Illinois Bell Telephone Compan v. Lula Ford ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-1489, 08-1494
ILLINOIS B ELL T ELEPHONE C OMPANY, INC.,
Plaintiff-Appellee,
v.
C HARLES E. B OX, et al., in their official capacities as
commissioners of the Illinois Commerce
Commission; and G LOBALCOM , INC.,
Defendants-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 1149—Joan B. Gottschall, Judge.
A RGUED S EPTEMBER 19, 2008—D ECIDED N OVEMBER 26, 2008
Before P OSNER, R IPPLE, and E VANS, Circuit Judges.
P OSNER, Circuit Judge. Illinois Bell brought this suit
for declaratory and injunctive relief against the Illinois
Commerce Commission, which regulates the telecom-
munications industry in Illinois, to prevent the com-
mission from requiring Illinois Bell to sell Globalcom
(another telecom company, which has intervened as a
2 Nos. 08-1489, 08-1494
defendant) some of Illinois Bell’s services at cost, a re-
quirement that Illinois Bell claims is preempted by federal
regulation of telecommunications. The district judge
granted summary judgment in favor of Illinois Bell.
Although the dual federal-state regulatory scheme for
the telecommunications industry is complex and even
arcane, the parties did not have to assault us with 206
pages of briefs, brimming with jargon and technical detail,
in order to be able to present the issues on appeal ade-
quately. Clarity, simplicity, and brevity are underrated
qualities in legal advocacy.
Illinois Bell is what is called an “incumbent local ex-
change carrier,” which means that it was a provider of
local telephone service when the Telecommunications Act
of 1996 was enacted. Section 251 of that Act, 47 U.S.C.
§ 251, imposes various duties on such carriers, including
(in subsection (c)(3)) the duty to provide “any requesting
telecommunications carrier” with “nondiscriminatory
access to network elements on an unbundled basis.” A
network element is a service, such as switching, that is
a component of telecommunications service. To
“unbundle” it is to make it purchasable separately from
the telecommunications service itself. Switching, in our
example, is just one stick in the bundle that is an end-to-
end phone call or data transmission.
Despite the broad wording of subsection (c)(3), sub-
section (d)(2) directs the Federal Communications Com-
mission to decide which services shall be deemed “network
elements” within the meaning of subsection (c)(3) and
thus must be offered on an unbundled basis, and further
Nos. 08-1489, 08-1494 3
directs the Commission, in making that decision, to
consider (A) whether access is “necessary” and (B) whether
“failure to provide access . . . would impair the ability
of the telecommunications carrier seeking access to pro-
vide the services that it seeks to offer.” (What (A) adds to (B)
is unclear, but of no moment.) Once the FCC determines
that unbundled access to some service is required by section
251(d)(2), a carrier wanting access must negotiate with the
incumbent local exchange carrier on price and other terms
of access. If the carriers cannot reach agreement, their
disagreement is submitted to what is called “arbitration”
but is really the first stage in a regulatory proceeding. For
the arbitration decision (and also any agreement reached by
negotiation) must be submitted to the relevant state regula-
tory commission (in this case the Illinois Commerce Com-
mission) for approval, §§ 252(a), (e); see Illinois Bell Tele-
phone Co. v. Box, 526 F.3d 1069, 1070 (7th Cir. 2008); and that
commission is authorized by the Act to set the “just and
reasonable rate” for access. This rate is defined as the
incumbent local exchange carrier’s cost, § 252(d)(1)(A)(i),
and further defined, by the FCC, as a rate equal to the
cost to an efficient carrier of providing the service in
question with newly purchased equipment. 47 C.F.R.
§ 51.505(a). Such a rate (of which the best-known version
is called “TELRIC”) is highly favorable to the competitors of
the incumbent local exchange carrier. The Supreme Court
has described it as a rate just above the confiscatory level.
Verizon Communications, Inc. v. FCC, 535 U.S. 467, 489 (2002).
The problem to which these provisions are Congress’s
solution is that of bottleneck facilities. AT&T Corp. v Iowa
Utilities Board, 525 U.S. 366, 388 (1999). Suppose Illinois
Bell has a switching facility for routing phone calls to
4 Nos. 08-1489, 08-1494
their destinations, and a competing carrier such as
Globalcom would like to route its own customers’ calls
through that facility. Suppose that the facility has a lot of
excess capacity and so could handle Globalcom’s traffic at
minimal cost and that it would be prohibitively expensive
for Globalcom to build its own facility because it
wouldn’t have enough traffic to be able to recoup its
investment. Then if Illinois Bell refused to grant Globalcom
access to its switching service at a cost close to Illinois
Bell’s cost, Globalcom would be unable to compete.
But suppose instead that the market for Globalcom’s
services is large enough to enable the company to recoup
the cost of investing in its own switching facility.
Globalcom would still prefer to piggyback on Illinois
Bell’s facility, hoping the Illinois Commerce Commission
would force Illinois Bell to charge a price so low that
Illinois Bell would be in effect subsidizing its competitor.
Section 251(d)(2) of the Telecommunications Act, by
authorizing the FCC to require unbundled access at cost
only to network services that the requesting carrier
(Globalcom in this case) needs in order to be able to
serve its customers, steers a middle course between
requiring the incumbent local exchange carrier to sell
its network services to competitors at cost and not requir-
ing it to sell them to anyone. As long as requesting carriers
rely on network services supplied by incumbent local
exchange carriers, competition is hampered because the
services continue to be monopolies and require regulation.
See Graeme Guthrie, “Regulating Infrastructure: The
Impact on Risk and Investment,” 44 J. Econ. Lit. 925 (2006).
Nos. 08-1489, 08-1494 5
Hence “one goal” of limiting the requirement of
unbundled access at cost to network services that request-
ing carriers need rather than just want “is to wean [those
carriers] from reliance on unbundled network elements
so that fully competitive landline networks will be built,
now that there is widespread agreement that local service
is no longer a natural monopoly.” Illinois Bell Telephone
Co. v. Box, supra, 526 F.3d at 1073. The 1996 Act thus
creates a framework for the gradual deregulation of the
industry as advances in technology and the expansion
of markets provide increased scope for competition with
the incumbent local exchange carriers, formerly regional
monopolists.
In proceedings under section 251 the FCC has decided
which network services are to be brought under (c)(3) and
thus opened to access at cost by carriers competing with
incumbent local exchange carriers and which not, and
its decision has been affirmed. Covad Communications Co.
v. FCC, 450 F.3d 528 (D.C. Cir. 2006). For example, consis-
tent with our earlier discussion, the FCC has decided
that in large markets, which can support multiple switch-
ing centers, unbundled access at the incumbent local
exchange carrier’s cost is not required, because com-
peting carriers have enough traffic to be able to support
their own centers. Id. at 533-36.
But the Illinois Commerce Commission, dissatisfied
with the FCC’s determination, has, on the authority of an
Illinois statute, 220 ILCS 5/13-801(d), ordered Illinois Bell
to sell additional network services to such carriers at cost.
So although, for example, the FCC does not count local
6 Nos. 08-1489, 08-1494
switching as a network element that has to be unbundled,
the ICC requires that it be unbundled; and likewise
certain high-capacity loops (the wires that connect the
customer’s premises to the local switching facility). The
commission has not specified the maximum price that
Globalcom can be required to pay for the particular
services to which it is demanding access, but the Illinois
statute that the commission enforces forbids the
incumbent local exchange carrier to charge a price for
network services that exceeds the carrier’s cost. 220 ILCS
5/13-801(g).
The state commission wants in effect to overrule the
FCC’s decision not to require additional unbundling at
the incumbent local exchange carrier’s cost. It would not
be physically impossible for Illinois Bell to comply with
both federal and state law; it’s not as if the FCC wanted
Illinois Bell to use copper cable and the state plastic cable.
But it would be contrary to the FCC’s interpretation and
application of federal law. The FCC has been charged by
Congress with determining the optimal amount of
unbundling—enough to enable carriers like Globalcom to
compete with Illinois Bell but not so much as to enable
them to take an almost free ride on services that Illinois
Bell has spent a lot of money to create. That judgment,
which is certainly within the power of the federal gov-
ernment to make, is without force if a state can require
more unbundling at cost than the FCC requires.
It is true that section 251 contains a savings clause: the
FCC “shall not preclude the enforcement of any regula-
tion, order, or policy of a State commission that
Nos. 08-1489, 08-1494 7
(A) establishes access and interconnection obligations of
local exchange carriers; (B) is consistent with the require-
ments of this section [section 251]; and (C) does not
substantially prevent implementation of the requirements
of this section.” 47 U.S.C. § 251(d)(3). But the access
requirements imposed by the Illinois Commerce Com-
mission are inconsistent with the requirements of section
251 and do prevent their implementation. As in Illinois
Bell Telephone Co. v. Box, supra, 526 F.3d at 1072-73, where
we invalidated a similar order, the ICC is requiring
what the FCC has determined, in accordance with the
standard set forth in section 251(d)(2), should not be
required. We explained that requiring access merely to
enable interconnection is much less problematic than
requiring other forms of access, id. at 1071-72, because the
Telecommunications Act requires an incumbent local
exchange carrier “to provide, for the facilities and equip-
ment of any requesting telecommunications carrier,
interconnection with the local exchange carrier’s net-
work.” 47 U.S.C. § 251(c)(2). The access that Globalcom
seeks in this lawsuit is not to enable interconnection
with Illinois Bell’s network; it has that already.
In addition to requiring Illinois Bell to sell network
services to other carriers at cost, the Illinois Commerce
Commission has ordered it to sell certain non-network
services, such as “splitting,” at cost. Splitting (so far as
pertains to this case) is dividing a telecommunications
line to enable it simultaneously to carry different
messages, such as high-speed data and ordinary phone
calls. The defendants want Illinois Bell to unbundle
splitting from its line charge, though they acknowledge
8 Nos. 08-1489, 08-1494
that splitting is not a network element; it enhances
rather than enables a telecommunications service. Section
251 of the Telecommunications Act of 1996, as we know,
requires unbundling only of network elements (services),
and this only if the unbundling is necessary to overcome
a bottleneck. The Act does not say in so many words
that the state commission cannot require the unbundling
of non-network elements any more than it says that
about unbundling network elements, but to allow a state
commission to require it would defeat the Act’s goals.
Verizon New England, Inc. v. Maine Public Utilities Comm’n,
509 F.3d 1, 9 (1st Cir. 2007). Remember that the Act seeks
to create a competitive telecommunications industry, in
which carriers that compete with incumbent local ex-
change carriers are allowed to demand access at a price
below the market price to those carriers’ facilities only
to the extent necessary to prevent those carriers from
using their facilities to throttle their competitors. So it is
only bottleneck facilities that competitors can demand
access to—the facilities they need to provide a network
service. They do not need splitting to provide network
service, and they must therefore obtain it at market rates
rather than at cost. Likewise with respect to the other non-
network services that the Illinois commission ordered
Illinois Bell to provide.
The defendants retreat to another provision of the
Telecommunications Act of 1996, section 271, which
entitles telecommunications carriers to demand access
to unbundled services beyond those to which section 251
entitles them. That section imposes duties not on incum-
bent local exchange carriers as such, it is true, but rather
on “Bell operating companies” that wish to provide long-
Nos. 08-1489, 08-1494 9
distance service. The term refers to telephone companies
(or their successors) that became independent when AT&T
was broken up in the early 1980s. But Illinois Bell is one of
those companies, as well as being an incumbent local
exchange carrier.
When the Bell operating companies were first spun off
from AT&T, it was feared that they would use their
regional monopolies to control long-distance service; that
fear has diminished but the companies continue to face
additional regulation when they enter the long-distance
market. The duties that section 271 imposes include
requirements of providing unbundled access, for
example to local switching, that go beyond the access
requirements that the FCC has imposed on incumbent local
exchange carriers under section 251(d)(2). 47 U.S.C.
§ 271(c)(2)(B).
A Bell operating company that wants to provide long-
distance service must apply to the FCC for authorization,
§ 271(d)(1), and Illinois Bell has done that and has been
authorized, and so has assumed the access duties that
section 271(c)(2)(B) specifies. But unlike section 13-801
of the state statute, section 271 of the federal statute does
not require a carrier to charge a rate no higher than its
cost. As acknowledged by the Illinois commission and
noted and approved in the only two appellate decisions to
have addressed the issue, the FCC allows the market rate
to be charged. Nuvox Communications, Inc. v. BellSouth
Communications, Inc., 530 F.3d 1330, 1334-35 (11th Cir. 2008)
(per curiam); Verizon New England, Inc. v. Maine Public
Utilities Commission, supra, 509 F.3d at 9 (“one issue is
whether the states can require that section 271 elements be
10 Nos. 08-1489, 08-1494
priced at TELRIC rates. The FCC orders provide carriers
the authority to charge the potentially higher just and
reasonable rates, in order to limit subsidization and to
encourage investment by the competitors. To allow the
states to require the lower TELRIC rates directly con-
flicts with, and undercuts, the FCC’s orders”).
We emphasize, in light of the defendants’ equivocation
over the difference between the “just and reasonable” rate
that the Illinois Commerce Commission would fix for
unbundled access to section 271 services and the rate that
the FCC permits—namely the market price—that the
market rate has to be higher, and so there is a real conflict
between the federal and state regulatory schemes. Other-
wise Globalcom’s desire to obtain access under the state
statute would make no sense; Globalcom would pay the
same price for access to Illinois Bell’s services whether
that access was required by the Illinois Commerce Com-
mission or by the FCC. More fundamentally, if the rate
for unbundled access under section 271 were identical to
the rate under section 251, it wouldn’t make sense for
Congress to have required a showing of “necessity” and
“impairment” by competing carriers wanting those cost-
based section 251 rates; for no similar showing is re-
quired when unbundled access is sought under section 271.
Unlike a state’s regulatory authority under the savings
clause of section 251, moreover, the state has only a
consultative role in proceedings under section 271. 47
U.S.C. § 271(d)(2)(B). But we must consider the bearing of
section 252, which regulates agreements between incum-
bent local exchange carriers and competing carriers
concerning the terms of unbundled access under section
Nos. 08-1489, 08-1494 11
251. Those agreements are subject to approval and price
regulation by the state commission, and the defendants
argue that any request by a competing carrier for access
under section 271 must be treated likewise. This makes no
sense, however, not only because section 252 doesn’t
mention section 271 but also because the consultative
role to which section 271 confines the state commissions
would be read out of the Telecommunications Act if the
defendants were correct, since section 252 allows the
state commission to set price.
The defendants cite Qwest Corp. v. Public Utilities Com-
mission of Colorado, 479 F.3d 1184, 1197-99 (10th Cir. 2007),
but all the court held in that case was that an agreement
on the terms of access required by section 251 must be
filed with the state commission under section 252 even if the
agreement also sets terms for access under section 271. The
court was explicit that the state commission’s power over
such an agreement is limited to the terms in the agreement
relating to access under section 251. The Verizon New
England decision holds the same, 509 F.3d at 7, as does
Southwestern Bell Telephone, L.P. v. Missouri Public Service
Commission, 530 F.3d 676, 682-83 (8th Cir. 2008). So while
network services provided by incumbent local exchange
carriers that are necessary to enable a competing carrier to
provide service are to be priced at cost, any additional
network services that a Bell operating company (that wants
to provide long-distance service) must provide unbundled
access to can be priced at the market price.
A FFIRMED.
11-26-08