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Verizon The Supreme Court examined the Fcc's interpretation of the Telecommunications Act in accordance with the standard in Chevron, which involves a two step approach. First, does the statute clearly answer the interpretive inquiry? If so, apply the statute by its terms to affirm or reverse the agency. If not, the Court adopts a position of deference towards the agency and will only reject an interpretation if it is unreasonable. The Fcc's rule adopting TELRIC was initially challenged in Iowa Utilities Board v.
Federal Communications Commission, where the Eighth Circuit upheld the choice of a forward-looking methodology, but struck down the rule defining TELRIC as being based upon the use of a hypothetically efficient network. Both issues were before the Supreme Court in Verizon. The Supreme Court found that the FCC could require state commissions to set the rates charged by incumbents for leased elements on a forward-looking basis unrelated to the incumbents' investment. The Court focused on the term cost in the statute and found that apart from a prohibition against rate of return or other rate-based proceedings, the term was a chameleon capable of multiple interpretations.
In particular, the Court noted that the Act used cost as an intermediate term in the calculation of just and reasonable rates and that historically regulatory bodies required to set rates expressed in these terms had ample discretion to choose methodology. The Court thus rejected the incumbents argument that cost meant the past cost to an incumbent of furnishing the actual network element to be physically provided, as distinct from its value or the price that would be paid for it on the open market. Because the statute was ambiguous and because the deference to the FCC was not defeated by the incumbent's showing of unreasonableness, the Supreme Court upheld the Eighth Circuit's ruling, which allowed a forward-looking methodology. The Supreme Court originally only applied the Takings Clause to direct government appropriations of private property or physical invasions that effectively divested the owner of possession.
The Supreme Court subsequently recognized two types of takings that can arise without a physical occupation. First, rate regulation may effect a taking if the rate is set so low as to be confiscatory. (Daniel F. Spulber & Christopher S. Yoo) Second, government regulation that goes too far in limiting the owners use of his or her property (noninvasive regulatory takings) may result in a taking. In the telecommunications access sphere ILECs raised all three areas of takings jurisprudence in the Fcc's Local Competition Provisions to support their argument that TELRIC was unconstitutional. The takings issue also arose in academic circles with the coining of the new phrase Deregulatory Takings and its subsequent critique.
The proponents of deregulatory takings, J. Gregory Side and Daniel F. Spulber, argue, in short, that a regulatory contract exists between regulators and regulated firms which promise that the regulated firms will be able to recover a competitive return on their investments that were undertaken at the behest of the regulator. The failure to set access prices which honor that commitment results in a taking.
Further, although deregulation is aimed at promoting competition to benefit consumers, the rights of ILECs and their investors may be compromised, leading to the observation that the predictable appeal that competition holds for legislators and regulators should not obscure the fact that the transition from regulated monopoly to competition, like the transition from dirty air to clean, is not free. The most relevant category of takings jurisprudence relates to rate setting. The regulation of rates chargeable for the employment of private assets for public uses is constitutionally permissible, although the charge cannot be so unjust as to be confiscatory. The case of Federal Power Commission v.
Hope Natural Gas Company stands for the proposition that a court should look at the total effect of the rate order. Further, a taking would only arise when the rate endangered a firms survival, or prevented successful operations (i. e. , an inability to maintain its financial integrity) to attract capital, and to compensate its investors for the risks assumed. In Duquesne Light Company v. Branch, the Supreme Court reiterated the need to look at the net effect of a rate order and focused on whether the investors rate of return from investing in the entire business was commensurate with the risk of that type of business. As the rate orders did not show a failure to give a reasonable rate of return on equity given the risks of the regime, there was no taking. (Susan Rose-Ackerman & Jim Rossi) In Texas Office of Public Utility Counsel v.
Federal Communications Commission, the Fifth Circuit approached the deregulatory takings issue from the rate-setting perspective by contrasting one ILECs claim that a regulated entity cannot be forced to operate one segment of its business at a loss on the expectation that it can make up the shortfalls from another competitive line of business, with the FCC response that the ILEC must show that a taking will necessarily result from the regulatory actions and the ILEC must demonstrate that its losses are so significant that the net effect is confiscatory. The Fifth Circuit rejected the takings claim as the ILEC could not satisfy the requirements of Duquesne, because it could not demonstrate any loss of revenue, let alone enough of a loss to constitute a taking. In Verizon, the incumbents sought to rely on a rule of constitutional avoidance to argue that cost should be construed by reference to historical investment to avoid a serious constitutional question: whether TELRIC leads to a taking of property in violation of the Fifth Amendment. A unanimous Court addressed the incumbents argument in terms of the above rate-setting cases, and it found that the result rather than the methodology must be examined so that the takings question was not ripe. Further, the ILECs made no argument that TELRIC jeopardized their financial integrity or that it failed to provide adequate compensation to current equity holders for the risk associated with their investments, so that TELRIC could not be shown to be confiscatory.
Lastly, the Court rebuffed the idea of a regulatory contract creating some expectation that historical cost would be used by observing that no such promise was ever made. As a result, it is clear that the rate-setting category of takings jurisprudence is applicable to access pricing, but to succeed in showing a taking, an ILEC must demonstrate the firms operations will be rendered unsuccessful or the rate fails to give a reasonable rate of return on equity given the risks of the regime. (Susan Rose-Ackerman & Jim Rossi) Verizon did not consider the other two categories of takings jurisprudence. The noninvasive regulatory takings category is applied through a three factor test that weighs the following considerations: economic impact of the regulation on the claimant, extent to which the regulation has interfered with distinct investment-backed expectations, and character of the governmental action. The distinct investment-backed expectations criterion limited takings to situations where the property owner could demonstrate that they purchased their property in reliance on a state of affairs that did not include the regulatory regime. If an owner bought property with knowledge of the regime then they have assumed the risk of any economic loss.
The ILECs argue that the historical regulation of telecommunications created expectations that investments in specialized facilities would make compensatory returns. The category has been argued to be inapplicable to access pricing because it is concerned with balancing financial burdens between a property owner and the public in general, while a telecommunications investor is able to spread risk and mitigate losses through an investment portfolio that the owner of physical property cannot do. Further, the finding in Verizon that there was no promise that could create the expectation that historical cost would be used suggests the lack of any interference with investment-backed expectations. Nonetheless, whether noninvasive regulatory takings law may be applicable remains an open question because it shares similar policy concerns with the rate regulation jurisprudence. In particular, the recognition that there is a need to balance government's need for a certain degree of leeway to be able to function with government action that may adversely affect the value of private property because the power to regulate can become the power to take. The Supreme Court in Verizon has intimated that the rate-setting category of takings is applicable to telecommunications regulation once there is a result rather than just a mere method.
While the possibility of administrative law providing a remedy to ILECs remains slim -- due to the accountability abyss created by Chevron deference and congressional delegation -- ILECs will continue to pursue constitutional law remedies such as those provided by the Takings Clause. The rate-setting category of takings may allow the regulated firm to recover only its reasonable costs of providing the service in question or be entitled to earn a rate of return on investment comparable to the return that investors expect to receive before committing funds to investments having commensurate risks. Although receiving just compensation may equate to a low return on investment or recovery of costs, it will continue to be pursued by ILECs whenever it amounts to a better outcome than receiving a TELRIC-based rate set by a state commission. However, the ability of the Takings Clause to protect against confiscations of property and, incidentally, to ensure regulator accountability requires that the jurisprudence be updated for the current regulatory environment. The current jurisprudence sets the bar for a just rate at a low level by focusing on the impact of the rate on the entire regulated enterprise. Future cases should question whether such an approach is appropriate in a deregulated environment -- where some telecommunications services are regulated but others are not -- so that losses in one area cannot be offset by altering rates in another area.
In a competitive environment, aggressive competitors in the market in which the subsidy is drawn (prices are increased above economic cost to support some other activity) can price below the ILEC and engage in cream-skimming so as to thwart any cross-subsidization. However, there may still be explicit subsidies (e. g. , universal service) or regulatory benefits (e. g. , having the line of business restrictions lifted if ILECs meet certain criteria) that complicate any determination of the total effect of regulation. The Supreme Court has battled with the appropriate property denominator in the other takings categories and in determining how to classify a temporary deprivation. The Supreme Court needs to redetermine the appropriate property denominator to which the rate is applied.
The denominator could be the network element subject to access or a combination of network elements that make up a marketable service. The essential point is that the takings jurisprudence must reflect the economic reality of a deregulating telecommunications market rather than the extinct fully regulated private monopoly. References: Daniel F. Spulber & Christopher S. Yoo, Access to Networks: Economic and Constitutional Connections, 88 CORNELL L. REV. 885, 933 - 34 (2003) Verizon Comm. , Inc.
v. FCC, 535 U. S. 467, 523 (2002). Susan Rose-Ackerman & Jim Rossi, Disentangling Deregulatory Takings, 86 VA. L. REV. 1435, 1456 (2000); Chen, supra note 90, at 1558 - 59.
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Research essay sample on Federal Communications Commission Supreme Court
