United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 7, 2002 Decided May 24, 2002

No. 00-1012

United States Telecom Association, et al.,

Petitioners

v\.

Federal Communications Commission and

United States of America,

Respondents

Bell Atlantic Telephone Companies, et al.,

Intervenors

Consolidated with

01-1075, 01-1102, 01-1103

\-\-\-\-\-\-\-\--

No. 00-1015

United States Telecom Association, et al.,

Petitioners

v\.

Federal Communications Commission and

United States of America,

Respondents

AT&T Corporation, et al.,

Intervenors

Consolidated with

00-1025

On Petitions for Review of Orders of the

Federal Communications Commission

Michael K. Kellogg argued the cause for petitioners and supporting
intervenors in 00-1012 & 00-1015. With him on the briefs in 00-1012 were
Mark L. Evans, Sean A. Lev, James D. Ellis, Paul K. Mancini, Roger K.
Toppins, Gary L. Phillips, Lawrence E. Sarjeant, Linda L. Kent, Keith
Town-send, John W. Hunter, Julie E. Rones, William P. Barr, Michael E.
Glover, Edward H. Shakin, John P. Frantz, Richard M. Sbaratta, and James
G. Harralson. With him on the briefs in 00-1015 were Mark L. Evans, Sean
A. Lev, David L. Schwarz, Lawrence E. Sarjeant, Linda L. Kent, Keith
Townsend, John W. Hunter, Julie E. Rones, Sharon J. Devine, Robert B.
McKenna, William T. Lake, John H. Harwood II, Jonathan J. Frankel, James
D. Ellis, Paul K. Mancini, Roger K. Toppins, Gary L. Phillips, Michael
E. Glover, Edward H. Shakin, William P. Barr, John P. Frantz, Jonathan
B. Banks, Richard M. Sbaratta, and James G. Harralson. Donna M. Epps
entered an appearance in 00-1012. Daniel L. Poole and William R.
Richardson, Jr. entered appearances in 00-1015.

Laurence N. Bourne, Counsel, Federal Communications Commission, argued
the cause for respondents in 00-1012. With him on the brief in 00-1012
were Charles A. James, Assistant Attorney General, Daniel M. Armstrong,
Associate General Counsel, John E. Ingle, Deputy Associate General
Counsel, James M. Carr, Counsel, Catherine G. O\'Sullivan and Nancy C.
Garrison, Attorneys, U.S. Department of Justice. Lisa S. Gelb, Counsel,
Federal Communications Commission entered an appearance in 00-1012.

Richard K. Welch, Counsel, Federal Communications Commission, argued the
cause for respondents in 00-1015. With him on the briefs in 00-1015 were
Charles A. James, Assistant Attorney General, Daniel M. Armstrong,
Associate General Counsel, John E. Ingle, Deputy Associate General
Counsel, Laurence N. Bourne and James M. Carr, Counsel, Catherine G.
O\'Sullivan and Nancy C. Garrison, Attorneys, U.S. Department of
Justice. Lisa S. Gelb, Counsel, Federal Communications Commission,
entered an appearance in 00-1015.

Jonathan Jacob Nadler argued the cause for intervenors AT&T Corp., et
al. in 00-1012. With him on the brief in 00-1012 were David W.
Carpenter, Peter D. Keisler, James P. Young, Mark C. Rosenblum, Lawrence
J. Lafaro, Richard H. Rubin, Donald B. Verrilli, Jr., Maureen F. Del
Duca, Michael B. DeSanctis, Thomas F. O\'Neil III, William Single, IV,
Theresa K. Gaugler, Charles C. Hunter, Catherine M. Hannan, Albert H.
Kramer, Robert McDowell, Jay C. Keithley and H. Richard Juhnke. John J.
Heitmann, Jonathan E. Canis and Roy E. Hoffinger entered appearances in
00-1012.

David W. Carpenter argued the cause for intervenors AT&T, Corp., et al.
in 00-1015. With him on the brief in 00-1015 were Peter D. Keisler,
James P. Young, C. Frederick Beckner III, Mark C. Rosenblum, Lawrence J.
Lafaro, Richard H. Rubin, Donald B. Verrilli, Jr., Maureen F. Del Duca,
Michael B. DeSanctis, Thomas F. O\'Neil III, William Single, IV, Rodney
Joyce, Christy C. Kunin, Russell I. Zuckerman, Francis D.R. Coleman,
Richard E. Heatter, Marilyn H. Ash, Douglas G. Bonner, Albert H. Kramer,
Charles C. Hunter and Catherine M. Hannan. Roy E. Hoffinger, Lawrence G.
Acker, John J. Heitmann and Jonathan E. Canis entered appearances.

Before: Edwards and Randolph, Circuit Judges, and Williams, Senior
Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge Williams.

Williams, Senior Circuit Judge: Petitioners in these two cases\--certain
incumbent local exchange carriers (\"ILECs\") and the U.S. Telecom
Association, representing approximately 1200 such carriers\--seek review
of two rulemaking orders of the Federal Communications Commission. One
order requires ILECs to lease a variety of \"unbundled network
elements\" (\"UNEs\") to competitive local exchange carriers
(\"CLECs\"), and the other unbundles a portion of the spectrum of local
copper loops so that CLECs can offer competitive Digital Subscriber Line
(\"DSL\") internet access. We grant both petitions, and remand both
rules to the Commission.

I. Background

Congress passed the Telecommunications Act of 1996, Pub. L. 104-104, 110
Stat. 56, codified at 47 U.S.C. § 151 et seq. (the \"1996 Act\" or the
\"Act\"), to \"promote competition and reduce regulation in order to
secure lower prices and higher quality services for American
telecommunications consumers and encourage the rapid deployment of new
telecommunications technologies.\" 1996 Act, preamble. In pursuit of
that goal, § 251 of the Act requires that ILECs \"unbundle\" their
network elements\--that is, provide them on an individual basis to
competitive providers on terms prescribed by the Commission. 47 U.S.C. §
251(c)(3). To guide the Commission in deciding which network elements
are to be unbundled, the Act goes on to specify:

\(2\) Access standards

In determining what network elements should be made available for
purposes of subsection (c)(3) of this section, the Commission shall
consider, at a minimum, whether\--

\(A\) access to such network elements as are proprietary in nature is
necessary; and

\(B\) the failure to provide access to such network elements would
impair the ability of the telecommunications carrier seeking access to
provide the services that it seeks to offer.

47 U.S.C. § 251(d)(2) (emphasis added).

In its first effort at implementation, Implementation of the Local
Competition Provisions in the Telecommunications Act of 1996, First
Report and Order, CC Docket No. 96-98, 11 FCC Rcd 15499 (1996) (\"First
Local Competition Order\"), the Commission gave this section the
following reading:

The term \"impair\" means \"to make or cause to become worse; diminish
in value.\" We believe, generally, that an entrant\'s ability to offer a
telecommunications service is \"diminished in value\" if the quality of
the service the entrant can offer, absent access to the requested
element, declines and/or the cost of providing the service rises. We
believe we must consider this standard by evaluating whether a carrier
could offer a service using other unbundled elements within an incumbent
LEC\'s network.

Id. at 15643, p 285 (emphasis added). In AT&T Corp. v. Iowa Utilities
Board, 525 U.S. 366 (1999), the Supreme Court found the Commission\'s
view far too broad, saying that under such a standard it was \"hard to
imagine when the incumbent\'s failure to give access to the element
would not constitute an \'impairment.\' \" Id. at 389. It specifically
criticized the Commission\'s having \"blind\[ed\] itself to the
availability of elements outside the incumbent\'s network,\" including
self-provisioning and leasing from other providers. Id. It criticized
the Commission\'s view that \"any increase\" in the competitor\'s cost
(resulting from lack of access to an incumbent\'s element) would be an
\"impairment.\" Id. at 389-90 (emphasis in original). Summarizing the
overall picture, it said that if \"Congress had wanted to give blanket
access to incumbents\' networks,\" it \"would simply have said (as the
Commission in effect has) that whatever requested element can be
provided must be provided.\" Id. at 390.

In Iowa Utilities Board, the Supreme Court also addressed the Act\'s
provisions on rates for UNEs, reversing the Eighth Circuit\'s holding
that the Commission had no authority to set such rates. Id. at 377-86.
It accordingly returned the remaining rate issues to the Eighth Circuit,
which on remand invalidated the Commission\'s rate-setting principle,
known by the acronym TELRIC (for \"total element long-run incremental
cost\"). See Iowa Utilities Board v. FCC, 219 F.3d 744 (8th Cir. 2000).
The Supreme Court reversed, upholding the TELRIC principle. Verizon
Communications, Inc. v. FCC, No. 00-511, 2002 WL 970643 (May 13, 2002).

Following the Supreme Court\'s remand on the \"impairment\" standard,
the Commission again tackled that issue in the rulemakings now on
review. In what we will call the \"Local Competition Order,\"
Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, Third Report and Order and Fourth
Further Notice of Proposed Rulemaking, 15 FCC Rcd 3696 (1999), it
revised its definition of \"impair\" so as to require unbundling if,
\"taking into consideration the availability of alternative elements
outside the incumbent\'s network, including self-provisioning by a
requesting carrier or acquiring an alternative from a third-party
supplier, lack of access to that element materially diminishes a
requesting carrier\'s ability to provide the services it seeks to
offer.\" Local Competition Order, 15 FCC Rcd at 3725, p 51 (emphasis
added); 47 C.F.R. § 51.317(b)(1). In weighing the availability of
alternative network elements, the Commission noted that it would examine
five factors\--cost, effect on timeliness of entry, quality, ubiquity,
and impact on network operations. Local Competition Order, 15 FCC Rcd at
3731, p 65, 3734-45, p p 71-100; 47 C.F.R. § 51.317(b)(2). Finally, it
said that beyond looking simply to \"impairment,\" it would consider
five factors that it believed would further the Act\'s goals, namely
whether unbundling would lead to \"rapid introduction of competition in
all markets,\" promote \"facilities-based competition, investment, and
innovation,\" reduce regulatory obligations, promote certainty in the
market, and be administratively practical. 15 FCC Rcd at 3745-50, p p
101-16; 47 C.F.R. § 51.317(b)(3).

Of particular importance to this case, the Commission decided to make
its unbundling requirements (except for two elements) applicable
uniformly to all elements in every geographic or customer market. We
return in detail to this issue after a survey of the elements unbundled
by the Local Competition Order:

. Local loops, defined as \"all features, functions and capabilities of
the transmission facilities, including dark fiber and attached
electronics (except those used for the provision of advanced services,
such as DSLAMs \[DSL Access Multiplexers\]) owned by the incumbent LEC,
between an incumbent LEC\'s central office and the loop demarcation
point at the customer premises.\" 15 FCC Rcd at 3772, p 167; 47 C.F.R. §
51.319(a)(1). The Commission also required that incumbent LECs
\"condition\" loops so as to allow CLECs to offer advanced services. 15
FCC Rcd at 3775, p 172; 47 C.F.R. § 51.319(a)(3). Conditioning, for
these purposes, means removing devices such as bridge taps, low-pass
filters, range extenders, etc., that improve voice transmission but may
decrease a loop\'s advanced services capabilities. Id.

. Subloops, i.e., those \"portions of the loop that can be accessed at
terminals in the incumbent\'s outside plant.\" 15 FCC Rcd at 3789, p
206; 47 C.F.R. § 51.319(a)(2). Points of access might include the pole
near the customer\'s premises, the network interface device (\"NID\"),
and the feeder distribution interface (where the trunk line from the
central office interfaces with the distribution line to the
subscribers). 15 FCC Rcd at 3789-90, p 206.

. Network Interface Devices, which include all \"features, functions,
and capabilities of the facilities used to connect the loop distribution
plant to the customer premises wiring, regardless of the particular
design of the NID mechanism.\" Id. at 3801, p 233; 47 C.F.R. §
51.319(b). This broad definition is intended to make the unbundling
requirement \"flexible and technology-neutral,\" so as to apply to any
new NID technologies that may develop. 15 FCC Rcd at 3801, p 234.

. Circuit switching, defined as the \"basic function of connecting lines
and trunks,\" including \"all the features, functions and capabilities
of the switch.\" Id. at 3805, p 244; 47 C.F.R. § 51.319(c). The
Commission made one narrow exception to circuit switch unbundling, which
we discuss below.

. Packet switching under some circumstances. Packet switches perform
\"the function of routing individual data units based on address or
other routing information contained in the units.\" 15 FCC Rcd at 3833,
p 302; 47 C.F.R. § 51.319(c)(4). The Commission for the most part denied
unbundling for packet switching, requiring it only where the ILEC has
used digital loop carrier systems, placing a DSLAM at a remote terminal
and refusing to allow the competitor to collocate its own DSLAM at that
remote terminal. 15 FCC Rcd at 3838, p 313. That is, if the loop is such
that a remote DSLAM is necessary to provide DSL service at all, and the
ILEC has denied the CLEC the right to collocate a DSLAM remotely, then
unbundling the packet switching (i.e., the ILEC\'s own DSLAM) would be
the only way to allow the CLEC to provide DSL service.

. Dedicated transport, defined as \"facilities dedicated to a particular
customer or carrier that provide telecommunications between wire centers
owned by incumbent LECs or requesting telecommunications carriers, or
between switches owned by incumbent LECs or requesting
telecommunications carriers.\" Id. at 3842, p 322; 47 C.F.R. §
51.319(d)(1)(i). The Commission expanded this traditional definition so
as to include all high-capacity transmission facilities of specified
types and \"such higher capacities as evolve over time,\" 15 FCC Rcd at
3843, p 323, as well as dark fiber, id. at 3843-46, p p 325-30; 47
C.F.R. § 51.319(d)(1)(ii).

. Shared transport, defined as \"transmission facilities shared by more
than one carrier, including the incumbent LEC, between end office
switches, between end office switches and tandem switches, and between
tandem switches in the incumbent LEC\'s network.\" 15 FCC Rcd at 3862, p
370; 47 C.F.R. § 51.319(d)(1)(iii).

. Signaling networks and call-related databases. Signaling networks
include signaling transfer points, to which each local switch must be
connected. 15 FCC Rcd at 3868, p 384; 47 C.F.R. § 51.319(e).
Call-related databases are \"used in signaling networks for billing and
collection or the transmission, routing, or other provision of
telecommunications service.\" 15 FCC Rcd at 3875, p 403. The databases
specifically unbundled include the calling name database, the 911
database, the toll free calling database, and several others. Id.

. Operations support systems. These are the \"functions supported by an
incumbent LEC\'s databases and information,\" including \"pre-ordering,
ordering, provisioning, repair and maintenance, and billing.\" 15 FCC
Rcd at 3884, p 425; 47 C.F.R. § 51.319(g).

So far as we understand, this list is narrower than that which the Court
reversed in Iowa Utilities Board only in its exclusion of some circuit
switches, as well as of operator services and directory assistance. See
15 FCC Rcd at 3822-31, p p 276-98, 3890-92, p p 438-42. In other areas,
the Commission\'s list has actually been expanded, now including
high-capacity loops, id. at 3777, p 176, 3780, p 184, dark fiber, id. at
3785, p 196, 3843-46, p p 325-30, subloops, id. at 3788-89, p p 202-05,
and packet switches in a few circumstances, id. at 3832-35, p p 300-06.

In what we call the \"Line Sharing Order,\" In the Matters of Deployment
of Wireline Services Offering Advanced Telecommunications Capability and
Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, Third Report and Order in CC Docket No.
98-147 and Fourth Report and Order in CC Docket No. 96-98, 14 FCC Rcd
20912 (1999), the Commission refined unbundling further. Copper loops
have a range of spectrum in which the transmission of information is
possible. Analog telephone service uses only the lower frequencies of
that spectrum (typically 300 to 3400 hz), leaving higher frequencies
unused. Recent technological development allows the provision of DSL
high-speed internet access over the high-frequency (i.e., 20,000+ hz)
spectrum.[^1] By fitting the loop with splitters (which split apart
voice and digital signals) and DSLAMs (Digital Subscriber Line Access
Multiplexers) (which send voice traffic to the circuit-switched
telephone network and data traffic to the packet-switched data network),
local carriers can provide both plain old telephone service and DSL
internet access at the same time.

In the \"Line Sharing Order\" the Commission decided that the high
frequency portion of copper loop spectrum should be unbundled as to
those loops on which ILECs are currently providing telephone service.
The Commission defined the \"high frequency\" portion as simply any
frequency \"above the voiceband on a copper loop facility used to carry
analog circuit-switched voiceband transmissions.\" Line Sharing Order,
14 FCC Rcd at 20926, p 26; 47 C.F.R. s 51.319(h)(1).

Such unbundling means, of course, that CLECs and ILECs would share the
same copper loop to provide two different services at once. See, e.g.,
14 FCC Rcd at 20923, p 17. The Commission clarified that the unbundling
obligation extends to only one competitor per line. Id. at 20948, p 47.

The Commission also required ILECs to condition loops, that is, to
remove loading coils, bridge taps, and other voice-band transmission
enhancing equipment that tends to interfere with DSL service. Id. at
20917; 20952-54, p p 81-87; 47 C.F.R. § 51.319(h)(5). An ILEC can escape
this obligation by demonstrating that conditioning would significantly
degrade analog voice service. The Commission explicitly recognized that
such a showing would be practically impossible for loops under 18,000
feet. 14 FCC Rcd at 20954, p 86.

II\. The Local Competition Order

We note at the outset the extraordinary complexity of the Commission\'s
task. Congress sought to foster competition in the telephone industry,
and plainly believed that merely removing affirmative legal obstructions
would not do the job. It thus charged the Commission with identifying
those network elements whose lack would \"impair\" would-be
competitors\' ability to enter the market, yet gave no detail as to
either the kind or degree of impairment that would qualify. We review
the two orders with this in mind.

A. Unvarying Scope

As to almost every element, the Commission chose to adopt a uniform
national rule, mandating the element\'s unbundling in every geographic
market and customer class, without regard to the state of competitive
impairment in any particular market. As a result, UNEs will be available
to CLECs in many markets where there is no reasonable basis for thinking
that competition is suffering from any impairment of a sort that might
have the object of Congress\'s concern.

One reason for such market-specific variations in competitive impairment
is the cross-subsidization often ordered by state regulatory
commissions, typically in the name of universal service. This usually
brings about undercharges for some subscribers (usually rural and/or
residential) and overcharges for the others (usually urban and/or
business). Petitioners\' opening brief in the Local Competition Order
case cites testimony of a former FCC Chairman for the proposition that
40% of telephone service is charged below cost, Petitioners\' Br. at 35
& n.16, and the Commission and its supporting intervenors do not demur.
See also, e.g., Robert W. Crandall & Thomas W. Hazlett,
Telecommunications Policy Reform in the United States and Canada, at 18,
Working Paper 00-9, AEI-Brookings Joint Center for Regulatory Studies
(Dec. 2000) (chart showing that in many American cities, businesses are
charged substantially more than residences for single lines); see also
generally Robert W. Crandall & Leonard Waverman, Who Pays for Universal
Service? When Subsidies Become Transparent (2000).

Competitors will presumably not be drawn to markets where customers are
already charged below cost, unless either (1) the availability of UNEs
priced well below the ILECs\' historic cost makes such a strategy
promising, or (2) provision of service may, by virtue of economies of
scale and scope, enable a CLEC to sell complementary services (such as
long distance or enhanced services) at prices high enough to cover
incomplete recovery of costs in basic service. The Commission never
explicitly addresses by what criteria want of unbundling can be said to
impair competition in such markets, where, given the ILECs\' regulatory
hobbling, any competition will be wholly artificial. And, although it
offers an explanation as to why it is desirable as a general matter that
CLECs should have \"ubiquitous\" unimpaired access to network elements,
see Local Competition Order, 15 FCC Rcd at 3744, p p 97-98, it never
explains why the record supports a finding of material impairment where
the element in question\--though not literally ubiquitous\--is
significantly deployed on a competitive basis in those markets where
there is no reason to suppose that rates are artificially low, compare
id. at 3847, p 335 (finding that 47 of the top 50 areas have 3 or more
competitors providing interoffice transport), with id. at 3849, p 340
(finding absence of requisite ubiquity for such transport).

But it is in the other segments of the markets, where presumably ILECs
must charge above cost (at least above average costs allocated in
conventional regulatory fashion) in order to offset their losses in the
subsidized markets, that the gap in the Commission\'s reasoning is
greatest. In finding that the CLECs\' lack of access to each of the many
elements \"materially diminish\[ed\]\" their ability to provide service,
the Commission nowhere appears to have considered the advantage CLECs
enjoy in being free of any duty to provide underpriced service to rural
and/or residential customers and thus of any need to make up the
difference elsewhere. As a matter of pure language, perhaps, one might
regard as an \"impairment\" any cost disadvantage that the CLECs suffer
in markets where ILECs are hampered by regulatory redistribution, even
if the disadvantage is fully offset by the exigencies faced by ILECs.
But the Commission has never explained why such a view makes sense.
Indeed, pointing to evidence of considerable investment by CLECs in
facilities for service in what are evidently the relatively overcharged
markets, see, e.g., Petitioners\' Br. at 16 (noting that as of 1999,
CLECs had deployed transport facilities in all of the top 50 markets),
the petitioners argue that there has been little or no real net
impairment. The Commission responds with an expression of doubt whether
these \"data accurately reflects \[sic\] the extent to which
alternatives are actually available to competitors.\" Local Competition
Order, 15 FCC Rcd at 3849, p 341. But because the Commission has loftily
abstracted away all specific markets, and because its concept of
impairing cost-differentials is so broad (an issue discussed below), we
have no way of assessing the real meaning of that conclusion.

We now turn to the reasons offered by the Commission for adopting an
undifferentiated national rule for each element (with narrow
exceptions). Having found legal authority to adopt such a rule, it said
that it would help achieve the goals of the Act, to wit: (1) rapid
introduction of competition, (2) promotion of facilities-based
competition, investment and innovation, (3) certainty in the
marketplace, (4) administrative practicality and (5) reduced regulation.
See Local Competition Order, 15 FCC Rcd at 3754-62, p p 124-143; see
also 47 C.F.R. § 51.317(b)(3) (identifying same five factors as guiding
Commission decision whether to unbundle a network element).

We first address the third and fourth justifications, both of which
seemingly turn on how clear any non-universal rule can be. The
Commission appears simply to assume that any such rule would be
unpredictable and hard to apply. Yet the Commission itself, in regard to
circuit switches, chose a partial rule, denying unbundling for local
circuit switches serving customers with four or more lines in the
highest-density zone in any of the top 50 Metropolitan Statistical Areas
(\"MSAs\"). See Local Competition Order, 15 FCC Rcd at 3823-31, p p
278-99. The Commission\'s order has no explanation of why comparable
differentiation was not available for other elements.

As to reduced regulation, the Commission says that a national list
\"will result immediately in reduced regulation.\" Id. at 3762, p 143.
It does not elaborate on this counterintuitive proposition. It goes on
to say that a national list is consistent with \"the deregulatory goals
of the Act\":

Reduced regulation will occur as we remove elements from the list as
requesting carriers are no longer impaired without access to those
elements, and it otherwise does not further the goals of the Act to
continue requiring incumbent LECs to unbundle them.

Id. We understand that elimination of an entire universal mandate at one
whack will achieve more deregulation than removal of a partial mandate.
But imposition of a national mandate does not itself entail national
elimination, and in any event we cannot see how imposition and then
retraction of a national mandate is more deregulatory, overall, than
imposition and retraction of a partial one.

This leaves the more substantive justifications\--the ideas that
universal rules would promote the goals of the Act by leading to rapid
introduction of competition, Local Competition Order, 15 FCC Rcd at
3754-57, p p 125-33, and to promotion of facilities-based competition,
investment, and innovation, id. at 3757-60, p p 134-39. Using certain
definitions, the first point\--more rapid introduction of
competition\--indeed follows automatically. If competition performed
with ubiquitously provided ILEC facilities counts, the more unbundling
there is, the more competition. The Commission, here in unison with the
ILEC petitioners, evidently assumes that the Commission-imposed prices
are highly attractive to CLECs; on that assumption, universal rules
encompassing as many elements as possible would indeed generate a rapid
spread of \"competition.\"

But the Commission never makes the argument in quite so stark a form,
unwilling to embrace the idea that such completely synthetic competition
would fulfill Congress\'s purposes. Thus it turns to the argument that
universal rules promote investment and facilities-based competition.

The Commission says that \"adoption of a national list\" will
\"facilitate the deployment\" of competitive facilities. Id. at 3757, p
134. There are plainly two sides to the effects on investment of
ubiquitously available UNEs at Commission-mandated prices. On one side,
the more widespread the availability of elements that can be more
efficiently provided by the incumbent (presumably because of economies
of scale and scope\--an issue to which we\'ll return), the quicker
competitors will set about providing the other elements and offering of
complete competitive service, including long distance service. Compare
Iowa Utilities Board, 525 U.S. at 416-17 (Breyer, J., concurring in part
and dissenting in part), cited at Respondent\'s Br. 32-33. Further,
access to UNEs may enable a CLEC to enter the market gradually, building
a customer base up to the level where its own investment would be
profitable.

On the other side, the petitioners argued before the Commission that
mandatory unbundling at Commission-mandated prices reduces the
incentives for innovation and investment in facilities. Their reasoning,
of course, is that a regulated price below true cost will reduce or
eliminate the incentive for an ILEC to invest in innovation (because it
will have to share the rewards with CLECs), and also for a CLEC to
innovate (because it can get the element cheaper as a UNE). Indeed, many
prices that seem to equate to cost have this effect. Some innovations
pan out, others do not. If parties who have not shared the risks are
able to come in as equal partners on the successes, and avoid payment
for the losers, the incentive to invest plainly declines.[^2] See Iowa
Utilities Board, 525 U.S. at 428-29 (Breyer, J., concurring in part and
dissenting in part); cf. FPC v. Hope Natural Gas Co., 320 U.S. 591,
647-53 (1944) (Jackson, J., dissenting) (discussing supply implications
of cost-based regulation of natural gas production). In any event, the
Commission\'s own assumption that universal access to virtually all
network elements would prove attractive (leading to rapid introduction
of \"competition\") suggests that such a disincentive effect cannot be
discounted a priori.

The Commission\'s only response is to point to evidence that both CLECs
and ILECs have built facilities since passage of the 1996 Act (the same
evidence invoked by the ILECs to show the existence of many markets
where unbundling is unneeded), despite the Act\'s obviously having
created a prospect of unbundling. Local Competition Order, 15 FCC Rcd at
3758-59, p p 135-38. But the existence of investment of a specified
level tells us little or nothing about incentive effects. The question
is how such investment compares with what would have occurred in the
absence of the prospect of unbundling, compare Sugar Cane Growers
Cooperative of Florida v. Veneman, No. 01-5335, 2002 Westlaw \-\-\--,
slip op. at 7 (D.C. Cir. May 10, 2002); Competitive Enterprise Institute
v. NHTSA, 956 F.2d 321, 325 (D.C. Cir. 1992), an issue on which the
record appears silent. Although we can\'t expect the Commission to offer
a precise assessment of disincentive effects (a lack of multiple
regression analyses is not ipso facto arbitrary and capricious), we can
expect at least some confrontation of the issue and some effort to make
reasonable trade-offs.

In the end, then, the entire argument about expanding competition and
investment boils down to the Commission\'s expression of its belief that
in this area more unbundling is better. But Congress did not authorize
so open-ended a judgment. It made \"impairment\" the touchstone. The
Commission argues that § 251(d)(2), directing it to consider necessity
and impairment \"at a minimum,\" clearly allows it to consider other
elements. We assume in favor of the Commission that that is so. But to
the extent that the Commission orders access to UNEs in circumstances
where there is little or no reason to think that its absence will
genuinely impair competition that might otherwise occur, we believe it
must point to something a bit more concrete than its belief in the
beneficence of the widest unbundling possible.

Besides the analysis described above, the Commission addressed the
question whether Iowa Utilities Board precluded its adoption of
universal rules for each network element. It concluded that nothing in
that opinion would require it \"to determine, on a localized
state-by-state or market-by-market basis which unbundled elements are to
be made available.\" Local Competition Order, 15 FCC Rcd at 3753, p 122.
We certainly agree that the Court\'s brief passage reversing the
Commission on the impairment issue contained little detail as to the
\"right\" way for the Commission to go about its work. But the Court\'s
point that if \"Congress had wanted to give blanket access to
incumbents\' networks,\" it \"would simply have said (as the Commission
in effect has) that whatever requested element can be provided must be
provided,\" Iowa Utilities Board, 525 U.S. at 390, suggests that the
Court read the statute as requiring a more nuanced concept of impairment
than is reflected in findings such as the Commission\'s\--detached from
any specific markets or market categories.

B. Kinds of Cost Disparities

Petitioners complain that the Commission myopically focused on \"cost
differences,\" thereby skewing its inquiry to produce the maximum
unbundling.

Of course any cognizable competitive \"impairment\" would necessarily be
traceable to some kind of disparity in cost. Indeed, the ILECs argued
before the Commission and the Supreme Court that Congress intended that
the impairment standard embody the criteria of the \"essential
facilities\" doctrine, see Iowa Utilities Board, 525 U.S. at 388, which
itself turns on concepts of cost. The doctrine\'s basic idea is that
where one firm controls some facility (such as a bridge) that is
essential for competition in a broader market, and it would make no
economic sense for competitors to duplicate the facility, and certain
other criteria are satisfied, see generally Phillip E. Areeda & Herbert
Hovenkamp, 3A Antitrust Law p p 771-73 (1996), the owner may be
compelled to share the facility with its competitors. The classic case
where competitor duplication would make no economic sense is where
average costs are declining throughout the range of the relevant market.
See Areeda & Hovenkamp, supra, at p 771c; see also 2 Alfred E. Kahn, The
Economics of Regulation: Principles and Institutions 119 (1989). In such
a case, duplication, even by the most efficient competitors imaginable,
would only lead to higher unit costs for all firms, and thus for
customers. See Areeda & Hovenkamp, supra, at p 771c; 2 Kahn, supra, at
122; see also generally Iowa Utilities Board, 525 U.S. at 416-17, 427-31
(Breyer, J., concurring in part and dissenting in part).[^3] Thus the
Supreme Court in Verizon observed that \"entrants may need to share some
facilities that are very expensive to duplicate (say, loop elements) in
order to be able to compete in other, more sensibly duplicable elements
(say, digital switches or signal-multiplexing technology).\" Verizon,
slip op. at 38 n.27 (emphasis added). See also id. at 39 n.27
(characterizing the elements with respect to which new entrants and
incumbents are not required to compete (i.e., the elements to be
unbundled) as those \" \'the duplication of \[which\] would prove
unnecessarily expensive\' \") (quoting Justice Breyer, post, at 8,
dissenting).

Petitioners\' position here is fundamentally that the Commission relied
on cost disparities that, far from being any indication that competitive
supply would be wasteful, are simply disparities faced by virtually any
new entrant in any sector of the economy, no matter how competitive the
sector. See Petitioners\' Br. at 28. Indeed, the Commission\'s order
does reflect an open-ended notion of what kinds of cost disparity are
relevant.

For example, in the discussion of local switching, the Commission notes
that there are economies of scale in switches, Local Competition Order,
15 FCC Rcd at 3812-13, p 259, and that it is cheaper to buy a
20,000-line switch than four increments of 5000 lines each, id. at 3813,
p 260. The Commission refers explicitly to a CLEC\'s probable inability
to enjoy scale economies comparable to ILECs\' \"particularly in the
early stages of entry.\" Id. at 3814, p 261 (emphasis added). But
average unit costs are necessarily higher at the outset for any new
entrant into virtually any business. The Commission has in no way
focused on the presence of economies of scale \"over the entire extent
of the market.\" 2 Kahn, supra, at 119 (emphasis added). Without a link
to this sort of cost disparity, there is no particular reason to think
that the element is one for which multiple, competitive supply is
unsuitable. See generally id. at 119-26.

The Commission of course has recognized that marketplace changes and
increases in competition may justify later reductions in unbundling
mandates. See, e.g., Local Competition Order, 15 FCC Rcd at 3704, p 15.
But this acknowledgement doesn\'t respond to the analytical problem. To
rely on cost disparities that are universal as between new entrants and
incumbents in any industry is to invoke a concept too broad, even in
support of an initial mandate, to be reasonably linked to the purpose of
the Act\'s unbundling provisions.

Each unbundling of an element imposes costs of its own, spreading the
disincentive to invest in innovation and creating complex issues of
managing shared facilities. See Iowa Utilities Board, 525 U.S. at 428-29
(Breyer, J., concurring in part and dissenting in part). At the same
time\--the plus that the Commission focuses on single-mindedly\--a broad
mandate can facilitate competition by eliminating the need for separate
construction of facilities where such construction would be wasteful.
Id. at 416-17. Justice Breyer concluded that fulfillment of the Act\'s
purposes therefore called for \"balance\" between these competing
concerns. Id. at 429-30. A cost disparity approach that links
\"impairment\" to universal characteristics, rather than ones linked (in
some degree) to natural monopoly, can hardly be said to strike such a
balance. The Local Competition Order reflects little Commission effort
to pin \"impairment\" to cost differentials based on characteristics
that would make genuinely competitive provision of an element\'s
function wasteful.

Petitioners here do not explicitly attack the Commission for its refusal
to incorporate the essential facilities doctrine, and we do not intend
to suggest that the Act requires use of that doctrine\'s criteria.[^4]
But what we do say is that cost comparisons of the sort made by the
Commission, largely devoid of any interest in whether the cost
characteristics of an \"element\" render it at all unsuitable for
competitive supply, seem unlikely either to achieve the balance called
for explicitly by Justice Breyer or implicitly by the Court as a whole
in its disparagement of the Commission\'s readiness to find \"any\" cost
disparity reason enough to order unbundling. The Commission\'s addition
of a materiality notion, see Local Competition Order, 15 FCC Rcd at
3725, p 51 (finding impairment in any case where lack of access to an
element \"materially\" diminishes ability to provide services), submits
to the Court\'s ruling in a nominally quantitative sense (though the
reality of such acquiescence cannot be measured and may be belied by the
virtual identity of the old and new orders). More important, adding the
adjective \"material\" contributes nothing of any analytical or
qualitative character that would fulfill the Court\'s demand for a
standard \"rationally related to the goals of the Act.\" Iowa Utilities
Board, 525 U.S. at 388.

Because the Commission\'s concept of \"impairing\" cost disparities is
so broad and unrooted in any analysis of the competing values at stake
in implementation of the Act, we cannot uphold even the two
non-universal mandates adopted by the Commission (for circuit switches
and packet switches).

Petitioners also attack the rules on specific elements. Some of these
attacks parallel the universality and cost-disparity issues already
discussed. Petitioners\' critique as to advanced services equipment
coalesces with the issues they raise about the Line Sharing Order (see
below). This leaves two issues, neither of which we need address here.
First, petitioners attack the Commission\'s requirements of certain
information disclosure and \"loop conditioning.\" After remand, these
issues may well be moot, and if they recur will do so in a different
context. Second, petitioners argue that the \"enhanced extended link\"
condition to the exception to the switch unbundling mandate is in
reality a mandate to combine otherwise uncombined network elements, and
is therefore invalid. The Supreme Court appears to have definitely
removed the basis of this claim, holding that the Commission has
authority to require such combinations, affirmatively\--that is, not
merely as a condition to an unbundling exception. See Verizon, slip op.
at 58-68. If any comparable claim somehow survives, it too can be raised
in the remand proceedings.

III\. The Line Sharing Order

Petitioners primarily attack the Line Sharing Order on the ground that
the Commission, in ordering unbundling of the high frequency spectrum of
copper loop so as to enable CLECs to provide DSL services, completely
failed to consider the relevance of competition in broadband services
coming from cable (and to a lesser extent satellite). We agree.

The Commission\'s own findings (in a series of reports under § 706 of
the 1996 Act) repeatedly confirm both the robust competition, and the
dominance of cable, in the broadband market. The first § 706 report
found that \"\[n\]umerous companies in virtually all segments of the
communications industry are starting to deploy, or plan to deploy in the
near future, broadband to the consumer market,\" including \"cable
television companies, incumbent LECs, some utilities, and \'wireless
cable\' companies.\" In the Matter of Inquiry Concerning the Deployment
of Advanced Telecommunications Capability to All Americans in a
Reasonable and Timely Fashion, and Possible Steps to Accelerate Such
Deployment Pursuant to Section 706 of the Telecommunications Act of
1996, 14 FCC Rcd 2398, 2404 p 12 (1999). The Commission also noted that
the \"most popular offering of broadband to residential consumers is via
\'cable modems\'\....\" id. at 2426, p 54, that \"no competitor has a
large embedded base of paying residential consumers,\" id. at 2423, p
48, and that the \"record does not indicate that the consumer market is
inherently a natural monopoly,\" id. The most recent § 706 Report (not
in the record of this case) is consistent: As of the end of June 2001,
cable companies had 54% of extant high-speed lines, almost double the
28% share of asymmetric DSL. Third Report Pursuant to § 706, 2002 FCC
LEXIS 655, at p p 44, 48 (Feb. 6, 2002). Even in the Local Competition
Order on review in this case, the Commission said, \"Competitive LECs
and cable companies appear to be leading the incumbent LECs in their
deployment of advanced services.\" 15 FCC Rcd at 3835, p 307.

Relying on the Commission\'s repeated findings, petitioners argue that
it is \"antithetical to the 1996 Act\'s language and deregulatory
objectives\" to mandate unbundling in a market that \"already has
intense facilities-based competition.\" DSL Petitioners\' Br. at 3. They
note the Supreme Court\'s observation that a proper \"impairment\"
standard should be limited by the \"goals of the Act.\" Id. at 23
(quoting Iowa Utilities Board, 525 U.S. at 388).

The Commission\'s response to this argument is to say that it was
\"merely adhering\" to the letter of the statute: Thus it quotes the
instruction of § 251(d)(2)(B) that it consider whether \"failure to
provide access to such network elements would impair the ability of the
telecommunications carrier seeking access to provide the services that
it seeks to offer.\" DSL Respondent\'s Br. at 20, quoting 47 U.S.C. §
251(d)(2)(B) (emphasis added by Respondent). On this theory the
Commission believes it was justified in focusing solely on DSL because
that is what \"CLECs seek to offer when they request line sharing.\" Id.
at 21. The Commission thus appears to acknowledge that it adopted the
Line Sharing Order with indifference to petitioners\' contentions about
the state of competition in the market.

The Commission\'s inference from § 251(d)(2)(B)\'s allusion to the
services the requester \"seeks to offer\" strikes us as quite
unreasonable. See Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 842-43 (1984). As Justice Breyer\'s
separate opinion carefully explained, mandatory unbundling comes at a
cost, including disincentives to research and development by both ILECs
and CLECs and the tangled management inherent in shared use of a common
resource. Iowa Utilities Board, 525 U.S. at 428-29. And, as we said
before, the Court\'s opinion in Iowa Utilities Board, though less
explicit than Justice Breyer on the need for balance, plainly recognized
that unbundling is not an unqualified good\--thus its observation that
the Commission must \"apply some limiting standard, rationally related
to the goals of the Act,\" id. at 388, and its point that the Commission
\"cannot, consistent with the statute, blind itself to the availability
of elements outside the incumbent\'s network,\" id. at 389. In sum,
nothing in the Act appears a license to the Commission to inflict on the
economy the sort of costs noted by Justice Breyer under conditions where
it had no reason to think doing so would bring on a significant
enhancement of competition. The Commission\'s naked disregard of the
competitive context risks exactly that result.

Accordingly, the Line Sharing Order must be vacated and remanded.
Obviously any order unbundling the high frequency portion of the loop
should also not be tainted by the sort of error identified in our
discussion of the Local Competition Order and identified by petitioners
here as well.

Petitioners also claim that the Commission without explanation reversed
a prior decision that a portion of the spectrum of a loop cannot qualify
as a \"network element.\" The Commission urges that any language
suggesting such a view is explicable as simply reflecting a judgment on
technical feasibility, which it here reversed on the basis of a
reexamination of the facts. Line Sharing Order, 14 FCC Rcd at 20942-43,
p 63. We think the Commission\'s view is convincing.

Finally, petitioners attack the Commission\'s pricing rule, which
limited an ILEC\'s charges for access to the high frequency portion of
the loop to the value the ILEC \"allocated to \[asymmetric\] DSL
services when it established its interstate retail rates for those
services,\" even where this rule would reduce the charges below the
level derived from the Commission\'s general UNE pricing principles.
Line Sharing Order, 14 FCC Rcd at 20975-76, p 139. As in the case of the
element-specific claims raised in the Local Competition Order case, we
think the possible mootness, and certainty that any recurrence will be
in a different context, warrant deferring the issue to another day.

\* \* \*

We grant the petitions for review, and remand both the Line Sharing
Order and the Local Competition Order to the Commission for further
consideration in accordance with the principles outlined above.

So ordered.

[^1]: There are numerous types of DSL technology: ADSL (asymmetric DSL,
    in which upstream transmissions are much slower than downstream),
    HDSL (high-speed DSL), UDSL (universal DSL), VDSL (very-high-speed
    DSL), and RADSL (rate-adaptive DSL). See Line Sharing Order, 14 FCC
    Rcd at 20915 n.5. The Commission here and elsewhere refers to these
    technologies collectively as \"xDSL,\" the \"x\" serving as a
    generic identifier. In the interests of judicial economy, we shall
    simply use \"DSL\" as the generic term.

[^2]: The Commission\'s standard for deciding that a network element
    should be unbundled\--whether lack of access to it \"materially
    diminishes\" the requesting carrier\'s \"ability\" to provide the
    services in question\--implicitly builds in a relation to the prices
    at which CLECs get access to UNEs. (The Commission is rarely clear
    on precisely what costs are being compared, but in saying that lack
    of access to unbundled elements would cause a material increase in
    cost it often uses terms implying that the comparison is to the
    Commission-mandated price of unbundled elements, i.e., at present
    TELRIC. See, e.g., 15 FCC Rcd at 3815, p 263; id. at 3864, p 375.)
    Lack of access would not diminish the requester\'s ability at all if
    it could secure the function more cheaply on its own. Thus, the
    closer the Commission\'s pricing principle is to the low end of what
    it may lawfully set, the greater the probability that lack of access
    would cause \"material diminution.\" As a result low UNE prices
    would not only have the direct effect mentioned in the text, but
    would inherently tend to expand the sphere of these effects. As the
    \"price squeeze\" jurisprudence shows, even prices that are set
    within the band of what is lawfully permissible may have perverse
    effects, and the Commission may be obligated to consider them. Cf.
    FPC v. Conway Corp., 426 U.S. 271, 278-79 (1976); Sprint
    Communications Co. L.P. v. FCC, 274 F.3d 549, 555 (D.C. Cir.

    2001).

[^3]: Compare William J. Baumol, On the Proper Cost Tests for Natural
    Monopoly in a Multiproduct Industry, 67 Amer. Econ. Rev. 809 (1977)
    (proposing concept of \"subadditivity\" for ascertainment of natural
    monopoly), and William W. Sharkey, The Theory of Natural Monopoly
    (1982) (further development of subadditivity).

[^4]: We note that scholars have raised very serious questions about the
    wisdom of the essential facilities doctrine as a justification for
    judicial mandates of competitor access, and accompanying judicial
    price setting. See, e.g., Areeda & Hovenkamp, supra, at p 771c. But
    a doctrine that is inadequate for that purpose may nonetheless offer
    useful concepts for agency guidance when Congress has directed an
    agency to provide competitor access in a specific industry.