Verizon Communications Inc. v. Federal Communications Commission

The Telecommunications Act of 1996 (the act) required incumbent local exchange carriers (ILECs) to open their facilities to competitors on just, reasonable, and nondiscriminatory rates as set by state regulatory commissions. To implement this provision of the act, the Federal Communications Commission (FCC) (defendant) prescribed a methodology by which state commissions could set those rates. The act required the FCC in setting the methodology to determine the cost of providing a particular network element, plus a reasonable profit. The act prohibited the FCC from relying on a rate of return or other rate-based proceeding. The FCC decided to use a forward-looking cost-of-a-network element, set at the sum of (1) the total element long-run incremental cost of the element (TELRIC) and (2) a reasonable allocation of forward-looking costs that could not be attributed to a single network element (common costs). Further, the FCC found that TELRIC should be defined based on the most efficient technology available in each ILEC’s geographic area. Verizon Communications Inc. and other ILECs (plaintiffs) appealed the FCC order in federal court. The United States Court of Appeals for the Eighth Circuit found that a forward-looking cost model could be appropriate but ruled that the FCC could not use TELRIC in its methodology because the act required actual, as opposed to hypothetical, forward-looking costs. Both parties appealed, and the United States Supreme Court granted certiorari. ILECs argued that the plain meaning of the act prohibited the use of a forward-looking cost model, as opposed to a model related to historical investment. ILECs also argued that by setting rates based on hypothetical perfect competition, TELRIC set ILECs’ wholesale rates so low that new entrants would simply freeride and never be incentivized to build their own facilities. The FCC argued that TELRIC was permissible under the act. The FCC presented evidence that new entrants had invested $55 billion in telecommunications facilities from 1996 to 2000.