Opinion ID: 618656
Heading Depth: 2
Heading Rank: 2

Heading: Principles Governing Compensation Rates

Text: The 1996 Act also established principles for determining the rates that incumbent carriers can charge to competitors for use of the incumbents' equipment and networks. Historically, telephone companies had been regulated as monopolistic public utilities. Verizon, 535 U.S. at 477, 122 S.Ct. 1646. In order to prevent monopoly power from leading to exorbitant prices, legislatures and administrative agencies became involved in setting the rates utilities could charge consumers, both at the wholesale and retail levels. Id. at 477-78, 122 S.Ct. 1646. Regulation of retail prices focused on setting just and reasonable rates, balancing the utility provider's interest in a fair return on investment against the public's interest in a fair price for services. See id. at 480-81, 122 S.Ct. 1646. Put more bluntly, [t]he traditional regulatory notion of the `just and reasonable' rate was aimed at navigating the straits between gouging utility customers and confiscating utility property. Id. at 481, 122 S.Ct. 1646 (citing Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 88 L.Ed. 333 (1944)). However, determining effective standards for such a balancing testwith the vague, amorphous goal of achieving just and reasonable rates and a balance between the interests of the utility and those of consumersproved elusive. Over the years, the Supreme Court applied various tests and standards to determine just and reasonable pricesconcepts such as the fair-value test, the prudent-investment rule, and price caps. See Verizon, 535 U.S. at 481-88, 122 S.Ct. 1646. The constant underlying those standards was the idea that calculating the utility's cost and then allowing a fair rate of return on it was a sensible way to identify a range of rates that would be just and reasonable to investors and ratepayers. See id. at 487-88, 122 S.Ct. 1646. Under this rate-of-return model, a utility had a strong incentive to inflate its costs and to make costly but unnecessary investments, in order to raise its rate base and thus increase its incomes. See id. at 488, 122 S.Ct. 1646. The Telecommunications Act of 1996, however, appears to be an explicit disavowal of this rate-of-return model. Verizon, 535 U.S. at 489, 122 S.Ct. 1646. Under the Act, Congress called for rate making different from any historical practice, to achieve the entirely new objective of uprooting the monopolies that traditional rate-based methods had perpetuated.... in favor of novel ratesetting designed to give aspiring competitors every possible incentive to enter local retail telephone markets, short of confiscating the incumbents' property. Id. at 488-89, 122 S.Ct. 1646. The Act does retain references to the goal of achieving just and reasonable and nondiscriminatory rates. See 47 U.S.C. § 252(d)(1) (providing that [d]eterminations by a State commission of the just and reasonable rate for the inter-connection of facilities and equipment shall be nondiscriminatory and based on the cost ... of providing the interconnection or network element, and may include a reasonable profit). However, the Act is radically unlike all previous statutes in providing that rates be set `without reference to a rate-of-return or other rate-based proceeding.' Verizon, 535 U.S. at 489, 122 S.Ct. 1646 (quoting 47 U.S.C. § 252(d)(1)(A)(i)). Now prohibited from depending on rate-of-return or any other rate-based method of setting prices, the Federal Communications Commission (FCC) chose instead to treat cost for purposes of § 252(d)(1)(A)(i) as forward-looking economic cost, based on the total element long-run incremental cost (TELRIC) of each element and a reasonable allocation of forward-looking common costs (for those costs that cannot be attributed directly to individual elements). Verizon, 535 U.S. at 495, 122 S.Ct. 1646 (quoting 47 C.F.R. § 51.505). The FCC further specified that TELRIC itself should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration, given the existing location of the [ILEC's] wire centers. 47 C.F.R. § 51.505(b)(1). Therefore, the Act still requires state commissions to determine just and reasonable rates for interconnection agreements. 47 U.S.C. § 252(d)(1). However, the Act does not stop there. It further specifies how state commissions must determine such just and reasonable rates. Such rates shall be based on the cost of providing the individual network elements, and this cost shall in turn be determined without reference to traditional rate-of-return or rate-based methods. Id. § 252(d)(1)(A)(i). Exercising its remaining discretion within these constraints, see Verizon, 535 U.S. at 495, 122 S.Ct. 1646, the FCC further defined this cost as forward-looking, and provided that the cost shall be determined through the TELRIC methodology, which assumes a forward-looking cost over the long run as well as a lowest cost network configuration that uses the most efficient telecommunications technology currently available. 47 C.F.R. § 51.505. The Supreme Court has upheld this TELRIC methodology as a reasonable exercise of the FCC's discretion. See Verizon, 535 U.S. at 523, 122 S.Ct. 1646 (TELRIC appears to be a reasonable policy for now, and that is all that counts.) (citing Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 866, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)). Accordingly, under the 1996 Act, the FCC has adopted TELRIC as the new standard for determining just and reasonable rates. U.S. Telecom Ass'n v. FCC, 359 F.3d 554, 561 (D.C.Cir.2004). The Supreme Court has noted that the FCC's treatment of cost as forward looking is something distinct from the kind of historically based cost generally relied upon in valuing a rate base after Hope Natural Gas.  Verizon, 535 U.S. at 495, 122 S.Ct. 1646. Thus, the FCC's TELRIC methodologywhich presumes a forward-looking, most efficient, and lowest cost hypothetical network in the local market, 47 C.F.R. § 51.505(b)represents a significant break from traditional rate-setting models. See Verizon, 535 U.S. at 495, 122 S.Ct. 1646. Furthermore, in Verizon, the Supreme Court upheld the FCC's TELRIC methodology, id. at 523, 539, 122 S.Ct. 1646, noting that it was the very point of Hope Natural Gas that regulatory bodies required to set rates expressed in [terms of `just and reasonable' rates] have ample discretion to choose methodology. Id. at 500, 122 S.Ct. 1646.