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Sprintcom, Inc. v. Commissioners of the Ill. Commerce Comm'n

United States Court of Appeals, Seventh Circuit

June 23, 2015

SPRINTCOM, INC., et al., Plaintiffs-Appellants,

Argued May 19, 2015.

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 13 C 6565 -- Edmond E. Chang, Judge.

For SPRINTCOM, INC., WIRELESSCO, L.P., NEXTEL WEST CORPORATION, NPCR, INC., doing business as Nextel Partners, Plaintiffs - Appellants: Philip R. Schenkenberg, Attorney, BRIGGS & MORGAN, Minneapolis, MN.

For BRIAN J. SHEAHAN, chairman, JOHN R. ROSALES, ANN MCCABE, MIGUEL DEL VALLE, Defendants - Appellees: Thomas R. Stanton, Attorney, Matthew Leslie Harvey, Attorney, ILLINOIS COMMERCE COMMISSION, Office of General Counsel, Chicago, IL.

For ILLINOIS BELL TELEPHONE COMPANY, Defendant - Appellee: Dennis Friedman, Attorney, Hans Germann, Attorney, MAYER BROWN LLP, Chicago, IL.

Before POSNER, EASTERBROOK, and MANION, Circuit Judges.


Page 752

Posner, Circuit Judge.

The Telecommunications Act of 1996, 47 U.S.C. § § 151 et seq., sought (so far as relates to this case) to encourage competition in local telephone service. 110 Stat. 56, preamble. Companies that had once been the local subsidiaries of AT& T, such as Illinois Bell, but that had become independent when AT& T was broken up in 1984 (or successors to those companies) were believed, despite the competition of MCI and GT& T in many parts of the country, to have near monopolies of local telephone service because of the heavy costs that a competitor would have to incur to duplicate the cables, switches, and other transmission infrastructure owned and operated by each Bell company (officially called a " Regional Bell Operating Company" ). Indeed, before 1996 the dominant local carriers (almost all Bell companies) earned more than 99 percent of the telecommunications revenue generated in local telecommunications markets. Federal Communications Commission, Industry Analysis Division, Common Carrier Bureau, " Local Competition" 12 (1998), (visited June 17, 2015).

Page 753

If the existing infrastructure could handle the entire local demand for telephone service, a new entrant, needing to create its own infrastructure, might be unable to charge prices that would recover the costs of that infrastructure. The monopolist would have recovered its infrastructure costs and could therefore charge a remunerative price lower than any new entrant, since the new entrant would have to charge a price that covered not only its marginal costs but also its fixed costs, that is, the costs of building an infrastructure competitive with the monopolist's (though there would be instances in which an established monopolist had to incur substantial costs to update and repair its infrastructure while new entrants could build out their networks at lower cost because costs tend to fall as technology advances). Alternatively, the monopolist could either refuse to connect its network to that of the new entrant or agree to do so only on exorbitant terms; that would prevent the entrant's customers from reaching the monopolist's large customer base and would thus severely limit the entrant's ability to attract customers. See Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First Report & Order, 11 FCC Rcd. 15499, 15508-09 (1996). It is no surprise, therefore, that studies evaluating the effectiveness of the 1996 Act in promoting local competition have yielded at best mixed results. See, e.g., Donald L. Alexander & Robert M. Feinberg, " Entry in Local Telecommunication Markets," 25 Review of Industrial Organization 107 (2004); Jaison R. Abel, " Entry into Regulated Monopoly Markets: The Development of a Competitive Fringe in the Local Telephone Industry," 45 Journal of Law & Economics 289 (2002).

A telephone company that before the breakup of AT& T was the monopolist in a local market is called an " incumbent local exchange carrier" and is usually a Bell company once owned by AT& T but since the breakup independent. Such a carrier, like Illinois Bell (which does business under the name " AT& T" but which we'll call " Illinois Bell" to distinguish it from its former parent), provides telephone service in a local area; a carrier that provides long-distance service is called an interexchange carrier, because it carries calls between local exchange areas.

These local exchange carriers might have remained monopolists of local telephone service had not the 1996 Telecommunications Act required them to interconnect with new entrants (indeed with any " requesting telecommunications carrier" ) by giving them access to the cables and switches and other equipment that bring telephone service to buildings in the company's market area (the " exchange area" in telecom jargon). 47 U.S.C. § 251(c)(2). (Some interconnection obligations predated the 1996 Act, however. See United States v. American Telephone & Telegraph Co., 552 F.Supp. 131 (D.D.C. 1982).) So, were Sprint a new entrant in Chicago and wanted its subscribers to be able to call at competitive rates people who were subscribers to Illinois Bell rather than to Sprint, it could require Illinois Bell to allow it to connect its modest infrastructure of cables and so on to Illinois Bell's infrastructure. A Sprint caller would dial a Bell customer and the call would travel to the latter through the interconnected transmission systems of the two carriers.

To make the interconnection requirement as inexpensive for new entrants as possible, the FCC further forbade local exchange carriers to charge not just rates that exceeded a " just and reasonable" price for interconnection--a common regulatory formula--but also rates that exceeded " TELRIC" rates (we'll spare the reader the uninformative ...

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