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BACKGROUND

A. The Telecommunications Act of 1996

Prior to 1996, local telephone service generally was pro- vided by a local monopolist who offered services at prices regulated and imposed by a variety of governmental agencies. Such monopolist providers are commonly referred to as “in- cumbent local exchange carriers” or “incumbent LECs.” Con- gress enacted the Act to deregulate the telecommunications market. See generally Verizon Comms. Inc. v. FCC, 535 U.S. 467, 475-76 (2002). But, to facilitate the entry of new partici- pants into these local markets, the Act imposes on incumbent LECs two duties relevant in this case.

Interconnection Duty at Regulated Rates.

First, the Act imposes a duty on incumbent LECs to permit 3392 PACIFIC BELL v. CALIFORNIA PUC “interconnection.” Pursuant to 47 U.S.C. § 251(c)(2),1 incum- bent LECs must allow the competitive LEC to link its net- work to that of the incumbent LEC, so that customers of the competitive LEC may place calls to customers of the incum- bent LEC. Without the ability to link its network to that of the incumbent LEC, the competitive LEC would have little pros- pect of selling its telephone services, to say…