United States Court of Appeals

[FOR THE DISTRICT OF COLUMBIA CIRCUIT]{.smallcaps}

Argued February 2, 2000 Decided March 17, 2000

No. 99-1176

[GTE Service Corporation, et al., ]{.smallcaps}

[Petitioners]{.smallcaps}

v\.

[Federal Communications Commission and ]{.smallcaps}

[United States of America, ]{.smallcaps}

[Respondents]{.smallcaps}

[NorthPoint Communications, Inc., et al., ]{.smallcaps}

[Intervenors]{.smallcaps}

Consolidated with

99-1201

On Petitions for Review of an Order of the

Federal Communications Commission

*Mark L. Evans* argued the cause for petitioners. With him on the briefs
were *William P. Barr, M. Edward Whelan III., *

*John F. Raposa, Dan L. Poole, Robert B. McKenna, Michael K. Kellogg,
Lawrence E. Sarjeant, Linda Kent, John W. Hunter*, and *Julie E. Rones.*

*Laurence N. Bourne*, Counsel, Federal Communications Commission, argued
the cause for respondents. With him on the brief were *Joel I. Klein*,
Assistant Attorney General, United States Department of Justice,
*Catherine G. O\'Sullivan* and *Nancy C. Garrison*, Attorneys,
*Christopher J. Wright*, General Counsel, Federal Communications
Commission, and *John E. Ingle*, Deputy Associate General Counsel.

*Mark C. Rosenblum, Peter D. Keisler, James P. Young, William Single,
IV., Mark D. Schneider, Ruth M. Milkman, Robert J. Aamoth, Jonathan
Jacob Nadler, Leon M. Kestenbaum, Jay C. Keithley, H. Richard Juhnke,
Glenn B. Manishin, Christy C. Kunin, Renee R. Crittendon, Randall B.
Lowe, Eric J. Branfman, Andrew D. Lipman*, and *Rodney L. Joyce. Harold
R. Juhnke* were on the brief for intervenors AT & T Corporation, et al.
*Michael B. Fingerhut, David W. Carpenter, Jodie L. Kelley, Mark B.
Ehrlich*, and *Emily M. Williams* entered appearances.

Before: [Edwards]{.smallcaps}, *Chief Judge*, [Ginsburg]{.smallcaps} and
[Sentelle]{.smallcaps}, *Circuit Judges*.

Opinion for the Court filed by *Chief Judge* [Edwards]{.smallcaps}.

[Edwards]{.smallcaps}, *Chief Judge*: Section 251(c)(6) of the
Telecommunications Act of 1996 (the \"Act\"), 47 U.S.C. § 251(c)(6),
imposes a statutory duty on incumbent local exchange carriers (\"LECs\")
to provide physical or virtual collocation for competing providers
(\"competitors\"). The Act also requires the Federal Communications
Commission (\"FCC\" or \"Commission\") to issue implementing regulations
to fulfill the collocation mandate. *See* 47 U.S.C. § 251(d)(1). In
March 1999, in Deployment of Wireline Services Offering Advanced
Telecommunications Capability (\"Collocation Order\"), 14 FCC Rcd 4761
(1999), the FCC issued rules purporting to implement § 251(c)(6).
According to the Commission, a principal purpose of the Collocation
Order is to \"adopt \... additional measures to further facilitate the
development of competition in the advanced services market \... \[by\]
strengthen\[ing\] \... collocation rules to reduce the costs and delays
faced by competitors that seek to collocate equipment in an incumbent
LEC\'s central office.\" *Id*. at 4764 ¶ 6.

The petitioners before the court are LECs who challenge the Collocation
Order on the ground that it impermissibly imposes intrusive \"physical
collocation\" requirements on them. Section 251(c)(6) says that LECs
must provide for physical collocation of equipment \"necessary for
interconnection or access to unbundled network elements at the premises
of the local exchange carrier.\" 47 U.S.C. § 251(c)(6). The FCC has
taken the position that \"necessary\" means that \"an incumbent LEC may
not refuse to permit collocation of any equipment that is \'used or
useful\' for either interconnection or access to unbundled network
elements, regardless of other functionalities inherent in such
equipment.\" Collocation Order, 14 FCC Rcd at 4776-77 ¶ 28. Petitioners
argue that, with the adoption of this rule, the FCC seeks to require
collocation well beyond what has been authorized by Congress.
Petitioners also claim that the Collocation Order is unauthorized and
unreasonable in forcing LECs to offer competitors \"cageless
collocation,\" defining \"premises\" in § 251(c)(6) to include a LEC\'s
central office and adjacent property, allowing competitors to have too
much say over the placement of their equipment in a LEC\'s central
office, and depriving LECs of an opportunity to gain full recovery of
the initial costs of preparing collocation space for competitors.

Petitioners\' position that \"physical collocation\" under the Act is
limited to caged collocation is meritless, as is the claim that the
FCC\'s definition of \"premises\" is unduly broad. We also reject
petitioners\' challenge to the cost recovery mechanism under the
Collocation Order. We agree with petitioners, however, that the FCC\'s
interpretations of \"necessary\" and \"physical collocation\" appear to
be impermissibly broad. We therefore vacate the challenged Collocation
Order insofar as it embraces unduly broad definitions of \"necessary\"
and \"physical collocation\" and remand for further consideration by the
FCC.

**[I. Background]{.smallcaps}**

In recent years, the FCC has sought to increase competition in the
market for interstate access services, which connect long‑distance
companies with local telephone networks and subscribers. In 1992 and
1993, the Commission issued orders requiring LECs to set aside portions
of their premises for occupation and use by competitive access
providers, thus generating legal battles that have continued to the
present. *See Bell Atlantic Telephone Cos. v. FCC*, 24 F.3d 1441 (D.C.
Cir. 1994). In their initial attempts to require LECs to permit physical
collocation of competitors\' equipment on demand, the FCC relied on §
201(a) of the Communications Act of 1934, 47 U.S.C. § 201(a), which
empowers the agency to order \"physical connections\" as necessary for
the public interest. The FCC reasoned that its efforts to create a level
playing field of competition in the market for interstate access
services served the public interest. On review, however, this court
upheld a challenge to the Commission\'s physical collocation rule,
finding that nothing in the Communications Act of 1934 explicitly
authorized the FCC to order takings of LECs\' property through physical
collocation. *See id.* at 1446 (\"The Commission\'s power to order
\'physical connections,\' undoubtedly of broad scope, does not supply a
clear warrant to grant third parties a license to exclusive physical
occupation of a section of the LEC\'s central offices.\"). The court was
concerned that

*Chevron* deference to agency action that creates a broad class of
takings claims, compensable in the Court of Claims, would allow agencies
to use statutory silence or ambiguity to expose the Treasury to
liability both massive and unforeseen.

*Id.* at 1445 (citing *Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc.*, 467 U.S. 837 (1984)). Thus, absent a more definite
congressional authorization, the court was unwilling to defer to the
FCC\'s unduly broad reading of § 201(a).

The FCC responded to the court\'s ruling in *Bell Atlantic Telephone* by
adopting new rules that gave LECs the option to rely more on \"virtual
collocation\" in lieu of physical collocation. *See* Expanded
Interconnection with Local Telephone Company Facilities, Memorandum
Opinion and Order, 9 FCC Rcd 5154 (1994). Virtual collocation allows a
LEC to retain physical control of the equipment, along with the
responsibility for installing, maintaining, and repairing it. Virtual
collocation therefore minimizes the takings problem, because competitors
do not have physical access to a LEC\'s property. The LECs petitioned
for review of this order, but the issue on appeal was rendered moot with
the passage of the Telecommunications Act of 1996. The court therefore
remanded the case for reconsideration in light of 47 U.S.C. §§ 251(c)(6)
& (g), as applied after the enactment of the Telecommunications Act of
1996. *See Pacific Bell v. FCC*, 81 F.3d 1147 (D.C. Cir. 1996).

The 1996 Act completely revamped the statutory landscape by providing
explicit congressional authorization for physical collocation. Under §
251(c)(6), LECs are now required

to provide, on rates, terms, and conditions that are just, reasonable,
and nondiscriminatory, for physical collocation of equipment *necessary
for interconnection or access to unbundled network elements at the
premises of the local exchange carrier*, except that the carrier may
provide for virtual collocation if the local exchange carrier
demonstrates to the State commission that physical collocation is not
practical for technical reasons or because of space limitations.

47 U.S.C. § 251(c)(6) (emphasis added).

Armed with this explicit congressional authorization, the FCC first
adopted rules resembling earlier orders mandating collocation. *See*
Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996 (CC Docket No. 96-98), 11 FCC Rcd 15499
(\"Local Competition Order\"), *aff\'d in part and rev\'d in part*,
*Iowa Utils. Bd. v. FCC*, 120 F.3d 753 (8th Cir. 1997), *rev\'d in part
and aff\'d in part*, *AT & T Corp. v. Iowa Utils. Bd.*, 525 U.S. 366
(1999). However, under the heat of critical commentary, the Commission
decided that more was necessary \"to remove\[ \] barriers to competition
so that competing providers are able to compete effectively with
incumbent LECs and their affiliates in the provision of advanced
services.\" Collocation Order, 14 FCC Rcd at 4763 ¶ 3. After studying
the issue and reviewing comments, the FCC \"adopted several measures\"
in the Collocation Order that are designed to \"promote competition in
the advanced services market.\" *Id*. ¶ 4.

The Collocation Order obviously strengthens the Commission\'s stance on
physical collocation. First, the Order requires LECs to allow
competitors to collocate \"all equipment that is necessary for
interconnection or access to unbundled network elements, regardless of
whether such equipment includes a switching functionality, provides
enhanced service capabilities, or offers other functionalities.\" *Id*.
at 4776 ¶ 28. In particular, the Order says that \"an incumbent LEC may
not refuse to permit collocation of any equipment that is \'used or
useful\' for either interconnection or access to unbundled network
elements, regardless of other functionalities inherent in such
equipment.\" *Id*. at 4776-77 ¶ 28. Second, the Order requires LECs to
offer competitors both caged and cageless collocation. Third, the Order
requires LECs to offer collocation space in both their central offices
and in adjacent controlled environmental vaults or similar structures;
and it prohibits LECs from imposing unreasonable minimum space
requirements on collocators. Finally, the Order requires LECs to bear
the initial costs of preparing collocation space for their competitors,
as opposed to requiring the first collocator to bear the entire cost of
preparing new collocation space---and thus bear the risk of unoccupied
space---as an up-front charge. Petitioners claim that these new rules
are neither authorized by the Act nor justified by reasoned
decisionmaking.

**[II. Discussion]{.smallcaps}**

*A. Standard of Review*

The principal issue in this case is whether the Commission\'s
interpretation of § 251(c)(6) of the Telecommunications Act of 1996 can
withstand scrutiny. In particular, petitioners challenge the FCC\'s
Collocation Order on the ground that the agency\'s constructions of
\"necessary,\" \"physical collocation,\" and \"premises\" will allow
unauthorized takings of LEC property by their competitors.

As this court noted in *Bell Atlantic Telephone Companies v. FCC*, 131
F.3d 1044 (D.C. Cir. 1997),

*Chevron U.S.A., Inc. v. Natural Resources Defense Council*, 467 U.S.
837 (1984), governs review of agency interpretation of a statute which
the agency administers. Under the first step of *Chevron*, the reviewing
court \"must first exhaust the \'traditional tools of statutory
construction\' to determine whether Congress has spoken to the precise
question at issue.\" *Natural Resources Defense Council, Inc. v.
Browner*, 57 F.3d 1122, 1125 (D.C. Cir. 1995) (quoting *Chevron*, 467
U.S. at 843 n.9, 104 S. Ct. at 2782 n.9). The traditional tools include
examination of the statute\'s text, legislative history, and structure,
see *Southern California Edison Co. v. FERC*, 116 F.3d 507, 515 (D.C.
Cir. 1997); as well as its purpose, *see First Nat\'l Bank & Trust v.
National Credit Union*, 90 F.3d 525, 529-30 (D.C. Cir. 1996). This
inquiry using the traditional tools of construction may be characterized
as a search for the plain meaning of the statute. If this search yields
a clear result, then Congress has expressed its intention as to the
question, and deference is not appropriate. *See Hammontree v. NLRB*,
894 F.2d 438, 441 (D.C. Cir. 1990). If, however, \"the statute is silent
or ambiguous with respect to the specific issue,\" *Chevron*, 467 U.S.
at 843, 104 S. Ct. at 2782, Congress has not spoken clearly, and a
permissible agency interpretation of the statute merits judicial
deference. *Id*.

*Id*. at 1046-47.

There is no doubt here that Congress has delegated to the FCC the
authority to issue regulations implementing § 251(c)(6). *See* 47 U.S.C.
§ 251(d)(1). It is equally clear that, given the complexity of the task
at hand, any search for \"plain meaning\" in the statute is fruitless.
The disputed terms at issue---\"necessary,\" \"physical collocation,\"
and \"premises\"---all bear relatively clear definitions if taken out of
the context of the statutory provision in which they are found. The
problem here is that these terms are found in a *circumscribed*
statutory provision that seeks to ensure competition in areas of
advanced technology in telecommunications; *i.e.*, the statute gives
competitors access to the private property of LECs by requiring LECs to
offer physical collocation on reasonable terms, but this access is
neither open‑ended nor is it even required if not practical for
technical reasons or because of space limitations. This is hardly the
stuff of \"plain meaning.\"

Because the disputed terms in § 251(c)(6) are ambiguous in their
meanings, we are required to consider the Commission\'s interpretations.
Under the second step of *Chevron*, we will defer to the Commission\'s
interpretations if they are reasonable and consistent with the statutory
purpose. *See Troy Corp. v. Browner*, 120 F.3d 277, 285 (D.C. Cir. 1997)
(noting that an agency\'s interpretation must be \"reasonable and
consistent with the statutory purpose\"); *City of Cleveland v. U.S.
Nuclear Regulatory Comm\'n*, 68 F.3d 1361, 1367 (D.C. Cir. 1995)
(providing that an agency\'s interpretation must be \"reasonable and
consistent with the statutory scheme and legislative history\").
However, a court will not uphold an interpretation \"that diverges from
any realistic meaning of the statute.\" *Massachusetts v. Department of
Transp*., 93 F.3d 890, 893 (D.C. Cir. 1996). In this case, as will be
shown below, the FCC\'s interpretations of \"necessary\" and \"physical
collocation\" appear to diverge from any realistic meaning of the
statute, because the Commission has favored the LECs\' competitors in
ways that exceed what is \"necessary\" to achieve reasonable \"physical
collocation\" and in ways that may result in unnecessary takings of LEC
property.

Petitioners\' claim that the Collocation Order unfairly precludes LECs
from gaining full recovery of the initial costs of preparing collocation
space for competitors raises a matter that is subject to review under
the traditional \"arbitrary and capricious\" standard. As the Supreme
Court explained in *Motor Vehicle Manufacturers Ass\'n v. State Farm
Mutual Automobile Insurance Co.*, 463 U.S. 29, 43 (1983),

\[t\]he scope of review under the \"arbitrary and capricious\" standard
is narrow and a court is not to substitute its judgment for that of the
agency. Nevertheless, the agency must examine the relevant data and
articulate a satisfactory explanation for its action including a
\"rational connection between the facts found and the choice made.\"
*Burlington Truck Lines, Inc. v. United States*, 371 U.S. 156, 168
(1962). In reviewing that explanation, we must \"consider whether the
decision was based on a consideration of the relevant factors and
whether there has been a clear error of judgment.\" *Bowman
Transportation, Inc. v. Arkansas-Best Freight System, Inc*., \[419 U.S.
281, 285 (1974)\]; *Citizens to Preserve Overton Park v. Volpe*, \[401
U.S. 402, 416 (1971)\]. Normally, an agency rule would be arbitrary and
capricious if the agency has relied on factors which Congress has not
intended it to consider, entirely failed to consider an important aspect
of the problem, offered an explanation for its decision that runs
counter to the evidence before the agency, or is so implausible that it
could not be ascribed to a difference in view or the product of agency
expertise. The reviewing court should not attempt itself to make up for
such deficiencies; we may not supply a reasoned basis for the agency\'s
action that the agency itself has not given. *SEC v. Chenery Corp*., 332
U.S. 194, 196 (1947). We will, however, \"uphold a decision of less than
ideal clarity if the agency\'s path may reasonably be discerned.\"
*Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc.*,
\[419 U.S. at 286\]. See also *Camp v. Pitts*, 411 U.S. 138, 142-143
(1973) (per curiam).

*Id*.; *see also Communications Satellite Corp. v. FCC*, 836 F.2d 623
(1988) (quoting *Motor Vehicle Mfrs. Ass\'ns*, 463 U.S. at 43). As we
indicate below, the cost allocation rules under the Collocation Order
easily survive arbitrary and capricious review. There is a discernible,
reasoned basis for the agency\'s action, and the decision reached by the
agency does not reflect a clear error of judgment.

We now turn to a consideration of the statutory interpretation
questions, focused on the meaning of § 251(c)(6).

*B. \"Necessary\"*

The first question in this case centers on the meaning of \"necessary\"
under 47 U.S.C. § 251(c)(6). As noted above, the statute requires LECs
to provide physical collocation of equipment as \"necessary for
interconnection or access to unbundled network elements at the premises
of the local exchange carrier.\" This statutory provision is, at first
blush, fairly straightforward. Something is *necessary* if it is
*required* or *indispensable* to achieve a certain result. Thus,
competitors who are protected by the Act have a right to collocate any
equipment that is *required* or *indispensable* to achieve
interconnection or access to unbundled network elements at the premises
of the local exchange carrier. In the Collocation Order, however, the
FCC appears to ignore the statutory reference to \"necessary\" in
requiring LECs to collocate any competitors\' equipment that is \"
\'used or useful\' for either interconnection or access to unbundled
network elements, regardless of other functionalities inherent in such
equipment.\" 14 FCC Rcd at 4776-77 ¶ 28. Petitioners argue that by
interpreting \"necessary\" as \"used or useful\" and by permitting
competitors to collocate equipment that may do more than what is
required to achieve interconnection or access, the FCC\'s Collocation
Order impermissibly invites unwarranted intrusion upon LECs\' property
rights. The petitioners\' argument has merit, for the Collocation Order
as presently written seems overly broad and disconnected from the
statutory purpose enunciated in § 251(c)(6).

The Collocation Order makes two critical points in interpreting
\"necessary\" under § 251(c)(6): First, the Order says that \"an
incumbent LEC may not refuse to permit collocation of any equipment that
is \'used or useful\' for either interconnection or access to unbundled
network elements, *regardless of other functionalities inherent in such
equipment*.\" *Id*. at 4776-77 ¶ 28 (emphasis added). Second, the Order
makes it clear that LECs must allow competitors to collocate \"all
equipment that is necessary for interconnection or access to unbundled
network elements, *regardless of whether such equipment includes a
switching functionality, provides enhanced services capabilities, or
offers other functionalities*.\" *Id*. at 4776 ¶ 28 (emphasis added). In
other words, the Collocation Order appears to permit competitors to
collocate equipment that may do more than what is required to achieve
interconnection or access.

Petitioners\' concerns with the breadth of the Collocation Order are not
idle. The Supreme Court recently had occasion to address a similar
problem in reviewing a challenge to the FCC\'s interpretation of 47
U.S.C. § 251(d)(2), which provides, in relevant part, that

\[i\]n determining what network elements should be made available for
purposes of subsection (c)(3) of this section, the Commission shall
consider \... whether \... access to such network elements as are
proprietary in nature is necessary.

47 U.S.C. § 251(d)(2). In *AT & T Corp. v. Iowa Utilities Board*, 525
U.S. 366 (1999), the Court faced a controversy over what \"necessary\"
meant in the context of § 251(d)(2). *See id*. at 388. The Court
rejected the FCC\'s formulation, concluding that \"the Act requires the
FCC to apply *some* limiting standard, rationally related to the goals
of the Act, which it has simply failed to do.\" *Id*. The Court noted
that

the Commission announced that it would regard the \'necessary\' standard
as having been met, regardless of whether \'requesting carriers can
obtain the requested proprietary element from a source other than the
incumbent,\' since \'\[r\]equiring new entrants to duplicate
unnecessarily even a part of the incumbent\'s network could generate
delay and higher costs for new entrants, and thereby impede entry by
competing local providers and delay competition, contrary to the goals
of the 1996 Act.\' \... The Commission cannot, consistent with the
statute, blind itself to the availability of elements outside the
incumbent\'s network. That failing alone would require the Commission\'s
rule to be set aside. In addition, however, the Commission\'s assumption
that *any* increase in cost (or decrease in quality) imposed by denial
of a network element renders access to that element \'necessary\' \...
is simply not in accord with the ordinary and fair meaning of \[the
statute\'s\] terms.

*Id*. at 389-90.

As is clear from the Court\'s judgment in *Iowa Utilities Board*, a
statutory reference to \"necessary\" must be construed in a fashion that
is consistent with the ordinary and fair meaning of the word, *i.e.*, so
as to limit \"necessary\" to that which is required to achieve a desired
goal. The Court\'s admonition seems particularly relevant here where a
broader construction of \"necessary\" under § 251(c)(6) might result in
an *unnecessary* taking of private property.

One clear example of a problem that is raised by the breadth of the
Collocation Order\'s interpretation of \"necessary\" is seen in the
Commission\'s rule requiring LECs to allow collocating competitors to
interconnect their equipment with other collocating carriers. *See*
Collocation Order, 14 FCC Rcd at 4780 ¶ 33 (\"We see no reason for the
incumbent LEC to refuse to permit the collocating carriers to
cross‑connect their equipment, subject only to the same reasonable
safety requirements that the incumbent LEC imposes on its own
equipment.\"). The obvious problem with this rule is that the
cross‑connects requirement imposes an obligation on LECs that has no
apparent basis in the statute. Section 251(c)(6) is focused solely on
connecting new competitors to LECs\' networks. In fact, the Commission
does not even attempt to show that cross‑connects are in any sense
\"necessary for interconnection or access to unbundled network
elements.\" Rather, the Commission is almost cavalier in suggesting that
cross‑connects are efficient and therefore justified under § 251(c)(6).
This will not do. The statute requires LECs to provide physical
collocation of equipment as \"necessary for interconnection or access to
unbundled network elements at the premises of the local exchange
carrier,\" and nothing more. As the Supreme Court made clear in *Iowa
Utilities Board*, the FCC cannot reasonably blind itself to statutory
terms in the name of efficiency. *Chevron* deference does not bow to
such unbridled agency action.

There are other examples, as well, to demonstrate that the FCC\'s
interpretation of \"necessary\" under § 251(c)(6) is impermissibly
broad. At oral argument, counsel was asked whether, under the
Collocation Order, a LEC would be required to afford collocation of a
competitor\'s equipment that included *unnecessary* multi‑purpose
features, such as enhancements that might facilitate payroll or data
collection features. In other words, must a LEC allow collocation of
equipment that is not truly \"necessary\" for a competitor\'s
\"interconnection or access to unbundled network elements\"? Counsel
could offer no satisfactory answer to the question. Counsel seemed to
recognize that to require collocation on such broad terms would not
really square with the terms of § 251(c)(6); yet, the literal terms of
the Collocation Order seem to embrace any and all equipment that is
otherwise necessary without regard to whether such equipment
unnecessarily *\"includes a switching functionality, provides enhanced
service capabilities, or offers other functionalities*.\" Collocation
Order, 14 FCC Rcd at 4776 ¶ 28 (emphasis added). The FCC\'s Collocation
Order seeks to justify this broad rule by contending that \"competitive
telecommunications providers must be permitted to collocate integrated
equipment that lowers costs and increases the services they can offer
their customers.\" *Id*. at 4777-78 ¶ 29. It was precisely this kind of
rationale, based on presumed cost savings, that the Supreme Court flatly
rejected in *Iowa Utilities Board. See* 525 U.S. at 389-90. In short,
the FCC\'s interpretation of \"necessary\" under § 251(c)(6) goes too
far and thus \"diverges from any realistic meaning of the statute.\"
*Massachusetts v. Department of Transp*., 93 F.3d at 893.

Because, in some significant respects, the FCC\'s current definition of
\"necessary\" finds no support in the Act, we vacate the offending
portions of the Collocation Order and remand the case to the agency for
further consideration. We do not mean to vacate the Collocation Order to
the extent that it merely requires LECs to provide collocation of
competitors\' equipment that is directly related to and thus necessary,
required, or indispensable to \"interconnection or access to unbundled
network elements.\" Anything beyond this, however, demands a better
explanation from the FCC, for the current rules under the Collocation
Order make no sense in light of what the statute itself says. And the
Commission must operate within the limits of \"the ordinary and fair
meaning of \[the statute\'s\] terms.\" *Iowa Utilities Bd.,* 525 U.S. at
390.

*C. \"Physical Collocation\"* and *\"Premises*\"

Petitioners also challenge the FCC\'s interpretations of \"physical
collocation\" and \"premises\" under § 251(c)(6). The Collocation Order
requires LECs to make \"cageless\" collocation available to requesting
competitors. Absent problems related to technical feasibility or
specific security concerns, new competitors are entitled \"to collocate
in any unused space in the incumbent LEC\'s premises.\" Collocation
Order, 14 FCC Rcd at 4785 ¶ 42. And to protect against bogus claims by
LECs that they have run out of space, the Collocation Order provides
that, when space is legitimately exhausted, LECs must \"permit
collocation in adjacent controlled environmental vaults or similar
structures to the extent technically feasible.\" *Id*. at 4786 ¶ 44.

Petitioners claim that the FCC lacks the authority to promulgate such
sweeping rules in support of cageless collocation, because \"\[a\]s the
language, structure, and history of § 251(c)(6) reflect, Congress
understood \'physical collocation\' to mean the installation of a
competitor\'s equipment in an area that is *physically separate* from
the incumbent\'s own facilities.\" Br. of Petitioners at 24. Petitioners
also contend that Congress intended collocation to be limited to
available space within a LEC\'s central office, and not to extend to
anywhere on a LEC\'s property beyond the confines of the central office.

Although petitioners raise some telling points, their arguments go too
far. Section 251(c)(6) merely provides that incumbents have a duty to
provide \"for physical collocation of equipment necessary for
interconnection or access to unbundled network elements *at the premises
of the local exchange carrier.*\" 47 U.S.C. § 251(c)(6). Congress chose
not to define either \"premises\" or \"physical collocation,\" and, at
least in this context, the meaning of these terms is far from
self‑evident. Moreover, nothing in the statute can be read to *require*
caged collocation, so the FCC surely was free to promulgate reasonable
rules implementing physical collocation under a cageless regime.

The FCC has satisfied its burden under step two of *Chevron* in
interpreting § 251(c)(6) as requiring cageless collocation. The
Collocation Order points out that caged collocation results in the
\"inefficient use of the limited space in a LEC premises,\" Collocation
Order, 14 FCC Rcd at 4784 ¶ 42. A cageless regime, the Order notes,
ensures that LECs do not place unreasonable minimum space requirements
on collocating competitors; the rule thus has the effect of reducing the
cost of collocation and reducing the likelihood of premature space
exhaustion. *See id*. at 4785-86 ¶ 43. We find that the agency\'s
interpretation in support of cageless collocation is reasonable and
consistent with the statutory purpose of promoting competition, without
raising the threat of unnecessary takings of LEC property. Indeed, on
the record at hand, it is hardly surprising that the FCC opted to
prohibit LECs from forcing competitors to build cages, particularly
given the alternative means available to LECs to ensure the security of
their premises.

We also reject petitioners\' claim that the FCC lacks authority to
require LECs to make available space beyond their central offices for
the collocation of competitors\' equipment. The Collocation Order simply
requires \"incumbent LECs, when space is legitimately exhausted in a
particular LEC premises, to permit collocation in adjacent controlled
environmental vaults or similar structures to the extent technically
feasible.\" *Id*. at 4786 ¶ 44. The rule seeks to address the \"issue of
space exhaustion by ensuring that competitive carriers can compete with
the incumbent, even when there is no space inside the LEC\'s premises.\"
*Id*. The rule clearly furthers the purpose underlying § 251(c)(6). The
rule is also eminently reasonable: adjacent collocation is required only
when space in the central offices is exhausted; adjacent collocation may
occur only to the extent that it is technically feasible; adjacent
collocation is subject to state regulations over zoning, design, and
construction parameters; and adjacent collocation is subject to
reasonable safety and maintenance requirements. And petitioners can find
no argument to show that this rule is impermissible under § 251(c)(6),
for the simple reason that the disputed \"adjacent\" properties all are
on the LECs\' \"premises,\" which is all that is required by the
statute.

In sum, the FCC\'s regulations forbidding LECs from requiring
competitors to \"cage\" their equipment and requiring LECs, under
limited circumstances, to use adjacent property for the collocation of
competitors\' equipment are permissible and reasonable under step two of
*Chevron*. This is not the end of the inquiry, however, regarding
petitioners\' challenge to the FCC\'s interpretation of \"physical
collocation\" under § 251(c)(6).

Petitioners argue that, even conceding the validity of cageless
collocation and an interpretation of \"premises\" that includes both the
central office and adjacent property, the Collocation Order still goes
too far in giving competitors rights well beyond what is reasonably
required by § 251(c)(6). In particular, petitioners point to paragraph
42 of the Collocation Order, which states, in part, that LECs

*must* give competitors the option of collocating equipment *in any
unused space* within the incumbent\'s premises, to the extent
technically feasible, and *may not* require competitors to collocate in
a room or isolated space separate from the incumbent\'s own equipment.

*Id*. at 4785 ¶ 42 (emphases added); *see also* Reply Br. at 16
(complaining about paragraph 42). The Order acknowledges that a LEC
\"may take reasonable steps to protect its own equipment, such as
enclosing the equipment in its own cage,\" *id*., but this gloss does
not save the rest of the paragraph.

The FCC offers no good reason to explain why a competitor, as opposed to
the LEC, should choose where to establish collocation on the LEC\'s
property; nor is there any good explanation of why LECs are forbidden
from requiring competitors to use separate entrances to access their own
equipment; nor is there any reasonable justification for the rule
prohibiting LECs from requiring competitors to use separate or isolated
rooms or floors. It is one thing to say that LECs are forbidden from
imposing unreasonable minimum space requirements on competitors; it is
quite another thing, however, to say that competitors, over the
objection of LEC property owners, are free to pick and choose preferred
space on the LECs\' premises, subject only to technical feasibility.
There is nothing in § 251(c)(6) that endorses this approach. The statute
requires only that LECs reasonably provide space for \"physical
collocation of equipment necessary for *interconnection or access to
unbundled network elements at the premises of the local exchange
carrier*,\" nothing more.

The sweeping language in paragraph 42 of the Collocation Order appears
to favor the LECs\' competitors in ways that exceed what is
\"necessary\" to achieve reasonable \"physical collocation\" and in ways
that may result in unnecessary takings of LEC property. Once again we
find that the FCC\'s interpretation of § 251(c)(6) goes too far and thus
\"diverges from any realistic meaning of the statute.\" *Massachusetts
v. Department of Transp*., 93 F.3d at 893.

The Collocation Order again suggests that there may be cost savings that
will flow from the enunciated approach. *See* Collocation Order, 14 FCC
Rcd at 4785 ¶ 42. This is a weak claim. First, there is no explanation
from the FCC as to why this would be so. It is not intuitive that all of
what is required by paragraph 42 of the Collocation Order will support a
decrease in the cost of collocation and an increase in the amount of
available collocation space, as suggested by the FCC. *See id.* And
merely saying it does not make it so. Second, and more importantly, as
noted by the Court in *Iowa Utilities Board*, \"delay and higher costs
for new entrants \... \[that may\] impede entry by competing local
providers and delay competition\" cannot be used by the FCC to overcome
statutory terms in the Telecommunications Act of 1996. 525 U.S. at
389-90.

We therefore vacate the Collocation Order insofar as it embraces the
aforecited sweeping rules on physical collocation in paragraph 42. On
remand, the FCC will have an opportunity to refine its regulatory
requirements to tie the rules to the statutory standard, which only
mandates physical collocation as \"necessary for interconnection or
access to unbundled network elements at the premises of the local
exchange carrier.\" 47 U.S.C. § 251(c)(6). Even counsel for the
Commission seemed unwilling to embrace an expansive view of paragraph
42: He suggested that LECs should be allowed to choose the collocation
space; he also suggested that the LECs should be allowed to segregate
collocation space from the rest of a LEC\'s property. If counsel\'s
interpretation is correct, the FCC must make that clear. In any event,
paragraph 42, as presently written, does not withstand scrutiny under
step two of *Chevron*.

*D. The FCC\'s Cost Allocation Rule*

The final issue before the court is petitioners\' challenge to the
FCC\'s cost allocation rule. The Collocation Order provides that LECs

must allocate space preparation, security measures, and other
collocation charges on a pro‑rated basis so the first collocator in a
particular incumbent premises will not be responsible for the entire
cost of site preparation\.... In order to ensure that the first entrant
into an incumbent\'s premises does not bear the entire cost of site
preparation, the incumbent must develop a system of partitioning the
cost by comparing, for example, the amount of conditioned space actually
occupied by the new entrant with the overall space conditioning
expenses.

Collocation Order, 14 FCC Rcd at 4789 ¶ 51. State commissions are
charged to oversee this process \"to ensure that incumbent LECs properly
allocate site preparation costs among new entrants.\" *Id*. at 4790 ¶
51.

Petitioners claim that the new rule is arbitrary and capricious, because
it forces LECs to bear the risk of unoccupied space. On this score,
petitioners argue that \"\[i\]t is bad enough that the incumbent must
prepare space so that its competitors can take its property; it is
beyond the pale that the Commission would make incumbents pay to do
so.\" Br. of Petitioners at 32. This argument is specious.

The approach adopted by the Commission is fully justified as a
reasonable way to ensure that LECs do not impose prohibitive
requirements on new competitors and thus kill competition before it ever
gets started. As the Government pointed out in its brief in support of
the FCC,

new entrants asserted that incumbent LEC pricing practices with respect
to the preparation of collocation space acted as an unreasonable barrier
to competitive entry. In particular, they assailed the practice of many
\[LECs\] of charging the first collocator up front for the entire cost
of preparing new collocation space (*e.g.*, air conditioning and power
generation upgrades), even if that collocator was only going to use a
small portion of the available central office space.

*See* Br. of Respondents at 16. Petitioners do not seriously challenge
this assertion.

Petitioners nonetheless contend that the Commission\'s cost allocation
rules fail to give them any reasonable mechanism to recover their costs
for space that is not fully or permanently occupied. Petitioners\'
complaints are based, however, upon an apparent misreading of the
Collocation Order. The Order does not define the contours of a recovery
mechanism, but it clearly does not foreclose mechanisms for the recovery
of LECs\' prudently incurred costs. Rather, the Order simply notes that
state commissions are charged with the responsibility of
\"determin\[ing\] the proper pricing methodology,\" which undoubtedly
may include recovery mechanisms for legitimate costs. Collocation Order,
14 FCC Rcd at 4789-90 ¶ 51; *see also* Br. for Respondents at 51
(\"\[T\]he *Order*, fairly read, contemplates mechanisms for the
recovery of \[a LEC\'s\] prudently incurred costs.\"). The FCC\'s cost
allocation rule thus withstands judicial scrutiny, because it is neither
arbitrary nor capricious.

**[III. Conclusion]{.smallcaps}**

Consistent with the foregoing opinion, we grant the petitions for review
in part and hereby vacate the challenged Collocation Order insofar as it
embraces unduly broad definitions of \"necessary\" and \"physical
collocation.\" The case will be remanded for further consideration by
the FCC with respect to these two points. On all other points, the
petition for review is denied.