The FCC does not have to take into account an existing carrier's historical costs, the justices said.
The ruling could have a profound impact on competition in the industry.
Ultimately at stake, of course, are the services and costs to consumers for local telephone service.
The 1996 Telecommunications Act tries to foster competition in the communications industry.
In part, the act forces local telephone companies to allow potential competitors access to their existing phone networks; forces the existing companies to let newcomers use those networks to provide competing local telephone service; and it forces the existing local carriers to allow those competitors access to individual elements of their networks.
The act also requires local phone companies to sell to those new competitors, at a wholesale rate, any telecommunications service the local company sells its customers at retail rates, so that the competitors in turn can resell the service to local customers at retail rates.
In other words, the federal act forces local phone companies, usually Baby Bells, to foster the business of those newcomers who want to compete with them.
In its 1999 term, the Supreme Court ruled in cases involving the FCC and scores of public service commissions and local phone companies that the FCC had the authority to design "pricing methodology" -- to tell the local companies how they would charge competitors -- and generally set the rules in the new era.
However, the Supreme Court sent the cases back to a federal appeals court to review whether the FCC was designing the "pricing methodology" in a way that was consistent with federal law.
The U.S. Court of Appeals for the 8th Circuit, based in St. Louis, eventually ruled that the FCC violated the 1996 act's pricing standard "by prescribing a rate of methodology based on the costs of a hypothetical (local) carrier using optimally efficient technology and configuration at any given time."
In other words, the appeals court said the FCC would have to base its pricing scheme on the actual equipment a local phone company makes available to a competitor, not some perfect ideal of that equipment that didn't exist in the real world.
But the appeals court also rejected the local companies' claim that they should recover the "historical" costs of setting up their networks, when they charged competitors for access to those networks.
The appeals court also rejected the local companies claims for compensation based on the "taking" of their private property by the government.
The FCC, competitors and local phone companies then asked the Supreme Court for review of the appeals court ruling.
The Supreme Court granted review, but limited the future argument to three questions: Whether the appeals court erred in ruling that the 1996 act "forecloses the cost methodology adopted by the FCC, which is based on the efficient replacement cost of existing technology, for determining" hookup rates for new companies; whether the appeals court made a mistake when it ruled that neither the constitutional ban against government appropriation without compensation, nor the 1996 act, require figuring in an existing company's "historical" costs into the rates it charges new companies for access to the network; and whether federal law prohibits the FCC from requiring that existing companies combine elements of their networks when a new company requests the combination and agrees to pay for the process.
The justices heard extended argument in the case on Oct. 10.
Monday, a Supreme Court majority upheld some of the lower court's ruling, reversed other parts and sent the case back down for a new hearing based on the majority's opinion.
However, the ruling supports the FCC's core positions.
It says the FCC can require state commissions to set leasing rates on a "forward-looking basis," one not tied to how much existing carriers invested in their equipment.
It rejects the argument of Verizon and other existing companies that the FCC's policy violates the plain language of the statute or makes or unreasonable interpretation of the statute.
The ruling also said the FCC could require existing carriers to combine elements of their networks at the request of potential rivals, and reversed that part of the appeals court decision that said it couldn't.
Justices Antonin Scalia and Clarence Thomas agreed with parts of the opinion. Justice Stephen Breyer filed an opinion agreeing with the majority in part and dissenting in part, joined -- but only in part -- by Scalia.
Justice Sandra Day O'Connor, who owns some telecommunications stock, did not take part in the case.
(Nos. 00-511, Verizon et al vs. FCC; 00-555, Worldcom et al vs. Verizon et al; etc.)