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November 12, 2003, 9:00 AM ET, Alert No. 777.
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7th Circuit Rules in Illinois UNE Case

11/10. The U.S. Court of Appeals (7thCir) issued its opinion [15 pages in PDF] in AT&T v. Illinois Bell, an appeal from a District Court decision that held that portions of the state of Illinois's Public Utilities Act are preempted by Section 251 of the Communications Act, pertaining to interconnection and unbundling.

Introduction. This is a dispute over the rates that competitive carriers pay incumbents for access to unbundled network elements. AT&T filed a lawsuit in federal court in Illinois alleging that a just enacted Illinois statute pertaining to rates is preempted by federal law. The District Court granted summary judgment to AT&T, held the state statute unlawful, and enjoined implementation of this state statute. The Appeals Court affirmed.

But, this is a complex case, and the Appeals Court opinion is densely packed with significant interpretations and analysis of the 1996 Act, interconnection, unbundling, total element long-run incremental cost (TELRIC) pricing, state authority, and procedure. Readers interested in this area of law will want to carefully read the entire opinion.

To start with, the case caption is confusing. The case was filed, and proceeded through the District Court, as Voices for Choices v. Illinois Bell. The Appeals Court changed the caption. It wrote in the present opinion that "AT&T tried to give the suit a public-interest patina by making ``Voices for Choices´´ -- which despite its name is a trade association rather than a consumers' group -- the lead plaintiff. The appellate brief reveals that AT&T's lawyers also represent Voices for Choices, which presents no arguments on its own behalf; we have changed the caption to reflect the real parties in interest."

This is not the first time that this Appeals Court has expressed disapproval of the posturing in this case. On August 6, Judge Richard Posner issued a solo opinion [7 pages in PDF] in which he explained his reasons for refusing to accept two amicus curiae briefs submitted by state legislators and an interest group. He wrote that individual legislators and interests groups should not attempt to lobby in the judicial process. See, story titled "Judge Posner Opines On Amicus Briefs" in TLJ Daily E-Mail Alert No. 714, August 8, 2003.

Parties and Proceedings Below. When the dispute underlying this case began, in the aftermath of the Telecommunications Act of 1996, Illinois Bell was a subsidiary of Ameritech, one of the Regional Bell Operating Companies (RBOCs). Competitive entrants AT&T and MCI both demanded access to the unbundled network element platform (UNE-P) of Illinois Bell. The companies could not agree on a price. So, in 1997, the Illinois Commerce Commission (ICC) set a price of about $5 per month per UNE-P in Chicago, and about $12 on average statewide. Retail customers pay an average of about $36 per month for the service one UNE-P creates.

Ameritech subsequently merged with SBC. Five years after the original ICC proceeding, Illinois Bell (SBC) asked the ICC to raise the rates. SBC argues that it costs it $29 per month to supply the UNE-P that fetches $36 from a retail customer but only $12 on average from AT&T or MCI.

While the ICC was considering this matter (ICC Docket 02-0864), the Illinois State Legislature enacted a statute (which the Appeals Court opinion quotes at length) regarding unbundled network element rates. It is codified at 220 ILCS 5/13-408.

The Court of Appeals summarized the statute: "In other words, within 30 days the ICC had to adjust SBC's rates using its current fill factors and depreciation schedules from its financial statements. Depreciation, like fill factor, is inversely related to price under TELRIC. If economically and technologically efficient equipment would have a useful life of five years, then the TELRIC price to rivals is greater (because cost must be covered faster) than if the life is ten years. The statute told the ICC to use the equipment life spans that SBC had adopted for purposes of financial reporting—and for that purpose firms often use lives as short as the IRS will accept, because shorter lives mean faster depreciation and lower taxes. Through 220 ILCS 5/13-408 the tax-and-accounting lives of SBC’s assets became their economic lives too. The legislation added that AT&T and SBC could not use the ensuing higher wholesale prices as justifications for increased retail rates."

Before the ICC made its decision, AT&T (Voices for Choices) filed a complaint in U.S. District Court (NDIll) against Illinois Bell alleging that the 1996 Telecom Act preempts the Illinois statute. On June 9, 2003, the District Court held that the state statute is defective because federal law makes the state regulatory commission the exclusive source of non-federal substantive rules, and because the particular statutory rules for the handling of fill factors and depreciation conflict with TELRIC.

Excerpts from the Court's Discussion of TELRIC and the Triennial Review Order. The Appeals Court wrote that "TELRIC obliges both incumbents and state regulators to set prices based on the long-run costs that would be incurred to produce the services in question using the most-efficient telecommunications technology now available, and the most efficient network configuration. Incumbents that have aging and inefficient equipment thus must sell for less than their historical cost; the old system that calculated rates based on actual cost of equipment plus a reasonable rate of return on capital is out the window."

In continued that "In Verizon Communications Inc. v. FCC, 535 U.S. 467 (2002), the Supreme Court held that TELRIC is a choice within the FCC's discretion."

"TELRIC is a framework rather than a formula; there is considerable play in the joints. See AT&T Corp. v. FCC, 220 F.3d 607, 615-16 (D.C. Cir. 2000); Sprint Communications Co. v. FCC, 274 F.3d 549, 556 (D.C. Cir. 2001). Incumbent carriers may be unable to agree with would-be entrants about what the most efficient technology is, how much it would cost to construct, and what the incremental costs of a given network element would be. Moreover, even when the parties can agree on the technology, they may be unable to agree on vital details. One such detail is the ``fill factor.´´"

The Court added that "TELRIC does not contain an algorithm for determining the fill factor. The FCC has approved several. In the Triennial Review Order the FCC explained that many issues have a range of reasonable answers for the parties—or state regulators, acting under state law -- to flesh out. See Report and Order, FCC 03-36, 68 Fed. Reg. 52,276, 52,284 (Aug. 21, 2003). Moreover, the Commission has opened an investigation of TELRIC’s operation to ensure that price does not fall below the level needed to encourage efficient investment in new facilities by both incumbents and their rivals. See Notice of Proposed Rulemaking, FCC 03-224, 68 Fed. Reg. 59,757 (issued Sept. 15, 2003, and published Oct. 17, 2003)."

See, story titled "Summary of FCC Triennial Review Order", also published in TLJ Daily E-Mail Alert No. 725, August 25, 2003. See also, story titled "FCC Releases TELRIC NPRM and Working Paper" in TLJ Daily E-Mail Alert No. 740, September 16, 2003.

Appeals Court Holding. The Appeals Court, reviewed the history of the breakup of the AT&T monopoly, passage of the 1996 Telecom Act, the nature of interconnection, and the meaning and legal status of TELRIC. The Court also addresses in detail the problems created by AT&T's procedural tactic of challenging the lawfulness of the Illinois statute, rather than the ICC's forthcoming rate ruling (which had to be made within 30 days).

In the end the Court affirmed the District Court, and offered this explanation of the consequences of its affirmance. "The injunction still bars the ICC from using 220 ILCS 5/13-408 to set rates. If the elected branches of state government want the Commission to proceed along these lines, they must enact new legislation that addresses fill factors and asset lives as elements of a comprehensive process designed to generate a rate that complies with TELRIC. The ICC also is compelled by the injunction to reinstate the proceeding in its Docket 02-0864, which the state law had terminated, and to proceed to decision as expeditiously as possible. The ICC must attempt to produce a rate that complies with TELRIC as of 2003 -- and if doing this entails use of SBC’s current fill factors, the ICC is free to use them. And it must do this speedily. A rate that is long out of date, as this 1997 rate is, frustrates the goals of TELRIC every bit as much as does a rate generated under the flawed state legislation. SBC and its rivals alike are entitled to an updated rate that comports with federal law."

Judge Frank Easterbrook wrote the opinion of the Appeals Court. Judges Dianne Wood and Bauer joined.

This case is AT&T Communications of Illinois, Inc., et al. v. Illinois Bell Telephone Co. and Ameritech Corp., U.S. Court of Appeals for the 7th Circuit, Nos. 03-2735 & 03-2766, an appeal from the U.S. District Court for the Northern District of Illinois, D.C. Nos. 03 C 3290 and 03 C 3643, Judge Charles Kocoras presiding.

NIST Releases Draft Information Security Guidelines for Federal Agencies

10/31. The National Institute of Standards and Technology (NIST) released the first public draft [238 pages in PDF] of NIST Special Publication (SP) 800-53, titled "Recommended Security Controls for Federal Information Systems". See also, NIST release.

Last year, the Congress enacted HR 2458 (107th Congress), the "E-Government Act of 2002". President Bush signed it on December 17, 2002. It then became Public Law No. 107-347. Title III of this act, which pertains to "Information Security", is also known as the "Federal Information Security Management Act of 2002".

It seeks to provide "a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support Federal operations and assets". And it tasks the NIST, among other things, with "developing and overseeing the implementation of policies, principles, standards, and guidelines on information security"

In particular, the Act requires the NIST shall "(1) have the mission of developing standards, guidelines, and associated methods and techniques for information systems; (2) develop standards and guidelines, including minimum requirements, for information systems used or operated by an agency or by a contractor of an agency or other organization on behalf of an agency, other than national security systems (as defined in section 3542(b)(2) of title 44, United States Code); and (3) develop standards and guidelines, including minimum requirements, for providing adequate information security for all agency operations and assets, but such standards and guidelines shall not apply to national security systems."

SP 800-53 states that "The purpose of this special publication is to provide guidelines for selecting and specifying security controls for information systems. These guidelines have been developed to help achieve more secure information systems by: Facilitating a more consistent, comparable, and repeatable approach for selecting and specifying security controls for information systems; Providing a recommendation for baseline (minimum) security controls for information systems categorized in accordance with FIPS Publication 199, Standards for Security Categorization of Federal Information and Information Systems; Promoting a dynamic, extensible catalog of security controls for information systems to meet the demands of changing requirements and technologies; and Creating a foundation for the development of verification techniques and procedures for determining security control effectiveness."

SP 800-53 provides a method for categorizing security risk levels based upon another recent NIST document, the draft [13 pages in PDF] of Federal Information Processing Standards (FIPS) Publication 199, titled "Standards for Security Categorization of Federal Information and Information Systems", and dated "December 2003".

SP 800-53 is applicable to most federal agency information systems; it excludes national security systems. However, the NIST predicts that it is "expected to have a wide audience beyond the federal government."

SP 800-53 was authored by Ron Ross, Gary Stoneburner, Stuart Katzke, Arnold Johnson, and Marianne Swanson.

The NIST seeks public comments. Comments are due by January 31, 2003. Comments may be submitted to SEC-CERT@NIST.GOV or to the Computer Security Division, 100 Bureau Drive (Mail Stop 8930), Gaithersburg, MD, 20899-8930

Washington Tech Calendar
New items are highlighted in red.
Wednesday, November 12

The House will meet at 2:00 PM for legislative business. It will consider numerous non tech related items under suspension of the rules. Votes will be postponed until 6:30 PM. See, Republican Whip Notice.

? TIME? The Senate Commerce Committee will hold a business meeting to consider pending calendar business. Press contact: Rebecca Hanks (McCain) at 202 224-2670 or Andy Davis (Hollings) at 202 224-6654. Location: Room S-216, Capitol Building.

10:00 AM. The Senate Judiciary Committee will hold a hearing to examine judicial and executive nominations. Press contact: Margarita Tapia (Hatch) at 202 224-5225 or David Carle (Leahy) at 202 224-4242. Location: Room 226, Dirksen Building.

11:00 AM. The Cato Institute will host a book forum on Black Ice: The Invisible Threat of Cyberterrorism. Author Dan Verton will speak. See, Amazon page and Cato notice. Lunch will follow the program. Location: 1000 Massachusetts Ave., NW.

3:00 PM. The Center for Strategic and International Studies (CSIS) will release a report titled "Spectrum Management For The 21st Century". The speakers at this event will be Rep. Tom Davis (R-VA), Rep. Christopher Shays (R-CT), Michael Gallagher (acting head of the National Telecommunications and Information Administration), James Schlesinger, and Janice Obuchowski (former Nextwave EVP). Press contact: Mark Schoeff at 202 775-3242 or Location: Room 2154, Rayburn Building.

Deadline to submit comments to the U.S. Patent and Trademark Office (USPTO) regarding proposed changes to its rules of practice to support the implementation of the 21st Century Strategic Plan. The proposed changes include permitting electronic signatures on a number of submissions, streamlining the requirements for incorporation by reference of prior filed applications, and clarifying the qualifications for claiming small entity status for purposes of paying reduced patent fees. See, notice in the Federal Register, September 12, 2003, Vol. 68, No. 177, at Pages 53815 - 53859.

Deadline to submit comments to the Federal Communications Commission (FCC) in response to its Notice of Inquiry (NOI) regarding the impact that communications towers may have on migratory birds. See, notice in the Federal Register, September 12, 2003, Vol. 68, No. 177, at Pages 53696 - 53702. This is Docket No. WT 03-187, and FCC 03-205. The FCC adopted this NOI on August 8, 2003, and released it on August 20, 2003. See also, story titled "FCC Release NOI On Communications Towers and Migratory Birds" in TLJ Daily E-Mail Alert No. 723, August 21, 2003.

Thursday, November 13

The House will meet at 10:00 AM for legislative business. See, Republican Whip Notice.

9:00 AM - 12:00 NOON. The Telecommunications Service Priority (TSP) System Oversight Committee will meet. See, notice in the Federal Register, October 10, 2003, Vol. 68, No. 197, at Page 58725. Location: 2nd floor conference room, National Communications System (NCS), 701 South Courthouse Road, Arlington, VA.

9:00 AM - 3:45 PM. The National Institute of Standards and Technology's (NIST) Advanced Technology Program Advisory Committee hold a partially closed meeting. See, notice in the Federal Register, October 27, 2003, Vol. 68, No. 207, at Page 61189. Location: NIST, Administration Building, Employees' Lounge, Gaithersburg, MD.

POSTPONED. 9:30 AM. The Senate Commerce Committee will hold a hearing to examine the General Accounting Office's (GAO) study [94 pages in PDF] titled "Telecommunications: Issues Related to Competition and Subscriber Rates in the Cable Television Industry". The witnesses will be Mark Goldstein (GAO), James Robbins (P/CEO of Cox Communications), George Bodenheimer (President of ESPN and ABC Sports), Gene Kimmelman (Consumers Union), Robert Sachs (P/CEO of the NCTA), Rodger Johnson (P/CEO of Knology). See, story titled "GAO Releases Study on Cable Industry", in TLJ Daily E-Mail Alert No. 766, October 27, 2003. Press contact: Rebecca Hanks (McCain) at 202 224-2670 or Andy Davis (Hollings) at 202 224-6654. Location: Room 253, Russell Building.

9:30 AM. The Federal Communications Commission (FCC) will hold a meeting. Location: FCC, 445 12th Street, SW, Room TW-C05 (Commission Meeting Room).

9:30 AM. The U.S. Court of Appeals (DCCir) will hear oral argument in Adams Comm Corp v. FCC, No. 02-1232. Judges Randolph, Roberts and Williams will preside. Location: Courtroom 20, 333 Constitution Ave. NW.

10:00 AM. The Internal Revenue Service (IRS) will hold a hearing regarding its notice of proposed rulemaking (NPRM) regarding computation and allocation of the credit for increasing research activities for members of a controlled group of corporations or a group of trades or businesses under common control. The rules implement the research and development tax credit codified at 26 U.S.C. § 41. Location: IRS Auditorium, 7th Floor, 1111 Constitution Ave., NW. See, notice in the Federal Register, July 29, 2003, Vol. 68, No. 145, at Pages 44499 - 44506.

2:00 - 3:00 PM. The Heritage Foundation will host an event titled "Beyond Do-Not-Call: The FTC Agenda". The speakers will be Timothy Muris, Chairman of the Federal Trade Commission (FTC), and James Gattuso of the Heritage Foundation. Refreshments will be provided. See, notice. Location: Heritage Foundation, Lehrman Auditorium, 214 Massachusetts Ave., NE.

6:00 - 9:15 PM. The D.C. Bar Association will host a CLE course titled "How to Litigate an Intellectual Property Case Series: Part 1 How to Litigate a Trademark Case". Prices vary. For more information, call 202 626-3488. Location: D.C. Bar Conference Center, 1250 H Street NW, B-1 level.

Friday, November 14

RESCHEDULED FOR NOVEMBER 20. 9:30 AM. The U.S. Court of Appeals (DCCir) will hear oral argument in CA Metro Mobile Comm v. FCC, No. 02-1370. Judges Sentelle, Henderson and Garland will preside. Location: 333 Constitution Ave. NW.

12:00 NOON - 2:00 PM. The Progress and Freedom Foundation (PFF) will host a panel discussion titled "Copyright Protection and the Broadcast Flag". The speakers will be Rick Chessen (Chair of the FCC's Digital Television Task Force), Mike Godwin (Public Knowledge), William Adkinson (PFF), Robert Atkinson (Progressive Policy Institute), and James DeLong (PFF). There will be a buffet lunch. See, notice [PDF]. Location: Room 1539, Longworth Building.

12:30 PM. The Federal Communications Bar Association's (FCBA) Legislation Committee will host a brown bag lunch. The topic will be the "The Northpoint Issue: Will Congress Provide Spectrum Without an Auction? The View From the Hill". For more information, contact Lee Carosi at 202 224-0990 or Location: Wiley Rein & Fielding, 1750 K Street Building, 5th Floor Conference Room.

Monday, November 17

11:00 - 12:30 PM. The Heritage Foundation will host an event titled "Preserving Privacy, Providing Security: Information And Technology At The DHS". The speakers will be Nuala Kelly (Chief Privacy Officer of the Department of Homeland Security) and Paul Rosenzweig (Heritage Foundation). See, notice. Location: Heritage Foundation, Lehrman Auditorium, 214 Massachusetts Ave., NE.

Deadline to submit written comments to the Trade Policy Staff Committee (TPSC) regarding negotiations with Bahrain on a free trade agreement (FTA). The TPSC seeks comments and testimony to assist the Office of the U.S. Trade Representative (USTR) on many topics, including "Relevant trade-related intellectual property rights issues that should be addressed in the negotiations" and "Existing barriers to trade in services between the United States and Bahrain that should be addressed in the negotiations". See, notice in the Federal Register, August 25, 2003, Vol. 68, No. 164, at Pages 51062 - 51064.

Tuesday, November 18

8:00 AM - 5:30 PM. The Department of Commerce's (DOC) National Institute of Standards and Technology's (NIST), Judges Panel of the Malcolm Baldrige National Quality Award will hold the first day of a four day closed meeting. See, notice in the Federal Register, October 27, 2003, Vol. 68, No. 207, at Pages 61189 - 61190. Location: NIST, Building 222, Red Training Room, Gaithersburg, MD.

9:00 AM - 4:15 PM. The Federal Communications Commission (FCC) will hold electronic licensing and filing systems training (ECFS, EDOCS, ULS, CDBS and IBFS). Location: FCC, 445 12th Street, SW, Room TW-C305 (Commission Meeting Room).

9:30 AM. The U.S. Court of Appeals (DCCir) will hear oral argument in Mountain Communications, Inc. v. FCC, No. 02-1255. Judges Sentelle, Garland and Silberman will preside. Location: 333 Constitution Ave., NW.

12:15 PM. The Federal Communications Bar Association's (FCBA) Cable Practice Committee will host a brown bag lunch. The speaker will be Stacy Fuller, Legal Advisor to FCC Commissioner Kathleen Abernathy. RSVP to Location: Dow Lohnes & Albertson, 1200 New Hampshire Ave., NW, 8th Floor.

2:30 PM. The Senate Governmental Affairs Committee will hold a hearing on the nomination of James Loy to be Deputy Secretary of Homeland Security. Room 342, Dirksen Building.

People and Appointments

11/11. Microsoft's shareholders approved the addition of two members to its Board or Directors, Helmut Panke (BMW Bayerische Motoren Werke AG Chairman of the board of management) and Charles Noski (former AT&T Vice Chairman). Before joining AT&T, Noski was COO of Hughes Electronics Corp., a satellite and wireless communications business. Microsoft also announced committee assignments for its expanded board. See, Microsoft release. On September 18, Microsoft announced that it had proposed these additions. See, Microsoft release.

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