Opinion ID: 3024925
Heading Depth: 6
Heading Rank: 2

Heading: Use of a Forward-looking Methodology

Text: The petitioners contend that the FCC's use of its forward-looking TELRIC methodology, which denies the ILECs recovery of their historical costs, is contrary to the express terms of the Act and is unreasonable. The petitioners state that the term cost plainly refers to historical cost and that the juxtaposition of cost in § 252(d)(1)(A)(i) with profit in § 252(d)(1)(B) confirms this. They refer to the discussion of profit in paragraph 699 of the First Report and Order as support for their proposition that if profit must be read in an accounting sense, then so too must cost. In addition, they assert the FCC failed to provide an adequate explanation for its rejection of historical costs and that an agency is not allowed to change ratemaking methodologies without cogently explaining why the change is being made. The respondents argue the term cost is an elastic term that can be construed to mean either historical or forward-looking costs and that the FCC's interpretation of cost as forward-looking is reasonable. They clarify the discussion in the First Report and Order regarding profit. They explain that the FCC found that a normal profit, which TELRIC is designed to yield, represents a reasonable profit within the meaning of the statute and that the FCC has not construed profit to mean accounting profit. The respondents also argue the FCC explained in detail its decision to use forward-looking costs and that the decision was reasonable based on the new competitive objectives of the 1996 Act. The intervenors agree with the respondents that the term cost imposes no clear limits on the FCC's authority to establish a ratemaking methodology, and according to their argument, it is in these circumstances that an agency is entitled to deference. We respectfully disagree with the petitioners' contention that cost, as it is used in the statute, means historical cost. The statute simply states that rates shall be based on the cost . . . of providing the interconnection or network element. 47 U.S.C. § 252(d)(1)(A). We conclude the term cost, as it is used in the statute, is ambiguous, 9 and Congress has not spoken directly on the meaning of the word in this context. We agree with the assessment that the word 'cost' is a chameleon, capable of taking on different meanings, and shades of meaning, depending on the subject matter and the circumstances of each particular usage. Strickland v. Commissioner, Maine Dept. of Human Servs., 48 F.3d 12, 19 (1st Cir. 1995), cert. denied, 516 U.S. 850 (1995). The FCC has the authority to make rules to fill any gap in the Act left by Congress, provided the agency's construction of the statute is reasonable. See Chevron, 467 U.S. at 843. Likewise, Congress is well aware that the ambiguities it chooses to produce in a statute will be resolved by the implementing agency. AT & T Corp., 525 U.S. at 397 (citation to Chevron omitted). Forward-looking costs have been recognized as promoting a competitive environment which is one of the stated purposes of the Act. The Seventh Circuit, for example, explained, [I]t is current and anticipated cost, rather than historical cost that is relevant to business decisions to enter markets . . . historical costs associated with the plant already in place are essentially irrelevant to this decision since those costs are 'sunk' and unavoidable and are unaffected by the new production decision. MCI Communications v. American Tel. & Tel. Co., 708 F.2d 1081, 111617 (7th Cir. 1983), cert. denied, 464 U.S. 891 (1983). Here, the FCC's use of a forward-looking cost methodology was reasonable. The FCC sought comment on the use of forward-looking costs and concluded that forward-looking costs would best ensure efficient investment decisions and competitive entry. See First Report and Order ¶ 705. It is apparent that the FCC explained in detail its reason for selecting a forward-looking cost methodology to implement the new competitive goals of the Act, and any past rejection of forward-looking methodologies was made in a monopoly, rather than a competitive, environment. See First Report and Order ¶¶ 618-711. 10 Additionally, we are unpersuaded by the petitioners' discussion of the juxtaposition of the word profit with cost in the statute. The FCC did not interpret profit as accounting5 profit as the petitioners contend. The First Report and Order discusses only two types of profit: economic6 and normal7. See First Report and Order 5 Accounting profit equals the difference between total revenue and explicit costs. Explicit costs are those costs incurred when a monetary payment is made. Accounting profit is typically higher than economic profit because accounting profit only subtracts explicit costs rather than the total opportunity costs. See ROGER A. ARNOLD, ECONOMICS 484-85 (2d ed. 1992). 6 Economic profit equals the difference between total revenue and total opportunity cost, including both explicit and implicit costs. Implicit costs represent the value of resources used for which no monetary payment is made. See id. Economic profit is also referred to as supranormal profit. See First Report and Order ¶ 699. 7 Normal profit is achieved when a company earns revenue that is equal to its total opportunity costs. This is the level of profit needed for a company to cover all of its opportunity costs. Normal profit is the same as zero economic profit. See ARNOLD, supra note 5, at 485. 11 ¶ 699. The FCC interpreted the word profit in the statute to mean normal profit. The FCC found that TELRIC provides for a normal profit and that level of profit is reasonable within the meaning of the statute. Section 252(d)(1)(B) states only that the rates paid for either interconnection or furnishing unbundled access may include a reasonable profit. The use of the word may indicates that the inclusion of a reasonable profit is not mandatory but permitted. Additionally, nothing in the phrase may include a reasonable profit suggests cost must mean historical costs. A profit can be made whether a historical cost or forward-looking cost methodology is used. We reiterate that a forward-looking cost calculation methodology that is based on the incremental costs that an ILEC actually incurs or will incur in providing the interconnection to its network or the unbundled access to its specific network elements requested by a competitor will produce rates that comply with the statutory requirement of § 252(d)(1) that an ILEC recover its cost of providing the shared items.