Voices for Choices v. IL Bell Tele Co ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 03-2735 & 03-2766
AT&T COMMUNICATIONS OF ILLINOIS, INC., et al.,
Plaintiffs-Appellees,
v.
ILLINOIS BELL TELEPHONE CO. and AMERITECH CORP.,
Defendants-Appellants.
____________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
Nos. 03 C 3290 & 03 C 3643—Charles P. Kocoras, Chief Judge.
____________
ARGUED SEPTEMBER 24, 2003—DECIDED NOVEMBER 10, 2003
____________
Before BAUER, EASTERBROOK, and DIANE P. WOOD, Circuit
Judges.
EASTERBROOK, Circuit Judge. The Telecommunications
Act of 1996 requires incumbent local exchange carriers—
the “Baby Bell” descendants of American Telephone &
Telegraph, spun off in 1982 as part of the divestiture that
ended the national telephone monopoly—to provide “un-
bundled” services to new entrants. One of history’s ironies
is that AT&T itself, reduced to a long-distance carrier by
the 1982 decree, has become one of the principal new en-
trants into local phone service. Meanwhile the Baby Bells,
now grown up, are expanding into long-distance service.
2 Nos. 03-2735 & 03-2766
Many carriers offer local and national wireless service
within each incumbent’s service area. The result is vigorous
competition. But much of the competition entails fighting
over the spoils of the 1996 Act. New entrants want to
combine the “unbundled network elements” into complete
packages of services (called local loops) that they can resell
in competition with the incumbent—and, if the wholesale
price is right, they can underbid the incumbent at retail
while still making a profit. The incumbents would like to
set the price of “network elements” high enough to make as
much per customer when selling services to their rivals at
wholesale as they do when selling to customers at retail.
Prices for unbundled elements affect not only the allocation
of income among producers but also new investment and
innovation: if the price to rivals is too low, they won’t build
their own plant (why make capital investments when you
can buy for less, one unbundled element at a time?), and the
incumbents won’t maintain or upgrade their facilities (why
make costly capital investments if you have to sell local
loops to rivals for less than it costs to produce them?).
The Federal Communications Commission implemented
the 1996 Act by directing the carriers and state utility
commissions to set prices using TELRIC—an acronym for “to-
tal element long-run incremental cost.” See 47 C.F.R.
§§ 51.505-.515. TELRIC obliges both incumbents and state
regulators to set prices based on the long-run costs that
would be incurred to produce the services in question using
the most-efficient telecommunications technology now
available, and the most efficient network configuration. In-
cumbents that have aging and inefficient equipment thus
must sell for less than their historical cost; the old system
that calculated rates based on actual cost of equipment plus
a reasonable rate of return on capital is out the window. In
Verizon Communications Inc. v. FCC, 535 U.S. 467 (2002),
the Supreme Court held that TELRIC is a choice within the
FCC’s discretion.
Nos. 03-2735 & 03-2766 3
TELRIC is a framework rather than a formula; there is
considerable play in the joints. See AT&T Corp. v. FCC, 220
F.3d 607, 615-16 (D.C. Cir. 2000); Sprint Communications
Co. v. FCC, 274 F.3d 549, 556 (D.C. Cir. 2001). Incumbent
carriers may be unable to agree with would-be entrants
about what the most efficient technology is, how much it
would cost to construct, and what the incremental costs of
a given network element would be. Moreover, even when
the parties can agree on the technology, they may be unable
to agree on vital details. One such detail is the “fill factor.”
Any sensible carrier builds more network capacity than can
be used at the moment; that way capacity will be available
as additional customers demand service, without waiting
for the arrival of new equipment, excavating streets to lay
new wire, and so on. Moreover, many kinds of telecommuni-
cations equipment have minimum efficient sizes; a switch
able to handle 100,000 circuits may be cheaper than two
switches able to handle 50,000 circuits apiece. The fill factor
reflects the extent of this (economically justified) unused
capacity. If an efficient network configuration would have
50% of the circuits in use and 50% idle—ready for new
customers, a shift in demand, or use in the event of a
breakdown—then the price per loop to a rival would be the
average long-run cost per loop divided by 0.5. If the efficient
fill factor were to have 2/3 of the circuits in use, then the
price would be the long-run cost divided by 0.667, and so on.
The lower the efficient fill factor, the higher the price per
loop the incumbent can charge to rivals. And TELRIC does
not contain an algorithm for determining the fill factor. The
FCC has approved several. In the Triennial Review Order
the FCC explained that many issues have a range of
reasonable answers for the parties—or state regulators,
acting under state law—to flesh out. See Report and Order,
FCC 03-36, 68 Fed. Reg. 52,276, 52,284 (Aug. 21, 2003).
Moreover, the Commission has opened an investigation of
TELRIC’s operation to ensure that price does not fall below
4 Nos. 03-2735 & 03-2766
the level needed to encourage efficient investment in new
facilities by both incumbents and their rivals. See Notice of
Proposed Rulemaking, FCC 03-224, 68 Fed. Reg. 59,757(issued Sept. 15, 2003, and published Oct. 17, 2003).
The first step in arriving at a price for a network element
is negotiation between the incumbent and its rival. 47
U.S.C. §§ 251(c)(1), 252(a). If the carriers cannot agree, then
the state agency resolves the dispute. 47 U.S.C. §252(b).
The statute refers to this as “arbitration,” a misleading
appellation. Arbitration is final (with the few exceptions
provided in 9 U.S.C. §10); the state agency’s decision, by
contrast, is subject to plenary review in federal district
court. 47 U.S.C. §252(e)(6). Having a state agency’s decision
reviewed by a federal court is another of the 1996 Act’s
innovations, and like TELRIC it has received the Supreme
Court’s imprimatur. See Verizon Maryland Inc. v. Public
Service Commission of Maryland, 535 U.S. 635 (2002).
Shortly after the 1996 Act went into force, AT&T and MCI
demanded access to the unbundled elements of Illinois Bell,
a subsidiary of Ameritech, one of the original Bell Operat-
ing Companies (or BOCs, as the divestiture decree called
the Baby Bells). AT&T and MCI sought the complete
package of services that would enable a retail customer to
use the phone system; the parties call this the “unbundled
network element platform” or UNE-P. The parties could not
agree on price, so their dispute was resolved in 1997 by the
Illinois Commerce Commission. The ICC set a price of about
$5 per month per UNE-P in Chicago, and about $12 on
average statewide. Retail customers pay an average of
about $36 per month for the service one UNE-P creates.
Prices set in 1997 were subject to adjustment by the ICC
after five years, and when that time came Illinois Bell
asked the ICC to raise the rates it could charge. By then
Ameritech had been acquired by SBC, another of the orig-
Nos. 03-2735 & 03-2766 5
inal BOCs, and SBC was less willing than Ameritech to
accept a low rate—especially not when, by SBC’s calcula-
tion, it costs $29 per month to supply the UNE-P that fetches
$36 from a retail customer but only $12 on average from
AT&T or MCI. At the same time, SBC was negotiating with
additional potential entrants, or disputing with them before
the ICC, and it did not want the $12 average rate to
propagate. (For simplicity, we disregard the status of the
negotiations, contracts, and proceedings between SBC and
rivals other than AT&T and MCI.)
While the ICC had the dispute under advisement, the
Illinois legislature enacted 220 ILCS 5/13-408, which
established some rules for decision:
This Section applies to and covers certain unbun-
dled network element rates that shall be charged by
incumbent local exchange carriers that are subject
to regulation under an alternative regulation plan
under Section 13-506.1 of this Act. The General
Assembly finds and determines that it should
provide direction to the Illinois Commerce Commis-
sion regarding the establishment of the monthly
recurring rates that such incumbent local exchange
carriers shall charge other telecommunications
carriers for unbundled loops, whether provided on
a standalone basis or in combination with other
unbundled network elements, in order to ensure (i)
that such rates are consistent with the require-
ments of the federal Telecommunications Act of
1996, the regulations promulgated thereunder, and
subsection (g) of Section 13-801 of this Act, and (ii)
that such incumbent local exchange carriers are
able to recover the efficient, forward-looking costs
of creating, operating, and maintaining the network
outside plant infrastructure capacity and switching
and transmission network capacity necessary to
permit such incumbent local exchange carriers to
6 Nos. 03-2735 & 03-2766
meet in a timely and adequate fashion the obliga-
tions imposed by Section 8-101 of this Act.
In order to ensure recurring unbundled network
element rates for loops that accomplish these ob-
jectives, the Illinois Commerce Commission shall
set the recurring rates affected incumbent local
exchange carriers receive for unbundled loops,
whether provided on a standalone basis or in com-
bination with other unbundled network elements,
in accordance with the requirements delineated
below.
(a) The General Assembly directs that the Illinois
Commerce Commission shall employ fill factors (the
proportion of a facility or element that will
be “filled” with network usage) that represent a rea-
sonable projection of actual total usage of the ele-
ments in question, in accordance with applicable
federal law. The General Assembly finds that
existing actual total usage of the elements that
affected incumbent local exchange carriers are
required to provide to competing local exchange
carriers, as reflected in the current actual fill fac-
tors for the elements in question, is the most
reasonable projection of actual total usage. The
Commission, therefore, shall employ current actual
fill factors that reflect such existing actual total
usage on a going forward basis in establishing cost
based rates for such unbundled network elements.
In addition, the Commission shall adjust all exist-
ing Commission-approved rates for unbundled
loops, whether provided on a standalone basis or in
combination with other unbundled network ele-
ments, that are currently in effect to make such
rates consistent with this provision.
(b) The General Assembly further directs that the
Commission shall employ depreciation rates that
Nos. 03-2735 & 03-2766 7
are forward-looking and based on economic lives as
reflected in the incumbent local exchange carrier’s
books of accounts as reported to the investment
community under the regulations of the Securities
and Exchange Commission. Use of an accelerated
depreciation mechanism shall be required in all
cases. Use of a depreciation rate based on historical
rate-of-return regulation derived lives of the ele-
ments and facilities in question shall be prohibited.
In addition, the Commission shall adjust all exist-
ing Commission-approved rates for unbundled
loops, whether provided on a standalone basis or in
combination with other unbundled network ele-
ments, that are currently in effect to make such
rates consistent with this provision.
(c) The rate adjustments required by subsections
(a) and (b) of this Section must be completed within
30 days of the effective date of this Section. In the
case of any incumbent local exchange carrier that is
subject to an alternative regulation plan under
Section 13-506.1 at the time this Section becomes
effective, in making these rate adjustments, the
Commission shall determine the specific required
adjustments with respect to fill factors and depreci-
ation lives by employing the models and methodol-
ogy used to generate the proposed rates submitted
by such an incumbent local exchange carrier in ICC
Docket 02-0864. The Commission proceedings
initiated to establish such adjusted rates shall be
deemed interconnection agreement arbitration and
approval proceedings under Sections 252(b) and (e)
of the federal Telecommunications Act of 1996.
Immediately upon conclusion of such proceedings,
all existing interconnection agreements in this
State of affected incumbent local exchange carriers
shall be deemed amended to contain the adjusted
8 Nos. 03-2735 & 03-2766
rates established in such proceedings. In addition,
immediately upon conclusion of such proceedings,
all wholesale tariffs, currently effective in this
State, of affected incumbent local exchange carriers
shall be deemed amended to contain the adjusted
rates established in such proceedings. In accor-
dance with these provisions, immediately upon the
establishment by the Commission of the adjusted
rates covered hereby, each affected incumbent local
exchange carrier shall charge such adjusted rates,
to the extent applicable, for all of the network
element products that are provided to other car-
riers, whether those products are provided under an
interconnection agreement or a tariff. The proceed-
ing in ICC Docket 02-0864 is hereby abated as of
the effective date of this amendatory Act of the 93rd
General Assembly.
(d) Notwithstanding anything to the contrary
contained in Section 13-505.1 of this Act, unbundled
network element rates established in accordance
with the provisions of this Section shall not require
any increase in any retail rates for any telecommu-
nications service.
In other words, within 30 days the ICC had to adjust SBC’s
rates using its current fill factors and depreciation sched-
ules from its financial statements. Depreciation, like fill
factor, is inversely related to price under TELRIC. If eco-
nomically and technologically efficient equipment would
have a useful life of five years, then the TELRIC price to ri-
vals is greater (because cost must be covered faster) than if
the life is ten years. The statute told the ICC to use the
equipment life spans that SBC had adopted for purposes of
financial reporting—and for that purpose firms often use
lives as short as the IRS will accept, because shorter lives
mean faster depreciation and lower taxes. Through 220
ILCS 5/13-408 the tax-and-accounting lives of SBC’s assets
Nos. 03-2735 & 03-2766 9
became their economic lives too. The legislation added that
AT&T and SBC could not use the ensuing higher wholesale
prices as justifications for increased retail rates. The ICC
complied with this statute by assuming that all aspects of
the 1997 calculation except fill factors and depreciation had
been frozen. The adjustments required by this statute
raised SBC’s average statewide rate to $19 per UNE-P.
Wholesale prices are lower in central parts of Chicago
($7.81 per month), higher elsewhere. SBC believes that
these rates still do not cover its costs; its rivals, however,
believe that they exceed TELRIC. (Both propositions could be
true, given TELRIC’s future-oriented, hypothetical-cost
nature.)
Once the ICC made its decision, AT&T and MCI were
entitled to commence a challenge in federal court. Instead,
they jumped the gun. Invoking the federal-question juris-
diction, they filed suit immediately after the state enacted
220 ILCS 5/13-408 and argued that the 1996 Act preempts
this legislation. The district court agreed with this conten-
tion and issued an injunction. Voices for Choices v. Illinois
Bell Telephone Co., 2003 U.S. Dist. LEXIS 9548 (N.D. Ill.
June 9, 2003). (AT&T tried to give the suit a public-interest
patina by making “Voices for Choices”—which despite its
name is a trade association rather than a consumers’
group—the lead plaintiff. The appellate brief reveals that
AT&T’s lawyers also represent Voices for Choices, which
presents no arguments on its own behalf; we have changed
the caption to reflect the real parties in interest.) The
district court held that the statute is defective in two ways:
First, federal law makes the state regulatory commission
the exclusive source of non-federal substantive rules;
second, the particular statutory rules for the handling of fill
factors and depreciation conflict with TELRIC.
The decision to file suit before the ICC had applied the
statute and announced new rates has caused unnecessary
troubles. Congress provided for federal judicial review of
10 Nos. 03-2735 & 03-2766
rates set by state commissions; it did not provide for review
of individual factors that influence those rates. A lower fill
factor, which elevates the rate, may be offset by other
factors that depress it. As long as the final rate comports
with TELRIC, why should it matter what role particular
intermediate factors played? Any effort to analyze a factor
in isolation poses a distinct risk of generating an advisory
opinion, as well as a certainty of complicating review of the
rate ultimately announced. A different way to put this is
that review of agency action usually is limited to the
agency’s final decision, and the choice of one or two legal
criteria that the agency will use along the way cannot be
called a “final” decision. See, e.g., FTC v. Standard Oil Co.
of California, 449 U.S. 232 (1980). By the time the district
court entered its injunction, the ICC had completed its work
(the statute gave it only 30 days, after all); it would have
been easy enough to wait that short time to ensure that the
ICC’s final decision was before the district court.
Making this suit a challenge to the particular rules of
decision in the new statute also complicated the crafting of
relief. The district court apparently did not see any diffi-
culty, however, because it entered this brief injunction:
(1) summary judgment is entered for plaintiffs;
(2) 220 ILCS 5/13-408 & 13-409 are declared un-
lawful; and
(3) defendants are permanently enjoined from im-
plementing these provisions of the Illinois Public
Utilities Act.
What does this mean? “Implementing the provisions” of the
statute was a task for the ICC—which completed its work
before the district judge acted. What, then, does this
injunction do? Must the ICC rescind its order? (So far it has
not done so.) Must the ICC reopen, and decide under former
law, the pending proceedings that the statute displaced?
(Again it has not done so, though one would suppose that
Nos. 03-2735 & 03-2766 11
this is essential.) May SBC charge the rates established in
the order that had issued before the injunction entered? If
not, may SBC increase rates on its own authority (the old
agreements with AT&T and MCI having expired) and wait
for them to demand “arbitration” before the ICC? The
injunction does not address any of these important issues.
At oral argument, counsel for AT&T revealed that the
parties had drafted this language, and that the judge signed
what was put before him; as the parties themselves know
what they meant, they did not think it important to write
it down. This is not a satisfactory explanation. How are we
to review this order—it is, after all, the final decision now
on appeal—if the key to its meaning lies in the private
consultations among counsel? How could a court enforce
this order if only the private litigants, and not either the
ICC or the judiciary, know what the order means?
These difficulties are connected to a third problem: the
ICC and its members, though parties to the litigation, have
not appealed. The agency did not welcome the statutory
restrictions on its discretion and was happy to have the
judge rid it of them. The judiciary thus became involved in
a power play among branches of the state government. (The
legislature and the Governor favored the new law; the
commissioners did not.) Because the agency did not ap-
peal—and no other state official attempted to compel it to
do so—it is forbidden to enforce the new law no matter what
happens on this appeal. That raises the question whether
there is a continuing case or controversy. As long as the
agency is bound by the injunction, what relief could an
appeal offer to SBC? See Kendall-Jackson Winery, Ltd. v.
Branson, 212 F.3d 995 (7th Cir. 2000). We directed the
parties to file supplemental memoranda about this question
and the related question whether SBC may set its own
rates, now that the ICC’s order has been knocked out.
The answers to our questions—answers received not only
in the supplemental memoranda but also at oral argu-
12 Nos. 03-2735 & 03-2766
ment—reveal that the three difficulties we have mentioned
(prematurity, vague injunction, and the availability of ef-
fective relief given the ICC’s acquiescence) are related. The
parties agree that: (1) the injunction, read in connection
with SBC’s agreements and the ICC’s 1997 decision,
compels SBC to continue charging the rate promulgated in
1997, whether or not that rate is today appropriate under
TELRIC; (2) what 220 ILCS 5/13-408 does is not only compel
the ICC to change the fill factors and depreciation but also
forbid the ICC to make any other adjustment during its
2003 ratemaking; and (3) the combination of (1) and (2)
means that this suit really is a review of the final rate
prescribed by the ICC, for these two factors were the whole
ball game rather than components of a more complex cal-
culation. These propositions might have been debatable,
individually or collectively; certainly the statute does not
say in so many words that the ICC is forbidden to adjust
other factors. But the parties’ agreement reflects the ICC’s
actual conduct and the parties own conduct: SBC has con-
tinued to charge the 1997 rates. This shows that there is a
live controversy: a carrier is entitled to appellate review of
the final rate (which affects ongoing income) whether or not
the regulatory commission contests the district court’s
decision. These three propositions also indirectly resolve the
substance of the parties’ dispute and compel us to af-
firm—not, however, on the district court’s grounds.
The district judge thought that the 1996 Act bars state
legislatures from playing any role in ratemaking. Yet
nothing in the federal statute says this. Federal law names
the state public utilities commission as regulator and ad-
judicator (“arbitrator”), but this does not imply that the
agency is the sole source of substantive rules any more than
Article III’s commitment of adjudication to the federal
judiciary implies that judges alone make up the rules by
which cases are decided. See Robertson v. Seattle Audubon
Society, 503 U.S. 429 (1992). An attempt by the state
Nos. 03-2735 & 03-2766 13
legislature to set rates by itself would transgress the federal
statute, which departs from the older approach under which
ratemaking was a legislative prerogative. See St. Joseph
Stock Yards Co. v. United States, 298 U.S. 38, 50 (1936);
Minnesota Rate Cases, 230 U.S. 353, 433 (1913). (Illinois
has not argued that the 1996 Act invades its sovereign
prerogative to reallocate powers internally, so we need not
determine whether, by participating in the cooperative
state-federal system established by the Act, Illinois has
waived such a contention.) But neither the 1996 Act nor its
implementing regulations goes to the other extreme,
excluding all legislative activity despite the longstanding
tradition that delegation to agencies comes with some
legislative standard-making. See Wichita R.R. & Light Co.
v. Public Utilities Commission of Kansas, 260 U.S. 48, 58-59
(1922). As long as federal law leaves a gap-filling role for
the states—and the FCC believes that its TELRIC rules leave
a good deal of discretion to states, see First Report & Order,
11 F.C.C. Record 15,499 ¶¶ 22, 53 (1996)—there is no
reason why legislation cannot be a source of substantive
norms. The 1996 Act contains a general anti-preemption
clause, see 47 U.S.C. §609 note (“This Act and the amend-
ments made by this Act shall not be construed to modify,
impair, or supersede Federal, State, or local law unless
expressly so provided in such Act or amendments”), which
precludes a reading that ousts the state legislature by
implication.
The district judge also thought that any use of actual fill
factors (or asset lives matching the company’s financial
reports) violates federal law because TELRIC is forward look-
ing, while depreciation looks to the past and fill factors to
the present. True enough, TELRIC calls for a projection, but
it does not demand that every ingredient be hypothetical.
How could one know the long-run costs of the most efficient
technology without understanding the costs of today’s most
efficient producers? If SBC’s current fill factors are the
14 Nos. 03-2735 & 03-2766
efficient ones (or are within the range that a student of the
subject might think a reasonable estimate of that figure),
then they are exactly the right figures to use. What is more,
as we have mentioned, TELRIC requires that the rate reflect
the costs of efficient production, not that each ingredient of
the formula do so independently. The district court’s
analysis may have been affected by the parties’ choice to
present for decision a challenge to two factors, standing
alone, rather than a challenge to a promulgated rate. Both
of these factors look to the present or the past; if they were
the only factors, then the problem would be clear; but under
TELRIC they can’t be the only factors, and their propriety
should not have been evaluated in isolation from the other
components of a TELRIC rate.
Which brings us to the problem: The state law, as the ICC
understood and applied it, does require these factors to be
used in isolation. The ICC took as set in stone all ingredi-
ents of ratemaking from 1997, and it adjusted the rate only
by changing fill factors and asset lives. That approach
conflicts with the 1996 Act and the TELRIC methodology and
is therefore preempted. See Wisconsin Bell, Inc. v. Bie, 340
F.3d 441 (7th Cir. 2003). Technology has changed since
1997; it cannot be that every rate-influencing consideration
(other than fill factor and asset lives) has remained con-
stant over the last six years. A rate for unbundled network
elements generated by combining some factors that are six
years out of date with two other factors that are not
forward-looking cannot possibly satisfy the requirements of
federal law. At oral argument counsel for SBC contended
that this could be solved in a new ratemaking next year,
when AT&T or MCI or some other rival could ask the ICC
to reexamine the other components that produced the final
rate. But the possibility of repair in the future is no warrant
for promulgating today a rate that deviates from the TELRIC
standard. Federal law requires that any rate for unbundled
network elements, adopted by a state commission, comply
Nos. 03-2735 & 03-2766 15
with TELRIC when adopted. The rate adopted by the ICC did
not do this and was properly set aside.
Where does this leave matters? The injunction still
bars the ICC from using 220 ILCS 5/13-408 to set rates.
If the elected branches of state government want the
Commission to proceed along these lines, they must enact
new legislation that addresses fill factors and asset lives as
elements of a comprehensive process designed to generate
a rate that complies with TELRIC. The ICC also is compelled
by the injunction to reinstate the proceeding in its Docket
02-0864, which the state law had terminated, and to pro-
ceed to decision as expeditiously as possible. The ICC must
attempt to produce a rate that complies with TELRIC as of
2003—and if doing this entails use of SBC’s current fill
factors, the ICC is free to use them. And it must do this
speedily. A rate that is long out of date, as this 1997 rate is,
frustrates the goals of TELRIC every bit as much as does a
rate generated under the flawed state legislation. SBC and
its rivals alike are entitled to an updated rate that comports
with federal law.
AFFIRMED
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—11-10-03