdictional authority at the front end.

Whether on the merits it would be okay under Chevron deference is a different question. Let me just point out in my remaining time that there are other interpretive anomalies that flow from the Eighth Circuit's ruling. First, if the Eighth Circuit's ruling were correct, the very same phrase, quote, the requirements of section 251, would have to mean radically different things in section 251 which discusses the regulatory responsibilities of the FCC than it means in section 252 discussing the judicial responsibilities of Federal district courts.

252 requires that all State arbitration decisions can be reviewed by Federal district courts. Federal district courts are supposed to determine whether there has been compliance with, quote, the requirements of section 251. Plainly that means all of the requirements of section 251.

But when talking about the regulatory responsibilities of the FCC, the Eighth Circuit had to construe that very same phrase to mean only those requirements of section 251 which themselves call for FCC involvement. That's a conflict.

Furthermore, section 271 also makes clear that cannot be correct because 271 requires the FCC to determine whether there's been full compliance with section 251(c)(2) and (c)(3), and that cannot mean only those requirements of (c)((2) and (c)(3) that call for FCC involvement because those provisions do not themselves call for FCC involvement. My time is up. Thank you very much.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Ennis. Ms. Munns, we'll hear from you.

MS. DIANE MUNNS: Mr. Chief Justice, and may it please the Court: Congress created a national framework but -- to bring competition to the local markets, but did not delegate full authority to the Federal Communications Commission. It defined States the duty to set prices when parties can agree, and it specifically left section 2(b) and the dual jurisdictional scheme in tact under the Telecommunications Act. So, where the statute is clear is in section 252 with respect to pricing.

The language must be given full effect. If there is an ambiguity in the statute, then Congress intended for the dual jurisdictional scheme to continue.

JUSTICE JOHN PAUL STEVENS: May I ask you a question about 252? It plainly gives the States authority to fix rates in certain circumstances, but it does that, as I understand it, only when it's resolving arbitration disputes.

MS. MUNNS: That is correct.

JUSTICE STEVENS: And in doing so, it is to apply a Federal standard, is it not? The States are to apply a Federal standard.

MS. MUNNS: It is. It is applying Federal standards.

JUSTICE STEVENS: And their -- whether they've applied it correctly or incorrectly is subject to review by the Federal district court.

MS. MUNNS: And that's correct.

JUSTICE STEVENS: Now, is this -- does that -- and this is in a procedural section, 252, whereas the requirements are in 251. Now, is it your -- is it your thought that the Federal -- basic Federal standards that must be applied are already in the statute or that nobody is to implement them with further rulemaking. Can the FCC do it, the States do it, or nobody?

MS. MUNNS: It's our position that the standards are in section 252. They're in section 252(d), but they are to be implemented in the arbitration proceedings when the facts are brought forward to the State commissions.

JUSTICE STEVENS: But that's not quite responsive to my question. My question is, does the statute contemplate further rulemaking to define the methodology for ratemaking in greater detail than is already found in the statute? And if so, who is to be the rulemaker under your view of the statute?

MS. MUNNS: Not the FCC. The FCC has no authority under 252.

JUSTICE STEVENS: So, the only learning about the meaning of the Federal standard is in the statute itself without further guidance.

MS. MUNNS: Yes, I think the State --

JUSTICE SCALIA: Could the States issue regulations setting forth their interpretation of what this says? Federal --

MS. MUNNS: Yes, I believe that the States could do that.

JUSTICE SCALIA: But they would have to be litigated in -- in Federal district court?

MS. MUNNS: Now, that's an interesting question because those would be under the State's Administrative Procedures Act.

JUSTICE SCALIA: Well, but they'd relate to the standards set forth in the Federal statute I assume.

MS. MUNNS: Yes, that's correct.

JUSTICE SCALIA: I assume those would be Federal questions.

MS. MUNNS: Yes.

JUSTICE SCALIA: And you could have 50 different States having 50 different sets of regulations.

MS. MUNNS: Yes, you could, Your Honor.

JUSTICE SCALIA: Until they were all litigated out eventually, you know.

MS. MUNNS: And many different decisions under the Federal standards that are in section 252. Congress set those standards and set very broad standards and assigned to the States the jurisdiction to do the pricing in the arbitrations.

JUSTICE KENNEDY: So, the State regulatory authorities would be given, in effect, Chevron deference, a standard similar to Chevron in the Federal system?

MS. MUNNS: I don't think with respect -- you know, what the Federal courts are to look at when they look at those arbitration decisions is to see whether or not they're in compliance with the statute, and with respect to questions of law, there would be no deference.

JUSTICE SCALIA: Well, but we usually give the agency committed with initial interpretation of the statute deference. So, you know, if it's within the range of ambiguity, we say if you want to pick it here, that's fine.

Now, can we do that with the States? Maybe you can have -- maybe -- maybe you were too quick in responding to my question or maybe I was too quick in answering -- in asking it.

Maybe you can have 50 different State interpretations of -- of what 252 requires. If we give Chevron deference to each of the 50 States and no one of them is so outrageous as to fail Chevron, I guess we could have 50 different interpretations.

MS. MUNNS: I think that's a question that's being litigated in the courts right now, as those arbitrations go through the Federal district courts.

JUSTICE KENNEDY: But then that would seem to make illusory the congressional scheme to have Federal review. I mean, we have the district court in San Francisco giving deference to one set of rules and in New York, the other. That doesn't make sense.

MS. MUNNS: Well, I don't -- I don't think that -- that that's necessarily right. I believe that this is a Federal statute and that the -- that Congress wanted review to be at the Federal courts to assure some uniformity in the --

JUSTICE GINSBURG: Ms. Munns, if it's a Federal statute, then who is taking care to see that the Federal law is faithfully executed? I thought that was the job of the Federal executive. And I don't know, frankly, any scheme where you have Federal law governing, Federal courts doing the review, but no Article II agency. There's no Federal executive presence in it. So, you have the legislature. The legislation is Federal. The enforcement in court is Federal, but in between no Federal executive presence. And is there any other -- in all of Federal law, is there any other such scheme, and if there is, how does it measure up to Article II?

MS. MUNNS: And I'm not aware of any scheme like this, but --

JUSTICE SCALIA: There might be a scheme if you didn't take the position that the States could issue regulations. If the States couldn't issue regulations and could only adjudicate, you'd have a scheme like section 1983 I guess where -- where you can sue in State courts, but no regulations are issued by State entities. But you can sue in State court and State judges would interpret 1983 I suppose. Right?

MS. MUNNS: Yes. I'm not aware of --

JUSTICE SCALIA: You could do that, but you couldn't have any regulations coming out of the States then.

JUSTICE STEVENS: But here, as I understand it, the 252 gives the State agencies jurisdiction just in an adjudicatory way. They're resolving specific disputes that arise out of arbitrations. So, they are basically adjudicators within the scheme of the statute.

MS. MUNNS: They are adjudicators, but the standards are also in section 252. And when it gives the State commissions that duty, it says for the purposes of setting just and reasonable rates --

JUSTICE STEVENS: Follow the Federal standard.

MS. MUNNS: -- for section 251, and it makes no reference to Federal standards.

JUSTICE SOUTER: Well, what do you think of 252(c)(1), which General Waxman alluded to, which binds the adjudicators in those circumstances to applying the regs issued under 251? 251(d) does not make any textual distinction in

-- in the regulation granting authority between regulations over rates and -- and other subjects that the Commission could address. Therefore, it seems to say -- the two seem to say combined -- that the State adjudicatory authorities have got to follow Commission regs even when those Commission regs refer to -- to rate, i.e., ratemaking methodology. What's your answer to that?

MS. MUNNS: Section 252(c) that you're referring to says that when the State is making a decision in an arbitration, it must look to make sure that the decision is in compliance with section 251, including the FCC's regulations under 252 and the standards under section 252(d). There's no reference to any kind of Commission regulations with respect to those pricing standards.

JUSTICE SOUTER: Well, but maybe I'm missing -- I know I'm missing the point because I thought the reference back to 251 and regs issued under 251 was a reference, in effect, to the rulemaking authority under 251(d). And I don't think there's any textual distinction in 251(d) between regs that may affect the ratemaking methodology and regs on other subjects. So, that's why I thought the reference in 252(c)(1) would, in effect, be a reference back to Commission regulations insofar as they deal with ratemaking.

MS. MUNNS: Well, section 251(d) is not a grant of authority to the FCC. What it says is it must do -- must complete its rulemaking within a 6-month period to meet the requirements of that section.

As I said, the -- the standards, the pricing standards, for State commissions to follow are -- are in section 252. They're not in section 251. It says, for purposes of setting just and reasonable rates for section 251(c), the State commissions shall, and then it sets out those pricing standards. The FCC doesn't have a role with respect to pricing unless the State fails to act. In that case, then the FCC may step forward.

JUSTICE SOUTER: So, basically your answer is that 251(d) refers solely to timing. What about the reference in the preceding -- whether or not I agree with that, what about the references in the preceding sections with respect to -- interconnection, unbundled access, and so on that themselves refer to regulations?

MS. MUNNS: And -- and it's our position that the FCC does have authority with respect when -- 252(d) says --

JUSTICE SOUTER: But they include regulations dealing with rates.

MS. MUNNS: I think that when -- when Congress in 252 said that the State commissions shall establish for -- shall set rates for the purposes of section 251, that it became clear that the State commissions were to do that.

When you look at section 251(d), the rulemaking just goes for the requirements of this section. That kind of reading is required under section 2(b) of the act.

Any authority that's granted to the FCC must be expressed straightforward and unambiguous under the rule that you set in Louisiana. So, when -- if there is no reference to the FCC, then they have no rulemaking authority. That's the rule that was set in Louisiana.

JUSTICE GINSBURG: But Louisiana was before the 1996 act. And doesn't the 1996 act change the character of the -- there was once a clear divide, and that's why these 1934 parts that weren't changed are written as they are. But now the 1996 act becomes part of the total legislative package. And so, all of these restrictions that were appropriate in 1934 have to be adjusted so that 1996 legislation can fit. Isn't that so?

MS. MUNNS: You know, Your Honor, these are still dual-use facilities. The 1996 act has not changed that. These facilities have been -- they have interstate components and they have intrastate components. When Congress promulgated the '96 acts, they -- they looked at whether or not they should retain the applicability of 2(b) to the '96 act. There was a point where it was excepted from the title 2 provisions, the local competition provisions. When it came out of the conference committee, it was back in.

It is applicable. And that says, nothing in this act shall be construed to apply or to give the FCC jurisdiction over intrastate matters unless they have express and unambiguous authority from Congress.

JUSTICE SCALIA: Where does it say that?

MS. MUNNS: In section --

JUSTICE SCALIA: It doesn't say any unless it's explicit.

MS. MUNNS: Louisiana.

JUSTICE SCALIA: Are you quoting 2(b)?

MS. MUNNS: This Court in -- no, I'm quoting this Court in Louisiana.

JUSTICE SCALIA: I see.

MS. MUNNS: That's an interpretation of 2(b) from Louisiana.

JUSTICE SCALIA: 2(b) doesn't really mean what it says. It says -- it just -- unless it's clear, you shouldn't interpret it to allow authority over intrastate matters.

MS. MUNNS: That -- that was what this Court has said in Louisiana, that there has to be two parts: first, that the statute has to apply; but secondly, that Congress has to make an assignment of an intrastate duty to the FCC. If you look at other acts where the -- where Congress has legislated in the intrastate areas -- I take you specifically to the Cable Act -- Congress both legislated in the area and gave the FCC express authority. The pay phone section, 276, of this act. Congress both legislated in the area and gave express authority to the FCC.

JUSTICE KENNEDY: Well, as I interpret the Solicitor General's argument, at least from the brief, there's -- one line is between interstate and intrastate. Another line is between what the act covers and what the act doesn't cover. And I think it's the Government's position that they're relying more on the latter, that this act covers the prices, and therefore the FCC's authority has to extend to that.

MS. MUNNS: Their argument is that --

JUSTICE KENNEDY: And we -- and Louisiana did not address that point, did it?

MS. MUNNS: No, but Louisiana said that 2(b) acts as both a rule of construction and a congressional denial of power to the FCC. So, in order for it to -- for the authority to apply and for the FCC to have authority, the act must both apply and express delegation must be made to the FCC.

I'd like to point you to section 225(b)(2) which is in the telecommunications services for the hearing -- for hearing and speech impaired individuals. There's a section in there where Congress expressly made the FCC's authority co-extensive with the terms of the act.

They said all the general authority that the FCC has extends to this section. So, the question is, why did they take that additional step? If, when Congress legislates in an intrastate area, FCC authority attaches, why was it necessary in section 225(b) to make that statement that all their general authority attach? Why when the passed the Pay Phones Act did they also make very clear that it related to both interstate and to intrastate?

JUSTICE STEVENS: But you do agree, Ms. Munns, do you not, that insofar as 2(b) refers to what -- how far the act shall apply, that it's been repealed?

MS. MUNNS: We concede that the 1996 act covers intrastate matters --

JUSTICE STEVENS: And therefore, that that portion of 2(b) is no longer have any meaning in this case.

MS. MUNNS: No, that the statute must both apply and the FCC must --

JUSTICE STEVENS: No. I was just asking insofar as it talks about where it applies, you agree the '96 act does apply in a manner that's inconsistent with the language of 2(b).

MS. MUNNS: No. No, I don't, Your Honor. Thank you.

CHIEF JUSTICE REHNQUIST: Thank you, Ms. Munns. Mr. Tribe, we'll hear from you.

MR. LAURENCE H. TRIBE: Mr. Chief Justice, and may it please the Court: Could I have some water? Thanks. I think it would be more important and more useful for me to focus on the interaction of the precise statutory provisions of this act rather than to dwell too long on the boiler plate background provisions of, for example, section 201(b) where I'm afraid I read it as the Chief Justice does, as limited to its context. It's quite clear that when Congress takes the trouble that it did here to provide with great precision for who shall have jurisdiction to do what --

JUSTICE SCALIA: Great -- great precision?

MR. TRIBE: Well, it took me a while --(Laughter.)

JUSTICE SCALIA: You can describe this piece of legislation as great precision? (Laughter.)

MR. TRIBE: Not -- not, Justice Scalia, as great elegance. (Laughter.)

MR. TRIBE: But let me try to say why I think it precise. Section 251 imposes, quite clearly, a duty on all incumbent LEC's to provide various things, interconnection, unbundled access, resale -- to provide them at just and reasonable rates in accordance with the requirements of 252.

Now, that I think is unambiguous. That's precise. If you look at 252, it in turn quite precisely says the State commissions -- not the FCC, but the State commissions -- shall establish those rates according -- and I quote it -- to section 252(d). Now, 252(d) in turn spells out what the State commissions, quote, determinations of the just and reasonable rates for purposes of section 251 shall be based on.

JUSTICE STEVENS: Mr. Tribe, is it not significant that they are given that statutory duty in the context of resolving arbitrations? They are not given that statutory duty in the context of rulemaking.

MR. TRIBE: Justice Stevens, with all respect, I do not agree with that.

JUSTICE STEVENS: Now, what in the statute -- what in the statute gives them rulemaking authority with regard to pricing?

MR. TRIBE: Well, in section 261(b) and 261(c), it's quite clear that rulemaking authority is contemplated, and indeed the preemptive structure established there shows that we're talking about State regulations.

261(b), for example, says that nothing in this part shall be construed to prohibit a State commission from enforcing regulations prescribed before a certain date or from prescribing regulations after the date of enactment -- and listen to this -- in fulfilling the requirements of this part, that is, 251 to 61, if such regulations are not inconsistent with its provisions. And if you look --

JUSTICE STEVENS: That's the key point. That's the key point: if not inconsistent with the provisions.

MR. TRIBE: Well, with the provisions. But notice how that differs, Justice Stevens, from the next section. That is, those things that fulfill the act are to be tested only against the provisions of the statute. Those, however, which go beyond are to be not inconsistent -- the end of 261(c) -- with this part or the Commission's regulations to implement this part. And if you combine that with 251(d)(3), I think you can see what the -- what structure here emerges. If you look at 251(d)(3)(A), in prescribing and enforcing regs to implement the requirements of this section, the Commission -- that is, the FCC -- shall not preclude the enforcement of any regulation, order, or policy of a State commission that establishes access and interconnection obligations of local exchange carriers. And it's clear in --

JUSTICE STEVENS: And is consistent with the requirements of this section.

MR. TRIBE: Of this section, but no reference to regulations of the FCC, and nothing in the section precludes the commissions from carrying out the duty. Let me just --

JUSTICE GINSBURG: What about (d)(1)?

JUSTICE STEVENS: Let me ask -- let me ask one question just to summarize it, Mr. Tribe, because I want to be sure I understand your position. Is it your view that in -- that beyond the statutory provisions that do impose certain requirements, certain standards, Federal standards, on pricing that there is no agency that has further rulemaking authority, that it's a Federal agency, or it's State agencies?

MR. TRIBE: The State commissions have rulemaking authority contemplated by this act to implement it including doing what they are told they must do in 252(d)(1).

JUSTICE STEVENS: And are they then promulgating in your view Federal standards or State standards?

MR. TRIBE: I think they are promulgating State standards to implement a general Federal principle. That is, the Federal rule under 252(d) says what the standards must achieve. It says that they must be based on cost, that they can include profit, that they should not be old-style ratemaking standards. Within that broad framework, there is room left for the 50 States to interpret that in somewhat different ways. You don't need Chevron deference.

JUSTICE SCALIA: We don't need Chevron deference.

MR. TRIBE: I don't think so, Justice Scalia. If the Federal Government says that certain functions are to be carried out by State commissions, as this law does, and that they are to carry them out to achieve certain -- within certain parameters -- they must use costs -- you have a Federal standard applied by the Federal district court, on review of the Commission, see if they have complied with that. But 50 States can have 50 somewhat different conceptions of what --

JUSTICE GINSBURG: Somewhat different? Could some have historical costs and others not?

MR. TRIBE: I don't think that's yet clear, Justice Ginsburg, because so far, as you know, most of them, as you pointed out, are using TELRIC or something very close to it.

JUSTICE GINSBURG: Well, if there's a limit -- I mean, only the word cost.

MR. TRIBE: That's right, and the limit --

JUSTICE GINSBURG: And who defines the limits of that word cost?

MR. TRIBE: The Federal judiciary ultimately. That is, this was passed by a Congress --

JUSTICE GINSBURG: The Federal judiciary without any Federal executive in between.

MR. TRIBE: That's what --

JUSTICE GINSBURG: Isn't that an unusual scheme?

MR. TRIBE: Well, but it's not unique, Justice Ginsburg. There is, for example, the Hinshaw amendment in the natural gas area, 17 U.S.C., section 717(c), and there are other provisions in this statute dealing with border towns and pole attachment rates and rural exemptions where it's clear that Congress was doing something a bit different. It was, though, not unique.

JUSTICE SCALIA: I don't understand why you say that Federal courts will determine them. It seems to me you can't say, on the one hand, the Federal courts will determine the meaning of cost, and on other hand, you know, within the range of ambiguity, the States can determine the meaning of the words. I mean, take one position or the other.

MR. TRIBE: I think, Justice Scalia --

JUSTICE SCALIA: Cost -- does cost mean a single thing that Federal courts will determine or is it up to the States?

MR. TRIBE: The concept of cost is ultimately up to the Federal judiciary to determine.

JUSTICE SCALIA: Okay.

MR. TRIBE: But some concepts have latitude. That is, there are a lot of different -- if I say --

JUSTICE SCALIA: Like the concept of cost.

MR. TRIBE: Like the concept of cost.

JUSTICE SCALIA: Right. Well, it either has latitude or it doesn't have latitude.

MR. TRIBE: It has latitude.

JUSTICE SCALIA: Okay, so it's up to the States.

MR. TRIBE: But -- but it has borders. I still think --

JUSTICE SCALIA: It can't mean non-costs.

JUSTICE BREYER: No, no.

JUSTICE SCALIA: That's just Chevron deference you're talking about. That's no different from Chevron.

MR. TRIBE: Well, the difference I think, Justice Scalia, is that in the Chevron context, one would tell the governing Federal agency that within a permissible range of meanings, we're not going to decide what it means. We're actually going to let you decide what it means. That's different from saying we decide what it means.

JUSTICE BREYER: Why what it means? What Justice Ginsburg said was about the limits on what it means. I take it you're saying that a State commission would have considerable leeway to decide whether to determine costs on the basis of a price cap, on the basis --

MR. TRIBE: Right.

JUSTICE BREYER: -- of some kind of historical rate base like, despite that parenthetical which is there for no purpose --

MR. TRIBE: But that's -- that I think is unclear.

JUSTICE BREYER: -- is there for another purpose. All right, but there are ways, or future oriented. But there might still be limits on what it can do. Fine. Those limits would be determined by a Federal judge in your view.

MR. TRIBE: That's right.

JUSTICE BREYER: But in section 6 of duties, it imposes a duty upon a carrier to make an unbundled element available at a rate that is reasonable.

Now, the Commission, if we assume they have some rulemaking authority, would, I take it -- and this is my question -- at least have authority to determine when a rate is unreasonable.

MR. TRIBE: Justice Breyer, there's nothing in this intricate statute --

JUSTICE BREYER: Yes.

MR. TRIBE: -- that gives the Commission authority to speak to the issue of reasonableness of rates, because even though the words appear in that general section --

JUSTICE BREYER: I don't mean reasonableness by being too high. I mean reasonableness because a system was adopted by a State commission that, were it to be generalized throughout that State, would seriously undermine the purposes of the act.

MR. TRIBE: But then there is section 253, which says that when a particular system of any kind, not just about rates, when a policy or order or regulation has been promulgated by a State and when you can show, when the Commission can show after notice and hearing that it, that particular one, will operate as an impermissible barrier to competition, then it may be preempted, says the statute, but only to the extent necessary to cure the violation. It seems to me --

JUSTICE BREYER: Do I have to choose between all or none? That is -- that is, could we view the word rates in section 6 and the negative phrase, rulemaking authority, later on as giving the Commission the authority to say when something, a system, for example, is unreasonable, but not to dictate which among several systems should -- the State should use?

MR. TRIBE: I think, Justice Breyer, as long as it does that not ex ante and across the board, but by looking at a particular action of a State, then it's operating within the ambit of the statute.

JUSTICE BREYER: Thank you.

MR. TRIBE: But this statute rejects I think very clearly anything that resembles a kind of prior restraint invalidation across the board of some set of rates. And if ratemaking were delegated to the States here only for purposes of arbitrations in 252(c), then perhaps you could understand the distinction the SG is making between rulemaking, which he says is for us, although as he admits when pressed, the rules can get right down to the last details, the way their proxy prices did, where they averaged from six States and applied specifics -- basically he's saying rulemaking is for us and applying is for you. But if you look at 252(d), it's very clear that when the States set prices, they are doing it, quote, for purposes of section 251, not for arbitrations, but for 251, which is the generic provision defining the obligations of the incumbent LEC's --

JUSTICE KENNEDY: Yes, but --

MR. TRIBE: -- and indeed, also for 251(f). That is, their dilemma about section 271 is solved by 251(f). In 271, at what they call the back end, the FCC has to decide whether a Bell operating company that wants to go into long distance has complied with the rate regulations. But it's got to comply with the rate regulations and rules promulgated by the States because the State commissions --

JUSTICE KENNEDY: Did I understand you to answer Justice Breyer that the Commission, FCC, could examine whether any particular application of a rate was reasonable? I mean, how would it do that?

MR. TRIBE: Well, the way --

JUSTICE KENNEDY: What's the mechanism for it doing that other than by promoting a rule -- promulgating the rule?

MR. TRIBE: Under 253(d) the mechanism is described. If after notice and an opportunity for comment, the Commission determines that a State or local government has permitted or imposed any statute, regulation, or legal requirement that violates subsection (a) which talks about excluding competition, then its enforcement may be -- the enforcement of such statute, regulation, or requirement, to the extent necessary to correct such violation or inconsistency, shall be preempted.

JUSTICE KENNEDY: So, the Congress limits the FCC to an adjudicative role?

MR. TRIBE: Well, in this area, I think if you immerse yourself in this statute, what happens is that the FCC is permitted essentially in this limited special area of rates -- and there are a few others in the statute like it -- not its customary role of promulgating regulations, but to the role of backstop --

JUSTICE STEVENS: But, Mr. Tribe, that --

MR. TRIBE: -- intervening in particular cases.

JUSTICE STEVENS: -- that isn't a fair reading of 251(c)(2)(D) because (c)(2)(D) refers to the interconnection on rates, terms, and conditions that are just and reasonable, and that's in 251 itself. And I think it's -- everyone seems to agree that -- that the FCC has rulemaking authority with respect to 251.

MR. TRIBE: Well, with respect to terms and conditions and as to rates, perhaps --

JUSTICE STEVENS: Rates, terms and conditions that are just, reasonable, and nondiscriminatory.

MR. TRIBE: But I suppose the word nondiscriminatory could apply to rates, but in determining what is just and reasonable, the statute says that that's to be done in accord with the standards of 252(d), and that's with the State commissions. But there was one point that I was trying to make a bit earlier that I want to come back to --

JUSTICE SCALIA: No, it did say -- it doesn't say that. It says in accordance with the terms and conditions of the agreement and the requirements not just of section 252. And the requirements of this section and section 252.

MR. TRIBE: Right.

JUSTICE SCALIA: And that's crucial.

MR. TRIBE: But I think, Justice Scalia, that the only way to give coherent meaning to these provisions is to understand that when it refers to the requirements of this section, of 251, it's not saying this section and any regulations promulgated thereunder. This statute draws that distinction repeatedly; 10 times I believe it refers to section 251 and regulations promulgated thereunder.

CHIEF JUSTICE REHNQUIST: Thank you --

MR. TRIBE: Here it does not.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Tribe.

MR. TRIBE: Thank you.

CHIEF JUSTICE REHNQUIST: General Waxman, you have about 30 seconds left. (Laughter.)

MR. WAXMAN: Every question that has been raised in this oral argument can be answered with reference to section 251(c)(3) which requires -- that deals with unbundled network elements and requires that they provided -- be provided at rates, terms, and conditions that are just, reasonable, and -- and consistent with the standards of section 252. Four of the five issues we're going to be talking about in the next hour deal with that.

CHIEF JUSTICE REHNQUIST: Thank you. General Waxman, your time has expired. Now we'll take a very momentary respite from sections 251 and 252 while counsel change their tables. (Pause.)

Spectators are admonished, do not talk until you get out of the courtroom. The Court remains in session. Mr. Barr.

MR. WILLIAM P. BARR: Thank you, Mr. Chief Justice. May it please the Court: I'm Bill Barr and I'm representing the local telephone companies. To promote local phone competition, Congress granted a right of access to incumbent facilities, and this required drawing a line, a line through the business of the local telephone companies. On one side of the line where no access is granted, the entrants are told here is where you can and should compete. Here is where you put in your inputs. Here is where you try to become more efficient.

That's where competition is, and the more of that the merrier. On the other side of the line, Congress says there may be areas where we can't have competition because of the legacy of monopoly. Maybe it is not fair to ask you to replicate or duplicate the input of the incumbent, and so here, you may have access. Now, in drawing this line, Congress set two standards. First, it said, the only thing you can get access to are network facilities. As to everything else, we expect you to compete. You put in your inputs. And even as to network facilities, you don't automatically get all of those. We want you to compete there too the best you can, but if the FCC finds that there is part of the facility that you need, that if you fail to get it, it will impair your ability to offer service, then you can use that and get access to that part.

Now, we're not here today because we are quibbling over the application of those standards and think the line should be drawn a little bit to one side or the other. We're here because the FCC obliterated those lines. They did not apply either standard.

They ended up by saying that need doesn't mean need, it means technical feasibility. Anything you can possibly get access to you must get access to. That's their rule. And as to network, they say, network? No, no. Anything that's used in the overall commercial offering of your service to the public -- anything -- anything that differentiates you, anything that makes you more efficient in offering to the public -- is up for grabs. So, what does this mean? This is the most promiscuous right of access that you can imagine.

And to use the metaphor that you often use, Justice Breyer, about the spring and the mousetrap, they haven't take our spring. They haven't taken our mousetrap. They haven't stopped there. They're taking the cheese. (Laughter.)

Now, let's look at what they did on need. Three paragraphs in the order are dispositive. Paragraphs 278, 285, and 286. Congress said in section 251(d)(2), apply a need-based standard, determine whether their failure to get access will impair their ability to provide service.

That's what you have to consider. What do they do? They obliterate that standard. They adopt a rule in paragraphs 285 and 286 that say we refuse to look at any alternative outside the incumbent's network.

We must start with the incumbent's network. We close our eyes and put on blinders. We will not look at any alternative outside the incumbent's network.

JUSTICE GINSBURG: Mr. Barr, just as a matter of information, what else is there for the would-be entrant who has no facilities of its own? What other source would there be to obtain network elements?

MR. BARR: Well --

JUSTICE GINSBURG: Where else could they go?

MR. BARR: That -- that's the inquiry that should have been made, and in fact, in many markets there are many facilities. There are wires into the home from cable companies. There are dozens of switches in major metropolitan areas put in by CLEC's, competitive LEC's.

There's more fiber under the streets of some cities than there is concrete above. Signaling services are things that are typically bought from vendors. Many ILEC's, many incumbents, don't even provide their own. They go out and buy it.

For AT&T to suggest -- they were the manufacturers of switches up until the time they divested Lucent -- that somehow they can't get a switch is ludicrous. There are many things to look out -- look at out there. But that's what they didn't do. They didn't make the inquiry, and by definition, that violates the plain meaning of any need standard. Whether the need standard is indispensability, reasonable need, a little need, fairness, to apply any standard other than want or than technical feasibility, by definition you have to look at the alternatives.

How can you tell if someone is hurt or impaired unless you look at the consequences of them not getting access? They came up with a rule that says we take access as a given in every case. We start out with access. Now, why do they do that? This is the interesting thing.

They do that -- if you look at paragraph 278 of their order, they do that because their entire premise was that there was an absolute technical feasibility standard and anything that can be given must be given. They got that by misreading a provision in the statute that said access must be given to an element at any technically feasible point. So, what do they say in paragraph 278? Oh, any technically feasible point. That means they have to give up everything that's technically feasible to give up.

Now, the Eighth Circuit knocked them down on that and said, that's ridiculous. That talks to the point of access, not what you have to give access to. But what the Eighth Circuit failed to appreciate is that just seven paragraphs later in the order, when they encounter the need standard, the FCC scratches its head and says, oh, that's funny. There's an absolute requirement for them to give everything and here there seems to be some discussion of need. What do we do? Well --

JUSTICE STEVENS: Mr. Barr, can I just ask for help? You're referring to 278 of the order?

MR. BARR: Yes.

JUSTICE STEVENS: Where in the papers is that?

MR. BARR: That's joint appendix 49, Your Honor.

JUSTICE STEVENS: Is it in the petitioners' appendix? They seemed to have skipped those paragraphs.

MR. BARR: It's in the joint appendix at page 49.

JUSTICE STEVENS: Joint appendix. Thank you. It's not in the other.

MR. BARR: They say, gee, how do we reconcile this absolute standard, which is now bogus? They have not appealed the Eighth Circuit order. It's a bogus standard. And they say, how do we give that effect to this so-called absolute right of access?

Well, we'll read the need standard out of the statute. We'll adopt a rule that says you never look beyond the incumbent's network. So, our point is they refused to apply the standard that Congress told them to apply.

They adopted a rule which by definition contravenes the plain meaning of a need or an impairment standard, and they did all of this premised on giving an effect to an error, something they haven't even appealed. Now they say, well, we didn't have to apply the standard --

CHIEF JUSTICE REHNQUIST: Mr. Barr, what again is what you say is the error that they have not appealed?

MR. BARR: Their premise was that the language technical feasibility, the point of technical feasibility meant not just the point at which you grant access to an element, but that you have to give access to every element that's technically feasible to give access to. The Eighth Circuit said, no, that's not right. But what the Eighth Circuit didn't appreciate is that seven paragraphs later --

JUSTICE SCALIA: Point of technical feasibility where in the statute?

MR. BARR: 251(c)(3) --

JUSTICE SCALIA: Right.

MR. BARR: -- says you get access to unbundled elements at any technically feasible point. They took that language and said, that means you get access to every element that's technically feasible to get access to. The Eighth Circuit said, no, that means that, assuming you get access to an element, it's at the technically feasible point.

JUSTICE SCALIA: That's what 278 says.

MR. BARR: No, no. That's what the Eighth Circuit said. 278 says -- 278, which is their order, the FCC order before the Eighth Circuit case, said we interpret at any technically feasible point to mean you have to give access to everything.

JUSTICE SCALIA: Right.

MR. BARR: Then seven paragraphs later, when they come across the need standard, they say, gee, that's funny. There seems to be a tension here. Congress told us to give access to everything. This seems to talk about need. We'll interpret need by saying you never look outside the network.

You always assume access to the incumbent's network. You start out with saying that you get access to the incumbent's network. You never look to see if there's another switch in the market. That violates the plain meaning of any need standard, not just need and impairment here, but any standard above technical feasibility. So, it violates the plain meaning and it's premised -- the whole premise of their approach is predicated on an error, an error that was detected by the Eighth Circuit, an error which they have not appealed.

But now they say, well, we can just rely on what people want. If there's something out there, then -- then -- then -- the -- the person will want it. The entrant will take it. So, we don't have to apply a need standard. The problem there is, Congress used a need standard precisely because it knew that -- that entrants sometimes want what they don't need. It doesn't make a differentiation between advantages that an incumbent may have that flow from the positive forces of competition, skill and innovation, from those that are the products of natural monopoly.

So, it does not make any differentiation. Something that -- that a incumbent has that's a good thing an entrant may want, but maybe they don't need it because it is a competitive advantage that was fairly acquired by skill and innovation. Now, let's see what they do to the definition of network element. The game is in the first sentence of that definition which is --

JUSTICE GINSBURG: Before you go away from the need and impair, what would be a fair way of implementing that statutory provision?

MR. BARR: What the FCC should have done was to engage in the fundamental task here, which is to differentiate what are the advantages and the things about the incumbent's business that can be fairly competed against, that can be counteracted by an effective competitor, and what are the things in their business that even an effective competitor could not reasonably counteract in a short period of time because of the legacy of monopoly. They never made that differentiation.

JUSTICE BREYER: Is it right -- I'm thinking in my mind that -- for example, a local loop, which means wires that go under the street to my house, spread out throughout a city, would be something that would be quite difficult for a new competitor to do. He'd have to get permission from the city council and dig up the streets. But a computer which handles the switching, you call up IBM and you order one.

MR. BARR: That's absolutely --

JUSTICE BREYER: Is that what you're trying to get at?

MR. BARR: That's absolutely correct. In fact, in Canada, the only thing unbundled is the loop, and in the U.K., nothing is -- nothing is made available because cables are another wire under the house and they could be made two-way. And that's why 10 percent of the British population is already using cable --

JUSTICE BREYER: Certainly Congress here thought that there could be elements of the system where it would be possible to introduce competition.

MR. BARR: Absolutely.

JUSTICE BREYER: And so, certainly the FCC is reasonable in trying to figure out which those elements are.

MR. BARR: They -- they should have. They didn't try. They didn't apply a need standard.

JUSTICE BREYER: Well, they said, we don't know, and since we don't know, we're going to assume that what those elements are is anything that somebody wants.

MR. BARR: Well --

JUSTICE BREYER: Maybe that's the best they can do before -- you know, you say, well, we tried. Come up with something better.

MR. BARR: That's not what they say in their order. They didn't say --

JUSTICE BREYER: Well, suppose they have. They said, you don't like this. You think this is silly because obviously the computer is different from the -- from the loop going into a person's house, and one you can order from IBM and the other you can't. Very well. You come up with a standard. I didn't see in any of these briefs a better standard.

MR. BARR: Well, as I say, number one, they didn't do it, and number two, if they applied that standard, it's inconceivable that they would find that in every market, every competitor needs everything.

JUSTICE SCALIA: Why not? I mean, you say, it impairs my ability to enter the market if it -- if -- if providing it by myself would raise my rates. In other words, if I can't get it as cheaply as you can give it to me, it impairs my ability to enter the market. And the only condition on which I would want it or desire it is you can give it to me more cheaply than I can develop it for myself. That makes sense.

MR. BARR: No, it doesn't make sense.

JUSTICE SCALIA: So long as you take impair to mean, you know, come at a higher price.

MR. BARR: No. If they had used a cost standard, which they didn't do, they didn't apply a -- just a pure cost standard. Remember, they just said technical ifeasibility. But if they had, I would be here saying they can't do that either. They can't do that either because all -- that -- that assumes that all advantages that the incumbent has -- all advantages -- have to be given over, even those that a good competitor could counteract. The key insight here is that you don't advance competition by taking things that a competitor could actually compete on and turning it over to a competitor.

JUSTICE BREYER: I mean, that's absolutely correct, but I want to ask you again to see if I -- if the answer is going to be negative. This morning I was thinking along the lines that you just state, and I was tempted to criticize the FCC for not getting a better standard.

And then I asked myself the question, how well could I have done? You see? And I think it is a defense to say, well, it isn't good but it's the best we could do.

And therefore, I would like to ask you to give me an example of how you would have made the intuitive -- how you would have embodied the intuitive distinction you mention in a rule that would be better than this one.

MR. BARR: Yes. We are dealing -- first, I would bear in mind that we're dealing with local markets, and I -- and the FCC promulgates -- has the tools to address local markets. They promulgate rules every day of the week that make distinctions between concentrated urban markets and dispersed rural markets. Every day of the week. Moreover, they have the tool of arbitration which gets you down to a carrier-by-carrier level. They could easily say in New York where there are dozens of switches, in New York where there are companies that have built from soup to nuts entire networks -- there are people building it today without taking any of our pieces. They could say that in certain markets, certain kinds of businesses don't need certain things. The notion that everybody in every market needs, as a perquisite -- as a prerequisite to competition everything we have is ludicrous.

JUSTICE KENNEDY: Well, from -- from an economic standpoint, if they don't need it, why will they ask for it?

MR. BARR: Because people will want what they don't need. For example, if something is --

JUSTICE KENNEDY: Well -- (Laughter.)

MR. BARR: If there is something cheaper out there --

JUSTICE KENNEDY: That sounds maybe like some of the old-day telephone companies, not the new telephone companies. (Laughter.)

MR. BARR: There are two examples. If something -- if there's an alternative that's cheaper out there, there are powerful incentives for the entrant to still use the incumbent. He avoids investment risk and innovation risk. He invests -- if he puts -- if he buys his own --

JUSTICE KENNEDY: That's why he needs it.

MR. BARR: Excuse me?

JUSTICE KENNEDY: That's why it needs it.

MR. BARR: He needs it to avoid competing. That's what -- that's what that answer is. He can compete. There's an alternative out there. He doesn't want to use it because he wants to avoid competing. The purpose of the statute is to make him compete.

Now, suppose that the incumbent has something that's a little more efficient. The fact that he wants it doesn't mean he needs it because the efficiency may come from skill and innovation, not as a legacy of the natural monopoly. A want rule is not the same as a need rule.

And they made no inquiry as to what's available. This is the most promiscuous unbundling rule you can imagine. It's the only country in the world that does it this way, and that's why we're behind because boards of directors are not going to authorize billions of dollars of investment in alternative facilities as long as the FCC is out there waving total access at TELRIC prices which, by definition, are the lowest price you can possibly have in a competitive market. Now, look at the game they play on definition of the element. The key phrase there is used in the provision of the --

CHIEF JUSTICE REHNQUIST: What section are you talking about?

MR. BARR: Section 153, paragraph 29. The key language there is used in the provision of a telecommunications service. Now, what they try to say is used in the provision means used in the offering, the overall commercial --

JUSTICE STEVENS: Could you help us again? Where is that in the materials?

MR. BARR: It is section 153 of the statute, paragraph 29.

JUSTICE STEVENS: Oh, of the -- you're referring to the statute.

MR. BARR: The statute. It's the definition of network elements. They say used --

JUSTICE SOUTER: We don't -- we don't have that in the -- it's not in the petitioners' appendix.

MR. BARR: It's in the back of -- of our brief, the red brief.

JUSTICE BREYER: It's on page A-3 of the appendix there.

JUSTICE KENNEDY: What the subsection?

JUSTICE BREYER: Page A-3.

JUSTICE KENNEDY: What's your subsection? 153?

MR. BARR: 153, paragraph 29. It's the definition of network element. That's what they get access to, or that's a candidate for access, if they need it. Now, the whole battle is in that first sentence because that tells you what equipment are we talking about. Are we talking about equipment in the business, or are we talking about some other kind of equipment like the transmission facility, the stuff that operates it? They say --

CHIEF JUSTICE REHNQUIST: Where again are we talking about, Mr. --

JUSTICE BREYER: I have it at page A-3 of Professor Tribe's brief.

MR. BARR: Page A-3 of Professor Tribe's brief. It's the first page on our brief in the back on the statute.

CHIEF JUSTICE REHNQUIST: Thank you.

MR. BARR: It says that a network element is equipment or facilities used in the provision of a telecommunications service. They say that means used in offering to the public the service, everything that goes into offering. We say it means no. It's used to produce the service that is offered. It's the input, the equipment input, into the production, the generation of the service.

CHIEF JUSTICE REHNQUIST: Mr. Barr, you say the FCC says it means one thing. You say it means something else. You have to show that what they're saying is wrong, don't you?

MR. BARR: Their definition clearly conflicts with the statute.

CHIEF JUSTICE REHNQUIST: Why?

MR. BARR: Number one, it doesn't comport with the -- with the word network. Network has a meaning, a common, ordinary meaning of the wires and switches, the transmission system. Second, they -- they are deleting the word provision from the statute.

As the second sentence of that definition shows, provision is not the synonym for offering. As the last phrase of the second sentence shows, it says, transmission routing or other provision. They're talking about the steps in producing the service, the steps in carrying the traffic.

JUSTICE SCALIA: But the sentence says, such term also includes. Now, you take that second sentence to mean despite the -- the prior definition?

MR. BARR: No.

JUSTICE SCALIA: We're adding to it information sufficient for billing and collection? Information for billing and collection isn't -- isn't something that is needful for the provision of the telecommunications service.

MR. BARR: It's or. It's or. Here's how it works. First, you tell what equipment you're talking about. That's done in the first sentence. The work done in the first sentence is, is it equipment that's in the transmission facility or is it some other equipment?

The second sentence then says, once you got that equipment, it includes the features of that equipment and data and information provided by that equipment that is either sufficient for billing or used --

JUSTICE SOUTER: But that's not what it says. It doesn't say what you have just said. It says, such term, and the term is network element includes da-da, da-da, da-da, features and capabilities. That's not what you said.

MR. BARR: Of such -- yes. It's provided by such equipment. It's the features provided by such equipment.

JUSTICE SOUTER: So, the term then is equipment. Okay.

MR. BARR: Yes. So, equipment. Then the features of that equipment. Then information generated by that equipment that's used. For example --

JUSTICE KENNEDY: But it said provided by means of such and so. If you have an answering system, an operator, a 411 operator, live operator, she or he, that operator, is providing that service by means of the physical facility. So, it would include that.

MR. BARR: Well, it would include -- it would include the operator's facility, not the operator. We would say it's the equipment input --

JUSTICE KENNEDY: Well, why wouldn't it include the operator because --

MR. BARR: Because an operator, we would say is not a facility.

JUSTICE KENNEDY: -- because it is a capability provided by means of the physical plant.

MR. BARR: That's right. A capability provided by the physical plant is included. And another example would be a switch captures the duration of a call. That's information. It generates a record, how long a call took. That's information provided by means of the equipment that we have to make available. No doubt about it. The point is whether the equipment we're talking about is anything we used in offering -- anything we used in offering or anything we use in producing the service, the transmission activities. And the other -- the legislative history makes it crystal clear that what Congress was talking about was the bottleneck facilities which they defined as the elements needed to originate or terminate a telephone call, the equipment with capabilities of routing and signaling calls. And ultimately, if you take what is supposed to be a line that is dividing the business to encourage competition wherever it can occur, and you say it's anything in the business that gives you an advantage in offering, you've obliterated the line. But let's look at OSS as an example, and why we need the Court's intervention here is because they adopted this sweeping rule with no limiting principle --

CHIEF JUSTICE REHNQUIST: What is OSS? Office of Special Services -- (Laughter.)

MR. BARR: Right, the predecessor to the CIA. (Laughter.) No. It's a very broad category of operational support systems, anything in our business that supports our operations. And I'd like to give you a tangible example of how this works.

We develop a screen that comes up for a sales representative when someone calls. Let's say we pulled together a lot of information. It has their past billing records and their records of interaction with us. It has their credit history, so we could do a credit history check.

And it also has a box that allows us to activate the switch and turn on their service. Now, we have no problems giving them the box that activates the service because that's part of the operation, the continued operation, of the transmission system.

But if we've developed a system ourselves that let's us do credit checks on customers and let's us, you know, have better customer care because we're aware of the whole background of that customer and their interaction with us, that is not used in the provision of the service. And the only way they're getting that is to say it's used in the general offering. And if you look at paragraphs --

JUSTICE SCALIA: Wait. You say it's provided by means of the same equipment that -- that enables you to activate their -- their service.

MR. BARR: No. Our -- the outboard equipment, the system, the OSS system, which is outboard of the network, is a means that we have of accessing our network to turn it on.

They have a right to access our network that's nondiscriminatory. So, we could say to them, put in your remote triggering device or inherently we can give you the same access we had. You can use our system.

JUSTICE SCALIA: But this is what makes your definition so -- I don't know -- manipulable. You could look on it as the fact that this screen, which you have developed in such a fashion that you can push one side of the screen and it will activate, it will send a signal, that that equipment is -- is itself equipment which has these other functions on it.

MR. BARR: This is exactly the thing that the FCC didn't do. They didn't sort out what is necessary to operate the network and the stuff that we've developed to enhance our marketing. And they -- by adopting a broad category, they just sweeped it all in.

We're not asking you to make those distinctions. We're saying they didn't make those distinctions. And this is important because their broad rule is binding on the States, and we're facing situations in the States where we're being -- people are coming in and saying your people have to put velcro patches on with AT&T name on it. Your trucks have to have magnetic things that shift back and forth. AT&T, GTE, and so forth. We -- we need a principled basis, a rule for them to apply and they didn't -- and they didn't do that. I'd like to reserve the balance of my time.

CHIEF JUSTICE REHNQUIST: Very well, Mr. Barr. General Waxman.

MR. WAXMAN: Mr. Chief Justice, and may it please the Court: Because Congress has authorized the FCC to promulgate rules implementing the Communications Act, those rules must be given effect unless they are arbitrary, capricious, unreasonable, or manifestly contrary to the statute.

There are five substantive rules that are at issue in this portion of the case, and each one is fully consistent with the text of the act. The incumbents object to those rules based on their predictions about how competition will proceed if the rules were permitted to go into effect.

But each of those objections was considered by the Commission within the mandatory 6-month period and in an atmosphere in which there was no competition to speak of in any market, and the Commission, after hearing thousands and tens of thousands of pages of comments, resolved those policy objections on the record in a manner that promotes the paramount objective of the 1996 amendments to produce vigorous competition in this country's monopoly local telephone markets as rapidly as possible by giving potential new entrants a range of competitive options. Take, for example, the two issues that, at least before this morning, appeared to be at the center of the case. They certainly were at the center of the briefs of the case. First, this is rule 315(b).

Applying the nondiscrimination requirement of section 251(c)(3) that we talked about, the FCC promulgated a rule that prohibits incumbents from imposing completely gratuitous costs on new entrants by ripping apart network elements that are already combined in the incumbent's system.

Second, the Commission declined to legislate a requirement nowhere present in the language of the statute that new entrants build one or more network elements before invoking the right to these others. The incumbents, but notably in this regard not the State commissions, argue that these rules, taken together, will undermine the current system of implicit universal service subsidies. That is correct. In section 254 of the act, Congress mandated an end to this monopoly-based system to be replaced by a new system of explicit charges, applied equally among all carriers, regardless of the means by which they compete. The FCC is implementing its part of the reform, and it has found on the record that the State commissions will do as well, as soon as cost-based competition is introduced into their local markets.

The incumbents argue that these rules would, quote, eviscerate resale as a competitive option. But the Commission found that they would not and it explained why in its order and its predictive judgments are entitled to deference.

JUSTICE BREYER: I rather missed the reason. I mean, I read the section, but I missed the reason. That is -- maybe I'll say what -- the part that's bothering me, and I think the reason they've gotten to this is, if I saw this act as having two parts, the first part is that the BOC's are supposed to bring competition to long distance, that they can't do that because the others said we're not going to let you compete with us unless you let us compete with you. But the difficulty, as you put in your brief very well, you say on page 4 of your brief -- you explained it beautifully -- that there are large elements of this that are naturally monopolistic, loops, et cetera, and no one knows where they break off. So, their complaint is that what happened with this rule is it says,

Steve Breyer or you or anybody else in the world could go to Bell Atlantic and say, sell us your whole system. Now, why would someone do that? Because for years and years Bell Atlantic has had to charge high prices to business customers, for example, because, one, the universal service, but also because of allocation rules on their fixed costs which shove a lot of the fixed costs onto business people. So, you or I can make a fortune by buying up their system, and using this TELRIC system, which -- by the way, the best criticism of which comes from Holmes and Brandeis in Missouri v. Southwestern Bell. But regardless of that, isn't what they say factually true? And if that's factually true, how could that be consistent with a statute which is designed to allow new competition in some but not all elements, indeed, not in the elements that you state on page 4? Now, that's my one question, but it's fairly long and fairly basic.

MR. WAXMAN: Let me try and address it if I understand what the -- I understand the question to be why isn't there fear that new incumbents will use the opportunity to lease all elements to, in effect, make an end run around the resale option that the statute permits under (c)(4) which is priced as a discount to retail rates. Is that --

JUSTICE BREYER: If you can answer that, you will go a long way towards answering the question.

MR. WAXMAN: I will -- okay, I will take a try, and to the extent to which there is some part of your question I haven't answered, please give me the chance. The assertion that allowing new entrants to lease all network elements would obliterate resale as a competitive option is both empirically wrong, as the Commission found on the record -- and I will point you to the provisions -- but it is also -- and before I get to it, I think it fundamentally misconceives the statute.

There is no textual basis in the statute for preferring one mode of competition or the other. The FCC found -- and I think it's correct in this regard -- that Congress, in passing this statute, in effect, acted in the role of Aristotle's prime mover.

It set -- it created a set of options for private choice to ensure that something would work to bring competition in each disparate local market whether it's rural residential or downtown Manhattan, and like natural selection, what matters is not that every variation survives for every possible competitive strategy, but that at least one works in each environment. So, I disagree with the -- and the FCC disagreed with the premise of their understanding of the act. Now, creating a rule --

JUSTICE SCALIA: Excuse me. That's assuming that what Congress means by competition is just having competing salesmen for the same network.

MR. WAXMAN: Well, that -- that is the problem for --

JUSTICE SCALIA: Do you think that's what -- do you think that's what Congress meant by -- by competition? We're going to have -- just one single network, but we're going to have competing salesmen.

MR. WAXMAN: No. Congress wanted facilities -- new entrants to build facilities. And the FCC has embraced that. We're now talking about the means to get there.

What your comment suggests is the reason why resale, using the (c)(4) option, will not -- can't produce this -- construction of new facilities and doesn't even produce real price competition because the resalers --

JUSTICE SCALIA: The producers --

MR. WAXMAN: -- are just getting a discount.

JUSTICE SCALIA: Right, exactly.

MR. WAXMAN: Now, with respect to the empirical findings that the Commission made -- and recall, Justice Breyer, that these were findings that had to be made within 6 months by mandate in a period in which there is no competition.

Someone's predictive judgment is going to have to be given weight, either the FCC's, which for 65 years has been regulating this industry, or local -- or local incumbents who have never experienced and certainly have not embraced cost-based competition.

What the FCC found -- and I would direct you to paragraphs 331 through 334 of the First Report and Order principally, although there are some other subsidiary references -- is as follows. First, that resale allows quicker entry because you don't have to go through this detailed, bottoms-up costing determination. It provides, unlike leasing network elements, a guaranteed return. You know what you are going to be making when you resell and you know what your costs will be. It also is better, Justice Breyer, for an entrant that only wants to offer a narrow range of services or an entrant that has little up-front capital. I mean, this act was not enacted to protect AT&T or Bell Atlantic or any other giant that may be able to compete on its own terms.

The purpose of this act was to allow vigorous competition even by little guys a la what happened when long-distance services were deregulated because AT&T at the time had to give access to its elements at the best rate it offered to anybody.

And moreover, even in the short-term period before State universal service is reformed from a monopoly-implicit subsidy situation to what Congress has mandated, explicit subsidies that apply to and are charged against all entrants, even entrants that are competing on the basis of network elements, during that period rural customers can only receive competition through resale. And in general, residential customers who don't make long-distance calls will be serviced through the (c)(4) mechanism.

The Commission also found -- I think it's paragraph 334 -- that just as resale has certain advantages and disadvantages with respect to leasing elements, leasing elements has greater risks and operational costs for all potential competitors.

First of all, there are fixed costs. Some network elements, like the loop, like the network interface device, like certain sub-elements within the switch, are leased on a flat rate per month basis, and those costs have to be paid whether you get enough revenues from the customer or not.

And in many instances -- and they're documented I think in AT&T's reply brief -- the -- the fixed costs for leasing the loop alone, which is only one of the seven elements, is greater than the retail charge that the incumbent is making for that service.

In addition, TELRIC and other pricing mechanisms allow incumbents to charge -- make nonrecurring charges like one-time provisioning and installation charges. That's money that you pay on the barrel head whether you want to get out quickly or not and whether your customer ends up generating enough revenue to satisfy you or not. Even as to usage-sensitive rates, there are risks. You can say, well, you know, you only pay for so much of the switch as you use. That's true, but you have to be able to collect it from your customer, and if you have a customer, for example, who doesn't make any long distance calls, all he does is call his Internet service provider and he spends 5 hours a day surfing the web, you will end up having to -- if you resell, you don't have any risks, but if you lease the switch as a network element, you will have very significant usage costs and yet will only be able to --

CHIEF JUSTICE REHNQUIST: Get a new customer.

MR. WAXMAN: Well, exactly right. Exactly right.

JUSTICE BREYER: It seems virtually inconceivable intuitively that somebody goes and says -- the loop costs like $30 a month or something and -- or $12 a month and the chance that the customer who has it attached to her house is not going to pay the $12 a month or $14 or something like that --

I mean, it's conceivable I grant you, but when looking through those three paragraphs, if that's what the FCC is driving at, I think they'd have to use some example that's a little better than just announcing that there is some risk that the loop won't be paid for.

MR. WAXMAN: Well, let me make two points, Justice Breyer. I don't want to dwell on this point for all of my time. The FCC again was promulgate -- it had 6 months to -- to essentially review all of this record.

JUSTICE BREYER: I quite sympathize with the FCC on this. You're absolutely right.

MR. WAXMAN: The FCC has said at many times during this order there's no competition now and we don't have a crystal ball about the way it's going to compete, but we have to make a predictive judgment. And if competition develops in a way that our rules don't accommodate, we will change them. They say that over and over again with respect to the need and impair standard --

JUSTICE BREYER: But the reason that it's so serious I think is because of what they say in their brief, that -- that given the present structure of rates and given the fact that universal system subsidies have not yet come into effect, to follow this particular system, at least they say, runs the risk that people will, where in fact fixed costs have been shoved into business rates, go and buy this wholesale TELRIC thing which will give them rates that are well below.

MR. WAXMAN: Absolutely.

JUSTICE BREYER: On the other hand, where you're talking about residential consumers, what they'll do is they there will appeal to the resale wholesale business for a totally different reason.

It's because those costs are really below the costs of providing the service, and that's what they're worried about. And I don't -- in reading this, I didn't see an answer to that.

MR. WAXMAN: Okay.

JUSTICE BREYER: And because I didn't see an answer, I began to think, well, maybe they're right in saying this just goes too far, this interpretation.

MR. WAXMAN: Let me give you an answer that looks to the two paradigms you've just addressed. With respect to rural residential customers, the paradigmatic customers that under old universal service are getting service below cost --

JUSTICE BREYER: No. I'm not so much thinking of them because --

MR. WAXMAN: Okay. I just -- I just --

JUSTICE BREYER: I'm really thinking of residential customers who weren't getting subsidies in a straight sense, but in fact they were not bearing a proportionate share of the fixed costs.

MR. WAXMAN: Okay. With -- let me -- let me focus --

JUSTICE BREYER: Maybe that comes to the same thing.

MR. WAXMAN: Well, I -- let me just say that any time, if there is a subsidized customer under the old system, that a new incumbent takes over on the basis of resale, the local incumbent isn't hurt at all. It gets the same costs and the same revenues it always would have gotten. It's not hurt by having a new entrant take that subsidized customer away.

JUSTICE BREYER: Why would the residential customer be hurt because they'll grab away all the business with this wholesale thing and then, at least in the interim, they'd have to -- the Commission would have to raise the price of the -- maybe we're getting too complicated.

MR. WAXMAN: No, no, no. It --

JUSTICE BREYER: Forget my question.

MR. WAXMAN: Okay. Let's look at the business customer, what they refer to as the cream-skimming mode, that if these Commission rules are allowed to come into effect, the barbarians at the gate will come rushing in and -- and take away instantly all of their business customers, thus depriving them of what they need to provide universal service. First, again I think we have to refer to what the Commission considered and what the Commission decided, and unfortunately to do that, you need to look not only at the First Report and Order in this case, but the Commission's Report and Order with respect to access charge reform that is -- was affirmed in the Eighth Circuit decision we lodged with the Court, and the Commission's findings in its universal service reform order, which is on appeal now to the Fifth Circuit.

The -- the -- I think it's important to say here a few things. One, the State -- it's very significant that the State commissions, who have, after all, with the FCC the real interest in protecting universal service, have not challenged any of these unbundling rules.

Second of all, the FCC made a finding. It made an empirical finding that the pace of cost-based competition has not and is not likely to outstrip the incumbents' ability to bear it.

And it has found on the record that if that happens, the FCC like the States can take interim measures to protect the incumbents and to protect universal service.

JUSTICE KENNEDY: Are all of the points you have just made responsive to Mr. Barr's argument that the Commission failed to heed the word need in the statute?

MR. WAXMAN: No, but could I ask your indulgence and just finish this answer --

JUSTICE KENNEDY: Yes.

MR. WAXMAN: -- and then address --

JUSTICE BREYER: -- Kennedy has a question. Go ahead -- You --

MR. WAXMAN: I just want to make sure I -- I answer you fully. If you look at -- in our reply brief, for example, at pages 31 and 32, notes 21 and 22, you'll see some, but not all of the findings that the Commission made. And in fact, the Commission has already taken steps to provide interim relief to make sure -

CHIEF JUSTICE REHNQUIST: Mr. Waxman, you can't put questioners on hold.

MR. WAXMAN: Okay.

CHIEF JUSTICE REHNQUIST: When your red light goes on, it goes on.

MR. WAXMAN: Justice Kennedy, with respect to the -- the -- the question -- the point that -- I do apologize. I didn't realize I was that much out of time. With respect to the question that they've raised with respect to the Commission's interpretation of 251(d)(2),

251(d)(2) says nothing about State commissions. It says that in -- I'm quoting from the statute here. In determining what network elements should be made available for purposes of subsection (c)(3), the Commission shall consider need and impairment.

Now, there is no question in this case that the Commission applied dictionary definitions for those words, and there is no question in the First Report and Order that it considered both need and impair not only in general in the section that addresses this standard, but as to each of the seven network elements that it identified, loops, switches, trunks, NID's, signaling. It has a section with respect to each one that applies the need and impairment standard and states the reasons why it thinks that it was met.

Again, this is an order that was required to be produced within 6 months, a time when there was no competition, a time in which all of the incumbents are monopolists and the Commission determined, again making specific references to the fact that it may change its requirements as conditions develop -- it expressly said for present purposes in this environment where there's no competition, we're only going to look within the incumbent monopolist's own network. And that is a reasonable requirement in a monopoly regime.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Waxman. Mr. Carpenter, we'll hear from you.

MR. DAVID W. CARPENTER: Mr. Chief Justice, and may it please the Court: Mr. Barr made two principal arguments. He objects to the fact that new entrants can obtain all elements, and he objects to the application of the need standard. The implication and necessary consequence of his arguments, if accepted, would mean that there would be no price constraints whatsoever on the incumbent local monopolies in any area of the country until some local facility were constructed by ATT or anyone else who had the resources to do so, and even in those areas, the only constraint would be that that ATT would provide -- you have a duopoly rather than a monopoly. And that position follows from the fact that the only option people could use is resale, and when you use resale, you can only offer one of the two services that any local exchange network offers. You could only offer exchange service and you could only offer it on terms that don't affect the margins that the local monopolists run at all. So, there's no --

JUSTICE GINSBURG: What about Mr. Barr's point that there are other sources?

MR. CARPENTER: Pardon me?

JUSTICE GINSBURG: That Mr. Barr said -- I asked, suppose someone has no facilities, how do they get into this, apart from using the incumbent's facilities? And Mr. Barr answered, the FCC never looked around. If they did, they would see that there were other places where the new entrants --

MR. CARPENTER: Just let's put this in context. What Mr. Barr wants is a rule of the FCC that means that when these States conduct arbitrations, when any individual requesting carrier asks for something, you litigate whether, for that requesting carrier, it has options.

There's lots of people who concededly under even his view, the non-ATT's of this world, can't build -- can't construct alternative facilities. So, he wants to tie up these -- these arbitration proceedings with case-by-case, area-by-area litigation of whether particular entrants can acquire particular facilities. The FCC said that that was pointless. When it was applying the standards of 252(d), it said need means added cost. People -- it found people won't request things they don't need, paragraph 287, and it found that to give the LEC's this -- yet another weapon in slowing down competition would delay the -- delay entry and increase the costs --

JUSTICE GINSBURG: People won't request things they don't need. It's essentially as though that requirement weren't there. So, it doesn't really mean anything other than what would happen if it weren't there.

MR. CARPENTER: The FCC considered the consequences of the rule that Mr. Barr is urging and it found it would serve no positive purpose because people won't request things that they don't need. And it found that it would slow down entry and --

CHIEF JUSTICE REHNQUIST: But if --

MR. CARPENTER: -- impose added costs.

CHIEF JUSTICE REHNQUIST: If Congress provided that need is the standard, the FCC has got to defer to that. It can't just say Congress made a mistake.

MR. CARPENTER: Absolutely, Your Honor. But the -- but the -- but the FCC doesn't make elements available. The States do. The FCC adopts regulations that define the conditions under which

States must make them available. And what he's complaining about is that those regulations didn't allow case-by-case litigation of whether particular carriers --

CHIEF JUSTICE REHNQUIST: What he's complaining about is the -- is the transition from need to want, which is a statutory question.

MR. CARPENTER: It's a statutory question. The FCC was required to consider that in promulgating rules. It did consider that. It defined need as added cost, and no one disputes that that's a permissible interpretation.

And it -- it found that carriers who didn't need things, who could acquire them at a lower cost elsewhere, wouldn't ask for them, and that his rule would impose added litigation costs on new entrants and would delay entry.

JUSTICE SOUTER: But doesn't he have a textual basis for his claim to individualized determinations? In the language in (d)(2)(B), which refers to impairing the ability of the telecommunications carrier seeking access to provide the service, that sounds like an individualized determination.

MR. CARPENTER: No, Your Honor. That's the standard that applies to the FCC when it adopts rules that the States will apply when they perform the adjudicatory function of determining which elements are to be made available. So, it's -- that is a -- that is a standard that --

JUSTICE SOUTER: So you say.

MR. CARPENTER: And --

JUSTICE SOUTER: But it sounds like an individualized determination is contemplated, and I think that's what he's asking.

MR. CARPENTER: Well, if -- I would submit that the FCC doesn't make anything available. Only the States do that in arbitrations. Only the States are ever going to make individualized determinations under the structure of this act.

JUSTICE SOUTER: But he wants that determination to be individualized where it is made.

MR. CARPENTER: That's right, and the FCC determined that -- that it would defeat the objectives of the act and would impose added costs on people for no reason if that individualized determination were required to be made in each separate arbitration proceeding.

And it rests on -- on a finding that people won't ask for things they don't need, so that people will only be asking for things that they do need. So, it satisfies the -- the standard under that definition. I wonder, if I might, just refer to the other major point here, which is the -- the fact that people can obtain all the elements --

JUSTICE GINSBURG: Just before you do that, would you -- would you explain to me if Congress really meant these two to be available kind of at the entrant's option, why was there conditioning of the long-distance carrier on the -- getting into the resale business but not on the networks element, if Congress thought you could get everything by the networks element route?

MR. CARPENTER: Yes, and that relates to my second point. The point is that when you obtain elements, even if you obtain all the elements, you -- you are -- you are investing in the network in much the same way that an owner would be. Justice Breyer, if you look at the Commission's TELRIC rules, paragraphs 686 to 687, you will see that all the investment risks that a new entrant -- you know, that a new entrant has to -- has to take on all the investment risks of the -- of the carrier to the extent the new entrant is leasing the carrier's facilities.

So, the new entrant is fundamentally a lessee that is much in the position of an owner. And in response to you, Justice Ginsburg, when the -- when the FCC found that only people who engaged in resale under (c)(4) were prohibited from jointly -- jointly marketing long-distance services, it was on the basis that it only covered resale, didn't prohibit owners of facilities, and that lessees of network elements had investments like those of owners, not like those of resellers. And the difference between resale and -- and leasing network elements is absolutely fundamental.

When you -- when you're a reseller under (c)(4), you're just buying the same services that each of us use in our homes, the same services. When you're -- it's -- local telephone networks are plants that provide two things: exchange services we each buy, exchange access services that inter-exchange carriers buy and that account for 35 percent of the revenues. When you resell -- when you resell, you only get to resell what we use in our homes. When you lease elements, you're paying for the whole -- whole ball of wax, everything that's there, covering all the investment risks, and you're in a position to provide all the services that the LEC is currently providing and impose price constraints that otherwise won't exist. And this will have no effect on the incentives of people to build new facilities because even if you lease all these things at precisely their economic cost, you're going to have higher costs than they do because of the enormous transaction costs of -- of depending on a monopoly competitor to try to get what you need to compete.

The FCC found throughout this order that they have incentives to slow roll us in negotiation. They have the incentive and ability to discriminate against us. We -- no one in their right mind would rely on these people for -- for facilities if they could obtain -- could -- could obtain them from another source themselves at anything remotely approaching the sum of the costs if you lease all the elements. So -- so, this is as fundamental difference as one can imagine. Now, Mr. -- Mr. Barr talks about the specific definition of operator support systems.

I think the text of the first sentence forecloses this. The text of the second sentence establishes that the -- this is not something that's limited to routing and transmission. But I just want to point out that a separate regulation that no one has ever challenged --

313(d) I think it is -- independently requires the same access to operations for systems based on a finding that if you don't have the information that those systems provide, you're in a position where you never can get access to the six other elements that are not being challenged.He also complains about the fact that the -- this rule supposedly give access to live operators. They don't. The specific regulation says the access to operator facilities and all the functions they provide.

We get the access to those functions irrespective of whether those functions are performed by humans or by machines, as most operator functions are, by the way. And every single element in this network to some extent relies on humans. Thank you.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Carpenter. Mr. Barr, you have 4 minutes remaining.

MR. BARR: There's a pivotal word in section 251(c)(3). It's the word on an unbundled basis. What does that mean? If I have a statute that says -- we say it means unbundled from the whole. So, it means less than the whole. That's what you're taking under that provision.

If I have a statute that says to promote automobile manufacturers and it says you can buy GM's car and resell it if you want, or to make your own car, you can get parts from General Motors on an unbundled basis, to suggest that I can put an order in to General Motors saying please give me all the constituent parts of a car on a preassembled basis so I get the same output unit a car, and if that's the purpose of the provision, it's ludicrous. What unbundled means in every context I'm aware of is disaggregating the stuff you're taking from the whole.

And this is why it relates back to the need inquiry. What the FCC was supposed to do was say, what do they need, what don't they need. And the stuff they don't need from the incumbent they provide themselves, and in order to induce them to put that into the marketplace so you have competition at least on those parts, we have an unbundling provision that lets them get the rest unbundled from the whole.

So, our argument is that that provision simply is not available to go in and engage in a fiction that you're getting anything on an unbundled basis when you buy our entire network from stem to stern.

JUSTICE BREYER: But suppose they only had 6 months in the statute. So, the Solicitor General says, look, this isn't perfect. We only had 6 months. We had to do the best we can, and we'll change it --

MR. BARR: We say --

JUSTICE BREYER: -- if necessary.

MR. BARR: -- if you -- if you -- if you have to rely on everything that the incumbent has, that's why resale is there. Resale is there to build scale so you can deploy facilities. The second point I want to make about 251(c)(3) is this notion that there's something different is bogus.

There's no different risk. And more importantly, because you pay by the line, by the month, just as you would if you bought it resale and you only pay for what you actually use on capacity. But the more important point is the opportunities they talk about.

They say, oh, we have all these opportunities if we do it this way. Please focus. Those opportunities are restatements of the evasion. They say, under resale we can't joint market, but if we do it this way, we have the additional opportunity of selling long distance.

Under resale, we can't provide access, but if we do it this way, we can sell access as well. There's no new input by them. There is merely evasion of the restriction. They have taken the position that it's meant to induce them to bring inputs into the marketplace, partial inputs which otherwise couldn't be deployed unless they could fill in the gaps with the unbundling provision, and converted it into nothing more than another label for resale without the restrictions.

JUSTICE SOUTER: What about the right-mind point that Mr. Carpenter made? He said nobody in his right mind is going to deal -- want to deal with you if he's got an alternative. What's your answer to that?

MR. BARR: I -- I -- I would like someone to tell that to the Chairman of AT&T because they have been standing around with their hands in their pockets for 3 years talking about a UNE platform, that their entry strategy was to buy a UNE platform, which means our network, nothing different, totally our network under the fiction that they're buying pieces. That was their entry strategy. The Eighth Circuit stopped it, and so they finally had to go out and buy, guess what? Facilities, TCI and -- and a teleport.

So, they're now introducing facilities into the marketplace because the scam of taking a free ride on our network and using the arbitrage -- the person that is hurt by arbitrage is Aunt Tilly because the money that the business people are paying was supposed to support her service.

What the FCC rule does is it takes that money and diverts into the -- uses it as a subsidy for people to come in and provide Potemkin competition. I'm reselling the same network as these guys, and I'm taking the money that was supporting Aunt Tilly and putting it in my pocket.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Barr. The case is submitted.

Attribution:

The OYEZ Project

Featured:

MCI Telecommunications Corp. v. American Telephone & Telegraph Co. - Oral Argument

Fri, 09 Jan 2009 14:49:53 +0000

Case:

MCI Telecommunications Corp. v. American Telephone & Telegraph Co.

Media File:

93-356_19940321-argument.mp3

Related Transcript:

1993_93_356_argument.xml

Transcript:

Argument of Christopher J. Wright

Chief Justice Rehnquist: Well, we'll hear argument now in No. 93-356, MCI Telecommunications Corporation v. AT&T and United States v. AT&T.

Now, Mr. Wright.

Mr. Wright: Mr. Chief Justice, and may it please the Court:

Under section 203(a) of the Communications Act, telephone companies are required to file tariffs.

The issue in this case is whether the Federal Communications Commission has authority to relieve nondominant long distance companies of the requirement that they file tariffs.

In our view, that question is answered by section 203(b)(2) of the Act, which provides that the Commission may modify any requirement of section 203.

Since the Commission may modify any requirement of section 203, it may modify the tariff filing requirement established by section 203(a).

Unknown Speaker: Could it go so far as to say nobody has to file a tariff?

Mr. Wright: That is the position that the FCC has taken, and, of course, the D.C. Circuit struck that down.

Now, we believe that "modify any requirement" would mean that.

Let me point out, in response to your question, that the FCC has not gone nearly that far.

The--

Unknown Speaker: Modify including AT&T or just the nondominant carriers?

Could you do away with the rate filing altogether, or is your position just that you can do away with it with respect to nondominant carriers?

Mr. Wright: --Well, that's certainly all we're arguing about today.

Now, I guess I'd interpreted Justice Souter's question as sort of assuming that AT&T would become nondominant at some point in the future.

I don't know any rationale for eliminating the tariff filing requirement for a dominant carrier like AT&T.

Unknown Speaker: Why do you draw the distinction, market power?

Mr. Wright: Yes, that's exactly the--

Unknown Speaker: That's a reason, but where do you find that in the text?

Mr. Wright: --Well, the Commission has the authority.

Under our broadest reading of the statute, the Commission has the authority to modify any requirement.

There would be a question as to whether or not it was reasonable to relieve dominant carriers of the authority.

Unknown Speaker: And your position would be it would not be reasonable.

Mr. Wright: I don't... I... the Commission hasn't taken any view on that.

Unknown Speaker: You think it would be reasonable for us to take the position that it would not be reasonable.

Mr. Wright: Well, right now the Commission has not articulated any reason for relieving dominant carriers of such a requirement, but--

Unknown Speaker: No, but I think we just want to know whether we accept your position here... and if your position here, do we, in effect, and by implication, go the whole hog?

Mr. Wright: --Our reading of the statute, "modify any requirement", yes, would allow the Commission, for appropriate reasons, to relieve all carriers of the tariff filing requirement.

Unknown Speaker: Sort of the Act is no longer necessary, it's a fully competitive industry, and we'll simply modify the Act to no longer exist.

Mr. Wright: If and when it happens that the industry is fully competitive, then we believe Congress has authorized the Commission to do away with a tool to enforce just and reasonable rates that would no longer have a purpose.

Unknown Speaker: Well, why is it that... I think you acknowledged that the only purpose of the... that the purpose of the Act is not only to assure reasonable rates, but also to prevent price discrimination, and I don't know why it is so self-evident that when there is competition there cannot be effective price discrimination.

I don't understand that at all.

Mr. Wright: Well, I--

Unknown Speaker: Have you ever bought a new car?

A very competitive industry, but unless you're a good negotiator you're not going to get as good a price as somebody who is.

Mr. Wright: --Well, unreasonably discriminatory, as construed by the Commission, includes... I'm sorry, competition assumes that there'll be give-and-take of negotiation, and that... the fact that different rates get determined does not necessarily show that something's unreasonably discriminatory.

I'd like to rely on AT&T's submission to the Commission to answer your question, though.

I mean, they said that by definition, nondominant carriers lack sufficient market power to be able to engage in improper price discrimination without suffering the discipline of the marketplace.

Unknown Speaker: You're not urging us to believe AT&T, are you?

Mr. Wright: In this particular instance, Your Honor.

Unknown Speaker: In this particular.

Mr. Wright: I also wanted to make the point, in response to Justice Souter's question, that so far all the Commission has done is relieve part of one of three markets of the tariff filing requirement.

It has not been lifted for international calls.

It has not been lifted, by and large, for the local exchange carriers, which do 99 percent of the interstate access service.

It's only been lifted for 40 percent of the long distance market not served by AT&T, and with respect to that 40 percent, nondominant carriers like MCI frequently choose to file tariffs, especially with respect to residential customer services.

Unknown Speaker: So another way to put it is that it's been eliminated for all of the interstate market except AT&T.

Mr. Wright: For... and for carriers who choose to... choose to file tariffs, and--

Unknown Speaker: The requirement's eliminated for everybody in that whole market except AT&T.

Mr. Wright: --Yes.

It's not mandatory for the nondominant carriers.

AT&T reads the statute differently.

It says that it doesn't apply to any requirement.

Specifically, it doesn't apply to the tariff filing requirement, because that's a core requirement of the Act.

In AT&T's view, the statute only allows the FCC to modify formalities.

We have two responses.

First, that's not what the statute says.

The statute doesn't say anything about core requirements or formalities.

And, in fact, it's not at all clear that such a rule would be needed for formalities.

Section 203(a) says very little about formalities, and what it does say is the following:

"Tariffs shall contain such other information and be printed in such form and be posted and kept open for public inspection in such places as the Commission may by regulation require. "

So there's another provision that gives the... another provision in section 203 that gives the Commission authority over... over those formalities.

Unknown Speaker: There was a time when the Commission took a different view of 203, was there not, that 203 required rates to be filed?

Mr. Wright: There's a 1980 order of the Commission that in the text says something that sounds like that, and in the accompanying footnote says, but, of course, section 203 is very broad.

And the issue in that case was not whether or not... you know, that was dicta in that case.

Both of those contradictory statements were dicta in that case.

Since 1980, the Commission has been firmly of the view that it has authority to lift this requirement.

Unknown Speaker: Well, was the 1980 case a case where the Commission had been requested to modify the requirement?

Mr. Wright: No, Your Honor.

No, it was a different matter.

Unknown Speaker: To give "modify" a very broad reading... and you are explicit about that, you say it means more than the word "exempt", is that your position?

Mr. Wright: Well, yes, we define it in light of Webster's Ninth New Collegiate Dictionary.

Unknown Speaker: But, yet, in legal litany modify is usually a kind of an inbetween word, like courts have authority to affirm, modify, or reverse a lower court decision.

Mr. Wright: And I would concede even that one of "modify" 's meanings would even be more limited than that.

In some cases it would only mean circumscribed alterations.

But there are different--

Unknown Speaker: Not one of its meanings.

It's its normal meaning.

I mean, you say you have Ninth... there are bad dictionaries, just like there are bad regulations.

There are a whole bunch of English words that come from the same Latin root, all of which have a connotation of limitation.

Moderate, modulate, even the word modest, it all comes from the same root, and they all... a root which means measure, and they all contain that limitation of measured, limited, and it seems to me that "modify" bears that same connotation as all of them.

I don't care what one edition of Webster's might have said about it.

Mr. Wright: --Well, Justice Scalia, Webster's Collegiate Dictionary very clearly... the FCC's construction fits within its definition.

And this is not an obscure dictionary; this is one this Court's relied on.

This Court's favorite dictionary is Webster's Third New World Dictionary.

You've relied on it as recently as January, you relied on it 9 or 10 times last term, and it includes a definition

"to make a basic or important change in. "

So--

Unknown Speaker: To make a basic or important change, that's what "modify" means, to make a basic change?

Mr. Wright: --That is one of the definitions--

Unknown Speaker: Which meaning is that in terms of numbers?

Mr. Wright: --I'm not sure, Your Honor.

Unknown Speaker: And wasn't there a point made that at the time this Act was passed perhaps that definition wasn't there?

Mr. Wright: Well, AT&T has not actually said this.

It suggested that perhaps 1934, but actually the definitions that they cite from the thirties all say "alter".

Now we'd be happy if you want... if this means FCC has authority to alter any provision.

Unknown Speaker: There's a wonderful... wonderful line sung by the bass in the Messiah, Mr. Wright, where it says "and we shall be changed".

There's a feeling of transformation about it, and you say that could be sung "and we shall be modified".

[Laughter]

They really convey the same notion.

Mr. Wright: Well, on a practical level, it's occurred to me that before I went to law school I thought edit meant, you know, change a few tenses.

Then after seeing what a law review would do to something I wrote, I realized that it means rewrite.

Now, if somebody on a law review told me they were going to modify rather than edit what I was submitting, I'd really be scared about what was happening.

[Laughter]

Let me also say that this case is very similar to the Amtrak case, the case decided 2 years ago, National Passenger Railroad v. Boston & Maine.

The issue in that case was what the word "required" meant.

The D.C. Circuit had said that it had to mean necessary, that "required" meant necessary, that's the first definition.

The ICC had said, no, we're going to interpret it just to mean useful in this context; we're going to give it what was effectively a broader meaning.

This Court said that few phrases in a complex scheme of regulation are so clear as to be beyond the need for interpretation when implied in a real context, and went on to say that the existence of alternative dictionary definitions of the word "required", each making some sense under the statute, itself indicates that the statute is open to interpretation.

In this case, you can put "modify" in place of "required" and reach the exact same conclusion.

Let me add in that respect that AT&T has cited the... even though we devoted a few pages of our brief to it, has cited that case only in a footnote where they say that the reason it's distinguishable is because our definition of the statute makes no sense at all.

Unknown Speaker: What about the other language, Mr. Wright?

It not only says "modify" but also says "in special circumstances".

Do I have the language right?

Mr. Wright: That's one of... it says

"in its discretion and for good cause shown, modify any requirement either in particular instances or by general order applicable to special circumstances-- "

Unknown Speaker: And you say the "special circumstances" could be that the entire industry is now competitive.

The special circumstance is, what, 1993?

Mr. Wright: --Well, we think looking at the situation today from what Congress saw in 1934, that--

Unknown Speaker: Today is a special circumstance.

Mr. Wright: --The fact that AT&T no longer holds a monopoly over long distance service, but that there are 481 other nondominant carriers--

Unknown Speaker: They're not specified circumstances.

It says "special circumstances".

Don't you think that contains a connotation of limitation; not general circumstances applicable to the entire industry, but special circumstances, some limit?

Mr. Wright: --Well, it's not yet... I mean, as I've said, it's only applicable to one part of one of three markets here.

The fact that there's competition there has not gotten--

Unknown Speaker: Well, okay, now we're just arguing about how special "special" has to be, but that already backs you off of your initial position, which is that really it could extend to the entire--

Mr. Wright: --No... well, that's another... we would think that the Commission has authority to define what 1934, that... when there was really no competition at all, that today's telecommunications world is very different.

Unknown Speaker: --So "special circumstances" can include everything; the entire realm of communications can be special circumstances?

Mr. Wright: If, in fact--

Unknown Speaker: Yes, if the Commission says so.

Mr. Wright: --If, in fact, the communications industry has changed that dramatically.

Unknown Speaker: So your rule is that when the general circumstances are different from the predicate for the original legislation, as long as this modification power is in there, in effect the legislation can, in effect, be repealed by the Commission.

Mr. Wright: Well, I wouldn't phrase it that way, but--

Unknown Speaker: Well, I wouldn't either, if I were arguing your side of the case.

[Laughter]

But, I mean, that's where you go, isn't it?

Mr. Wright: --But, look it, in this... in 203 there are... there are seven sentences.

One of them is 203(b).

Five of the others contain a direction that carriers shall do something.

The verb "shall" is used in five of those sentences.

The Commission has said that... is told that it may modify any of those requirements.

It seems clear to us that the Commission may change the rules, that that's what Congress has authorized it to do.

And, in fact, I don't think I quite made the point that how little AT&T's view allows the Commission to do under "modify any requirement".

As I say, all it says is that we may modify formalities, and we already have authority to modify most of the formalities.

They... Congress expressly delegated that to the Commission as well.

AT&T reads this to modify some requirements.

Unknown Speaker: Well, maybe you're both wrong.

I mean maybe they can affect tariffs, but not all of them.

Maybe they can suspend one now and then or whatnot.

I don't think we're driven to take either view in particular.

Mr. Wright: Well, the logic of AT&T's position may be that we can go as far as we've gone and detariff part of one of three markets and not go as far as to detariff it if that becomes appropriate, but I don't really think that they've made that argument.

Unknown Speaker: Have we held, Mr. Wright, that Chevron deference is equally applicable to an independent commission as is to an agency of the Government?

Mr. Wright: I believe so.

Certainly the Amtrak case that I just cited was an ICC case, and, if anything, it would seem that more deference would be appropriate, but I'm not asking for any more, just the same amount.

Unknown Speaker: More deference is due to a body that is not controlled by elected representatives directly?

Mr. Wright: Well, I'll stand on the Amtrak case and the fact that that case is almost exactly like this one.

If I may, I'd like to reserve the remainder of my time for rebuttal.

Unknown Speaker: Very well, Mr. Wright.

Mr. Verrilli.

Argument of Donald B. Verrilli, Jr.

Mr. Verrilli Jr.: Mr. Chief Justice and may it please the Court:

I'd like to start, if I could, with the text of 203(b).

I think it's clear that, as a practical matter, what the Commission has done here is not to eliminate the tariff filing requirement.

We think that's also true as a textual matter.

What the Commission has done here is to make the requirement conditional.

In theory, this requirement continues to exist and operate for every carrier.

The question is whether the carrier meets the conditions that trigger the requirement.

It seems to us it is as much a modification of a requirement to change the conditions that trigger it as to change the obligations that are, in fact, triggered.

The Commission has done no more than that here.

Additionally, we think that section 203(c), in fact in particular the first sentence of 203(c), makes clear that the Commission has the power to remove the tariff obligation entirely, because it says that service must be provided under tariff unless otherwise provided by or under the authority of the Act.

Plainly, section 203(b)(2), in our view, which is the very preceding sentence in the Act, is authority conferred in the Act to remove the tariff filing obligation.

Unknown Speaker: Mr. Verrilli, in terms of the MCI's position that the FCC must require rate filing and it could not do away with that requirement either on a mandatory or even a permissive basis?

Mr. Verrilli Jr.: 10 years ago, Your Honor, MCI took that position in the court of appeals.

We now think that that position is wrong.

We've thought that position was wrong for many years, and we tried to indicate that in our brief at footnote 5, our reply brief.

In any event, it's our view now that this statute is capable of the meaning that the Commission has ascribed to it, which under Chevron is all that ought to be required to trigger deference.

But, yes, Your Honor--

Unknown Speaker: I just wanted to establish that the 10 years ago, so at least you found a plausible basis for making the argument that you made successfully 10 years ago.

Mr. Verrilli Jr.: --Yes, Your Honor, 10 years ago MCI made that argument.

We think, though, that the reading that we're advancing today is the better reading, particular given section 203(c), which makes clear that the requirement can be removed.

Unknown Speaker: Well, all that that gets you is that you can remove some... you can modify tariffs, just as you can modify other things.

It doesn't necessarily show that you can make the kind of massive modification to, in effect, detariff an entire segment of the industry, save for one provider, right?

Mr. Verrilli Jr.: But--

Unknown Speaker: I mean, all it shows is that you can affect tariffs.

Mr. Verrilli Jr.: --It shows--

Unknown Speaker: You're still left with the problem of, you know, how far "modify" takes you and what are "special circumstances".

Mr. Verrilli Jr.: --Yes, Your Honor, that's correct.

But it seems to us that the logic must be that if the Commission has the authority to remove it in some circumstances, therefore the necessary implication is that it's not in those circumstances indispensable to the functioning of title II if the logic that would allow the Commission to take that step exists with respect to 10 carriers and also exists with respect to a hundred or four hundred carriers, that there's no natural stopping place.

That if the logic works for that... for the small number of carriers and the logic works equally well for the large number of carriers, the Commission ought to have the discretion to expand that power to include a large number of carriers.

There's simply no policy justification for saying, well, it's okay to exempt 10, but it's not okay to exempt 400.

Unknown Speaker: Just a textual justification, the word "modify" and the word "special circumstances".

Mr. Verrilli Jr.: Well, Your Honor, so long... there are special circumstances here, which is the lack of market power.

The requirement hasn't been eliminated, it's been made conditional, so the Commission has remained faithful to the text.

And as long as it has done that--

Unknown Speaker: Are you still of the view that the mandatory no filing would be impermissible, so that you--

Mr. Verrilli Jr.: --No, Your Honor, we're not.

I think the logic of our position is that mandatory detariffing would, as a matter of statutory interpretation, be a permissible step.

Unknown Speaker: --So you really have come 180 degrees.

Mr. Verrilli Jr.: With respect to the meaning of section 203, yes, that's correct, Your Honor.

Unknown Speaker: But then so has the Commission, so has AT&T.

I mean there's enough of that to go around, isn't there?

[Laughter]

Mr. Verrilli Jr.: Thank you, Justice Scalia, I think that's correct.

I'd also like to focus for a minute on what I take to be AT&T's central argument, which is--

Unknown Speaker: Of course, the position you advocate today is advocated by an older, wiser, and more experienced lawyer.

[Laughter]

Mr. Verrilli Jr.: --That's correct, thank you.

What I take to be AT&T's central argument is that title II of the Act cannot be enforced absent tariff filings.

We think that that is simply wrong.

Although tariff filing is one method of enforcing an antidiscrimination provision, it is clearly not the only method.

The Commission has made a decision here, in its discretion, that it wants to use the complaint process as the statutory... as the principal enforcement method.

That is a decision that is owed substantial deference.

It's a reasonable policy decision, particularly given AT&T's concession that nondominant carriers can't charge unreasonable or discriminatory rates.

Indeed, many non... many price discrimination statutes, the antitrust laws, the Robinson-Patman Act, State unfair competition laws, are routinely enforced without any requirement of published rates.

The logic that allows those statutes to function is a logic on which the Commission ought to be entitled to rely here.

Unknown Speaker: Well, it's also... those statutes are applied to competitive industries as well.

I'm not sure those statutes help you.

I mean, they... those statutes operate on the assumption that the mere presence of competition does not eliminate price discrimination.

Indeed, the price discrimination is a tool that's often used most often in fiercely competitive industries.

Mr. Verrilli Jr.: But they do operate on the assumption, Justice Scalia, that the very existence of competitors is likely to ferret out the price discrimination, and that competitors have an incentive to find out what the other competitors are charging, and that customers have an incentive to disclose the best offers they're getting from one competitor in order that another competitor can come in and meet or beat that price.

And therefore it's a matter of disclosure of the rates being offered that counts here, that makes the enforcement mechanism work, and that's the kind of logic the Commission relied on here.

In our judgment, that was plainly a reasonable decision.

The third point I'd like to make is... if I could, is that it would, in our view, be an unwarranted extension of the filed rate doctrine to apply Maislin here.

In our view, by far more... the case most on point is Permian Basin.

In Permian Basin this Court faced an analog to the question faced today; does an agency have the statutory authority to remove a tariff obligation, in that case, the tariff obligations of section 4 of the Natural Gas Act.

In Permian, this Court squarely held that the Federal Power Commission had that authority.

And it did so in a statute, section 4 of the Federal Power Act, that imposed an unequivocal obligation on every carrier to file all rates.

Section 4 of the Natural Gas Act also imposed a nondiscrimination and a reasonable pricing requirement, just as does the Communications Act.

In fact, the Natural Gas Act was modeled on the Interstate Commerce Act and was passed in 1938.

Despite all that, this Court concluded that the Federal Power Commission did not exceed its statutory authority in removing that requirement for small producers of natural gas.

Now, that exemption from the tariff requirement in Permian Basin, if one goes back and reads the agency decision at 34 Federal Power Commission 235, applied to 2,000 of the 2,100 producers of natural gas who, in the aggregate, produced 15 percent of the natural gas supply.

Unknown Speaker: You want to let... you want us to allow the FCC to do for communications what the Federal Power Commission did for the energy industry?

Mr. Verrilli Jr.: We think that the proper role of the agency ought to be respected here, just as it was in Permian Basin, recognizing that the tariff mechanism needs to be adjusted in light of changed circumstances.

Unknown Speaker: My impression is that Permian Basin was the first step to a real regulatory diaster which we've ended up sorting out during the past decade with great difficulty.

Mr. Verrilli Jr.: Well, that may or may not be correct, Justice Scalia, but that seems to me to be in the bailiwick of the agency.

The agency's made a decision that this... that removal of tariffs in this circumstance will advance the public interest, will make this market more efficient and more competitive, and in our view that's a judgment that ought to be respected.

We think there's just a fundamental difference between the question that was at issue in Maislin, whether a filed rate must be followed, and the question at issue here, where the agency... whether the agency has the statutory authority to remove that.

We think, as we said, that the text of 203, particularly focusing on that first sentence of 203(c), makes clear that the FCC has that authority.

If there are no further questions, I'd like to reserve the balance of my time.

Unknown Speaker: Thank you, Mr. Verrilli.

Mr. Carpenter, we'll hear from you.

Argument of David W. Carpenter

Mr. Carpenter: Mr. Chief Justice and may it please the Court:

The issue in this case is whether Congress has given the FCC the power to exempt a broad and concededly potentially unlimited class of communications common carriers from a statutory requirement that was copied, almost verbatim, from those of the Interstate Commerce Act, and that is utterly central to the statutory scheme for the same reasons this Court identified in the Maislin case.

And we submit that it's very clear from the language of the Act, both 203 looked at in isolation and in context of the Act as a whole, and from its history, that the Communications Act just isn't susceptible to the FCC's interpretation, which was the basis for the court of appeals' decision.

But that even if the statutory terms were ambiguous, a century of decisions of this Court, reaffirmed recently in Maislin and the '86 Square D decision, established that exceptions to statutory filed rate requirements can't be inferred from general or ambiguous provisions, and there's no way that section 203(b) is an explicit exemption.

The statute--

Unknown Speaker: Excuse me, I don't... I really didn't... I didn't follow you there.

Mr. Carpenter: --Didn't follow that.

Unknown Speaker: Yes.

Why is it not an explicit exemption?

I can understand how you can quarrel about the scope of it, but surely it's an explicit exemption.

Mr. Carpenter: Well, as I say, we say the statute is not... 203(b) can't be read as authorizing what they want to authorize, which is exempting carriers from the requirement of 203(a) that they file all their rates, or the requirement of 203(c) that they charge only filed rates.

Unknown Speaker: And your position is that they cannot exempt any carrier at any time, no matter the circumstance and no matter how narrow the circumstance, right?

Mr. Carpenter: That is our position, that's correct.

They cannot exempt.

They can modify the requirement, but they can't exempt.

Unknown Speaker: Well, what's the difference between modification and exempting?

Mr. Carpenter: They cannot remove the requirement that carriers file all their charges somehow, someplace, somewhere, and the requirement that they charge only the rates that they'd filed, except in the situations where the statute explicitly authorizes exceptions, and there are many such exceptions.

Unknown Speaker: Then what does exemption mean, which you say they can't do?

Mr. Carpenter: They cannot do.

They cannot remove the requirement that every carrier file all its charges, and they can't remove the parallel requirement that carriers charge only filed rates.

That's our position, and that follows from the terms of the statute.

203(a) requires every carrier to file all charges.

203(c), just the flip side, prohibits a carrier from charging unfiled rates, and 203(b) only requires that the FCC may modify any requirement of the statute in particular circumstances.

Unknown Speaker: May I ask, Mr. Carpenter, do you think they could modify the filing requirement by changing the agency where the rates are filed?

Mr. Carpenter: Yes.

Yes, in fact, both circuits that have adopted the interpretation that we're advocating, the Second Circuit and the D.C. Circuit, have allowed precisely that.

Unknown Speaker: What if they said we'll file them in the sales office of corporate headquarters?

Mr. Carpenter: Well, we're now quibbling... we're now quibbling about the--

Unknown Speaker: Well, I'm not quibbling, because I imagine they may do that.

They may... they may have all their people know what the rates are, just file them, and have them open for public inspection at the home office.

Mr. Carpenter: --Well, the question ultimately... I think they have to be filed in some public... public agency, but the question ultimately boils down to this, you cannot enforce the other provisions of the statute--

Unknown Speaker: Well, let me just interrupt you a minute.

Mr. Carpenter: --Yeah.

Unknown Speaker: If you will agree they don't have to file them with the Commission, what is it in the statute that says they must file them with some other public agency?

Mr. Carpenter: What is it... what is... my position ultimately is that they can modify the requirements of 203(b), and... but they can't modify the other provisions of the statute, which they concede, and the courts have, you know, long held that the publication and filing of the rates somehow, someplace, somewhere, is ultimate... is central to the enforcement of all these other provisions of the statute that can't be modified: the ban on unreasonable discrimination, the requirement that rates be just and reasonable.

So unless the rates are filed and published somewhere, those other provisions can't be enforced and won't... the statutory--

Unknown Speaker: Somewhere must... could not be their own corporate offices open to the public if anybody wants to come in and look at it?

Mr. Carpenter: --The... that being so far from this case, I'm... you know, I guess my position is it should be a public agency because I'm not confident that they really would be open anywhere else.

But that's so far from this case--

Unknown Speaker: But as I understand, your opponents' position is that we should really treat this as sort of a Robinson-Patman Act; as long as they're nondiscriminatory and they adhere to uniform rates and so forth, that the purpose of the statute is served.

Mr. Carpenter: --No, the purpose of the statute wouldn't be served in that event because the purpose of the statute is to assure that all similarly situated customers pay equal rates.

And what... and these quotations of AT&T positions taken out of context, you know, we freely acknowledge that if there's no market power, that you obviously won't have rate differences that result from exercises of market power.

But for the reasons that I understood Justice Scalia to be identifying, in a competitive market you are always going to have rate differences.

And you have rate--

Unknown Speaker: Yes, but most economists take the view that in a true competitive market there cannot be economic discrimination.

Mr. Carpenter: --There... absolutely, there cannot be economic discrimination and there cannot be anticompetitive discrimination in a competitive market, but there will be rate differences between similarly situated customers, and this statute rests on the ground that you want to prevent those.

And the certain and direct method of preventing those kinds of rate differences, which is what the statute is directed at, is requiring that they be published so that all similarly situated customers can known of them and demand them.

And that this Court's held many many years that that was the congressionally prescribed means of carrying out the statute, and it's for this reason that in Maislin you held that exceptions to the rate-filing requirements can't be inferred even from facially applicable provisions.

There it was the ban on reasonable practices, and the conduct at issue there was, in my view, fraudulent, was an unreasonable practice under normal interpretation of that term.

But you refused to... the Court refused to construe the term broadly because that would undercut the central provision of the statute, essential to achieving all these other purposes, and that you said you wouldn't allow exceptions to the rate-filing requirements unless they were explicit in the statute.

And that rule, we submit, would control here if you reached the issue, but I would submit you don't have to, that the D.C. Circuit was correct that you cannot construe the term "modify" broadly to allow the removal of the rate-filing requirements for any carrier.

As we point out in the brief... you know, this battle of the dictionaries is one we've been fighting... certainly the ordinary meaning of the term and the term in effect in the dictionaries at the time the statute... the definition in effect when the statute was passed wouldn't allow exemptions.

MCI has this argument now that "modify" means make conditional, which means that it authorized conditional exemptions.

That's not a definition of "modify", but even if it were the text of the statute forecloses this because it says modify in special conditions.

As they say, page 8 of their brief, they want to read "modify" so it means remove the tariff-filing requirements in special conditions.

They're just rewriting the statute.

The statute says modify particular circumstances or conditions, and they want to rewrite it to say remove.

Unknown Speaker: Well, Mr. Carpenter, what provisions do you think the modification provision applies to?

If it doesn't apply to tariff, what does it apply to, what--

Mr. Carpenter: What provisions of 203 can be modified?

Unknown Speaker: --Yes.

Mr. Carpenter: Yes.

Well, I got in trouble when I referred to the first one, which is where the rates be filed.

And the other one, which is... has been a big issue in the past is what constitutes a rate schedule.

Obviously, in the ordinary meaning a rate schedule or a tariff is a price list, and it's something that you can place an order under.

You see the list of prices and you go to the carrier and you place an order under the tariff.

Well, the ICC has interpreted the statute to allow the filing of ordinary contracts, contracts between customers and carriers, which aren't, you know, price lists that you can place an order under; they only apply between the parties.

And the courts have held that that's... that that's a permissible modification because it doesn't undercut the other purposes of the statute, because the rates are filed so similarly situated customers can request them.

Unknown Speaker: Yeah, but the point I'm getting at is are you willing to apply your categorical notion that modify cannot include elimination, not even elimination in narrow circumstances.

For example... to the other things that it covers.

For example, to whether you have to apply schedules to each of your connecting carriers.

I suppose you're compelled to take the position that there can be no exceptions, no complete exceptions to say that this--

Mr. Carpenter: I fear I may be, to some extent, misleading you.

Our position is they can modify the requirements... the filing requirements of the statute, and that in deciding what that means you have to look at the other provisions of the statute for... to which the filing requirements are centrally important.

And the key thing, as you said in Maislin, is that the rates charged each customer be stated in or ascertainable from the public filing.

So if that purpose is being served, I think they can do lots of things to these other requirements, so long as that purpose is served.

And the example I just gave you, where they allowed things that aren't traditional rate schedules, would be an example of the modification of the requirements of the statute that does modify the requirements of 203 but's consistent with the statute as a whole because it doesn't affect the enforcement of the other provisions that the filing requirement is designed to serve.

So there's all sorts of things that I could imagine being done in modifying the requirements of 203, but the one thing that can't be done, which is that there can't be any modification of the requirement that the rates and the terms and conditions affecting the rates be filed so that similarly situated customers are in a position where they can know what they are and demand them.

Which is what... what this Court's held really for a century, going back... you know, all the decisions you cited in Maislin stand for the proposition that this rate-filing requirement that the rates be filed somehow, someplace, somewhere, is utterly central to the statute as a whole.

Unknown Speaker: --Suppose a Federal Agency gets into the telecommunications business and its rates are published in the Federal Register pursuant to its statute, could the FCC say that the rates of that particular carrier do not have to be filed under the Act?

Mr. Carpenter: Well, to answer your hypothetical question, I could imagine someone arguing that the statutory purposes were adequately served in that circumstance.

Happily, in this circumstance there's no dispute that the statutory purposes aren't being served, because the rates--

Unknown Speaker: No, but I'm just testing about whether you're really categorical--

Mr. Carpenter: --Right.

Unknown Speaker: --About you must file tariffs.

I find--

Mr. Carpenter: What I'm categorical... no, Your Honor--

Unknown Speaker: --I find that a very hard argument to sustain.

Mr. Carpenter: --Well, I think you... I think what I'm categorical about is that carriers cannot be excused from the obligation that they file their rates.

They don't have to look like tariffs, they maybe don't have to be filed at the FCC.

I'm categorical about the fact that the requirements of the statute can be modified up to the point that there's no interference with the core of the statute which is... goes to the whole statute, not just 203, that the rates be published so that everyone knows what they are and so the antidiscrimination provisions of the statute can be enforced.

And--

Unknown Speaker: What about the argument put forward by the FCC that the statute would be redundant if all that 203(d) would do that job?

Mr. Carpenter: --203(c).

Unknown Speaker: Is it... 203(c).

Mr. Carpenter: Yeah.

Well, this is Mr. Verrilli's argument, that the language of section 203... and the FCC's, that the language of section 203 shows that you have to read section 203(b) to authorize the kind of exemptions that we say are prohibited.

But that's just wrong.

I mean, section 203(c) says that carriers have to charge only filed rates, except as provided... unless otherwise provided by or under the authority of this chapter.

It says chapter, not section.

If it were referring to 203(b), it would say section.

And it's argued in the reply that there's no other provision in the statute that authorizes exceptions to the requirement... that... in which the FCC is authorized to create exceptions to the requirement that carriers charge only filed rates, but that's just untrue too.

In our brief, page 20, note 26, we list a number of examples, and in each of them the FCC is delegated authority to enter orders or take other actions that will have the affect of excusing carriers from the obligation that they file... they charge only filed rates.

Just to take one of them, the first one we list is 201(b) and 211, which say... 201(b) which is page 1a of our statutory appendix, says that nothing in this chapter will prohibit contracts between carriers for exchanges of service if the FCC enters an order that it's in the public interest.

So under this procedure, you file a contract with the FCC, if it approves then you're authorized... the carriers are authorized to swap services with one other and not charge each other filed rates.

That's true of each... every other example we list.

In each of those other provisions, 205, 210, and the newly enacted 332, the FCC is authorized to take specific action that will have the effect of relieving carriers from the requirement that they charge only filed rates.

And the fact that Congress enacts these specific exemptions just shows that the modification authority isn't as broad.

And if you want contemporaneous evidence that Congress didn't understand the modification authority to include the authority to exempt people from the rate-filing requirements whatsoever, at the same time Congress enacted the Communications Act, or the year... the next year it enacted the Motor Carrier Act, and it has the same filing requirements, same modification provisions applicable both to motor common carriers, that's section 217 of the Act, and motor contract carriers, that's 218.

And in the contract carrier provision, it has the rate-filing requirement, then it has the modification provision, then after that there's a provision that says:

"The ICC is authorized to grant relief from the requirements of this statute. "

That clearly shows that Congress didn't understand the modification authority reaches as broad as they say, because it enacted a specific additional provision authorizing them to grant relief.

So whatever the scope of modification--

Unknown Speaker: Was the additional provision subject to any restrictions?

That seems like an extremely broad--

Mr. Carpenter: --It was subject to the restriction the ICC had to find it to be in the public interest and consistent with, I believe it said national transportation policy.

So, I mean, when Congress wants to authorize exemptions from the statutory rate-filing requirements, it uses different language, it doesn't say "modify".

In fact, in the court of appeals opinion that's really at issue here, an '85 opinion, the court of appeals goes on... at pages 16 and... through 18... to describe all sorts of statutes where there's explicit exceptions to the rate-filing requirements, and each of those have the same sort of modification provisions that are at issue here.

Unknown Speaker: --Mr. Carpenter, just on the example you just gave us about the grant relief and how broad that, when did Congress enact that statute?

Mr. Carpenter: 1935.

Unknown Speaker: Oh, that's in the original, okay.

Mr. Carpenter: Yes.

No, that's the original Motor Carrier Act, and that was obviously carried through.

In fact, in Maislin among your reasons for declining to allow the FCC to create an exception to the rate-filing requirements under the unreasonable practices ban is the fact that Congress had adopted explicit exemptions for motor contract carriers.

And that was also at issue in the regular common carrier decision that was relied on in Maislin, and I believe judge... then Judge Scalia wrote in a former life.

Unknown Speaker: Mr. Carpenter, what do you respond to the argument that the existence of competition is a special circumstance?

Mr. Carpenter: There's no doubt that the existence of competition is an extremely significant fact in this regulatory scheme.

As we have said, in trying to get deregulation for ourself, it justifies modifications of the rate-filing requirements, it justifies elimination of cost-support requirements with the filings, it eliminates... it justifies eliminating active forms of cost-of-service regulation, shortening the notice period to as little as 1 day.

So it's a very significant fact, but the statute says you can modify in particular circumstances, not exempt, and all... all competition allows within... under 203 is the sorts of streamlined regulation that we are seeking in this petition that we filed that people keep misquoting.

So competition is very significant, but it doesn't eliminate the need for the rate-filing requirements for the reasons that I said earlier, because you'll have price differences even in competitive markets.

They're not anticompetitive, but they are price differences that Congress sought to eliminate.

Congress wanted equal rates for similarly situated customers, and decided the way to achieve that is making everyone file rates so that all customers would know what they were and could demand them.

Unknown Speaker: Does the FCC have a developed body of law to define what is a dominant participant in an industry, or is this a category... a juridical category that is new for this regulation only?

Mr. Carpenter: The FCC has had this classification for a number of years, I believe it dated from the early 1980's, and they define dominant carriers as carriers possessing market power, and it has significance for tarrifying requirements and for other provisions, because dominant carriers are subject to some FCC regulations, I believe, that others--

Unknown Speaker: Is there support in the statute for that category in these areas where the FCC has been applying it?

Mr. Carpenter: --We, I don't believe, have ever argued that the FCC doesn't have the authority to make that distinction for some purposes.

Our point here... and I... our point here is only that whatever the significant of that distinction for other purposes, you can't be... it can't be a basis to exempt carriers from what the statute unambiguously requires that all do, which is to charge only filed rates.

As I've said, that we think this case, even if you were to disagree with us that the statute is susceptible to the FCC's interpretation, we think this case is controlled by the decision in Maislin.

Because it establishes, as, you know, many prior cases had, that rate-filing requirements are so central to the statutory scheme that even broad and facially applicable provisions of the law, like the ban on unreasonable practices at issue there, can't be construed to authorize exceptions to the great filing requirement unless Congress has explicitly so provided.

I believe today, and certainly in the reply belief, that Mr. Verrilli tried to distinguish Maislin by saying that it didn't involve the requirement that rates be filed, but only a requirement... which is a requirement of section 203(a) of the statute... that involved only a requirement that carriers follow whatever tariffs they've filed and that they not charge rates that are different from those that are set forth in the tariff.

And they say there's a fundamental distinction in the statute between the two.

Now, even if that were true it wouldn't do these petitioners any good, because they're doing exactly what they say what Maislin said they couldn't do, they're charging lower rates than those set forth in the tariff.

That's what MCI did in the underlying litigation that led to this; it was negotiating discounts of 5 to 10 percent below its generally applicable tariff rates.

And the FCC and MCI each explain in their brief that the consequence of their position is that carriers can go off and cut secret deals, rebates, all the things that 203(c) of the statute prohibit.

So even if there were the distinction that they're positing, it wouldn't xx them any good here because this order allows exactly what Maislin prohibits.

But the more fundamental point is that there's no distinction in the statute between merely filing rates, which they say is a 203 obligation, and merely following tariffs, which they say is the 203(c) duty.

The two obligations are absolutely parallel.

They're just different ways of saying the same thing; they're opposite sides of the same coin.

If you charge a customer a rate that's lower than that set forth in your tariff and don't file the lower negotiated rate, you're violating both section 203 and 20... both section 203(a) and section 203(c).

You're violating 203(a) because you're not filing all your charges.

You're violating 203(c) because you're charging a customer a rate that's not filed.

The two obligations are parallel and they overlap and there's a violation of each, and for that reason Maislin relied both on the duty to file and on the duty to follow.

At page 126 of the opinion, 497 U.S. at 126, the Court said that the negotiated rates policy was inconsistent with both, quote, the duty to file rates with the Commission, citing the counterpart to 203(a), and the obligation to charge only those rates, citing the counterpart to 203(c).

So what this case ultimately boils down this... and this is, you know, really more in the reply briefs than the argument today... is they're arguing that you shouldn't follow the Maislin precedent here because the case involves, they say, a different industry and a different statute.

And in arguing that, they're asking you to overrule another line of cases which says that statutes that are modeled on the Interstate Commerce Act are to be construed the same way unless there's material differences.

That principle dates back at least to the 1932 U.S. Navigation case, which we cite in our brief, and it was the basis for Maislin.

Because in the--

Unknown Speaker: But Mr. Verrilli said that our guide should be Permian Basin and not Maislin.

Mr. Carpenter: --Yes, he did.

Now, that's a curious citation, because Permian Basin didn't involve exceptions to rate-filing requirements, but there was a subsequent followup to Permian Basin that did, and that's the FTC v. Texaco case, 417 U.S. 380, and that involved the kind of modifications of the rate-filing requirements that we say are permissible, that involved small gas producers who didn't deal with ultimate consumers and sold their output exclusively to pipelines whose rates were regulated.

And the Court didn't exempt the filing of those rates.

It allowed the large... the pipeline with whom the small producers sold to file the rates, and the Court said that that would be consistent with the statute if it were the case... and it was a remand, but if were the case that in regulating the rates of the large producer, it could be assured that the small producers' rates were just and reasonable.

No issue of discrimination there because it dealt... the small producers dealt only with the pipelines.

Unknown Speaker: They didn't file at all.

The small producers did not file.

Mr. Carpenter: The small producers did not file.

The rates were filed by the pipelines that each sold its output to exclusively.

The small producers didn't deal with ultimate consumers at all.

Unknown Speaker: And that's okay, you think?

Mr. Carpenter: I think if you could ever have a situation like that, comparable to that in the telecommunications industry... which I can't imagine, but if you ever could it would okay because the rates would be on file and the Commission would be in a position to assure that the rates were lawful.

So I don't think... and the Texaco case that they cite says that the Commission cannot exempt carriers.

It says they cannot be exempt, carriers, from the requirements of section 204, which is where the rate-filing requirement lives.

So it's a curious citation.

So I think their position ultimately boils down to an argument that you shouldn't follow the Interstate Commerce Act precedents because this case involves a different statute.

But Maislin rejected that, because there the Court applied pre-1935 decisions under the original Interstate Commerce Act, which applied only to railroads, and they applied it to motor carriers who were operating under a statute which to them was a successor to the 1935 Motor Carrier Act.

And in this situation, the Interstate Commerce Act precedents absolutely should apply because the statute was... the provisions we're dealing with here, sections 201 to 210, were copied almost verbatim from those in the Interstate Commerce Act, and this is a case like Laurilar v. Ponds where Congress exhibited, you know, detailed knowledge of the provisions of another statute, copied those provisions it wanted to follow, and then departed from other provisions it didn't want to follow.

Sections 201 to 210 of the Communications Act were copied from those of the Interstate Commerce Act, and then they didn't want to allow the FCC to preempt State regulation in the ways that the ICC had been allowed to do under an earlier precedent of this Court that was at issue in the 1986 Louisiana v. FCC case, so they put other provisions in the statute to make sure that the FCC wouldn't in those limited respects have the same powers the ICC had and wouldn't be subject to the same restrictions.

Unknown Speaker: Mr. Carpenter, I'm a little troubled about TOCSIA.

Do we use an acronym for that?

Mr. Carpenter: Yeah, that's our acronym.

Unknown Speaker: Telephone TOCSIA.

Mr. Carpenter: Yes.

Unknown Speaker: It seems to me that that legislation did assume that there was no filing requirement.

Do you contest that?

Mr. Carpenter: No, I do contest that.

In the first place, there... it's argued that that was assuming an FCC rule was valid, but as the court of appeals held here, it wasn't until 1992 that the FCC even said that this... that it had adopted a rule that it relieved carriers from the rate-filing requirement.

And the only interpretations of xx statute that were in existence in the time... at the time that was enacted was the 1985 decision of the D.C. Circuit which says that carriers couldn't be exempted.

Unknown Speaker: But why did the legislation make any sense, then--

Mr. Carpenter: The legislation--

Unknown Speaker: --If there was a filing requirement?

Mr. Carpenter: --The legislation made absolute sense.

The problem the statute addressed... it didn't have anything to do with whether rates were filed or not.

The problem was that a new sort of cottage industry had arose which involved both entities that weren't common carriers and weren't subject to the filing requirement and entities like AT&T... in theory like AT&T and MCI, that were.

And what Congress did in that statute was it made everybody who provided operator services... including those who weren't carriers and weren't subject to the statute, made everybody file information.

Some of it was information required by 203, rates, and some of it was other information that wasn't required by 203--

Unknown Speaker: And you'd say the carriers would have had to... in addition to that, although it overlapped, would have to comply in it... with 203 generally?

Mr. Carpenter: --Oh, absolutely, absolutely.

It imposed additional obligations.

It imposed obligations on carriers because it made them file information that wasn't required by 203, i.e. commissions, and it imposed obligations on noncarriers who weren't subject to any requirement at all.

Unknown Speaker: Noncarriers.

Mr. Carpenter: And the problem that led to the statute wasn't that the FCC wasn't receiving rate filings.

The problem was the FCC wasn't doing anything at all to combat something that had become a massive problem, which was the sort of new fly-by-night companies cutting deals with hotels and ending up charging people rates that were two or three times those that AT&T and MCI charged.

So that's what that statute addressed, and the statute explicitly said that nothing in it could be construed as altering the obligations of any provision in the statute.

And given that at the time 203 was construed--

Unknown Speaker: Thank you, Mr. Carpenter.

Mr. Carpenter: --Thank you.

Unknown Speaker: Mr. Verrilli, you have 4... or Mr. Wright or Mr. Verrilli, whoever wants to take the rebuttal time, you have 4 minutes left.

Rebuttal of Christopher J. Wright

Mr. Wright: Thank you, Mr. Chief Justice.

In response to AT&T's comments about Maislin and the filed rate doctrine, it is true, as has been pointed out, that that's a different issue arising under a different statute.

I'd also like to suggest that it's instructive to consider what... how... what would happen if the Communications Act said that the FCC may modify any requirement, including the tariff-filing requirement.

If the statute said that, I think there'd be no doubt... we wouldn't be here today, it would be clear that we could modify the tariff-filing requirement if the statute said modify any requirement, including the tariff-filing requirement.

Now, in this hypothetical statute, in that circumstance what had been said in a different context arising under a different statute wouldn't matter.

In fact, that phrase including the tariff-filing requirement would be redundant.

The statute says "modify any requirement", and it would be a peculiar rule of statutory construction that required Congress to be redundant.

Now, one thing that's clearly come out--

Unknown Speaker: I don't think your opponent would agree that that's... I don't think your opponent would agree that that statute would be... you would be right under that statute, because he says this is not a modification requirement, including the filing requirement.

Mr. Wright: --Well, I was going to say one thing that's come out is that AT&T clearly thinks that under no circumstances at all can the FCC lift the tariff-filing requirement.

Unknown Speaker: No.

Well, they would allow it to be filed by somebody else, so long as it's out there somewhere, and that's eliminating the tariff filing.

Mr. Wright: Well, the first requirement is that they shall be filed, and AT&T says that we... that the FCC doesn't have that authority.

We think that it's clear that it therefore reads 203(b)(2) to say modify some requirements, not any requirement, and that is what the statute says.

One final point, if I may.

You know, the... it's been suggested that Congress would... couldn't imagine a detariffed world.

Well, just last summer with respect to commercial mobile carriers like cellular carriers in section 332(c), Congress authorized... what Congress did was say that these cellular companies are generally subject to the title II requirements we've been discussing today, but it said that the Commission may waive any requirement, including the tariff-filing requirement, except for three that it specified: 201, 202, and 208.

202 is the one that prohibits unreasonable discrimination.

So Congress, as shown last year in its enactment concerning cellular telephones, clearly envisions that unreasonable discrimination may be prohibited without tariffs.

Unknown Speaker: Do you know if a provision like this existed under the Civil Aeronautics Act?

Mr. Wright: I do not know that, Your Honor.

In any event, as I've also already pointed out, there's really no answer to the fact that the Amtrak case... under the Amtrak case in the... with different dictionary definitions... and I've been informed that in APF Freight, the NLRB, this term the Court has applied Chevron to an independent agency.

The FCC ought to have discretion to reasonably interpret "modify any requirement" to mean what it says.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Wright.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The OYEZ Project

Featured:

Norfolk Redev. & Housing Auth. v. C. & P. Tel. - Oral Argument

Thu, 30 Aug 2012 22:13:57 +0000

Case:

Norfolk Redev. & Housing Auth. v. C. & P. Tel.

Media File:

81-2332_19831003-argument

Related Transcript:

81-2332_19831003-argument

Transcript:

ORAL ARGUMENT OF FRANCIS N. CRENSHAW, ESQ., ON BEHALF OF PETITIONER

Chief Justice Warren E. Burger: We'll hear arguments next in Norfolk Redevelopment against Chesapeake and Potomac Telephone Company.

Mr. Crenshaw, I think you may proceed whenever you are ready.

Francis N. Crenshaw: Mr. Chief Justice, and may it please the Court:

The question in this case is whether the Respondent telephone company is eligible under the terms of the Uniform Relocation Assistance and Real Properties Acquisition Policies Act of 1970 to be reimbursed for its costs when it disconnects transmission lines beneath certain streets in the City of Norfolk, Virginia and rebuilds replacement lines under new streets.

The claim was submitted to the Petitioner, Redevelopment Authority, and was denied because it felt that the common law requires a utility company to move its transmission lines at its expense, and the Uniform Act did not change the common law.

Furthermore, the telephone company did not meet the threshold requirements for eligibility under the Uniform Act because it did not move personal property, and it did not move any property as a result of the acquisition of land.

Now the telephone company had installed its facilities in the streets of Norfolk pursuant to a franchise with the City of Norfolk by virtue of which it had a mere license.

It was a franchisee and it is the established common law in Virginia and in the overwhelming majority of other states that a utility company having such a franchise has the obligation of moving its lines at its own expense when the public good requires those lines to be relocated.

This a long-standing and well understood and respected custom and the opinion of the Circuit Court of Appeals for the Fourth Circuit would change that rule.

Now in this case these transmission lines were rerouted because of the execution by the Petitioner, Redevelopment Authority, of conservation and redevelopment projects within the City of Norfolk.

Under those projects areas of blighted property were acquired.

The old buildings were demolished and the cleared land was made available for redevelopment.

In certain instances it was necessary and desirable to rearrange certain streets, and the Redevelopment Authority petitioned the City of Norfolk to close streets so that the new street pattern could be established.

The city did close those streets, and in a very cooperative manner the city, the Petitioner and the City of Norfolk worked together with the telephone company to work out an arrangement for the new streets to be built in a manner that the public and the private utilities could be laid within those streets with a minimum of inconvenience to all of the parties.

There was no coercion no eminent domain.

It was all done in a friendly and matter-of-fact way, and there was no request for any reimbursement.

Over a year after the redevelopment work had been done and the new streets had been laid the telephone company filed its claim which had been denied.

I think it is important that the Court recognize the nature of the facilities that are here involved.

By and large they are massive.

They are permanent.

They are embedded in the ground, and we have contended that they have become real estate.

They consist primarily of conduits which are about four inches in diameter which carry cooper cables which have as many as 3600 pairs in them.

Those conduits extend between underground vaults which are known as manholes.

These manholes are larger than a man is tall.

They are like a little subterranean womb.

The walls are a foot thick.

They have a collar that connects the top of the manholes to the street and when the--

Unidentified Justice: Mr. Crenshaw, I suppose the Fourth Circuit has determined that as a matter of state law these things were personal property.

Is that right?

Francis N. Crenshaw: --Justice O'Connor, I think that the Fourth Circuit must have been persuaded by the telephone company's interpretation of Transcontinental which is--

Unidentified Justice: Well, in any event that was the Fourth Circuit's determination, was it not?

Francis N. Crenshaw: --I think that is a reasonably fair statement.

I think there is a little equivocation there, yes.

Unidentified Justice: All right.

Do we not normally defer to a Circuit Court of Appeals determination on state law issues and leave that alone?

Francis N. Crenshaw: I would think so, but the difficulty here is I think you had a flat out decision by the Virginia Supreme Court which is contrary to the Fourth Circuit, and the Fourth Circuit in my judgment was a not too exhaustively reasoned opinion with respect to that so that I think that it is not facetious for me to assert in this Court that these facilities were in effect real property and not personal property.

Manifestly they are so massive and so connected that they have to be real property, and the case Transcontinental which was cited by both parties in this case holds that underground gas mains are real property, and the rationale that the Fourth Circuit relied upon is a rather small point which was not really applied to the underground mains but was applied to machinery that was in the Transcontinental case.

That is the reason that I mention that here.

Unidentified Justice: Is it essential to your argument that we disagree with the Court of Appeals for the Fourth Circuit about what kind of property?

Francis N. Crenshaw: There are three bases on which I would contend that the claim would be denied.

That is one of them.

I do not have to win on all three, but I think they are all three sound.

The first one is that the Act did not cover utilities at all.

This, I think, is the most compelling argument.

The Uniform Act was passed after a decade of extensive congressional committee inquiry.

It followed a prior decade when the highway statutes had been considered.

During the 1950's the Federal-Aid Highway statutes came along and in those hearings there was expressed and careful attention to the requirements of the utility companies.

The Highway Act contains Section 123 which dealt with utility companies.

Contrarywise during the 1960's when the hearings were being held on the Uniform Relocation Act there was no congressional inquiry into the plight of the utilities.

There were--

Unidentified Justice: Why do you suppose that is?

It seems so strange that no discussion of that emerged.

Francis N. Crenshaw: --The only reason that I can say is that the Congress was satisfied with the solution given by the Highway Act because that solution which was in Section 123 was retained.

It was not changed.

Unidentified Justice: But, of course, in the language of the Relocation Act in defining a person it did not admit of any exception, and I think it is just strange that there would not be some reference in the legislative history to the utility problem.

Francis N. Crenshaw: I think it is strange that in all of those hearings with the hundreds really of representatives that there was no movement by utilities to have had their particular problem addressed.

I think that the overwhelming reason was that the Uniform Relocation Act dealt with the acquisition of private property by and large from individuals and small businesses.

The C&P does not have private property.

It does not have a compensable property interest in its franchise.

The Fugate case by the Supreme Court of Virginia has held that their interest as a licensee does not amount to a compensable property interest so that I think that the purpose of the Uniform Act was to help those people whose property was being taken by eminent domain and to supplement the benefits.

The people who were getting fair market value under the principles of eminent domain were not being fairly treated.

A hardware store, for example, that was in a redevelopment project if their property was condemned they would get the fair market value of the building, but unless they got relocation costs they would not get the cost to move to a new location and they had to compete against another hardware store in the community who had the fair market value of their property.

It had not been taken, but they did not have to move.

That was the kind of disproportionate burden that I think the committees looked into.

The statistics are overwhelming that that is the sort of thing that they inquired about.

I think the statute had primarily humanitarian interests, the small person, the mom and pop business, those things who moved personal property in the common ordinary sense of personal property.

I just do not see anywhere in this statute or its legislative history any contemplation of the problem of utility lines, and as the District Court noted this matter was not under the table or hidden or secret at all.

There was a live controversy right across the Potomac in Virginia where PEPCO and the Virginia Highway Commission were going through all sorts of litigation about this very matter, but it was related to Section 123 of the Highway Act so that I think that the Act just simply did not contemplate it.

When you compare the Uniform Act to actions of the Congress before the Highway statute or actions of the Congress afterwards, in 1972 it adopted legislation which permitted relocation costs to utilities in the District of Columbia.

Specifically the committees dealt with that problem.

They recognized that if they did not pass this the utility companies would not be compensated, and that was two years after the Uniform Act.

Again, this past May in the Senate they have adopted amendments to this very statute that we are talking about.

I realize this is after this claim and after this decision, but still it is the same committee of Congress.

It is the same thrust that is being explained.

I think that the action by the Congress or the Senate this last May is very revealing about the congressional intent.

Unidentified Justice: Does the Uniform Act apply to all federal condemnations?

Francis N. Crenshaw: Yes, it does.

Unidentified Justice: Including highways?

Francis N. Crenshaw: Yes, it does.

With respect to the highways it is interesting that Chapter 5 of the Highway Act was amended and repealed, but Section 123 of the Highway Act which pertained to utilities was left exactly as it was so that the Uniform Act came up and sat on top of Section 123.

It refers to the comment by Justice Powell in the previous case.

There you have a specific statute, Section 123, which deals with utility relocation.

You have a general statute, the Uniform Relocation Act, which was passed in foreknowledge of the Highway statute which says nothing about it.

I think that simply shouts out that the Uniform Act does not contemplate utilities.

There are 21 federal agencies which administer some 50 programs that are affected by this Act.

None of them have regulations which pertain to utility relocation.

HUD which is the agency which was involved here has a specific regulation that the relocation costs for a utility transmission line is not an eligible cost unless the state law requires it.

That regulation was in effect before the Uniform Act.

It is in effect after the Uniform Act and there was no change by HUD.

So surely the agencies which interpret this Act as well as the utility companies in the localities have dealt with this Act as not including utilities.

Now there are two threshold requirements.

I have alluded briefly to one, that is, you must move personal property.

I contend that it is not personal property.

I think these facilities manifestly are real property, but secondly they were not moved.

When the street was discontinued the collar to this vault that I described was destroyed.

The vaults themselves were filled with sand and abandoned.

The conduits were abandoned and the cable which was in the conduits was withdrawn and sold for salvage where it was profitable to do so.

Unidentified Justice: What relocation expenses so-called are they claiming?

The cost of filling up the holes, for example?

Francis N. Crenshaw: Justice White, it is a little hard for me honestly to answer that because we have not got into damages.

The claims are very stark.

They have not been flexed out at all.

But my impression of those claims is the cost of constructing in the new streets--

Unidentified Justice: A new manhole.

Francis N. Crenshaw: --the new facility, right.

So there is not any movement from point A to point B, but it is a discontinuance in the old street and a new building job in the new street.

It is a construction job, not a move.

I think the last threshold requirement is that the real property must--

Unidentified Justice: You do not think that if the City just closed the street, for example, and there was not any so-called move at all there would not be any claim here?

Francis N. Crenshaw: --Well, I will say this.

If the City simply closed the street and there was no redevelopment project, no acquisition--

Unidentified Justice: Well, assume that Washington, D.C. builds a convention center that covers two or three blocks and you cannot go up and down Tenth Street any more.

They closed that street.

They built a building on it.

I suppose the utilities took their... Suppose they filled up their manholes in that street.

Under their claim in this case they would not have claimed anything.

Francis N. Crenshaw: --I think they would have claimed and the reason I say that--

Unidentified Justice: For just filling up the holes?

Francis N. Crenshaw: --No, the claim is far more than filling up the holes.

We would give them the money to fill up the holes.

But the point... When they terminate a block here they have to build a new block there because the service has got to be continued.

Ordinarily these lines are through.

They are not just serving little blocks, but these are transmission lines which go the extent of the city.

If you cut one here you have got to loop it around so it connects to another place.

You have got to keep the service going.

Unidentified Justice: Unless you have already got a utility line in some other street that would serve the purpose.

Francis N. Crenshaw: Right.

Now I do think if they discontinued a line and did not connect somewhere else I do no know of any claim.

But we do not have that in this case.

Unidentified Justice: All right.

Francis N. Crenshaw: I would like to reserve the rest of my time for rebuttal.

Chief Justice Warren E. Burger: Mr. Schwartz.

ORAL ARGUMENT OF JOSHUA I. SCHWARTZ, ESQ., ON BEHALF OF FEDERAL RESPONDENT IN SUPPORT OF PETITIONER

Joshua I. Schwartz: Mr. Chief Justice, and may it please the Court:

In the view of the United States the Court of Appeals has misinterpreted the pertinent provisions of the Federal Uniform Relocation Assistance Act.

It is our submission that that Act was never intended to address the question of who should bear the cost of reconstructing utility lines when those lines are recreated in a new location because of local public improvements in the very streets in which they have been located pursuant to local franchises.

Unidentified Justice: Mr. Schwartz, the Solicitor General has changed his mind in this case from the time of petition for certiorari.

Am I correct?

Joshua I. Schwartz: There has been some change, Mr. Justice Blackmun.

Our recommendation to the Court most forthrightly was that the petition should be denied.

I take it that is a moot question.

Unidentified Justice: I am not insisting that you do not have a right to change your mind.

I just want to be sure.

Joshua I. Schwartz: We have to that degree certainly... Well, the question is no longer presented whether the Court should have granted the petition.

The petition has been granted.

Unidentified Justice: I know but that is not the extent of your prior position.

Joshua I. Schwartz: That is right.

Unidentified Justice: Your prior position was that this was a reasonable construction of the statute.

Joshua I. Schwartz: If I may continue, Justice White, that is quite right.

Unidentified Justice: You have changed your mind on that?

Joshua I. Schwartz: We have concluded that it is an erroneous construction of the statute.

The position we urge is the same one we urged in the Court of Appeals, and if I might just say this, our reason for concluding that it is erroneous is based frankly on a closer study of the statute.

We believe that we have identified concrete statutory language that this claim simply does not fit.

So that contrary to what we said in the unfortunate brief we filed at the petition stage, this case simply does not in our view involve interpolating an exception into plain statutory language that covers the situation.

That is what the Court of Appeals thought it involved, and if that were true the Court of Appeals might be right.

But we believe that the statutory requirement which says that payment shall be made for moving of personal property or for moving one's self or one's business simply cannot comfortably be made to cover the situation of reconstructing utility lines.

I think the words are important, and the reality is important.

This really is a construction job.

The Respondent... I refer to C&P as the Respondent... says in their answering brief that we are in no position to deny that their claims represent certain matters.

One of the things they say they represent are the costs of reconstructing those lines.

I take that to be a concession that what we are talking about for the largest part is the cost of digging new trenches, pouring new concrete, installing new pipes, laying and installing new cables, and it seems to me that it would be a very odd choice of words indeed to use the words "moving personal property" if one wanted to describe those operations and paying for those costs.

If I might turn to something Justice O'Connor asked, the Court is not confronted necessarily with the question of whether the Fourth Circuit misunderstood Virginia law.

There is a question here whether this equipment, these lines are real or personal property.

The government is skeptical of the Fourth Circuit's conclusion that it is all personal property.

If the Court please, the Petitioner has lodged with the clerk an illustration of a sample utility manhole which is as far as we can see an underground building, and if you look closely at the Court of Appeals' opinion I would suggest that the Court of Appeals may have simply misunderstood what the physical equipment involved was and what the operation of replacing it was.

The Court of Appeals appears to have believed that this equipment was removed from its location and transferred to a new location.

Because of that misunderstanding I think the ordinary deference to the Court of Appeals reading of state law is not required here.

But even if it were, the question necessarily presented is a federal one, the question of what Congress meant by "moving".

That is the term in the federal statute as to which there is no reason to believe that state law was intended to be controlling.

Unidentified Justice: I have a little problem.

The difference between personal property and real property is determined by state law.

Joshua I. Schwartz: Ordinarily we would say that would be true but--

Unidentified Justice: It is ordinarily any way.

Do you know any other way to determine it?

Joshua I. Schwartz: --If the federal statute indicated an intent otherwise, but in this case we do not--

Unidentified Justice: Could the federal statute say that property in a manhole in Virginia is personal property?

Joshua I. Schwartz: --The federal statute does not--

Unidentified Justice: Can a statute say that, a federal statute?

Joshua I. Schwartz: --A federal statute could say that for the purposes of this statute the term "personal property" shall include the following, and the Congress could choose that manner of legislating.

We are not suggesting that that is what it has done here.

Unidentified Justice: Then next they can say a man is a woman in Virginia.

Joshua I. Schwartz: Congress probably could do that, Your Honor, but again that is not the mode of analysis by which we perceive Congress has used the term 'moving personal property

"or moving it itself. "

"We think that that choice of language does not comfortably apply to this process of abandoning capital facilities and recreating new ones in new locations. "

We would submit that at a minimum this language "moving personal property" is sufficiently ambiguous that it is not sufficient to stop with the statutory language, and it is sensible to go beyond it and look at the usual indicia of legislative intent.

In this case the first thing we are confronted by is the rather stark silence in the ten year long legislative record, and I might add that representatives of the American Right of Way Association which represents the interests of the utilities insofar as rights of way are concerned did speak at the hearings on this.

But they never suggested that this statute would or that it should alter the established common law rule.

Accordingly, while this would be an easier case if someone has said the obvious, it appears to us that everyone understood that this issue, the question of relocation assistance, was one that was governed by a well-established rule of state law and that absent any indication of an intent to change it Congress must have intended to leave it where it was especially because in 1956 in the Highway Act Congress had demonstrated that it was aware of the state law rule and that it chose for Highway Act purposes to defer to that state rule.

Now the Uniform Relocation Act does not say except insofar as provided by other law the following payments shall be made.

It says all federal acquisition shall be controlled and federally assisted acquisitions shall be controlled by this statutory scheme.

Given that, it is difficult for us to understand why Congress apparently quite deliberately left in effect provisions of the Highway Act which said thou may pay relocation assistance but only if state law provides for it.

If there were any question left in the wake of that Act in 1972 when Congress turned to the question again in the District of Columbia Public Utilities Reimbursement Act when Congress provided specifically for the purposes of interstate highways that these monies should be paid, that portion of the statute would have had precisely no effect and would have been entirely superfluous if the Uniform Relocation Act in 1970 had set aside the rule of Section 123 of the Highway Act.

As it happened, Congress did set aside other provisions of the Highway Act, Title 23, Sections 501 and the following sections which dealt with other provisions of relocation assistance.

So one cannot even say that Congress might have overlooked the Highway Act.

If you go through this statute and if you go through the House and Senate committee reports you will find an extraordinarily detailed listing set out in haec verba of each of the statutory texts that was repealed in many sections of the Highway Act that are to be found there.

It is just very difficult for me to believe that Congress just missed this.

It appears that Congress chose to leave Section 123 and its rule which defers to state law in effect.

There is another thing that one can garner from looking at the several occasions on which Congress has addressed the question of relocation assistance.

Congress has used different language to speak to this.

In the District of Columbia Act of 1972 Congress spoke of abandoning, relocating, reconstructing, reestablishing, and used a large number of terms which speak to the capital building process.

Unidentified Justice: Mr. Schwartz, did that bill go through the same committee that this bill, the Uniform Relocation Act, would have gone through?

Joshua I. Schwartz: Justice Rehnquist, I do not know the answer to that question, and I am skeptical that--

Unidentified Justice: I wonder how relevant it is if you do not really have any knowledge that the same individuals on a committee compared the two and chose to leave them the way they were.

Joshua I. Schwartz: --I think we have something special because there are three stages to this.

There is Section 123.

There is the Uniform Act, and there is the D.C. Act while perhaps the action of one committee in 1972 does not say that much about what the 1970 Congress though the entire statute that was enacted would have been of no effect at all.

I would question whether we ought to attribute that intent of Congress in 1972.

We would suggest that when Congress wishes to address this subject it knows how to do so and that it did not do so in the Uniform Relocation Act and that the judgment of the Court of Appeals accordingly should be reversed.

Chief Justice Warren E. Burger: Mr. Kelly.

ORAL ARGUMENT OF JOSEPH L. KELLY, ESQ., ON BEHALF OF RESPONDENT

Joseph L. Kelly: Mr. Chief Justice, and may it please the Court:

I believe we should first make quite clear that there is no uncertainty on the record in this case about the nature of the telephone company's claim, the nature of the expenses for which it claims.

There is no need to speculate from what is said in the briefs whether they correctly described them.

Those claims were filed in the beginning and have been in the possession of both Petitioner and the federal defendant since that time and still are.

Those claims are for the nonbetterment cost of reconstructing, the nonbetterment cost of moving utility lines, a completely familiar concept that is observed and applied every day.

It involves determining the true cost of moving by starting with the cost of rebuilding which is inevitably required whenever you move a utility line for the most part unless there happened to be overhead poles that can be moved or wires that can be moved and used again which would be exceptional.

But in all events in the multitude of cases in which a utility company moves its lines at the expense of someone else whether by contract or under voluntary arrangement at the time the parties well understood here from the beginning from the time these claims were filed as they understood when they stipulated that a similar expense if it happened to be a municipal system, stipulated in those words in this case, that the nonbetterment cost if it happened to be a municipal line is part of the cost of the project or is carried as the city's share, I guess the city's share of the total project cost.

So there should not be any uncertainty about the fact that this case from the beginning has involved claims for the relocation, for moving the lines in the only sense in which the vicinities of most displaced persons which happen to use heavy or large equipment and structures which are not part of the land taken because they are severed from it by agreement or by law.

As the Fourth Circuit has determined it, these were severed by law.

They were personal property.

Since they are not taken, then the expense of moving them, relocating them would be one of those inequitable expenses and burdens borne by a particular class of people instead of being borne--

Unidentified Justice: Mr. Kelly, you used the word "moving" a moment ago in your argument.

These facilities were never moved were they?

Joseph L. Kelly: --They were moved in the sense in which that term is most frequently moved in the same sense in which it is used... If the hardware store referred to in Mr. Crenshaw's brief had been the property of the hardware store owner severed from the land by agreement and he had a right to move it or if some structure that was part of it he had a right to move from the land, it did not belong to the owner of the land.

It was taken.

Unidentified Justice: Are there two manholes out there where there used to be one?

Joseph L. Kelly: Two manholes, Your Honor?

Unidentified Justice: Yes.

Joseph L. Kelly: There used to be one?

Unidentified Justice: Yes.

Joseph L. Kelly: No, Your Honor.

The facilities that were moved were simply duplicated by construction in a new place.

Unidentified Justice: Did they take up the manhole and move the manhole to another place?

Joseph L. Kelly: The manholes were not dug out of the ground and lifted and transferred to another place.

Unidentified Justice: So they were not moved, were they?

Joseph L. Kelly: There was no physical movement of them from one spot to another.

I submit that the language of the Act when it refers to moving personal property has to apply if the Act is to be intelligible at all, for instance, to this same hardware store operator's store cases, show cases, other trade fixtures which he has a right to move but which it is not sensible, not economically feasible for him to move bodily to the new place.

But no one would doubt that he has within the meaning of that Act moved those structures and facilities when he takes them down and scraps or abandons them when it is not practical to move them bodily and rebuilds and reconstructs them in a new place.

Unidentified Justice: Is there anything in the legislative history that will help you?

Joseph L. Kelly: I beg your pardon, Your Honor?

Unidentified Justice: Is there anything in the legislative history that will help you?

Joseph L. Kelly: I am so sorry, Your Honor.

I could not hear.

Unidentified Justice: Is there anything in the interpretive history that will help you in saying that this is what you mean by moving?

Joseph L. Kelly: By moving personal property?

Unidentified Justice: Yes, sir.

You cited a hardware case.

What else do you have?

Joseph L. Kelly: The fact that in common acceptation when one of the tower lines constructed on one man's land in sight of us all is taken down and rebuilt on another man's land, the whole world would say the company has moved its power line.

Unidentified Justice: But if you had a power line on one land and built a brand new power line on another man's land that would not be moving it, would it?

Joseph L. Kelly: Yes, I think, Your Honor, it would be.

Unidentified Justice: It would be moving?

Joseph L. Kelly: You would still... We would all still say the company has moved its power line.

Now we should not from that proceed to the assumption that a statute authorizing payment for the cost of moving that line would entitle anyone to be paid for building himself a new line the whole cost of that which might be a much bigger, better and newer line than the old one, and that is not the cost that was claimed here.

It is not the cost that all utility companies have always claimed when they were entitled, admittedly entitled to claim the nonbetterment cost of moving.

You start with the cost of the new construction.

You must deduct from it the unused value, any difference in value between the new line and the value of the old one that they gave up.

You do not get the benefit of new construction.

Our claims do not claim it.

Under our interpretation of the Act the displaced person does not get the benefit of new construction.

He gets the cost of replacing what cannot be moved.

It is not part of his cost of just moving if he builds a better one.

That is the cost of an improvement which he cannot claim and should not received.

But he has moved any shared structure of any kind which he had a right to take.

It was not taken with the land because it belonged to someone else.

That is why it was personal property.

He did not take it with him to the new land, but if--

Unidentified Justice: Mr. Kelly, will you look at Section 202(a) that is quoted in the Appendix to the government's brief.

I am sure you are familiar with the statute.

It talks about whenever the acquisition of real property, et cetera, and then it tells what you can recover for.

The first is actual, reasonable expenses.

The second is actual direct losses, and the third is actual reasonable expenses in searching for replacement.

Does your claim come under (a)(1)?

Joseph L. Kelly: --It comes under (a)(1), Your Honor.

Unidentified Justice: You are not claiming actual direct losses of--

Joseph L. Kelly: That is what, Your Honor?

Unidentified Justice: --You are not claiming under (2) then that it is actual direct losses of tangible personal property as a result of moving.

Joseph L. Kelly: No, the figure representing that loss appears in these claims in only one indirect way.

When you determine what was the cost of relocating this utility line from the old land it used to be on to the land it is on now, you start with the cost of building the new line.

You deduct from that the difference between the value of that new line and the old one that you gave up.

You must deduct also the salvage value of--

Unidentified Justice: I do not know where you get that measure of damages under (1) which simply talks about actual reasonable expenses in moving himself, his family, business, farm operation or other personal property.

It does not seem to allow the kind of computation you made.

Joseph L. Kelly: --Because, Your Honor, we would... The same statement... These same claims although we do argue and it is still our position that they are the cost of moving these utility lines the same thing is also--

Unidentified Justice: But the statute does not say cost.

It says expenses.

Joseph L. Kelly: --I beg your pardon, the expense of moving the lines.

It is not only the expense of moving the lines.

It is equally as true that those same expenses or the expense of moving a business--

Unidentified Justice: But if you do not move your line at all, if you do not move the physical personal property out of the ground how can you have any actual reasonable expenses incurred in moving it?

Joseph L. Kelly: --If that view of the expense of moving personal property were accepted which we still contest, if that were accepted the same figures still represent the expense of moving a business which is defined in the statute very carefully so as to mean any legitimate activity of business cannot be physically moved.

It is an activity.

It is not a thing physically.

Unidentified Justice: What section of the statute is it that defines carefully the expenses incurred in moving a business?

Joseph L. Kelly: 4601, subparagraph 7.

Unidentified Justice: Is that in your brief?

Joseph L. Kelly: Oh, yes, Your Honor.

It is in the Appendix to the government's brief.

It is in the opening pages of our brief on the merits.

It is 4601 (7), and it is in this instance every expense claimed was also we think it was an expense of moving a utility line.

Whether it was or not is was a sure expense of moving the lawful activity of using these lines from the land where they used to be used to serve the public.

That is what Senator Caplan defines as the meaning of the word "business" wherever used in the Act.

It was most assuredly the cost of moving that business activity--

Unidentified Justice: All I see... I am looking on the Statute Involved Section of your brief, the red brief, at page vii and viii, and all I see set off for (7) is the term "business" means any lawful activity, excepting a farm operation conducted primarily for the sale of services to the public.

Joseph L. Kelly: --That is correct, Your Honor.

That is not all of that section, but that is the act of business that we moved.

Then 4622(a) provides that payment shall be made for the cost not only of moving personal property... in this case it happened to be the same thing... it is the cost of moving a business which is that lawful activity that we were conducting on that property and also for the cost of just moving.

In the case of any business organization the business corporation, partnership or association cannot physically move.

It has no physical existence.

Unidentified Justice: Now you have got a proviso in (2), 4622(a)(2) where you say you can also include

"actual direct losses of tangible personal property as a result of moving or discontinuing a business. "

but then it goes on to say

"but not to exceed an amount equal to the reasonable expenses that would have been required to relocate such property as determined by the head of the agency. "

So that sets a ceiling on the kind of damage you are claiming of the amount of expenses you have incurred to relocate.

Joshua I. Schwartz: No, Your Honor.

I think it does not.

I think the clear sense of that section is altogether different from that.

It sets a ceiling on an expense we do not claim here.

No item of our claim is for the loss of property we left.

The sense of that section (2) is to cover the very common situation very likely to arise in which the owner of property that is not taken because it is not part of the land still like these manholes not feasible to move bodily.

The owner may just abandon and give up.

He may never find another place for part of his business, and yet he is a displaced person because he moved his business.

He just did not move that part, and he abandoned and lost it in place and never reconstructed it anywhere or in any other sense moved it.

In such case he just loses that property and that would be an expense borne by him, not borne by anyone else.

Yet one of the burdens, the expenses that that project required some persons to pay and the sense of the Act is that he should be reimbursed for that loss.

That would occur--

Unidentified Justice: Mr. Kelly, I guess the lower courts have not resolved these questions yet have they?

They just were dealing with whether the utilities were covered at all and then were going to send it back to resolve some of these things.

Joseph L. Kelly: They have not considered these questions except to the extent that they are necessarily included in the legal conclusion that a company in moving its facilities has moved or at least has moved its business or has moved its personal property from one place to another.

We think it moved all three.

It has not considered them directly because the contention that we have not moved our facilities was never made in the lower court or in any of the administrative proceedings and were stipulated by the parties alleged in the complaint that we did move all of our facilities, admitted in the answer that we did move all of our facilities, stipulated that we did move all of our facilities, stipulation agreed to by all the parties.

The significance of that fact... I do not contend that the parties, the Petitioner and the government, bound themselves by the legal conclusions involved in the use of those terms.

It is highly significant, though, to my contention that that is the usual and ordinary acceptation of the word "moved its facilities" when we are dealing with any displaced person whose facilities, whose personal property includes property of such physical nature that it needs to be rebuilt in a new place.

Unidentified Justice: Mr. Kelly, may I ask you a question?

Joseph L. Kelly: Yes, Your Honor.

Unidentified Justice: Am I correct in believing that the Court of Appeals did not rely on the provision that pertains to the moving of a business?

They relied on the moving of personal property as I remember the opinion.

Is that right?

Joseph L. Kelly: They did not mention--

Unidentified Justice: They did not mention 4637.

Joseph L. Kelly: --the removal of personal property although they plainly regarded that the reconstruction of these lines amounted to moving the lines.

Unidentified Justice: But moving the lines is a question--

Joseph L. Kelly: They bear fully understood--

Unidentified Justice: --But the question of moving a business they did not really face up to?

Joseph L. Kelly: --It was never discussed.

Unidentified Justice: Yes, because one might argue... I do not know if it is right or not... that that thinks in terms of moving an entire business or moving a facility or something like that.

Joseph L. Kelly: That point is indeed argued in the reply briefs.

The courts below did not consider any of these contentions now being made as to the meaning of the expression "moved" in the case of a corporation, moved from land, moved personal property from land when in fact it had to be rebuilt elsewhere.

It did not consider any of those because made for the first time in the government's brief on the merits never once advanced before and the Court will review the pleadings, the stipulations.

It is perfectly apparent that we were all agreed then that the utility company here, the telephone company, had moved its lines to the new places, moved all of its facilities to the new places stipulated in so many words that--

Unidentified Justice: Did they agree that the move of the personal property was a move made as a result of the acquisition of real estate?

Joseph L. Kelly: --That is the one thing they did not.

The answers denied although the government did not agree with this, that is, the Department of Housing and Urban Development in the administrative review disagreed.

They contended that we did not move as a result of the acquisition.

But they admitted that the removal of all of these facilities occurred.

That is expressly admitted in the answers, alleged in the complaint, admitted in the answers and stipulated in the stipulation of facts.

Unidentified Justice: Can I go back to when I raised the point?

Does the record still show that there were two manholes?

Joseph L. Kelly: I think the testimony makes clear that the manholes were abandoned and left in the ground.

Unidentified Justice: Well, how in the world can you say you moved them?

You moved one that did not move.

Joseph L. Kelly: In the same sense in which we say they rented the building.

The shed which one company has rented and used for years to store machinery on the land of another after which rebuilds on a new place we all say the company has moved its shed to the new place.

Unidentified Justice: I guess if we can put a grain elevator into Commerce we can do that.

Joseph L. Kelly: It is indeed possible and under this view of what is meant by "moved" the utility companies and all other displaced companies including the chainsaw company involved in the Beaird-Poulan case discussed where they moved plant.

They did not pick that plant up and move it, Your Honor.

They did not pick much up and move it.

They moved a whole plant, and the Court concluded that the Beaird-Poulan moved.

It is also the answer to the suggestion that maybe you have to move your entire business.

The chain saw plant was most assuredly not the only business of the Emerson Company.

That is why the statute was so careful to define what activity is, what a business means.

It means any activity conducted for a business purpose.

That activity was moved.

Whether we all could agree that the company moved that is what everyone would say in common parlance and that the power line was moved, the underground lines were moved, that is what everyone would say in common parlance.

We say that is what the Act meant.

Whether we could all agree on that or not, most assuredly the activity was moved to the new location.

I trust the Court understands that from the time when the claims were first filed right through... I cannot recall how many years of administrative consideration of those claims... two years in the trial court, a total of three years in litigation, the parties seem to be fully agreed that we had moved the lines and that we had moved.

There was never any contention to the contrary ever asserted.

That continued to be true down through the time when the government's first brief was filed.

Having declined to join in a petition for writ of error, the government's position was not quite fully stated just now by the Solicitor General.

The statement there twice was that the plain terms of the Act that the Court of Appeals had merely followed the plain terms of the Act.

Nothing has happened.

At that point the Department of Justice had been defending this litigation on behalf of the United States for more than three years.

It has in the trial court supported the administrative interpretation until the Fourth Circuit held that it was contrary to the plain terms of the Act after which the Solicitor General concluded and informed the Court in its brief in opposition that the Court of Appeals cannot be said to have erred in following the plain language of the Act and that the arguments to the contrary of the Petitioner and amicus supporting the Petitioner were made despite the Act's plain terms.

Nothing has been said to explain how in the next five months the Act's plain terms became any less plain.

I think attention should be called to the anomalous consequences that would arise out of any interpretation of the word "move personal property" in this or move property that would limit it to the case when it can be bodily transplanted.

The law was never intended to treat differently the power company, the gas company that takes up his lines and moves them and uses them again and the one where it is not feasible and not sensible to do that and puts new ones in the new place and recovers compensation only for the difference between the old and the new or the loss, the actual cost of putting itself back where it was by reconstructing and relocating its facilities in a new place.

Chief Justice Warren E. Burger: Do you have anything further, counsel, by way of rebuttal?

ORAL ARGUMENT OF FRANCIS N. CRENSHAW, ESQ., ON BEHALF OF THE PETITIONER -- REBUTTAL

Francis N. Crenshaw: I have just a couple of words if I might, sir.

I would like to call to the Court's attention that the complaint at paragraph 7 alleges that these lines were moved.

The Redevelopment Authority's answer at paragraph 7 denies those allegations.

The stipulation... That is at page 21 of the Joint Appendix... which refers to the term C&P has removed.

Then we stipulate that then any that have been removed were removed subject January the 2nd.

I do not think we have articulated well our argument on removal, but it certainly has been in the case.

The second thing I would like to say is that this statute was passed to supplement benefits of people whose private property was taken.

In this case we are dealing with the acquisition or the removal or reconstruction of lines in public property.

The public street was where the lines were.

When the streets were closed the Redevelopment Authority owned them.

It is a political subdivision of the state.

It is still public property.

Nowhere in this are we talking about taking a compensable property interest, and the telephone company has not cited and I do not believe they can cite any case in which benefits under the relocation statute are conferred unless there is the acquisition of a compensable interest in real property.

We think the claim should be denied.

Thank you.

Chief Justice Warren E. Burger: Thank you, gentlemen.

The case is submitted.

Unidentified Justice: The Honorable Court is now adjourned until tomorrow at 10:00.

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