## Facts

- The Telecommunications Act of 1996 required incumbent local exchange carriers (ILECs) to provide competitive local exchange carriers (CLECs) access to “unbundled network elements” (UNEs) at rates set by state utility commissions that are “just and reasonable” and “based on the cost” of providing the elements.
- The FCC implemented rules defining “cost” as a forward-looking methodology: total element long-run incremental cost (TELRIC) plus an allocation of forward-looking common costs, measured using the most efficient currently available technology and lowest-cost network configuration given existing wire-center locations.
- The FCC also adopted “combination” rules requiring ILECs, upon request and compensation, to perform the functions necessary to combine network elements for entrants unless technically infeasible.
- ILECs and others challenged these rules; the Eighth Circuit held the Act required rates based on actual historical cost and invalidated parts of the FCC’s approach, including certain combination requirements.
- The Supreme Court reviewed whether the FCC’s pricing and combination rules were authorized by the Act and whether the pricing rules effected an unconstitutional taking.

## Issues

1. Whether the Telecommunications Act of 1996 permits the FCC to require state commissions to set UNE rates using a forward-looking cost methodology untied to incumbents’ historical investment.
2. Whether the Act permits the FCC to require incumbents to combine network elements for entrants upon request (subject to limits such as technical feasibility).
3. Whether excluding historical cost and using a hypothetical efficient-cost model for UNE pricing constitutes a facial taking under the Fifth Amendment.

## Decision

- The Court affirmed in part, reversed in part, and remanded.
- The Court held the Act permits the FCC to require state commissions to use a forward-looking cost model (TELRIC) to price UNEs.
- The Court upheld the FCC’s authority to require incumbents to combine network elements for entrants upon request and compensation, subject to statutory constraints including technical feasibility.
- The Court rejected the facial takings challenge to TELRIC, concluding the methodology was not shown to be confiscatory and that any confiscation claim would ordinarily require an as-applied showing based on specific rates.

## Legal Principles

- When a statutory term such as “cost” is ambiguous in a complex regulatory scheme, an agency’s reasonable interpretation may be upheld under Chevron deference.
- Congress’s direction that “cost” be determined “without reference to a rate-of-return or other rate-based proceeding” supports an interpretation allowing methodologies distinct from traditional embedded-cost, rate-base ratemaking.
- The FCC may implement forward-looking, efficiency-based pricing rules for mandated access to network elements when consistent with statutory text and the Act’s competition-oriented purposes.
- The FCC may require incumbents to perform the functions necessary to combine network elements for entrants upon request, so long as the requirement stays within statutory limits (including technical feasibility) and is a reasonable construction of the incumbents’ duties.
- A facial Fifth Amendment takings challenge to rate regulation generally fails absent a demonstrated confiscatory outcome; speculative or predictive objections are insufficient without concrete rate effects.

## Conclusion

The Court sustained the FCC’s forward-looking TELRIC methodology for pricing unbundled network elements and largely upheld rules requiring incumbents to combine elements for entrants, while rejecting a facial takings attack because the challengers did not show the pricing regime was confiscatory.


Verizon Commc’ns Inc. v. FCC, 535 U.S. 467 (2002)