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Illinois Bell Telephone Company, Inc. v. Box

November 26, 2008

ILLINOIS BELL TELEPHONE COMPANY, INC., PLAINTIFF-APPELLEE,
v.
CHARLES E. BOX, ET AL., IN THEIR OFFICIAL CAPACITIES AS COMMISSIONERS OF THE ILLINOIS COMMERCE COMMISSION; AND GLOBALCOM, 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.

The opinion of the court was delivered by: Posner, Circuit Judge.

ARGUED SEPTEMBER 19, 2008

Before POSNER, RIPPLE, and EVANS, Circuit Judges.

Illinois Bell brought this suit for declaratory and injunctive relief against the Illinois Commerce Commission, which regulates the telecommunications industry in Illinois, to prevent the commission from requiring Illinois Bell to sell Globalcom (another telecom company, which has intervened as a defendant) some of Illinois Bell's services at cost, a requirement 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 adequately. 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-toend phone call or data transmission.

Despite the broad wording of subsection (c)(3), subsection (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 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 provide 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 Telephone 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 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 requiring 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).

Hence "one goal" of limiting the requirement of unbundled access at cost to network services that requesting 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 switching centers, unbundled access at the incumbent local exchange carrier's cost is not required, because competing 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 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 government 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 regulation, order, or policy of a State commission that (A) establishes access and interconnection obligations of local exchange carriers; (B) is consistent with the requirements 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 Commission 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 equipment of any requesting telecommunications carrier, interconnection with the local exchange carrier's network." 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 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 exchange 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 ...


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