Opinion ID: 785238
Heading Depth: 3
Heading Rank: 3

Heading: The Commission's definition of impairment

Text: 52 The Commission claims that no party in this litigation has challenged the concept embodied in its new interpretation of impairment. All the disputes, it says, are about the proper implementation of that standard. FCC Br. at 18. Not exactly. For example, although the ILEC petitioners' objections to the Commission's mass market switching provisions are all within the framework of the Commission's subdelegation scheme, a number of them clearly go to the character of the impairment standard embodied in that scheme. 53 As a general matter the ILECs argue the Commission's impairment standard is so open-ended that it imposes no meaningful constraints on unbundling, and would be unlawful even if applied by the FCC itself. ILEC Br. at 28; see also Separate Statement of Commissioner Kathleen Q. Abernathy Approving in Part and Dissenting in Part, FCC 03-36 at 6-7 & n. 16 (claiming that the Commission's multifactor test is no different from the totality-of-the-circumstances approach struck down in USTA I ). More specifically, the ILECs claim that the Commission's unbundling test unlawfully permits states to consider as a potential source of impairment retail rates that are held below cost by state regulation against the ILECs' will, and unlawfully precludes consideration of intermodal competition when determining whether a market is suitable for competitive supply. 54 On the general point about the open-endedness of the Commission's standard, we observe that the Order's interpretation of impairment is an improvement over the Commission's past efforts in that, for the most part, the Commission explicitly and plausibly connects factors to consider in the impairment inquiry to natural monopoly characteristics (declining average costs throughout the range of the relevant market), see Order ¶¶ 75-76 & nn.245, 256, 258-59, ¶ 87 & n.283, or at least connects them (in logic that the ILECs do not seem to contest) to other structural impediments to competitive supply. These barriers include sunk costs (Order ¶ 75 & n.244, ¶¶ 76, 80, 86, 88), ILEC absolute cost advantages (Order ¶ 75 & n.247, ¶ 90 & n.302), first-mover advantages (Order ¶ 75 & n.249, ¶ 89), and operational barriers to entry within the sole or primary control of the ILEC (Order ¶ 91). In contrast to the First Report and Order and the Third Report and Order, the Commission has clarified that only costs related to structural impediments to competition are relevant to the impairment analysis. 55 In light of our remand, this is not the occasion for any review of the Commission's impairment standard as a general matter; it finds concrete meaning only in its application, and only in that context is it readily justiciable. A few general observations are pertinent, however. 56 Relation of impairment to the at a minimum clause. We note that there are at least two ways in which the Commission could have accommodated our ruling in USTA I that its impairment rule take into account not only the benefits but also the costs of unbundling (such as discouragement of investment in innovation), in order that its standard be rationally related to the goals of the Act. See USTA I, 290 F.3d at 428. One way would be to craft a standard of impairment that built in such a balance, as for example by hewing rather closely to natural monopoly features. The other is to use a looser concept of impairment, with the costs of unbundling brought into the analysis under § 251(d)(2)'s at a minimum language. The Commission has chosen the latter, and we cannot fault it for doing so. This is especially true as the statutory structure suggests that impair must reach a bit beyond natural monopoly. While for proprietary network elements the statute mandates a decision whether they are necessary, § 251(d)(1)(A), for non-proprietary ones it requires a decision whether their absence would impair the requester's provision of telecommunications service, § 251(d)(1)(B). Thus, in principle, there is no statutory offense in the Commission's decision to adopt a standard that treats impairment as a continuous rather than as a dichotomous variable, and potentially reaches beyond natural monopoly, but then to examine the full context before ordering unbundling. 57 That said, we do note that in at least one important respect the Commission's definition of impairment is vague almost to the point of being empty. The touchstone of the Commission's impairment analysis is whether the enumerated operational and entry barriers make entry into a market uneconomic. Order ¶ 84. Uneconomic by whom? By any CLEC, no matter how inefficient? By an average or representative CLEC? By the most efficient existing CLEC? By a hypothetical CLEC that used the most efficient telecommunications technology currently available, the standard that is built into TELRIC? Compare 47 CFR § 51.505(b)(1). We need not resolve the significance of this uncertainty, but we highlight it because we suspect that the issue of whether the standard is too open-ended is likely to arise again. 58 Intermodal alternatives. As for the ILECs' claim that the Commission's impairment standard unlawfully excludes consideration of intermodal alternatives, we observe that the Commission expressly stated that such alternatives are to be considered when evaluating impairment. Order ¶¶ 97-98, 443. Whether the weight the FCC assigns to this factor is reasonable in a given context is an question that we need not decide, except insofar as we reaffirm USTA I 's holding that the Commission cannot ignore intermodal alternatives. 290 F.3d at 429. 59 Impairment in markets where state regulation holds rates below historic costs. In the name of universal service, state regulators have commonly employed cross-subsidies, tilting rate ceilings so that revenues from business and urban customers subsidize residential and rural ones. USTA I, 290 F.3d at 422. On remand from our decision in USTA I, the Commission decided to consider regulated below-cost retail rates as a factor that may impair CLECs in competing for mass market customers. See Order ¶ 518. The ILECs object strenuously, and it appears virtually certain that the issue will recur on remand. 60 The Commission's brief treatment of the issue makes no attempt to connect this barrier to entry either with structural features that would make competitive supply wasteful or with any other purposes of the Act (other than, implicitly, the purpose of generating competition, no matter how synthetic). The Commission rightly says that if prevailing rates are too low to elicit CLEC entry even with the benefit of UNEs, the unbundling mandate will have no consequences. True enough. But it is no defense of a rule to say that it is harmless in those cases where it has no effect at all; that presumably is true even of the most absurd rule. 61 The interesting case is the one where TELRIC rates are so low that unbundling does elicit CLEC entry, enabling CLECs to cut further into ILEC revenues in areas where the ILECs' service is mandated by state law — and mandated to be offered at artificially low rates funded by ILECs' supracompetitive profits in other areas. If the scheme of the Act is successful, of course, the very premise of these below-cost rate ceilings will be undermined, as those supracompetitive profits will be eroded by Act-induced competition. In competitive markets, an ILEC can't be used as a piñnata. The Commission has said nothing to address these obvious implications, or otherwise to locate its treatment of the issue in any purposeful reading of the Act. 62 We recognize, of course, that the historic accounting costs relied upon by state regulators are, like TELRIC itself, an artificial construct that may not closely track true economic cost. But that is no justification for the Commission's refusal to evaluate the probable consequences of its approach, and to adopt, in the light of those estimations, a policy that it can reasonably say advances the goals of the Act. 63