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United States Court of Appeals for the
Ninth Circuit
Case No. 08-17030
AT&T COMMUNICATIONS OF CALIFORNIA, INC.; TELEPORT COMMUNICATIONS GROUP OF SAN FRANCISCO; TELEPORT
COMMUNICATIONS GROUP OF LOS ANGELES; TELEPORT COMMUNICATIONS GROUP OF SAN DIEGO,
Plaintiffs-Appellants,
– v. –
PAC-WEST TELECOMM, INC.; MICHAEL R. PEEVEY; GEOFFREY E. BROWN; DIAN M. GRUENEICH; JOHN BOHN; RACHELLE CHONG, Commissioners of the California Public Utilities Commission in their official
capacity,
Defendants-Appellees.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA Case No. 3:06-cv-07271-JSW
BRIEF FOR PLAINTIFFS - APPELLANTS
MARK E. HADDAD CALIFORNIA BAR NO. 205945 MAX C. FISCHER CALIFORNIA BAR NO. 226003 SETH M. GOLDSTEIN CALIFORNIA BAR NO. 232071 SIDLEY AUSTIN LLP 555 West Fifth Street, Suite 4000 Los Angeles, California 90013 Telephone: (213) 896-6000 Fax: (213) 896-6600
Attorneys for Plaintiffs - Appellants
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CORPORATE DISCLOSURE STATEMENT
Pursuant to the provisions set forth in Federal Rule of Appellate
Procedure 26.1 and Federal Rule of Civil Procedure 7.1, Plaintiffs/Appellants
AT&T Communications of California, Inc.,Teleport Communications Group of
San Francisco, Teleport Communications Group of Los Angeles, and Teleport
Communications Group of San Diego state the following:
Teleport Communications Group of San Francisco, Teleport
Communications Group of Los Angeles, and Teleport Communications Group of
San Diego are wholly-owned subsidiaries of Teleport Communications Group, Inc.
and its subsidiaries. Teleport Communications Group, Inc., and AT&T
Communications of California, Inc. are wholly-owned subsidiaries of AT&T
Corp., which is a wholly-owned subsidiary of AT&T Inc., a publicly held
corporation.
Respectfully submitted,
/s/ Seth. M. Goldstein Seth M. Goldstein SIDLEY AUSTIN LLP 555 West Fifth Street, Suite 4000 Los Angeles, CA 90013 (213) 896-6000 Counsel for Plaintiffs - Appellants
January 28, 2009
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TABLE OF CONTENTS
STATEMENT OF JURISDICTION..........................................................................1 ISSUES PRESENTED FOR REVIEW .....................................................................1 STATEMENT OF THE CASE..................................................................................2
INTRODUCTION ...........................................................................................2
I. STATUTORY AND REGULATORY BACKGROUND....................6
A. The Interconnection Regime of Sections 251 and 252...............9
1. Interconnection .................................................................9
2. Reciprocal Compensation.................................................9
3. Additional Obligations for Incumbent Local Exchange Carriers...........................................................11
B. The Effect of the Interconnection Regime on State Jurisdiction over Interstate Telecommunications. ....................12
II. ISP-BOUND TRAFFIC ......................................................................14
A. The Declaratory Ruling.............................................................15
B. The ISP Remand Order .............................................................16
C. The Core Order.........................................................................21
D. The ISP Mandate Order ............................................................22
FACTUAL AND PROCEDURAL BACKGROUND..................................23
I. PAC-WEST’S COMPLAINT WITH THE CPUC .............................23
II. THE CPUC DECISION ......................................................................25
III. PROCEEDINGS BEFORE THE DISTRICT COURT ......................28
SUMMARY OF ARGUMENT ...............................................................................30 STANDARD OF REVIEW .....................................................................................32 ARGUMENT ...........................................................................................................33
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I. THE CPUC HAD NO JURISDICTION TO ENFORCE AN INTRASTATE TARIFF CHARGES FOR DELIVERY OF THIS INTERSTATE TRAFFIC. ........................................................33
II. THE DISTRICT COURT INCORRECTLY HELD THAT THE ISP REMAND ORDER DID NOT EXTEND TO CLEC-TO-CLEC TRAFFIC. ................................................................................40
A. The ISP Remand Order Applies To All Exchanges of Local ISP-Bound Traffic Between All LECs. ..........................41
B. The District Court’s Reasons For Concluding That The ISP Remand Order Does Not Address CLEC-CLEC Relationships Lack Merit. .........................................................46
1. The District Court Erred in Concluding That The “New Markets Rule” Establishes That The Order Applies Only To ILEC-CLEC Relationships. ................46
2. The Mirroring Rule Does Not Limit The ISP Remand Order To ILEC-CLEC Relationships ..............50
3. The NPRM Does Not Limit The ISP Remand Order To ILEC-CLEC Relationships.............................53
4. The District Court Erred In Relying On Sprint Spectrum. ........................................................................55
CONCLUSION........................................................................................................57 CERTIFICATE OF COMPLIANCE WITH CIRCUIT RULE 32-1 ......................58 STATEMENT OF RELATED CASES...................................................................59 STATUTORY ADDENDUM .................................................................................60
47 U.S.C. § 151..............................................................................................60
47 U.S.C. § 201..............................................................................................61
47 U.S.C. § 251..............................................................................................62
47 U.S.C. § 252..............................................................................................70
47 C.F.R § 51.701..........................................................................................78
47 C.F.R § 51.703..........................................................................................79
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TABLE OF AUTHORITIES
Page(s) CASES
AT&T Co. v. Central Office Tel., Inc., 524 U.S. 214 (1998)............................................................................................40
AT&T Communications v. BellSouth Telecomms Inc., 238 F.3d 636 (5th Cir. 2001) ..................................................................12, 13, 14
AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999)............................................................................9, 12, 35, 40
Bell Atlantic Tel. Co. v. FCC, 206 F.3d 1 (D.C. Cir. 2000)................................................................................16
Buono v. Norton, 371 F.3d 543 (9th Cir. 2004) ..............................................................................32
Fla. Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132 (1963)......................................................................................41, 57
Global Crossing Telecomm., Inc. v. Metrophones Telecomm, Inc., 550 U.S. 45 (2007)................................................................................................7
Global NAPs, Inc. v. Verizon New England, Inc., 444 F.3d 59 (1st Cir. 2006).................................................................................42
Global NAPs, Inc. v. Verizon New England, Inc., 454 F.3d 91 (2d Cir. 2006) .................................................................................53
Hines v. Davidowitz, 312 U.S. 52 (1941)..............................................................................................41
In re Core Communications, Inc., 531 F.3d 849 (D.C. Cir. 2008)......................................................................22, 42
Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355 (1986)..........................................................................................7, 8
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MCI Telecomm. Corp. v. Bell Atl.-Pa., 271 F.3d 491 (3rd Cir. 2001) ..................................................................13, 14, 34
MCI Telecomm. Corp. v. Ill. Bell Tel. Co., 222 F.3d 323 (7th Cir. 2000) ........................................................................13, 14
MCI Telecomm. Corp. v. Pub. Serv. Comm'n, 216 F.3d 929 (10th Cir. 2000) ............................................................................13
Metrophones Telecomm., Inc. v. Global Crossing Telecomm., Inc., 423 F.3d 1056 (9th Cir. 2005), aff’d 550 U.S. 45 (2007)...................................32
Missouri ex rel. Sprint Spectrum L.P. v. Missouri PSC, 112 S.W.3d 20 (Mo. Ct. App. 2003) ............................................................55, 56
North Carolina Utilities Comm'n v. FCC, 537 F.2d 787 (4th Cir.), cert. denied, 429 U.S. 1027 (1976) ...............................................................................8
North Carolina Utilities Comm'n v. FCC, 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874 (1977) .................................................................................8
Olympic Pipe Line Co. v. City of Seattle, 437 F.3d 872 (9th Cir. 2006) ..............................................................................32
Pacific Bell v. Pac-West Telecomm, Inc., 325 F.3d 1114 (9th Cir. 2003) .....................................................................passim
Postal Telegraph-Cable Co. v. Warren-Godwin Lumber Co., 251 U.S. 27 (1919)....................................................................................6, 34, 41
Qwest Corp. v. Wash. Utils. and Transp. Comm’n, 484 F.Supp.2d 1160 (W.D. Wash. 2007) ...........................................................53
Smith v. Illinois Bell Telephone Co., 282 U.S. 133 (1930)..................................................................................6, 34, 41
Southern New England Tel. Co. v. MCI Worldcom Comm., Inc., 353 F. Supp. 2d 287 (D. Conn. 2005).................................................................53
Verizon California, Inc. v. Peevey, 462 F.3d 1142 (9th Cir. 2006) ..............................................................................8
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Verizon North, Inc. v. Strand, 367 F.3d 577 (6th Cir. 2004) ...................................................................36, 37, 38
WorldCom, Inc. v. FCC, 288 F.3d 429 (D.C. Cir. 2002)............................................................................21
STATUTES
28 U.S.C. § 1291........................................................................................................1
28 U.S.C. § 1331........................................................................................................1
47 U.S.C. § 151..........................................................................................................7
47 U.S.C. § 152....................................................................................................7, 33
47 U.S.C. § 201.................................................................................................passim
47 U.S.C. § 251.................................................................................................passim
47 U.S.C. § 251(a)(1).................................................................................................9
47 U.S.C. § 251(b)(5)........................................................................................passim
47 U.S.C. § 251(c) ...................................................................................................11
47 U.S.C. § 251(g) .......................................................................................10, 16, 21
47 U.S.C. § 251(i) ....................................................................................................23
47 U.S.C. § 252.................................................................................................passim
47 U.S.C. § 252(a) ...................................................................................................11
47 U.S.C. § 252(b) ...................................................................................................12
47 U.S.C. § 252(c) ...................................................................................................12
47 U.S.C. § 252(d) .................................................................................10, 12, 22, 51
47 U.S.C. § 252(e) .......................................................................................11, 13, 34
47 U.S.C. § 252(i) ....................................................................................................49
The Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 .....passim
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REGULATIONS
47 C.F.R. § 51.505 ...................................................................................................51
47 C.F.R. § 51.511 ...................................................................................................51
47 C.F.R. § 51.701 .............................................................................................10, 43
47 C.F.R. § 51.703 .............................................................................................10, 43
47 C.F.R. § 51.705 ...................................................................................................51
AGENCY DECISIONS
Developing a Unified Intercarrier Compensation Regime, Notice of Proposed Rulemaking, 16 F.C.C. Rcd. 9610 (2001) ..............................18, 53, 54
Developing a Unified Intercarrier Compensation Regime; T-Mobile et al. Petition for Declaratory Ruling Regarding Incumbent LEC Wireless Termination Tariffs, Ruling and Report and Order, 20 F.C.C. Rcd 4855 (2005) ............................................................................................................55, 56
Implementation of the Local Competition Provisions in the Telecomms. Act of 1996, First Report and Order, 11 F.C.C. Rcd. 15499 (1996) .......10, 22, 33, 56
Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Intercarrier Compensation for ISP-Bound Traffic, Declaratory Ruling and Notice of Proposed Rulemaking, 14 F.C.C. Rcd 3689 (1999)...........................................................................15, 16
Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Intercarrier Compensation for ISP-Bound Traffic, Order on Remand and Report and Order, 16 F.C.C. Rcd. 9151 (2001)..................................................................................................passim
Intercarrier Compensation for ISP-Bound Traffic, Order on Remand and Report and Order and Further Notice of Proposed Rulemaking, CC Docket No. 99-68, 2008 WL 4821547 (Nov. 5, 2008).....................22, 23, 38, 43
Petition of Core Communications, Inc. for Forbearance Under 47 U.S.C. § 160(c) from Application of the ISP Remand Order, Order, 19 F.C.C. Rcd 20179 (2004) .......................................................................21, 22, 47, 48, 49
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STATEMENT OF JURISDICTION
The District Court exercised jurisdiction pursuant to 28 U.S.C.
§ 1331. Following cross-motions for summary judgment, it entered final judgment
on August 12, 2008, denying the motion for summary judgment of Appellants
AT&T Communications of California, Inc., Teleport Communications Group of
San Francisco, Teleport Communications Group of Los Angeles, and Teleport
Communications Group of San Diego (collectively, “AT&T”) and granting the
cross-motions for summary judgment of Appellees Pac-West Telecomm, Inc.
(“Pac-West”) and Commissioners of the California Public Utilities Commission
(“CPUC”). ER:001. Appellants filed a timely notice of appeal on September 11,
2008, docket 08-17030. ER:020. This Court has jurisdiction over the appeal
pursuant to 28 U.S.C. § 1291.1
ISSUES PRESENTED FOR REVIEW
1. In light of this Court’s holding in Pacific Bell v. Pac-West
Telecomm., 325 F.3d 1114 (9th Cir. 2003), does the CPUC have jurisdiction to
enforce a competitive local exchange carrier’s (“CLEC’s”) unilaterally filed
intrastate tariff against another CLEC for delivery of concededly interstate calls to
1 On December 21, 2008, Appellants filed a motion for an extension of time to file their opening brief to and including January 28, 2009. The Court has not acted on the motion and it remains pending. Pursuant to Circuit Advisory Committee Note to Rule 31-2.2, Appellants are filing their opening brief on January 28, 2009, within the time requested in the motion.
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internet service providers (“ISPs” and, with respect to traffic delivered to ISPs,
“ISP-bound traffic”)?
2. Even if the CPUC did have jurisdiction to enforce the tariff,
does its decision to enforce a unilaterally filed state tariff for reciprocal
compensation owed for the delivery of ISP-bound traffic conflict with the Federal
Communication Commission’s rule, in the ISP Remand Order and other related
orders, that the compensation for delivery of ISP-bound traffic between local
exchange carriers who do not have interconnection agreements shall be on a “bill
and keep” basis?
STATEMENT OF THE CASE
INTRODUCTION
When a user of “dial-up” internet service begins an internet session,
his or her computer originates a telephone call to the telephone number of an
internet service provider (“ISP”). The “dial-up” user’s local telephone company (a
local exchange carrier or “LEC”) transports the call over its network to a point of
interconnection with the network of the ISP’s LEC.2 The ISP’s LEC then
transports the call over its network from the point of interconnection and delivers it
to the ISP, which then connects the “dial-up” user to the internet.
2 Where the “dial-up” user’s LEC and the ISP’s LEC connect indirectly rather than directly, one or more intermediary carriers will transport the call between the two LECs’ networks.
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This case involves (1) what jurisdiction a state commission such as
the CPUC has to enforce an intrastate tariff against the “dial-up” user’s LEC for
delivering these concededly interstate calls to the ISP; and, (2) assuming that a
state commission had such jurisdiction, whether it may enforce rates inconsistent
with existing FCC rules.
For purposes of this appeal, AT&T is a CLEC, not an incumbent LEC
(“ILEC”), such as Pacific Bell. AT&T, prior to its recent acquisition by SBC,
entered the local telephone market as a CLEC offering voice services, and
continues to provide competitive alternatives for local telephone services.
Pac-West is a very different sort of LEC. Its entire business model is
based on a scheme of regulatory arbitrage. In particular, Pac-West has targeted
ISPs as customers – customers that receive many inbound calls, but make very
few, if any, outbound calls. Under the traditional federal reciprocal compensation
regime, LECs charge one another only for the delivery (not the origination) of
local calls. Thus, under Pac-West’s scheme, it imposes massive charges on LECs
whose customers originate calls that Pac-West delivers to ISPs, but pays no
charges back to those carriers (because ISPs make virtually no outbound calls
themselves that would require delivery by other LECs).
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The Federal Communications Commission (“FCC”) has recognized
that LECs such as Pac-West are causing enormous harm by artificially generating
these traffic imbalances and lopsided reciprocal compensation charges (which, by
2001, were reaching into the billions of dollars annually). In 2001, the FCC issued
the ISP Remand Order to stop this arbitrage, and to replace it with a reciprocal
compensation regime for ISP-bound traffic known as “bill and keep,” where each
LEC would simply bill their own end-users – rather than each other – for the
delivery of such calls. Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, Intercarrier Compensation for ISP-Bound
Traffic, Order on Remand and Report and Order, 16 F.C.C. Rcd. 9151 (2001)
(“ISP Remand Order”). Seeking to avoid the FCC’s bill and keep regime and to
perpetuate its regulatory arbitrage, Pac-West asked the CPUC to force AT&T to
pay reciprocal compensation charges, as set forth in an intrastate tariff, to Pac-
West for delivering ISP-bound traffic. The CPUC obliged.
As shown below, however, the CPUC had no jurisdiction to hear Pac-
West’s request to enforce its intrastate tariff (let alone decide that an intrastate
tariff was an appropriate basis for compensation) because the FCC has held that the
issue of reciprocal compensation for ISP-bound traffic is an issue that is
jurisdictionally interstate, and this Court, following the scheme that Congress
created in the 1996 Telecommunications Act, has held that state commissions have
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no jurisdiction over the interstate rates for such calls in these circumstances. The
District Court erred by failing even to consider this dispositive, threshold issue.
Moreover, the CPUC’s decision cannot be reconciled with the
regulatory scheme established by Congress and the FCC. Congress’s goal in
adopting the statutes at issue in 1996 was to promote competition for local
telephone services. Within a few years, however, the FCC recognized that CLECs
like Pac-West were abusing the reciprocal compensation scheme established by
Congress; rather than promoting competition, their conduct was undermining it, by
inducing CLECs to enter the market to serve only customers that received calls.
By 2001, this had become a problem of immense and growing magnitude: CLECs
were serving ISPs at deep discounts or even for free, funded by billions of dollars
of compensation from other LECs that served primarily voice customers. The
whole purpose of the FCC’s ISP-bound traffic orders was to put the brakes on this
harmful regulatory arbitrage.
The CPUC’s decision to enforce Pac-West’s unilaterally filed
intrastate tariff directly conflicts with the FCC’s rules and its express policy to end
such arbitrage. The ISP Remand Order establishes a bill-and-keep regime for
these calls, which leaves no room for enforcement of state tariffs that purportedly
govern this same interstate traffic. Pac-West’s contention, mistakenly adopted by
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the CPUC and the District Court, that the ISP Remand Order does not apply to
calls exchanged between two CLECs is belied by the Order’s plain terms.
I. STATUTORY AND REGULATORY BACKGROUND
Pre-1996 Regulation of Telecommunications
Congress has long divided responsibilities for regulating
telecommunications between state and federal agencies, vesting federal agencies
with exclusive jurisdiction over interstate telecommunications traffic. Starting
with the Mann-Elkins Act of 1910, Congress extended the exclusive jurisdiction of
the Interstate Commerce Commission to interstate telecommunications services.
Accordingly, in the landmark case of Smith v. Illinois Bell Telephone
Co., 282 U.S. 133 (1930), the Supreme Court invalidated an Illinois Commerce
Commission order establishing rates for the city of Chicago because it purported to
establish rates for interstate traffic. As the Court stated, “the interstate tolls are the
rates applicable to interstate commerce, and neither these interstate rates nor the
division of the revenue arising from interstate rates was a matter for the
determination either of the Illinois Commission or of the court in dealing with the
order of that Commission.” Id. at 148-49; see also Postal Telegraph-Cable Co. v.
Warren-Godwin Lumber Co., 251 U.S. 27, 30 (1919) (the “purpose” of “the act of
1910 . . . would be wholly destroyed if . . . the validity of contracts made by
telegraph companies as to their interstate commerce business continued to be
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subjected to the control of divergent and it may be conflicting local laws”); id. at
31 (the act of 1910 “was an occupation of the field by Congress which excluded
state action” from regulating “interstate business of telegraph [and telephone]
companies”).
When Congress enacted the Communications Act of 1934 (the
“FCA”), 47 U.S.C. § 151 et seq., it transferred the ICC’s broad authority to
regulate interstate communications to the newly created FCC. See Global
Crossing Telecomm., Inc. v. Metrophones Telecomm, Inc., 550 U.S. 45, 127 S.Ct.
1513, 1516 (2007). Preserving Congress’s historic division of jurisdiction over
telecommunications, Congress “grant[ed] the FCC the authority to ‘regulate
interstate and foreign commerce in wire and radio communication,’ 47 U.S.C. §
151, while expressly denying that agency ‘jurisdiction with respect to … intrastate
communication service ….’ 47 U.S.C. 152(b).” Louisiana Pub. Serv. Comm’n v.
FCC, 476 U.S. 355, 360 (1986).
Thus, the FCA purported “to divide the world of domestic telephone
service neatly into two hemispheres – one comprised of interstate service, over
which the FCC would have plenary authority, and the other made up of intrastate
service, over which the States would retain exclusive jurisdiction.” Id. However,
“because virtually all telephone plant that is used to provide intrastate service is
also used to provide interstate service, and … the same carriers provide both
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interstate and intrastate service, actions taken by federal and state regulators within
their respective domains necessarily affect[ed] … the other ‘hemisphere.’” Id.
Thus, the states were able to regulate interstate telecommunications, but only as a
necessary incident to their regulation of intrastate telecommunications, and only
where such regulation did not conflict with a federal rule. In contrast, where the
FCC regulated intrastate telecommunications as a necessary incident to its
regulation of interstate telecommunications and such regulation conflicted with
that of a state, it was clear that the federal regulation preempted the state rule. Id.
at 376 n.4 (citing North Carolina Utilities Comm'n v. FCC, 537 F.2d 787 (4th
Cir.), cert. denied, 429 U.S. 1027 (1976), and North Carolina Utilities Comm'n v.
FCC, 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874 (1977)).
The Telecommunications Act of 1996.
The Telecommunications Act of 1996 (the “1996 Act”), Pub. L. No.
104-104, 110 Stat. 56, dramatically altered the roles and responsibilities of the
FCC and the states with respect to the regulation of telecommunications traffic. To
promote the development of competition in local markets that previously had been
served by local monopolies, the 1996 Act preempted the exclusive state regulation
of local competition in favor of the federal interconnection regime established in
47 U.S.C. §§ 251 and 252. In this regime, the FCC is responsible for regulating
both interstate telecommunications and local competition, and states may exercise
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authority only to the extent permitted by the 1996 Act and the FCC’s rules. See
AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371-73 (1999).
A. The Interconnection Regime of Sections 251 and 252
To achieve its goal of ending local telephone monopolies, the 1996
Act imposes certain duties and obligations on various classes of
telecommunications providers.
1. Interconnection
The 1996 Act requires all telecommunications carriers “to
interconnect directly or indirectly with the facilities and equipment of other
telecommunications carriers.” 47 U.S.C. § 251(a)(1). Within the context of local
service, interconnection permits customers of one LEC to call the customers of
another LEC. Thus, when LEC A’s customer calls LEC B’s customer, LEC A (the
“originating” carrier) transports the call over its local network from the calling
party to a point of interconnection with LEC B; it then hands the call off, after
which LEC B (the “delivering” or “terminating” carrier) transports the call over its
own local network from the interconnection point to the called party. Verizon
California, Inc. v. Peevey, 462 F.3d 1142, 1146 (9th Cir. 2006).
2. Reciprocal Compensation
Concomitant with the duty to interconnect, the 1996 Act also imposes
upon all LECs (including both ILECs and CLECs) “the duty to establish reciprocal
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compensation arrangements for the transport and termination of
telecommunications.” 47 U.S.C. § 251(b)(5). Reciprocal compensation refers to
the arrangement by which two LECs compensate one another when they
collaborate to complete a call (as described in the previous paragraph). Under the
statute and the FCC’s implementing rules, LECs may charge one another only for
the transport and termination of calls, but not for the origination of calls. Thus, in
the example above, if LEC A and LEC B had a reciprocal compensation
arrangement, LEC A would pay LEC B for terminating the call on LEC B’s
network. Id.; see also 47 C.F.R. §§ 51.701, 51.703
The statute and the FCC’s implementing regulations also recognize,
however, that bill and keep is a permissible reciprocal compensation arrangement.
See, e.g., 47 U.S.C. § 252(d)(2). Bill and keep is a reciprocal compensation
arrangement in which the rate is set at zero. In other words, neither LEC charges
the other for terminating traffic that originates on the other’s network. Instead,
each carrier “bills” its own retail customers for the cost of originating and
terminating traffic and “keeps” the revenue.3
3 This case does not involve “access charges” for the transport of intrastate, but nonetheless long-distance, calls, which are subject to a different regulatory scheme. See 47 U.S.C. § 251(g); Implementation of the Local Competition Provisions in the Telecomms. Act of 1996, First Report and Order ,11 F.C.C. Rcd. 15499, 16013 ¶ 1033 (1996) (subsequent history omitted) (“Local Competition Order”).
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3. Additional Obligations for Incumbent Local Exchange Carriers
The 1996 Act attempts to create a new competitive environment for
local telephone service in which new companies have a level playing field to
compete with former monopolies. In doing so, it imposes certain additional
obligations upon the former local telephone monopolies, known as incumbent local
exchange carriers (“ILECs”) to facilitate competition from new entrants, known as
competitive local exchange carriers (“CLECs”). ILECs must share their networks
and services with CLECs through a variety of mechanisms, including permitting
the CLECs to interconnect their facilities to an ILEC’s network and to lease
elements of an ILEC’s network. Id. at § 251(c). The 1996 Act also requires ILECs
“to negotiate in good faith in accordance with section 252 … the particular terms
and conditions of agreements to fulfill the duties described in [§ 251(b) and (c)].”
Id. at § 251(c)(1).
Section 252 sets forth the procedures for the negotiation, arbitration
and approval of the interconnection agreements (“ICAs”) required by § 251(c)(1),
and specifies certain of the limited roles to which state commissions have been
confined. After an ILEC receives a request for interconnection, the ILEC may
voluntarily negotiate and enter into a binding agreement with the requesting
carrier. Id. at § 252(a)(1).
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If negotiation proves unsuccessful, either party, during the period
from 135 to 160 days after the request for interconnection, may petition a state
commission to arbitrate any unresolved issues. Id. at § 252(b)(1). The 1996 Act
provides detailed procedures and standards that the state commission must follow
in conducting the compulsory arbitration. Id. at § 252(b)-(d). Its resolution of the
issues and any conditions imposed on the parties to the arbitration must meet the
requirements of § 251 and any applicable FCC regulations. Id. at § 252(c).
“[A]ny party aggrieved by such determination may bring an action in an
appropriate Federal district court to determine whether the agreement or statement
meets the requirements” of §§ 251 and 252. Id. at § 252(e)(6).
B. The Effect of the Interconnection Regime on State Jurisdiction over Interstate Telecommunications.
The 1996 Act includes many detailed provisions governing
competition for local services, and the Supreme Court has made clear that, with the
Act, Congress has “unquestionably” taken the regulation of local
telecommunications competition away from the states. Iowa Utils., 525 U.S. at
378 n.6. The Act “establishe[s] a federal system headed by the FCC to regulate
local telecommunications competition,” and “validly preempt[s] the states’ power
to regulate local telecommunications competition.” AT&T Communications v.
BellSouth Telecomm's Inc., 238 F.3d 636, 646 (5th Cir. 2001) (“BellSouth”); see
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also MCI Telecomm. Corp. v. Bell Atl.-Pa., 271 F.3d 491, 509 (3rd Cir. 2001)
(“Bell Atl-Pa.”) (“The Act preempted the regulation of interconnection agreements
and of the terms on which a CLEC can provide competitive local service”); MCI
Telecomm. Corp. v. Ill. Bell Tel. Co., 222 F.3d 323, 343 (7th Cir. 2000) (“Ill. Bell”)
(“Congress, exercising its authority to regulate commerce, has precluded all other
regulation except on its terms.”).
“Congress could have made that preemption complete,” but “instead
preserved a role for state utility commissions in the federal regulatory scheme,
giving them back some regulatory power by allowing them the first opportunity to
conduct arbitrations and to approve or reject interconnection agreements.” Bell
Atl.-Pa., 271 F.3d at 510. “Because Congress validly terminated the states’ role in
regulating local telephone competition and, having done so, then permitted the
states to resume a role in that process, the resumption of that role by a state is a
congressionally bestowed gratuity.” Id., see also BellSouth, 238 F.3d at 646
(“After passage of the 1996 Act, regulation of competition among providers of
local phone service is no longer within the province of states' inherent authority.”);
MCI Telecomm. Corp. v. Pub. Serv. Comm'n, 216 F.3d 929, 938 (10th Cir. 2000)
(same).
As a result, a state’s authority to regulate local telecommunications
competition – i.e., intercarrier compensation arrangements between LECs – is now
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sharply limited by the 1996 Act. Bell Atl-Pa., 271 F.3d at 510; see also Ill. Bell,
222 F.3d at 343. “State commissions now exercise power over local competition
only pursuant to § 252(e) and only to the extent and in the manner provided by
Congress,” Bell Atl-Pa., 271 F.3d at 511, and “are not merely acting in an area
regulated by Congress; they are now voluntarily regulating on behalf of
Congress.” Ill. Bell, 222 F.3d at 343 (emphasis in original); see also Pacific Bell v.
Pac-West Telecomm, Inc., 325 F.3d 1114, 1126 n.10 (9th Cir. 2003) (“Pacific
Bell”) (“Under this new scheme, the state commissions are ‘deputized’ federal
regulators and are confined to the role that the Act delineates” (citations omitted));
BellSouth, 238 F.3d at 646.
II. ISP-BOUND TRAFFIC
ISP-bound traffic has received special attention from the FCC, which
the FCC has long held to be interstate telecommunications traffic subject to its
traditional rate-making authority under Section 201. 47 U.S.C. § 201. The FCC
realized that Section 251(b)(5)’s reciprocal compensation requirement created
incentives for a LEC to engage in regulatory arbitrage, and to profit, not by
charging its customers, but by positioning itself to receive a disproportionate
amount of reciprocal compensation from other LECs. ISP Remand Order at 9153
¶ 2.
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The problem, as explained by this Court, is that a user of “dial-up”
internet service will likely make many extended calls to the ISP, but the ISP will
rarely, if ever, call the “dial-up” user or anyone else. Pacific Bell, 325 F.3d at
1119. Because, under a reciprocal compensation regime, the originating LEC pays
the terminating LEC, LECs that serve only ISPs receive but rarely if ever pay
reciprocal compensation. This creates an incentive for LECs to serve ISPs at rates
well below market cost while deriving their revenues not from their ISP customers,
but from the LECs whose customers are calling the ISPs. Thus, when a LEC’s
customers primarily are ISPs, the whole notion of “reciprocal” compensation
becomes skewed. Id.
A. The Declaratory Ruling
The FCC first addressed ISP-bound traffic in 1999, when it found that
a call placed by a user of “dial-up” internet service does not terminate at the ISP’s
local server but continues to the ultimate destination or destinations, specifically at
an internet website that is often located in another state. Implementation of the
Local Competition Provisions in the Telecommunications Act of 1996; Intercarrier
Compensation for ISP-Bound Traffic, Declaratory Ruling and Notice of Proposed
Rulemaking, 14 F.C.C. Rcd 3689, 3697 ¶ 12 (Feb. 26,1999) (“Declaratory
Ruling”). Applying the so-called “end-to-end” analysis, which determines the
jurisdictional nature of communications by comparing the end points of the
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communication, the FCC concluded that ISP-bound telecommunications traffic is
jurisdictionally interstate. Id. at 3695-3702 ¶¶ 10-20. The FCC therefore held that
ISP-bound traffic would ultimately be subject to the FCC’s regulatory authority,
rather than the reciprocal compensation regime (which, at that time, was limited by
rule to “local” traffic).
B. The ISP Remand Order
On appeal, the United States Court of Appeals for the District of
Columbia Circuit accepted the FCC’s determination that ISP-bound traffic was
jurisdictionally interstate but rejected the FCC’s rationale for concluding that such
traffic was not subject to the reciprocal compensation rules. Bell Atlantic Tel. Co.
v. FCC, 206 F.3d 1, 7 (D.C. Cir. 2000) (“However sound the end-to-end analysis
may be for jurisdictional purposes, the [FCC] has not explained why viewing these
linked telecommunications as continuous works for purposes of reciprocal
compensation.”). On remand, the FCC modified its analysis. It concluded once
again that ISP-bound traffic fell outside of the scope of section 251(b)(5), because
Congress had excluded such traffic from reciprocal compensation under section
251(g) (which preserves the pre-1996 Act interstate access charge regime for
certain types of traffic). ISP Remand Order at 9152 ¶ 1. It then reaffirmed its
previous conclusion that ISP-bound traffic was jurisdictionally interstate traffic
that would be regulated directly by the FCC under its statutory authority under
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Section 201 to ensure that the rates for interstate services are “just and reasonable.”
Id. Given the magnitude of the ISP-bound traffic problem, the FCC decided that it
was time to establish an appropriate federal cost recovery mechanism for the
exchange of this traffic. Id. at 9154 ¶¶ 3-4.
The FCC concluded that “the most efficient recovery mechanism for
ISP-bound traffic may be bill and keep, whereby each carrier recovers costs from
its own end-users.” Id. at 9154 ¶ 4. With respect to ISP-bound traffic, the FCC
stated:
We believe that this situation is particularly acute in the case of carriers delivering traffic to ISPs because these customers generate extremely high traffic volumes that are entirely one-directional. . . . For example, comments in the record indicate that competitive local exchange carriers (CLECs), on average, terminate eighteen times more traffic than they originate, resulting in annual CLEC reciprocal compensation billings of approximately two billion dollars, ninety percent of which is for ISP-bound traffic. Moreover, the traffic imbalances for some competitive carriers are in fact much greater, with several carriers terminating more than forty times more traffic than they originate. . . . we believe that such decisions are driven by regulatory opportunities that disconnect costs from end-user market decisions. Thus, under the current carrier-to-carrier recovery mechanism, it is conceivable that a carrier could serve an ISP free of charge and recover all of its costs from originating carriers. This result distorts competition by subsidizing one type of service at the expense of others.
Id. at 9154-55 ¶ 5.
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Because the record indicated a need for immediate action with respect
to ISP-bound traffic, the FCC implemented an interim intercarrier compensation
regime for such traffic.4 Under the new rules, traffic exchanged between LECs
that exceeds a 3:1 ratio of terminating to originating traffic is presumptively
deemed to be ISP-bound traffic (id. at 9187-88 ¶ 79), and the new rules “(i) move[]
aggressively to eliminate arbitrage opportunities presented by the existing recovery
mechanism for ISP-bound [traffic] by lowering payments and capping growth; and
(ii) initiate[] a 36-month transition towards a complete bill and keep recovery
mechanism.” Id at 9155 ¶ 7.
Even where LECs were exchanging traffic pursuant to an ICA that
provided for payment of reciprocal compensation for ISP-bound traffic, the FCC
imposed overriding limits by establishing a gradually declining cap on reciprocal
compensation rates for delivering this traffic (the “rate caps”). Id. at 9187 ¶ 78.
To ensure that these capped rates did not induce carriers to expand efforts to
benefit from regulatory arbitrage, the regime also established a cap on the total
number of minutes of ISP-bound traffic for which a LEC could receive reciprocal
compensation under a particular ICA (the “growth caps”). Id. The FCC clarified
4 The FCC also initiated a rulemaking proceeding to determine whether to abolish all existing intercarrier compensation regimes in favor of bill-and-keep for all traffic, Developing a Unified Intercarrier Compensation Regime, Notice of Proposed Rulemaking, 16 F.C.C. Rcd. 9610 (2001) (“NPRM”), but the FCC has never acted on these proposals.
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that the caps had “no effect to the extent that states have ordered LECs to exchange
ISP-bound traffic either at rates below the caps we adopt here or on a bill and keep
basis (or otherwise have not required payment of compensation for this traffic).”
Id. at 9188 ¶ 80. In other words, the rate caps were “designed to provide a
transition to bill and keep … and no transition is necessary for carriers already
exchanging traffic at rates below the caps.” Id.
The FCC further provided that where two LECs were not exchanging
traffic pursuant to an ICA before the ISP Remand Order, they were to exchange
ISP-bound traffic on a bill and keep basis (the “new markets” rule). Id. at 9188-89
¶ 81. The FCC adopted this rule “to address and curtail a pressing problem that
has created opportunities for regulatory arbitrage and distorted the operation of
competitive markets,” and “to confine these market problems to the maximum
extent.” Id.
Finally, the FCC decided that it would be “patently unfair” to allow
ILECs to take advantage of the rate caps for ISP-bound traffic with respect to
which they were net payors, while permitting them to charge higher reciprocal
compensation rates for traffic with respect to which they were net payees. Id. at
9193-94 ¶ 89. Thus, the regime it adopted required ILECs to make a “mirroring
offer” – i.e., an ILEC must offer to exchange all traffic subject to reciprocal
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compensation at the same per-minute rate as ISP-bound traffic before the ILEC can
take advantage of the rate caps (the “mirroring rule”). Id. ¶ 89.
In setting forth a federal intercarrier compensation regime for ISP-
bound traffic, the FCC expressly preempted state authority to regulate such traffic:
Because we now exercise our authority under section 201 to determine the appropriate intercarrier compensation for ISP-bound traffic, however, state commissions will no longer have authority to address this issue.
Id. at 9189 ¶ 82.5
The FCC also recognized a continuing but limited role for state
commissions with respect to local ISP-bound traffic. For example, it did “not
preempt any state commission decision regarding compensation for ISP-bound
traffic for the period prior to the effective date of the interim regime.” ISP
Remand Order at 9189 ¶ 82 (emphasis added). In addition, it explicitly stated that
it did not change existing contractual arrangements, permitting state commissions
to enforce an ICA provision contrary to federal law in an ICA that had been
entered into prior to the order. Id.
5 At the same time, the FCC explicitly preserved state authority over ISP-bound traffic in certain contexts, including regulation of access charges (e.g., charges for services provided to interexchange carriers to originate or terminate their customers’ calls). Id. at 9169 ¶ 39. As noted above, the present case does not involve access charges.
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On appeal, the D.C. Circuit once again accepted the FCC’s conclusion
that ISP-bound traffic was jurisdictionally interstate; however, it once again
rejected the FCC’s rationale for concluding that ISP-bound traffic was not subject
to reciprocal compensation, holding that § 251(g) did not exempt ISP-bound traffic
from § 251(b)(5). WorldCom, Inc. v. FCC, 288 F.3d 429, 430 (D.C. Cir. 2002).
Significantly, however, as “there [was] plainly a non-trivial likelihood that the
Commission has authority” to adopt the regime set forth in the order, id. at 434, the
Court did not vacate the ISP Remand Order, and it remained in effect pending the
FCC’s proceedings on remand. See Pacific Bell, 325 F.3d at 1123-24.
C. The Core Order
In 2004, the FCC denied a petition for forbearance from enforcement
of the provisions of the ISP Remand Order with respect to the rate caps and the
mirroring rule, but granted forbearance with respect to the growth caps and new
markets rule. Petition of Core Communications, Inc. for Forbearance Under 47
U.S.C. § 160(c) from Application of the ISP Remand Order, Order, 19 FCC Rcd
20179 (2004) (“Core Order”). In rejecting the request for forbearance from the
rate caps, the FCC noted that it had “implemented the rate caps because the
application by state commissions of per-minute reciprocal compensation rates to
ISP-bound traffic ‘created opportunities for regulatory arbitrage and distorted the
economic incentives related to competitive entry into the local exchange and
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exchange access markets,’” and that “[t]hese caps, which apply to all carriers, were
designed to send more accurate price signals and substantially reduce market
distortions.” Id. at ¶ 18.
D. The ISP Mandate Order
After more than six years of waiting for the FCC to respond to the
Worldcom remand, the D.C. Circuit granted a writ of mandamus directing the FCC
to respond by November 5, 2008. In re Core Communications, Inc., 531 F.3d 849
(D.C. Cir. 2008).
In response, the FCC issued the ISP Mandate Order. Intercarrier
Compensation for ISP-Bound Traffic, Order on Remand and Report and Order and
Further Notice of Proposed Rulemaking, CC Docket No. 99-68, 2008 WL 4821547
(Nov. 5, 2008) (“ISP Mandate Order”). The FCC concluded for the first time that
ISP-bound traffic fell within the scope of § 251(b)(5); indeed, rejecting its prior
statement in the Local Competition Order that § 251(b)(5) only applied to local
traffic, the FCC concluded that “all telecommunications exchanged with LECs is
subject to the reciprocal compensation regime in sections 251(b)(5) and
252(d)(2).”6 Id. at ¶ 15. The FCC then reaffirmed its authority to regulate ISP-
6 “Notwithstanding section 251(b)(5)’s broad scope,” the FCC reiterated its “finding in the ISP Remand Order that traffic encompassed by section 251(g) is excluded from section 251(b)(5) except to the extent that the Commission acts to bring that traffic within its scope.” Id. at ¶ 16.
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bound traffic. “Because we re-affirm our findings concerning the interstate nature
of ISP-bound traffic, which have not been vacated by any court, it follows that
such traffic falls under [our] section 201 authority.” Id. at ¶ 21. While Congress
had altered the traditional regulatory framework in 1996 by adding sections 251
and 252, section 251(i) – providing that “[n]othing in this section shall be
construed to limit or otherwise affect the Commission’s authority under section
201” – “preserved the [FCC’s] authority to address new issues that fall within its
section 201 authority over interstate traffic, including compensation for the
exchange of ISP-bound traffic.” Id. Thus, the FCC concluded that, in the ISP
Remand Order, it had “properly exercised its authority under section 201(b) to
issue pricing rules governing the payment of compensation between carriers for
ISP-bound traffic.” Id. Further, it stated that these rules would remain in place
until the agency adopted more comprehensive intercarrier compensation reform.
Id. at ¶ 29.
FACTUAL AND PROCEDURAL BACKGROUND
I. PAC-WEST’S COMPLAINT WITH THE CPUC
Since 1998, Pac-West has had on file with the CPUC a tariff,
Schedule Cal. CLC 1-T, that, inter alia, purports to set forth Pac-West’s intrastate
charges for terminating local traffic originated by CLECs with which Pac-West has
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not entered into an ICA (the “California interstate tariff”). ER:298, 306, 311-16.
This tariff has been amended several times since 1998.
In mid-2001, Pac-West began invoicing AT&T for “termination of
local exchange traffic” to Pac-West customers. ER:306 (Affidavit of John Sumpter
(“Sumpter Aff.”) ¶ 7); see also ER:336 (“Invoices for termination of local traffic
have been sent to AT&T since July 2001”)). AT&T refused to pay these invoices
because (a) it did not have (and had never had) an ICA with Pac-West, (b) the
traffic at issue was local and ISP-bound, and (c) the FCC had ordered carriers not
exchanging local ISP-bound traffic pursuant to an ICA prior to the ISP Remand
Order to exchange such traffic on a bill-and-keep basis. ER:337
On October 24, 2004, Pac-West filed a complaint with the CPUC
alleging that AT&T had “unlawfully refused to pay the lawfully tariffed charges
contained in the invoices presented by Pac-West for the local traffic that [AT&T]
delivers to Pac-West.” ER:298 ¶ 30; see also ER:299 ¶ 35 (alleging that AT&T
“refused to pay the charges invoiced by Pac-West for terminating local traffic
originated by [AT&T] and delivered to Pac-West); ER 300 ¶ 39 (alleging that
AT&T “refused to pay Pac-West’s tariffed charges for terminating local traffic”).
As relief, Pac-West requested that the CPUC order AT&T “to immediately pay to
Pac-West the tariffed charges invoiced by Pac-West” and “to pay all future Pac-
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West invoices for terminating local traffic in accordance with terms and conditions
of Pac-West’s intrastate tariff.” ER:300 ¶ 43.
AT&T submitted testimony establishing that Pac-West terminated
approximately 115 times more traffic for AT&T than AT&T terminated for Pac-
West. ER:260. During the evidentiary hearing, Pac-West’s Director for
Interconnection, Mart McCann – the only PacWest witness to discuss traffic
patterns – accepted this conclusion, and agreed that “a de minimis amount of Pac-
West traffic terminates to AT&T and virtually all of the traffic originates with
AT&T and terminates to Pac-West.” ER:275-76. The FCC has adopted a
rebuttable presumption that traffic that exceeds a 3:1 ratio of terminating to
originating traffic is ISP-bound traffic. Once AT&T established that Pac-West
terminated at least three times as much local exchange traffic for AT&T than
AT&T terminated for Pac-West, the traffic exchanged by the two LECs was
presumed to be ISP-bound traffic as a matter of law. At this point, the burden
shifted to Pac-West to rebut this presumption by demonstrating that traffic above
the 3:1 threshold was not ISP-bound. ISP Remand Order at ¶ 8. Pac-West made
no effort to do so.
II. THE CPUC DECISION
On June 29, 2006, the CPUC issued Decision No. 06-06-055, granting
Pac-West’s complaint (the “Decision”). ER:207. In the Decision, the CPUC
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found that “[t]he overwhelming majority of the traffic terminated by Pac-West for
AT&T is traffic that originates with local exchange customers on AT&T’s network
who use dial-up telephone service to connect to their ISPs.” ER:251 (Finding of
Fact No. 5). Further, the CPUC found that “[t]he volume of local exchange traffic
terminated by Pac-West for AT&T is many times greater than the volume of local
exchange traffic terminated by AT&T for Pac-West.” Id. (Finding of Fact No. 7);
see also ER:250 (“[T]here can be little doubt that the ratio of traffic terminated by
Pac-West for AT&T to the traffic terminated by AT&T for Pac-West appears to be
many times greater than 3-to-1, and is thus more than sufficient to satisfy the
threshold for ‘ISP-bound traffic’ under the ISP Remand Order.”)
Despite recognizing that the traffic at issue was jurisdictionally
interstate ISP-bound traffic, the CPUC went on to determine what form of
reciprocal compensation should be paid for such traffic. Not only did it delve into
an area over which the FCC had asserted federal jurisdiction, it ordered AT&T to
pay a different form of reciprocal compensation than that required by the FCC’s
ISP Remand Order. Concluding that the ISP Remand Order did not apply to ISP-
bound traffic exchanged between CLECs, the CPUC stated that:
[i]n the absence of any controlling federal authority on the issue . . . this Commission has discretion to determine the compensation, if any, that should be paid by one CLEC that originates ISP-bound traffic on its network to
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another CLEC that terminates such traffic on its network.
ER:254 (Conclusion of Law No. 7).
AT&T argued to the CPUC that the commission did not have
jurisdiction to order AT&T to pay reciprocal compensation to Pac-West for ISP-
bound traffic because the FCC has determined such traffic is jurisdictionally
interstate and subject to the FCC’s authority. ER:288.7-288.16. Further, even if
the CPUC had jurisdiction to consider a dispute involving reciprocal compensation
for ISP-bound traffic, AT&T argued that the FCC had established a federal
reciprocal compensation regime for such traffic, thus precluding the CPUC from
applying a state tariff to it. ER:288.16-288.19. The CPUC rejected these
arguments. ER:232-43.
On or about July 31, 2006, so as to avoid the imposition of any
penalties, AT&T paid Pac-West the sum of $7,115,014.16, reflecting charges Pac-
West billed to AT&T for traffic covered by the Decision for the period from July
1, 2001 to January 3, 2005; on or about August 21, 2006, AT&T paid Pac-West the
sum of $2,992,673.12, reflecting charges Pac-West billed to AT&T for traffic
covered by the Decision for the period from February 1, 2005 to June 10, 2006;
and between August 28, 2006, and February 28, 2007, AT&T made payments
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totaling $573,839.52 to PacWest, reflecting charges Pac-West billed to AT&T for
traffic covered by the Decision, for periods subsequent to June 10, 2006.7
On July 31, 2006, AT&T filed an Application for Rehearing of the
Decision. On March 2, 2007, the CPUC denied AT&T’s Application for
Rehearing.
III. PROCEEDINGS BEFORE THE DISTRICT COURT
On November 27, 2006, AT&T filed the instant action in the Northern
District of California, seeking a declaration that federal law preempted the CPUC’s
Decision ordering AT&T to compensate Pac-West for terminating ISP-bound
traffic pursuant to Pac-West’s California intrastate tariff and seeking restitution of
the monies AT&T had paid pursuant to the Decision. ER:188, 204 The parties
agreed that the case presented a purely legal issue and that this issue was
dispositive and appropriate for decision by motion. ER:183-84 ¶¶ 3, 5-6.
In late 2007 and early 2008, the parties briefed cross-motions for
summary judgment. AT&T argued that the CPUC lacked jurisdiction to regulate
7 On March 9, 2007, pursuant to Federal Rule of Civil Procedure 67, AT&T moved for leave to deposit with the court money that AT&T would otherwise be obliged, under the Decision, to pay Pac-West. On April 13, 2007, the District Court granted AT&T leave to make such deposits. Since that date, AT&T has deposited sums purportedly owed to Pac-West with the District Court as such sums have come due. On September 19, 2007, the District Court stayed execution of its August 12, 2008 judgment, and permitted AT&T to continue depositing such sums during the pendency of this appeal.
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reciprocal compensation for ISP-bound traffic outside of the context of an ICA.
ER:160. AT&T also argued that even if the CPUC had jurisdiction, the FCC’s
compensation regime for the exchange of “local” ISP-bound traffic explicitly
preempted the CPUC’s authority to order AT&T to compensate Pac-West pursuant
to Pac-West’s intrastate tariff. ER:161.
Pac-West and the CPUC asserted that the Decision was not preempted
because the FCC had not exercised its jurisdiction over all ISP-bound traffic. ER:
094-096, 130-32. Specifically, they argued that the ISP Remand Order did not
preclude state regulation of ISP-bound traffic exchanged between CLECs and that
the CPUC could lawfully apply Pac-West’s intrastate tariff to the traffic at issue.
ER: 096-099, 132-36
On August 12, 2008, the District Court denied AT&T’s motion and
granted the cross-motions filed by Pac-West and the CPUC. The court held that
the FCC had not manifested a clear intent in the ISP Remand Order to preempt a
state agency’s ability to regulate compensation for ISP-bound traffic between two
CLECs. The District Court cited several decisions holding that the ISP Remand
Order did not preclude state agencies from regulating long-distance ISP-bound
traffic in the context of arbitrating disputes over interconnection agreements.
ER:012-015. The District Court did not address, however, AT&T’s argument that
the CPUC lacked jurisdiction under the 1996 Act to regulate interstate traffic
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outside of the section 252 context or to adjudicate a dispute regarding interstate
traffic between two CLECs who do not have an ICA.
SUMMARY OF ARGUMENT
It has been settled for decades that Congress has stripped the CPUC of
any jurisdiction to regulate interstate telecommunications traffic, except to the
limited extent granted by the Act. In the 1996 Act, Congress adopted an array of
new provisions, including the reciprocal compensation regime, in an effort to
promote competition for local telephone services. In Pacific Bell, this Court
recognized that the Act redefined the specific division of labor between the FCC
and the states, and that the Act grants state regulatory commissions only a “limited
defined” authority over interstate traffic “confined to the role described in § 252 –
that of arbitrating, approving, and enforcing interconnection agreements.” 325
F.3d at 1126. The District Court, and all of the parties, concede that the FCC has
established that ISP-bound traffic is jurisdictionally interstate. ER:012. Thus, the
CPUC has no authority to regulate ISP-bound traffic, except while arbitrating,
approving and enforcing interconnection agreements.
Here, it is undisputed that the CPUC was not engaged in any of those
tasks. AT&T and Pac-West do not have and have never had an interconnection
agreement. As a result, the CPUC lacked jurisdiction to enforce Pac-West’s
intrastate tariff. The District Court should be reversed on this ground alone.
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Rather than address the threshold question whether the CPUC even
had jurisdiction to enforce such tariffs, the District Court focused solely on the ISP
Remand Order. The court framed the question presented as “whether, in the ISP
Remand Order, the FCC manifested a clear intent to preempt a state agency’s
ability to regulate the manner in which two CLECs may be compensated for the
exchange of ISP-Bound traffic.” ER:005. The court then erred in finding that the
FCC did not manifest such an intent.
Indeed, the CPUC’s decision irreconcilably conflicts with the FCC’s
rules and the broader pro-competition policies of Congress and the FCC. The
basic purpose of the ISP Remand Order was to address the FCC’s profound
concern over the rapidly growing problem of CLECs like Pac-West abusing
Congress’s reciprocal compensation scheme by targeting ISPs as customers,
thereby distorting competition and engulfing the system with intercarrier
compensation payments that represented nothing but pure regulatory arbitrage.
Indeed, the FCC found that quickly growing legions of CLECs like Pac-West were
amassing billions of dollars annually in intercarrier compensation to fund deeply
discounted or even free local service to ISPs, severely distorting both CLEC entry
decisions and customer pricing signals. Whether the CLECs’ victims are ILECs or
CLECs is irrelevant, and the ISP Remand Order accordingly indicates again and
again that its rate regime applies to all ISP-bound traffic exchanged between LECs,
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which therefore includes ISP-bound traffic exchanged between CLECs. As the
order repeatedly says, the new rules apply to traffic exchanged between “LECs”
and “carriers,” which are broad, statutorily defined terms that include both ILECs
and CLECs.
The District Court thus construed the ISP Remand Order in a perverse
way. By ignoring the FCC’s express concerns about regulatory arbitrage and its
use of the generic term “LECs,” it invented a lack of clarity where there is none.
In so doing, it adopted a construction of the order that promotes the very abuses
that the FCC was trying to prevent, and it permitted the CPUC improperly to
substitute its own judgment for that of the FCC on an issue concerning interstate
traffic.
STANDARD OF REVIEW
The District Court’s grant of summary judgment is reviewed de novo.
Buono v. Norton, 371 F.3d 543, 545 (9th Cir. 2004). The District Court’s
conclusions of law, including its interpretation of federal statutes and regulations
and its decision regarding preemption, are also reviewed de novo. Olympic Pipe
Line Co. v. City of Seattle, 437 F.3d 872, 877 n. 12 (9th Cir. 2006); see also
Metrophones Telecomm., Inc. v. Global Crossing Telecomm., Inc., 423 F.3d 1056,
1063 (9th Cir. 2005), aff’d 550 U.S. 45 (2007).
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ARGUMENT
I. THE CPUC HAD NO JURISDICTION TO ENFORCE INTRASTATE TARIFF CHARGES FOR DELIVERY OF THIS INTERSTATE TRAFFIC.
AT&T’s principal argument below was that the CPUC had no
jurisdiction under the 1996 Act to enforce intrastate tariffs from Pac-West for this
concededly interstate traffic. As AT&T pointed out, there was a dispositive case
directly on point in this Circuit, Pacific Bell, 325 F.3d at 1126-28, in which this
Court held that under the statutory scheme adopted in the 1996 Act, state
commissions have no authority over interstate traffic, except for the authority to
adjudicate interconnection disputes pursuant to § 252. This dispute does not arise
under § 252, and therefore the CPUC had no jurisdiction to enforce this intrastate
tariff. The District Court ignored AT&T’s argument altogether, and its judgment
should be reversed on this ground alone.
As this Court held in Pacific Bell, the 1996 Act establishes a detailed
scheme of federal regulation that strictly limits state authority with respect to
intercarrier payments for the termination of jurisdictionally interstate telephone
calls. As the Court there explained, “[b]efore the 1996 Act, the FCC had general
rule-making authority to regulate ‘interstate’ traffic and the states had general
authority to regulate ‘intrastate’ traffic.” Pacific Bell, 325 F.3d at 1126 (citing 47
U.S.C. § 152; Local Competition Order at 15499 ¶ 83). Indeed, Congress has
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always intended federal regulation to preempt state law with respect to the
establishment of rates for interstate telecommunications traffic. See Smith, 282
U.S. at 148-49 (“Neither these interstate rates nor the division of revenue arising
from interstate rates was a matter for the determination” of a state regulatory
commission); Postal Telegraph-Cable Co., 251 U.S. at 30-31 (interstate rates are
governed by federal and not state law).
With the passage of the 1996 Act, Congress broadly extended the
FCC’s authority into the field of intrastate telecommunications; the Act and the
FCC’s rules now preempt state regulation of local telecommunications competition
generally. Bell Atl.-Pa., 271 F.3d at 510. “State commissions now exercise power
over local competition only pursuant to § 252(e) and only to the extent and in the
manner provided by Congress.” Id. at 511. “Under the Act, there has been no
delegation to state commissions of the power to fill gaps in the statute through
binding rulemaking . . . State commissions have been given only the power to
resolve issues in arbitration and to approve or reject interconnection agreements,
not to issue rulings having the force of law beyond the relationship of the parties to
the agreement.” Id. at 516.
These limitations on state authority under the new Act are doubly
clear with respect to jurisdictionally interstate traffic, over which the states
historically had no authority. Indeed, while the Act “granted the state commissions
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limited defined authority over interstate traffic under §§ 251 and 252 … it is clear
from the structure of the Act, however, that the authority granted to state regulatory
commissions is confined to the role described in § 252 – that of arbitrating,
approving, and enforcing interconnection agreements.” Pacific Bell, 325 F.3d at
1126 (emphasis added). As this Court has noted, “[t]he Act did not grant state
regulatory commissions additional general rule-making authority over interstate
traffic.” Pacific Bell, 325 F.3d at 1127; see also Iowa Utils. Bd., 525 U.S. at 378-
80; id. at 378 (“the grant in §201(b) means what it says: The FCC has rulemaking
authority to carry out the ‘provisions of this Act,’ which include §§ 251 and 252,
added by the Telecommunications Act of 1996.”).
For these reasons, this Court struck down the CPUC’s prior attempt to
regulate reciprocal compensation for ISP-bound traffic outside the context of §
252. Pacific Bell, 325 F.3d at 1126-28. The CPUC had issued generic orders
applicable to all ICAs, purporting to establish that ISP-bound traffic was covered
by the ICAs’ reciprocal compensation provisions. Nevertheless, because “the
CPUC’s only authority over interstate traffic is its authority under 47 U.S.C. § 252
to approve new arbitrated interconnection agreements and to interpret existing ones
according to their own terms,” this Court concluded that, “[b]y promulgating a
generic order binding on existing interconnection agreements without reference to
a specific agreement or agreements, the CPUC acted contrary to the Act’s
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requirement.” Id. at 1125-26. Thus, under Pacific Bell, with respect to interstate
telecommunications services, a state commission can do no more than adjudicate
disputes concerning ICAs; it cannot engage in any broader rulemaking or
policymaking functions.
These principles are dispositive here. The CPUC has no jurisdiction
over this interstate traffic outside the narrow context of a dispute over an ICA
under § 252. The CPUC’s Decision represents an attempt to regulate this traffic
outside that context, and, under Pacific Bell, the CPUC has no jurisdiction to
enforce a CLEC’s intrastate tariff that purports to set rates for this interstate traffic.
Defendants argued below that this Court in Pacific Bell invalidated
only general rulemaking orders purporting to regulate interstate traffic and not
individual tariffs, ER:032-033, 104, 129-30, but Pacific Bell’s jurisdictional
holding applies equally to the CPUC’s attempt to enforce an intrastate tariff for
interstate traffic. Indeed, this is precisely what the Sixth Circuit held in Verizon
North, Inc. v. Strand, 367 F.3d 577 (6th Cir. 2004). There, a CLEC billed an ILEC
with which it did not have an ICA for terminating ISP-bound traffic at rates set
forth in an intrastate tariff. When the ILEC refused to pay the charges, the CLEC
filed a complaint with the state commission. The state commission asserted
jurisdiction over the dispute, even though the CLEC was relying on its tariff rather
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than on an interconnection agreement and ordered the ILEC to pay the tariffed
rates.
The Sixth Circuit noted that a state’s ability to regulate
interconnection between LECs was “clearly bounded by the plain language of §
252.” While “the Act does not completely eliminate the role of the state
commissions in regulating interconnection between LECs … to the extent [a state
commission] order is inconsistent with the Act or prevents its implementation, it is
preempted.” Id. at 582-83. Because the state commission’s order bypassed the
federal statutory process for establishing interconnection and effectively permitted
the institution of the terms of an ICA “by fiat,” the order was inconsistent with the
statutory framework of § 252 and thus preempted. Id. at 584-85.
The District Court attempted to distinguish Verizon North in a
footnote, on the ground that it involved an ILEC and a CLEC instead of two
CLECs. ER:018 at n.11. But the critical fact here is not whether the intercarrier
relationship is an ILEC-CLEC or CLEC-CLEC relationship, but the fact that the
traffic at issue is jurisdictionally interstate. As Pacific Bell makes clear, the CPUC
has no jurisdiction over interstate traffic, except to the extent that the 1996 Act or
the FCC has granted state commissions such authority. This dispute does not arise
under § 252, and the FCC has not otherwise delegated authority to the state
commissions to regulate the intercarrier compensation for this interstate ISP-bound
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traffic. Indeed, the FCC has directly asserted its historic authority under § 201 to
regulate the interstate rates that CLECs serving ISPs may charge originating
carriers, which necessarily displaces state attempts to regulate such rates. See ISP
Remand Order ¶ 66; ISP Mandate Order ¶ 21 (“the Commission properly
exercised its authority under section 201(b) to issue pricing rules governing the
payment of compensation between carriers for ISP-bound traffic”). If Pac-West
disagrees with AT&T over how intercarrier arrangements for this interstate traffic
should be established, it should have taken its case to the FCC. The statute does
not permit Pac-West to evade the federal scheme by asking the CPUC to enforce
an intrastate tariff purportedly setting the rates for interstate traffic, and the CPUC
has no jurisdiction to accept Pac-West’s invitation to set the policy governing this
interstate traffic outside of the avenues specifically provided by federal law.8
8 Although the District Court did not consider AT&T’s argument with respect to the statute, it did suggest that permitting a CLEC to file an intrastate tariff does not conflict with the FCC’s goal of encouraging ICAs since in theory a state tariff does not preclude the parties from negotiating an interconnection agreement. ER:018. That is not correct: once a LEC has filed a tariff (in which a LEC, naturally, would set the prices at its preferred level), that LEC no longer has any incentive to negotiate an interconnection agreement. Accordingly, the option of filing a tariff with the CPUC would “completely forestall[] the need for negotiations,” thus thwarting the intent of Congress. Verizon-North, 367 F.3d at 585; see also id. (tariff would “completely obviate[] the need for negotiations by allowing the competitor to establish its own rate without any interaction between the incumbent and the competitor”).
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Defendants have also suggested that Pacific Bell bars only state orders
of general applicability, and that tariff proceedings such as this are individualized
adjudications. The rationale of Pacific Bell, however, does not turn on the fact that
rulemaking orders apply generally, but that such orders violate the terms of the Act
because the Act spells out a specific division of authority that limits the state role
to adjudicating interconnection agreement disputes. Pacific Bell, 325 F.3d at
1126-28. In any case, the order here does have broad applicability. As AT&T
explained before the District Court, Pac-West has relied on the Decision as binding
precedent in other proceedings. ER:067-068. Equally important, the Decision is
an invitation to other CLECs to file and seek to enforce similar tariffs – which, as
explained above, undermines the entire scheme of the Act by giving the CPUC
broad authority to regulate interstate traffic outside the narrowly defined avenues
Congress has provided for such regulation.
In short, the District Court answered the wrong question. It never
asked whether Congress or the FCC granted the state commission any authority
outside § 252 to enforce unilateral intrastate tariffs for this jurisdictionally
interstate traffic, and it never considered this Court’s dispositive decision in Pacific
Bell. Instead, it treated the situation as if the state commission was simply
rendering a decision within the context of arbitrating, approving or enforcing an
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ICA, and it asked only what federal rules applied to such a situation. This was not
the situation here, however, and the judgment should therefore be reversed.
II. THE DISTRICT COURT INCORRECTLY HELD THAT THE ISP REMAND ORDER DID NOT EXTEND TO CLEC-TO-CLEC TRAFFIC.
If this had been a case arising from a dispute over an ICA, then it
would have been appropriate to reach the question the District Court did attempt to
answer – i.e., whether the FCC’s rules and orders require a particular reciprocal
compensation arrangement for this type of traffic. The District Court answered
this question incorrectly as well, holding that the FCC’s ISP Remand Order did not
apply to ISP-bound traffic exchanged between two CLECs. In doing so, the
District Court ignored the FCC’s grave concerns about regulatory arbitrage and the
clear application of the ISP Remand Order to all “LECs” and “carriers” and,
instead, permitted a result that is antithetical to the ISP Remand Order’s entire
purpose: ending regulatory arbitrage of the type in Pac-West has engaged.
The FCA and the FCC’s rules and orders pre-empt contrary state
regulation. AT&T Corp. v. Iowa Utilities Bd., 525 U.S. at 378 n.6 (“the question in
these cases is not whether the Federal Government has taken the regulation of local
telecommunications competition away from the States. With regard to the matters
discussed by the 1996 Act, it unquestionably has.”); AT&T Co. v. Central Office
Tel., Inc., 524 U.S. 214 (1998) (federal filed tariffs preempt reseller’s claims under
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state contract and tort law); Smith, 282 U.S. at 148-49 (state commission’s
regulation of interstate rates preempted); Postal Telegraph-Cable Co., 251 U.S. at
30-31 (state regulation of interstate rates preempted). Federal law pre-empts
conflicting state regulation “where compliance with both federal and state
regulations is a physical impossibility,” Fla. Lime & Avocado Growers, Inc. v.
Paul, 373 U.S. 132, 142-43 (1963), or where state law “stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress,”
Hines v. Davidowitz, 312 U.S. 52, 67 (1941).
The FCC’s rules and orders concerning ISP-bound traffic pre-empt
the CPUC’s attempt to enforce Pac-West’s intrastate tariff for the traffic at issue,
because those rules and orders establish that intercarrier compensation for this
interstate ISP-bound traffic must be on a “bill and keep” basis. While the terms of
the ISP Remand Order are clear – it applies to “LECs” that serve ISPs and any
“carrier” delivering traffic to such a CLEC, which (as the District Court
acknowledged) by definition would include two CLECs – the District Court went
out of its way to turn these plain terms into ambiguity. In so doing, the District
Court read the ISP Remand Order to permit a result that squarely conflicts with
federal policy – i.e., it permits tariffs that promote the very regulatory arbitrage
that the FCC adopted the ISP Remand Order to prevent. The District Court’s
interpretation of the ISP Remand Order is untenable and must be reversed as well.
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A. The ISP Remand Order Clearly Applies To All Exchanges of Local ISP-Bound Traffic Between All LECs.
The ISP Remand Order is clear: it mandates bill-and-keep for all
intercarrier relationships between “LECs” and “carriers” when the traffic
imbalance between the two is greater than 3:1 (or rate caps if the carriers have a
pre-existing interconnection agreement). ISP Remand Order ¶¶ 67, 81-82. Indeed,
the D.C. Circuit has read the order as applying to CLEC-to-CLEC ISP-bound
traffic.9 The District Court, however, rather than simply applying the terms of the
order, held essentially that the slightest ambiguity concerning the FCC’s intentions
in the ISP Remand Order would be resolved in favor of permitting states to assert
authority over such traffic. See ER:012 (citing the First Circuit’s decision in
Global NAPs, Inc. v. Verizon New England, Inc., 444 F.3d 59, 72 (1st Cir. 2006)
(“ambiguity is not enough to preempt state regulation”)); ER:014.10 Under any
reasonable interpretation of the ISP Remand Order, however, the FCC did intend
to apply bill and keep when one CLEC sends ISP-bound traffic to another.
9 See In re Core Communications, Inc., 455 F.3d 267, 273 (D.C. Cir. 2006) (“The Commission adopted ‘rate caps,’ which established a gradually declining maximum rate that a carrier (typically, a CLEC) would charge another carrier (typically, an ILEC) for delivering a call to an ISP” (emphasis added), citing ISP Remand Order at 9188 ¶ 78). 10 It should be noted that Global NAPs involved a challenge to a state commission’s decision arbitrating a dispute over an interconnection agreement under § 252, and requiring the payment of access charges. See 444 F.3d at 61.
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To begin with, both the statute and the FCC’s reciprocal
compensation rules apply by their plain terms to CLEC-to-CLEC traffic. The
statutory reciprocal compensation provision, § 251(b)(5), applies to any “carrier”
that requests reciprocal compensation from any “LEC,” both of which are
statutorily defined terms that include CLECs. See supra, p. 9; see also ISP
Mandate Order at 9157 ¶ 10. Since 1996, the FCC’s rules implementing the
reciprocal compensation provisions have likewise applied to “LECs” and to any
“carrier” that requests reciprocal compensation, and thus apply to CLEC-to-CLEC
traffic. 47 C.F.R. §§ 51.701, 51.703. In the ISP Remand Order, the FCC did not
amend the language establishing that the rules govern traffic between all “LECs”
and requesting “carriers.” See ISP Remand Order, Appendix B (modifying 47
C.F.R. § 51.701(b)). Rather, it amended only the language establishing the types of
traffic that would be carved out from the reciprocal compensation rules for direct
federal regulation under § 201. See id.; see also ISP Remand Order at 9169 ¶ 39.
Accordingly, the text of the FCC’s rules cannot be reconciled with Pac-West’s
claim that the FCC had no intention of regulating CLEC-to-CLEC ISP-bound
traffic.
Similarly, in the ISP Remand Order itself, the FCC consistently
describes the new rules in terms that include CLEC-CLEC relationships. The FCC
made clear that it was addressing “whether reciprocal compensation obligations
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apply to the delivery of calls from one LEC’s end-user to an ISP in the same local
calling area that is served by a competing LEC.” Id. at 9159 ¶ 13 (emphasis
added); see also id. at 9181 ¶ 66 (“we must now determine, pursuant to our section
201 authority, what compensation mechanism is appropriate when carriers
collaborate to deliver calls to ISPs” (emphasis added)). It concluded that “a bill
and keep approach to recovering the costs of delivering ISP-bound traffic is likely
to be more economically efficient than recovering these costs from originating
carriers.” Id. ¶ 67 (emphasis added). It explained that it was adopting an “interim
compensation mechanism” that “limit[ed] carriers’ opportunity to recover costs
from other carriers.” Id. (emphasis added). It clarified that the rate caps it
imposed had “no effect to the extent that states have ordered LECs to exchange
ISP-bound traffic either at rates below the caps we adopt here or on a bill and keep
basis (or otherwise have not required payment of compensation for this traffic).”
Id. at 9188 ¶ 80. And, it explained that “where carriers are not exchanging traffic
pursuant to interconnection agreements prior to the adoption of this order” (as was
the case between AT&T and Pac-West), “carriers shall exchange traffic on a bill-
and-keep basis during this interim period.” Id. at 9188 ¶ 81 (emphasis added).
The FCC’s decision to apply the new interim rules to CLEC-to-CLEC
traffic should not be surprising, because the FCC’s entire focus in the order was on
CLECs (like Pac-West) that serve ISPs, not on the nature of the originating carrier
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that delivers traffic to such CLECs. As the FCC explained, a compensation regime
in which the originating carrier pays the CLEC serving the ISP creates an
“incentive to seek out customers, including but not limited to ISPs, with high
volumes of incoming traffic,” and “[t]o the extent that carriers offer these
customers below cost retail rates subsidized by intercarrier compensation, these
customers do not receive accurate price signals.” Id. at 9182 ¶ 68. As the FCC
found, “the record is replete with evidence that reciprocal compensation provides
enormous incentive for CLECs to target ISP customers,” with one-way payments
reaching more than two billion dollars by 2001. Id. at 9183 ¶ 70. The FCC
therefore specifically concluded that, in the context of ISP-bound traffic, the
originating-carrier-pays rule “undermines the operation of competitive markets,”
and that efficient market prices can prevail only when CLECs price their retail
services based on costs rather than “their ability to shift costs to other carriers.”
Id. ¶ 71 (emphasis added). This regulatory arbitrage victimizes originating ILECs
and CLECs alike, and thus the FCC had no policy-based reason to distinguish the
two (and in fact did not distinguish the two).
The District Court acknowledged much of this. It notes that the ISP
Remand Order consistently refers to “LECs” and “carriers,” and that when the
FCC wanted to refer specifically to an ILEC or a CLEC, “it knew how to do so.”
ER:015. It also acknowledged that the CPUC itself had conceded that there is
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nothing in the 2001 order that “expressly limits its applicability to an ILEC-CLEC
relationship.” Id.
Just as the FCC “knew how to” refer specifically to either ILECs,
CLECs, or “carriers,” it “knew how to” preserve state authority over some
elements of ISP-bound traffic. For example, it expressly preserved state decisions
contrary to the ISP Remand Order involving the period prior to the order. Id at
9189 ¶ 82. If the FCC intended to preserve state authority over ISP-bound traffic
exchanged between CLECs, it would have done so explicitly. But it did not.
Accordingly, the ISP Remand Order, by its terms, applies to all
“carriers,” with no exception that is applicable here. There is simply no basis in
the Order to conclude that the ISP Remand Order or the FCC’s rules cover only
ILEC-CLEC relationships to the exclusion of CLEC-CLEC relationships.
B. The District Court’s Reasons For Concluding That The ISP Remand Order Does Not Address CLEC-CLEC Relationships Lack Merit.
The District Court’s various explanations for why the ISP Remand
Order is ambiguous as to CLEC-CLEC compensation for ISP-bound traffic do not
withstand scrutiny.
1. The District Court Erred in Concluding That The “New Markets” Rule Establishes That The Order Applies Only To ILEC-CLEC Relationships.
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Under the ISP Remand Order’s “new markets” rule, if two parties
exchanging ISP-bound traffic did not have a pre-existing interconnection
agreement as of the date the order became effective (and AT&T and Pac-West did
not), then bill-and-keep applies between those two carriers immediately (i.e.,
without a transition or rate caps). See ISP Remand Order at 9188 ¶ 81 (“new
markets” rule applies “where carriers are not exchanging traffic pursuant to
interconnection agreements prior to the adoption of this Order” (emphasis added)).
The District Court, however, relied on its interpretation of the ISP
Remand Order as applying the “new markets” rule only to ILEC-CLEC
relationships. ER:015. The court expressly acknowledged that nothing in
Paragraph 81 suggests it is limited it to ILEC-CLEC relationships. ER:016.
Nonetheless, it concluded that Paragraph 81 is so limited based on a single
sentence in the Core Order issued three years later. Id., citing 19 F.C.C. Rcd at
20182 ¶ 9. The language from the Core Order that the District Court relied on
makes reference to the “new markets” rule contained in ¶ 81:
In this situation, if an incumbent LEC has opted into the federal rate caps for ISP-bound traffic, the two carriers must exchange this traffic on a bill-and-keep basis during the interim period. This rule applies, for example, when a new carrier enters a market or an existing carrier expands into a market it previously had not served.
Core Order, 19 F.C.C. Rcd at 20182 ¶ 9.
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The District Court, however, takes this language out of context, and
thereby misinterprets the meaning of the ISP Remand Order. First, the Core
Order, like the ISP Remand Order, consistently refers only to “LECs” and
“carriers” in describing the motivation for and the regime adopted by the ISP
Remand Order. It notes, for example, that the new rules were motivated by the
FCC’s concern that recovery of reciprocal compensation for ISP-bound traffic
harmed competition “because competitive LECs were able to recover a
disproportionate share of their own costs from other carriers” (emphasis added) –
not only “ILECs.” Id. at 20181 ¶ 5. In addition, it notes that the “rate caps
[provided by the ISP Remand Order] limited only what carriers could receive from
other carriers” – not only ILECs. Id. ¶ 6 (emphasis added).
Second, in the sentence immediately preceding the one on which the
District Court relied, the Core Order states that in Paragraph 81 of the ISP Remand
Order, the FCC “concluded that different interim intercarrier compensation rules
should apply if two carriers were not exchanging traffic pursuant to an
interconnection agreement prior to adoption of the ISP Remand Order.” Id. at
20182 ¶ 9.
The subsequent sentences, upon which the District Court relied, then
describe a special application of the “new markets” rule as it related to ILECs.
Id. Section 252(i) of the Act is a kind of “most favored nations” clause for ILEC
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interconnection agreements. Under that provision, an ILEC must make any of its
existing ICAs that have been approved under § 252 available to any other
requesting carrier that wishes to adopt its terms. 47 U.S.C. § 252(i). As the FCC
recognized, Section 252(i) potentially created a loophole in its new regime: a new
entrant CLEC could maneuver around the “new markets” rule’s bill-and-keep
requirement by invoking its § 252(i) rights against an ILEC that had opted into the
rate cap regime – i.e., a CLEC could simply opt into an existing ICA and thereby
require an ILEC to pay it one-way reciprocal compensation.
The FCC prevented this maneuver by clarifying that a CLEC could
invoke its § 252(i) rights only against an ILEC that had not opted into the rate
caps; if the ILEC had accepted the rate cap regime, the new entrant CLEC had to
exchange at bill-and-keep, notwithstanding § 252(i). But nothing in the FCC’s
discussion of this issue suggests that the regime as a whole applies only to ILEC-
CLEC relationships. As the Core Order itself reiterates, the “new markets” rule
was designed to limit regulatory arbitrage “to the maximum extent” during the
interim period – which plainly includes limiting such opportunities for CLEC-
CLEC traffic.
The Court also relied upon the statement at the end of the ISP Remand
Order that the regime was to balance the need for a new system with the need for a
fair and reasonable transition for “‘CLECs that have come to depend on
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intercarrier compensation revenues.’” ER:016 (citing ISP Remand Order at 9198 ¶
95). But that concern applies equally to CLECs that receive traffic from other
CLECs as from ILECs. Once again, the District Court reads in a limitation that the
text does not support. The quoted language says nothing about denying CLECs
compensation from only ILECs who have been subjected to regulatory arbitrage –
to the contrary, the FCC voiced that concern broadly with respect to “intercarrier
compensation revenues.”
2. The Mirroring Rule Does Not Limit The ISP Remand Order To ILEC-CLEC Relationships
Despite the FCC’s broad concerns about regulatory arbitrage, the
District Court found further support for the mistaken notion that the ISP Remand
Order applied only to ILEC-CLEC relationships based on its reading of the so-
called “mirroring rule.” See ER:017.
As explained above, the mirroring rule is a special requirement that
applies to ILECs to prevent them from seizing upon the newly imposed rate caps if
the new rates were lower than rates the ILEC might have already negotiated in an
ICA. The FCC explained, “[b]ecause we are concerned about the superior
bargaining power of incumbent LECs, we will not allow them to ‘pick and choose’
intercarrier compensation regimes, depending on the nature of the traffic
exchanged with another carrier.” ISP Remand Order at 9193 ¶ 89. Thus, unless an
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ILEC made a “mirroring offer” to exchange traffic at the rates set forth in the ISP
Remand Order for all local traffic (not just ISP-bound traffic), it could not avail
itself of the newly capped rates established by the order.
The District Court mistakenly interpreted the requirement that ILECs
had to make a “mirroring offer” as evidence that the ISP Remand Order was
intended to cover only ILEC-CLEC relationships. It noted, “[i]f the FCC was
concerned about the possibility of regulatory arbitrage between two CLECs, it is
reasonable to assume that it would have required the mirroring rule to apply to all
LECs.” ER:017.
Missing from the District Court’s analysis, however, is any
recognition that ILECs were in a unique position with respect to the new regime.
ILECs – and only ILECs – are subject to statutory reciprocal compensation rates
for terminating traditional “voice” traffic. See 47 U.S.C. § 252(d). The reciprocal
compensation rates ILECs are permitted to charge are set by a special federal
ratemaking methodology based on “forward-looking economic cost.” See 47
C.F.R. §§ 51.505, 51.511, 51.705. These rates, the FCC acknowledged, “are much
higher than the caps we adopt [in the ISP Remand Order], where the traffic
imbalance is reversed.” ISP Remand Order at 9193 ¶ 89. Thus, unless the FCC
took additional action, ILECs could pay CLECs the low rates imposed by the caps
for the ISP-bound traffic they originated (where the traffic imbalance favored the
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CLECs) while receiving payments from other CLECs based on the higher rates
established by the ratemaking formula for the traditional voice traffic they
terminated (where the traffic imbalance was more favorable to the ILECs).
Because the FCC did not want to provide ILECs with such an
advantage, it imposed an additional requirement on them. Rather than formally
amend the formula that established the rates ILECs could charge for terminating
voice traffic, the FCC adopted the mirroring rule essentially to induce ILECs to
give up their rights to the rates established by the formula, so that both ILECs and
CLECs would be exchanging all traffic at the new, lower, capped rates.11
There was no need for a similar mirroring rule for CLECs, because
the ratemaking formula applied only to ILECs, not CLECs.12 Thus, the fact that
the mirroring rule applies only to ILEC-CLEC relationships does not establish that
the ISP Remand Order regime as a whole applies only to ILEC-CLEC
relationships. The District Court erred in relying upon the fact that a single
11 Indeed, one paragraph later, the FCC went on to explain that “[t]his is the correct policy result because we see no reason to impose different rates for ISP-bound and voice traffic.” Id. at 9194 ¶ 90. 12 To the extent that CLECs were exchanging local traffic pursuant to an ICA, the terms of such an ICA would have been driven by market factors. The FCC had no concern that traditional CLECs offering voice services would have undue “bargaining power” in establishing reciprocal compensation rates. In any event, the ISP Remand Order specifically states that parties might avail themselves of any “change of law” provisions that are contained in their ICAs. Id. at 9189 ¶ 82.
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paragraph of the ISP Remand Order did not apply to CLECs, while ignoring the
countless paragraphs throughout the order making clear that the FCC was trying to
eliminate regulatory arbitrage with respect to all carriers.
The District Court also erred in relying on references to ILEC-to-
CLEC exchanges in various court decisions discussing the ISP Remand Order.
ER:017. Importantly, each and every one of these decisions involved review of a
state regulatory commission’s arbitration of an ICA between an ILEC and a CLEC.
See Global NAPs, Inc. v. Verizon New England, Inc., 454 F.3d 91, 96 (2d Cir.
2006) (reviewing state agency decision arbitrating ICA between CLEC and ILEC);
Qwest Corp. v. Wash. Utils. and Transp. Comm’n, 484 F.Supp.2d 1160, 1167
(W.D. Wash. 2007) (same); Southern New England Tel. Co. v. MCI Worldcom
Comm., Inc., 353 F. Supp. 2d 287, 290 (D. Conn. 2005) (same). Thus, the
references to ILEC-CLEC relationships do nothing more than describe the facts
presented before each court. Those references neither address nor support a
decision to preclude the application of the ISP Remand Order to CLEC-CLEC
exchanges of ISP-bound local traffic.
3. The NPRM Does Not Limit The ISP Remand Order To ILEC-CLEC Relationships
The District Court also suggests that statements in the NPRM that was
adopted on the same day as the ISP Remand Order indicate that the FCC was not
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concerned with CLEC-to-CLEC relationships when it issued the ISP Remand
Order. ER:017-018. The NPRM – in which the FCC sought comment on the far
broader proposal of adopting a bill-and-keep regime for all traffic – states that the
FCC did not “expect to extend compensation rules to other interconnection
arrangements that are not currently subject to rate regulation and that do not exhibit
symptoms of market failure.” NPRM, 16 FCC Rcd. at 9612 ¶ 2. In a footnote, the
FCC stated that it did “not contemplate a need to adopt new rules governing . . .
CLEC-CLEC relationships.” Id. at n.2.
The District Court, however, mistakenly interprets the NPRM as
explaining what the FCC had done in the ISP Remand Order, instead of describing
what the FCC was proposing to do in the new rulemaking proceeding. Indeed, the
stated goal of the NPRM was to explore the feasibility of a bill-and-keep approach
for a unified regime of intercarrier compensation. Outside the context of ISP-
bound traffic, CLECs are generally not subject to rate regulation today and are
generally acknowledged not to have market power. Accordingly, the FCC was
merely stating in the NPRM that it was likely that it would not impose new rate
regulation on CLECs where it did not already exist. But again, that has nothing to
do with the context of ISP-bound traffic; indeed, the entire purpose of the ISP
Remand Order was to impose rate regulation on the CLECs that were abusing the
reciprocal compensation regime.
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4. The District Court Erred In Relying On Sprint Spectrum.
Finally, the District Court erroneously relied on a state appellate court
decision for the proposition that state tariffs are generally compatible with the
FCC’s reciprocal compensation regime, as long as the tariffs are explicitly
subordinate to a negotiated interconnection agreement. See ER:018 (citing
Missouri ex rel. Sprint Spectrum L.P. v. Missouri PSC, 112 S.W.3d 20, 25-26 (Mo.
Ct. App. 2003)). That case is inapposite.
This Missouri appellate court decision involves not two CLECs, or
even two LECs, but a LEC and a wireless, or commercial mobile radio service
(“CMRS”), provider. There, the Missouri state court upheld a decision by a state
commission that permitted the use of tariffs to determine compensation for
terminating wireless traffic (not ISP-bound traffic) owed to a LEC by – not another
LEC – but a wireless carrier. Wireless services, of course, are traditional voice
services, and LECs and wireless carriers both terminate substantial numbers of
calls for one another (in stark contrast to the ISP-bound traffic situation).13 The
13 Notably, in the T-Mobile Order, the FCC, pursuant to its broad authority over wireless services, see 47 U.S.C. § 332, enforced state tariffs for terminating wireless traffic, but only because § 251(b) did not apply to wireless carriers, and only on a retrospective basis. Developing Unified Intercarrier Compensation Regime; T-Mobile et al. Petition for Declaratory Ruling Regarding Incumbent LEC Wireless Termination Tariffs, Ruling and Report and Order, 20 FCC Rcd 4855 (2005) (“T-Mobile Order”). In the same order, the FCC banned the use of state tariffs on a going-forward basis (thus superseding the tariffs enforced in
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Missouri court’s rationale for enforcing state tariffs for terminating traffic was
precisely that the wireless carriers were not LECs,14 and § 251(b)(5) did not
require them to enter into reciprocal compensation arrangements, and therefore the
tariffs did not interfere with a federal scheme. Id. at 25.
Whatever the merit of this Missouri decision, the situation here is
vastly different. In this case, the FCC has expressly found that foisting terminating
charges for ISP-bound traffic on originating LECs is harming the public interest
and should be replaced with rate caps (where carriers are exchanging traffic under
an ICA) or bill and keep. Now that the FCC has made its policy clear, permitting
CLECs like Pac-West that serve ISPs to file intrastate tariffs conflicts with this
FCC policy, by facilitating exactly the harm to the public interest the FCC’s new
regime is designed to prevent. If Pac-West (and the countless other CLECs like it)
are allowed to file intrastate tariffs and force traditional CLECs like AT&T to bear
these costs, the FCC’s new regime would be rendered meaningless (since CLECs
with a tariff would have no incentive to agree to anything else). For this reason as
well, the intrastate tariffs in this case are not compatible with the FCC’s new
Sprint Spectrum). T-Mobile at ¶¶ 14-16. 14 The Act’s definition of “local exchange carrier” expressly excludes providers of commercial mobile radio service, such as the wireless providers. See 47 U.S.C. 153(26); see also Local Competition Order, 11 FCC Rcd at 15996-97, ¶¶ 1005, 1008.
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policy, and must fall under the doctrine of conflict pre-emption. Fla. Lime &
Avocado Growers, 373 U.S. at 142-43.
None of the cases on which the District Court relied support its
strained reading of the ISP Remand Order. The FCC has squarely addressed the
reciprocal compensation rates that apply to the termination of ISP-bound traffic
between CLECs, and left no room for states to enforce conflicting intrastate tariffs
that undermine the federal policy of preventing regulatory arbitrage.
CONCLUSION
For the foregoing reasons, the judgment of the District Court should
be reversed.
Respectfully submitted,
/s/ Seth M. Goldstein Mark E. Haddad Max C. Fischer Seth Goldstein SIDLEY AUSTIN LLP 555 West Fifth Street, Suite 4000 Los Angeles, CA 90013 (213) 896-6000 Counsel for Plaintiffs - Appellants
January 28, 2009
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CERTIFICATE OF COMPLIANCE WITH CIRCUIT RULE 32-1
Pursuant to Circuit Rule 32-1, Appellees hereby certify that the text of
this Brief is double spaced, uses a proportionately spaced typeface, and contains a
total of 13,165 words, based on the word count program in Microsoft Word.
Respectfully submitted,
/s/ Seth M. Goldstein Seth M. Goldstein SIDLEY AUSTIN LLP 555 West Fifth Street, Suite 4000 Los Angeles, CA 90013 (213) 896-6000 Counsel for Plaintiffs - Appellants
January 28, 2009
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STATEMENT OF RELATED CASES
There are no related cases.
Respectfully submitted,
/s/ Seth M. Goldstein Seth M. Goldstein SIDLEY AUSTIN LLP 555 West Fifth Street, Suite 4000 Los Angeles, CA 90013 (213) 896-6000 Counsel for Plaintiffs - Appellants
January 28, 2009
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STATUTORY ADDENDUM
47 U.S.C. § 152. Application of chapter (a) The provisions of this chapter shall apply to all interstate and foreign communication by wire or radio and all interstate and foreign transmission of energy by radio, which originates and/or is received within the United States, and to all persons engaged within the United States in such communication or such transmission of energy by radio, and to the licensing and regulating of all radio stations as hereinafter provided; but it shall not apply to persons engaged in wire or radio communication or transmission in the Canal Zone, or to wire or radio communication or transmission wholly within the Canal Zone. The provisions of this chapter shall apply with respect to cable service, to all persons engaged within the United States in providing such service, and to the facilities of cable operators which relate to such service, as provided in subchapter V-A. (b) Exceptions to Federal Communications Commission jurisdiction Except as provided in sections 223 through 227 of this title, inclusive, and section 332 of this title, and subject to the provisions of section 301 of this title and subchapter V-A of this chapter, nothing in this chapter shall be construed to apply or to give the Commission jurisdiction with respect to (1) charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service by wire or radio of any carrier, or (2) any carrier engaged in interstate or foreign communication solely through physical connection with the facilities of another carrier not directly or indirectly controlling or controlled by, or under direct or indirect common control with such carrier, or (3) any carrier engaged in interstate or foreign communication solely through connection by radio, or by wire and radio, with facilities, located in an adjoining State or in Canada or Mexico (where they adjoin the State in which the carrier is doing business), of another carrier not directly or indirectly controlling or controlled by, or under direct or indirect common control with such carrier, or (4) any carrier to which clause (2) or clause (3) of this subsection would be applicable except for furnishing interstate mobile radio communication service or radio communication service to mobile stations on land vehicles in Canada or Mexico; except that sections 201 to 205 of this title shall, except as otherwise provided therein, apply to carriers described in clauses (2), (3), and (4) of this subsection.
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47 U.S.C. § 201. Service and charges (a) It shall be the duty of every common carrier engaged in interstate or foreign communication by wire or radio to furnish such communication service upon reasonable request therefor; and, in accordance with the orders of the Commission, in cases where the Commission, after opportunity for hearing, finds such action necessary or desirable in the public interest, to establish physical connections with other carriers, to establish through routes and charges applicable thereto and the divisions of such charges, and to establish and provide facilities and regulations for operating such through routes. (b) All charges, practices, classifications, and regulations for and in connection with such communication service, shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable is declared to be unlawful: Provided, That communications by wire or radio subject to this chapter may be classified into day, night, repeated, unrepeated, letter, commercial, press, Government, and such other classes as the Commission may decide to be just and reasonable, and different charges may be made for the different classes of communications: Provided further, That nothing in this chapter or in any other provision of law shall be construed to prevent a common carrier subject to this chapter from entering into or operating under any contract with any common carrier not subject to this chapter, for the exchange of their services, if the Commission is of the opinion that such contract is not contrary to the public interest: Provided further, That nothing in this chapter or in any other provision of law shall prevent a common carrier subject to this chapter from furnishing reports of positions of ships at sea to newspapers of general circulation, either at a nominal charge or without charge, provided the name of such common carrier is displayed along with such ship position reports. The Commission may prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions of this chapter.
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47 U.S.C. § 251. Interconnection (a) General duty of telecommunications carriers Each telecommunications carrier has the duty--
(1) to interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers; and
(2) not to install network features, functions, or capabilities that do not comply with the guidelines and standards established pursuant to section 255 or 256 of this title.
(b) Obligations of all local exchange carriers Each local exchange carrier has the following duties:
(1) Resale
The duty not to prohibit, and not to impose unreasonable or discriminatory conditions or limitations on, the resale of its telecommunications services.
(2) Number portability
The duty to provide, to the extent technically feasible, number portability in accordance with requirements prescribed by the Commission.
(3) Dialing parity
The duty to provide dialing parity to competing providers of telephone exchange service and telephone toll service, and the duty to permit all such providers to have nondiscriminatory access to telephone numbers, operator services, directory assistance, and directory listing, with no unreasonable dialing delays.
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(4) Access to rights-of-way
The duty to afford access to the poles, ducts, conduits, and rights-of-way of such carrier to competing providers of telecommunications services on rates, terms, and conditions that are consistent with section 224 of this title.
(5) Reciprocal compensation
The duty to establish reciprocal compensation arrangements for the transport and termination of telecommunications.
(c) Additional obligations of incumbent local exchange carriers In addition to the duties contained in subsection (b) of this section, each incumbent local exchange carrier has the following duties:
(1) Duty to negotiate
The duty to negotiate in good faith in accordance with section 252 of this title the particular terms and conditions of agreements to fulfill the duties described in paragraphs (1) through (5) of subsection (b) of this section and this subsection. The requesting telecommunications carrier also has the duty to negotiate in good faith the terms and conditions of such agreements.
(2) Interconnection
The duty to provide, for the facilities and equipment of any requesting telecommunications carrier, interconnection with the local exchange carrier's network--
(A) for the transmission and routing of telephone exchange service and exchange access;
(B) at any technically feasible point within the carrier's network;
(C) that is at least equal in quality to that provided by the local exchange carrier to itself or to any subsidiary, affiliate, or any other party to which the carrier provides interconnection; and
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(D) on rates, terms, and conditions that are just, reasonable, and nondiscriminatory, in accordance with the terms and conditions of the agreement and the requirements of this section and section 252 of this title.
(3) Unbundled access
The duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory in accordance with the terms and conditions of the agreement and the requirements of this section and section 252 of this title. An incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service.
(4) Resale
The duty--
(A) to offer for resale at wholesale rates any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers; and
(B) not to prohibit, and not to impose unreasonable or discriminatory conditions or limitations on, the resale of such telecommunications service, except that a State commission may, consistent with regulations prescribed by the Commission under this section, prohibit a reseller that obtains at wholesale rates a telecommunications service that is available at retail only to a category of subscribers from offering such service to a different category of subscribers.
(5) Notice of changes
The duty to provide reasonable public notice of changes in the information necessary for the transmission and routing of services using that local exchange carrier's facilities or networks, as well as of any other changes that would affect the interoperability of those facilities and networks.
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(6) Collocation
The duty to provide, on rates, terms, and conditions that are just, reasonable, and nondiscriminatory, for physical collocation of equipment necessary for interconnection or access to unbundled network elements at the premises of the local exchange carrier, except that the carrier may provide for virtual collocation if the local exchange carrier demonstrates to the State commission that physical collocation is not practical for technical reasons or because of space limitations.
(d) Implementation
(1) In general
Within 6 months after February 8, 1996, the Commission shall complete all actions necessary to establish regulations to implement the requirements of this section.
(2) Access standards
In determining what network elements should be made available for purposes of subsection (c)(3) of this section, the Commission shall consider, at a minimum, whether--
(A) access to such network elements as are proprietary in nature is necessary; and
(B) the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer.
(3) Preservation of State access regulations
In prescribing and enforcing regulations to implement the requirements of this section, the Commission shall not preclude the enforcement of any regulation, order, or policy of a State commission that--
(A) establishes access and interconnection obligations of local exchange carriers;
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(B) is consistent with the requirements of this section; and
(C) does not substantially prevent implementation of the requirements of this section and the purposes of this part.
(e) Numbering administration
(1) Commission authority and jurisdiction
The Commission shall create or designate one or more impartial entities to administer telecommunications numbering and to make such numbers available on an equitable basis. The Commission shall have exclusive jurisdiction over those portions of the North American Numbering Plan that pertain to the United States. Nothing in this paragraph shall preclude the Commission from delegating to State commissions or other entities all or any portion of such jurisdiction.
(2) Costs
The cost of establishing telecommunications numbering administration arrangements and number portability shall be borne by all telecommunications carriers on a competitively neutral basis as determined by the Commission.
(3) Universal emergency telephone number
The Commission and any agency or entity to which the Commission has delegated authority under this subsection shall designate 9-1-1 as the universal emergency telephone number within the United States for reporting an emergency to appropriate authorities and requesting assistance. The designation shall apply to both wireline and wireless telephone service. In making the designation, the Commission (and any such agency or entity) shall provide appropriate transition periods for areas in which 9-1-1 is not in use as an emergency telephone number on October 26, 1999.
(f) Exemptions, suspensions, and modifications
(1) Exemption for certain rural telephone companies
(A) Exemption
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Subsection (c) of this section shall not apply to a rural telephone company until (i) such company has received a bona fide request for interconnection, services, or network elements, and (ii) the State commission determines (under subparagraph (B)) that such request is not unduly economically burdensome, is technically feasible, and is consistent with section 254 of this title (other than subsections (b)(7) and (c)(1)(D) thereof).
(B) State termination of exemption and implementation schedule
The party making a bona fide request of a rural telephone company for interconnection, services, or network elements shall submit a notice of its request to the State commission. The State commission shall conduct an inquiry for the purpose of determining whether to terminate the exemption under subparagraph (A). Within 120 days after the State commission receives notice of the request, the State commission shall terminate the exemption if the request is not unduly economically burdensome, is technically feasible, and is consistent with section 254 of this title (other than subsections (b)(7) and (c)(1)(D) thereof). Upon termination of the exemption, a State commission shall establish an implementation schedule for compliance with the request that is consistent in time and manner with Commission regulations.
(C) Limitation on exemption
The exemption provided by this paragraph shall not apply with respect to a request under subsection (c) of this section, from a cable operator providing video programming, and seeking to provide any telecommunications service, in the area in which the rural telephone company provides video programming. The limitation contained in this subparagraph shall not apply to a rural telephone company that is providing video programming on February 8, 1996.
(2) Suspensions and modifications for rural carriers
A local exchange carrier with fewer than 2 percent of the Nation's subscriber lines installed in the aggregate nationwide may petition a State commission for a suspension or modification of the application of a requirement or requirements of subsection (b) or (c) of this section to telephone exchange service facilities specified in such petition. The State commission shall grant such petition to the extent that, and for such duration as, the State commission determines that such suspension or modification--
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(A) is necessary--
(i) to avoid a significant adverse economic impact on users of telecommunications services generally;
(ii) to avoid imposing a requirement that is unduly economically burdensome; or
(iii) to avoid imposing a requirement that is technically infeasible; and
(B) is consistent with the public interest, convenience, and necessity.
The State commission shall act upon any petition filed under this paragraph within 180 days after receiving such petition. Pending such action, the State commission may suspend enforcement of the requirement or requirements to which the petition applies with respect to the petitioning carrier or carriers.
(g) Continued enforcement of exchange access and interconnection requirements On and after February 8, 1996, each local exchange carrier, to the extent that it provides wireline services, shall provide exchange access, information access, and exchange services for such access to interexchange carriers and information service providers in accordance with the same equal access and nondiscriminatory interconnection restrictions and obligations (including receipt of compensation) that apply to such carrier on the date immediately preceding February 8, 1996 under any court order, consent decree, or regulation, order, or policy of the Commission, until such restrictions and obligations are explicitly superseded by regulations prescribed by the Commission after February 8, 1996. During the period beginning on February 8, 1996 and until such restrictions and obligations are so superseded, such restrictions and obligations shall be enforceable in the same manner as regulations of the Commission. (h) Definition of incumbent local exchange carrier
(1) Definition
For purposes of this section, the term ‘incumbent local exchange carrier’ means, with respect to an area, the local exchange carrier that--
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(A) on February 8, 1996, provided telephone exchange service in such area; and
(B)(i) on February 8, 1996, was deemed to be a member of the exchange carrier association pursuant to section 69.601(b) of the Commission's regulations (47 C.F.R. 69.601(b)); or
(ii) is a person or entity that, on or after February 8, 1996, became a successor or assign of a member described in clause (i).
(2) Treatment of comparable carriers as incumbents
The Commission may, by rule, provide for the treatment of a local exchange carrier (or class or category thereof) as an incumbent local exchange carrier for purposes of this section if--
(A) such carrier occupies a position in the market for telephone exchange service within an area that is comparable to the position occupied by a carrier described in paragraph (1);
(B) such carrier has substantially replaced an incumbent local exchange carrier described in paragraph (1); and
(C) such treatment is consistent with the public interest, convenience, and necessity and the purposes of this section.
(i) Savings provision Nothing in this section shall be construed to limit or otherwise affect the Commission's authority under section 201 of this title.
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47 U.S.C. § 252. Procedures for negotiation, arbitration, and approval of agreements (a) Agreements arrived at through negotiation
(1) Voluntary negotiations
Upon receiving a request for interconnection, services, or network elements pursuant to section 251 of this title, an incumbent local exchange carrier may negotiate and enter into a binding agreement with the requesting telecommunications carrier or carriers without regard to the standards set forth in subsections (b) and (c) of section 251 of this title. The agreement shall include a detailed schedule of itemized charges for interconnection and each service or network element included in the agreement. The agreement, including any interconnection agreement negotiated before February 8, 1996, shall be submitted to the State commission under subsection (e) of this section.
(2) Mediation
Any party negotiating an agreement under this section may, at any point in the negotiation, ask a State commission to participate in the negotiation and to mediate any differences arising in the course of the negotiation.
(b) Agreements arrived at through compulsory arbitration
(1) Arbitration
During the period from the 135th to the 160th day (inclusive) after the date on which an incumbent local exchange carrier receives a request for negotiation under this section, the carrier or any other party to the negotiation may petition a State commission to arbitrate any open issues.
(2) Duty of petitioner
(A) A party that petitions a State commission under paragraph (1) shall, at the same time as it submits the petition, provide the State commission all relevant documentation concerning--
(i) the unresolved issues;
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(ii) the position of each of the parties with respect to those issues; and
(iii) any other issue discussed and resolved by the parties.
(B) A party petitioning a State commission under paragraph (1) shall provide a copy of the petition and any documentation to the other party or parties not later than the day on which the State commission receives the petition.
(3) Opportunity to respond
A non-petitioning party to a negotiation under this section may respond to the other party's petition and provide such additional information as it wishes within 25 days after the State commission receives the petition.
(4) Action by State commission
(A) The State commission shall limit its consideration of any petition under paragraph (1) (and any response thereto) to the issues set forth in the petition and in the response, if any, filed under paragraph (3).
(B) The State commission may require the petitioning party and the responding party to provide such information as may be necessary for the State commission to reach a decision on the unresolved issues. If any party refuses or fails unreasonably to respond on a timely basis to any reasonable request from the State commission, then the State commission may proceed on the basis of the best information available to it from whatever source derived.
(C) The State commission shall resolve each issue set forth in the petition and the response, if any, by imposing appropriate conditions as required to implement subsection (c) of this section upon the parties to the agreement, and shall conclude the resolution of any unresolved issues not later than 9 months after the date on which the local exchange carrier received the request under this section.
(5) Refusal to negotiate
The refusal of any other party to the negotiation to participate further in the negotiations, to cooperate with the State commission in carrying out its function as an arbitrator, or to continue to negotiate in good faith in the presence, or with
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the assistance, of the State commission shall be considered a failure to negotiate in good faith.
(c) Standards for arbitration In resolving by arbitration under subsection (b) of this section any open issues and imposing conditions upon the parties to the agreement, a State commission shall--
(1) ensure that such resolution and conditions meet the requirements of section 251 of this title, including the regulations prescribed by the Commission pursuant to section 251 of this title;
(2) establish any rates for interconnection, services, or network elements according to subsection (d) of this section; and
(3) provide a schedule for implementation of the terms and conditions by the parties to the agreement.
(d) Pricing standards
(1) Interconnection and network element charges
Determinations by a State commission of the just and reasonable rate for the interconnection of facilities and equipment for purposes of subsection (c)(2) of section 251 of this title, and the just and reasonable rate for network elements for purposes of subsection (c)(3) of such section--
(A) shall be--
(i) based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the interconnection or network element (whichever is applicable), and
(ii) nondiscriminatory, and
(B) may include a reasonable profit.
(2) Charges for transport and termination of traffic
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(A) In general
For the purposes of compliance by an incumbent local exchange carrier with section 251(b)(5) of this title, a State commission shall not consider the terms and conditions for reciprocal compensation to be just and reasonable unless--
(i) such terms and conditions provide for the mutual and reciprocal recovery by each carrier of costs associated with the transport and termination on each carrier's network facilities of calls that originate on the network facilities of the other carrier; and
(ii) such terms and conditions determine such costs on the basis of a reasonable approximation of the additional costs of terminating such calls.
(B) Rules of construction
This paragraph shall not be construed--
(i) to preclude arrangements that afford the mutual recovery of costs through the offsetting of reciprocal obligations, including arrangements that waive mutual recovery (such as bill-and-keep arrangements); or
(ii) to authorize the Commission or any State commission to engage in any rate regulation proceeding to establish with particularity the additional costs of transporting or terminating calls, or to require carriers to maintain records with respect to the additional costs of such calls.
(3) Wholesale prices for telecommunications services
For the purposes of section 251(c)(4) of this title, a State commission shall determine wholesale rates on the basis of retail rates charged to subscribers for the telecommunications service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier.
(e) Approval by State commission
(1) Approval required
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Any interconnection agreement adopted by negotiation or arbitration shall be submitted for approval to the State commission. A State commission to which an agreement is submitted shall approve or reject the agreement, with written findings as to any deficiencies.
(2) Grounds for rejection
The State commission may only reject
(A) an agreement (or any portion thereof) adopted by negotiation under subsection (a) of this section if it finds that--
(i) the agreement (or portion thereof) discriminates against a telecommunications carrier not a party to the agreement; or
(ii) the implementation of such agreement or portion is not consistent with the public interest, convenience, and necessity; or
(B) an agreement (or any portion thereof) adopted by arbitration under subsection (b) of this section if it finds that the agreement does not meet the requirements of section 251 of this title, including the regulations prescribed by the Commission pursuant to section 251 of this title, or the standards set forth in subsection (d) of this section.
(3) Preservation of authority
Notwithstanding paragraph (2), but subject to section 253 of this title, nothing in this section shall prohibit a State commission from establishing or enforcing other requirements of State law in its review of an agreement, including requiring compliance with intrastate telecommunications service quality standards or requirements.
(4) Schedule for decision
If the State commission does not act to approve or reject the agreement within 90 days after submission by the parties of an agreement adopted by negotiation under subsection (a) of this section, or within 30 days after submission by the parties of an agreement adopted by arbitration under subsection (b) of this section, the agreement shall be deemed approved. No State court shall have
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jurisdiction to review the action of a State commission in approving or rejecting an agreement under this section.
(5) Commission to act if State will not act
If a State commission fails to act to carry out its responsibility under this section in any proceeding or other matter under this section, then the Commission shall issue an order preempting the State commission's jurisdiction of that proceeding or matter within 90 days after being notified (or taking notice) of such failure, and shall assume the responsibility of the State commission under this section with respect to the proceeding or matter and act for the State commission.
(6) Review of State commission actions
In a case in which a State fails to act as described in paragraph (5), the proceeding by the Commission under such paragraph and any judicial review of the Commission's actions shall be the exclusive remedies for a State commission's failure to act. In any case in which a State commission makes a determination under this section, any party aggrieved by such determination may bring an action in an appropriate Federal district court to determine whether the agreement or statement meets the requirements of section 251 of this title and this section.
(f) Statements of generally available terms
(1) In general
A Bell operating company may prepare and file with a State commission a statement of the terms and conditions that such company generally offers within that State to comply with the requirements of section 251 of this title and the regulations thereunder and the standards applicable under this section.
(2) State commission review
A State commission may not approve such statement unless such statement complies with subsection (d) of this section and section 251 of this title and the regulations thereunder. Except as provided in section 253 of this title, nothing in this section shall prohibit a State commission from establishing or enforcing other requirements of State law in its review of such statement, including
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requiring compliance with intrastate telecommunications service quality standards or requirements.
(3) Schedule for review
The State commission to which a statement is submitted shall, not later than 60 days after the date of such submission--
(A) complete the review of such statement under paragraph (2) (including any reconsideration thereof), unless the submitting carrier agrees to an extension of the period for such review; or
(B) permit such statement to take effect.
(4) Authority to continue review
Paragraph (3) shall not preclude the State commission from continuing to review a statement that has been permitted to take effect under subparagraph (B) of such paragraph or from approving or disapproving such statement under paragraph (2).
(5) Duty to negotiate not affected
The submission or approval of a statement under this subsection shall not relieve a Bell operating company of its duty to negotiate the terms and conditions of an agreement under section 251 of this title.
(g) Consolidation of State proceedings Where not inconsistent with the requirements of this chapter, a State commission may, to the extent practical, consolidate proceedings under sections 214(e), 251(f), 253 of this title, and this section in order to reduce administrative burdens on telecommunications carriers, other parties to the proceedings, and the State commission in carrying out its responsibilities under this chapter. (h) Filing required A State commission shall make a copy of each agreement approved under subsection (e) of this section and each statement approved under subsection (f) of this section available for public inspection and copying within 10 days after the
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agreement or statement is approved. The State commission may charge a reasonable and nondiscriminatory fee to the parties to the agreement or to the party filing the statement to cover the costs of approving and filing such agreement or statement. (i) Availability to other telecommunications carriers A local exchange carrier shall make available any interconnection, service, or network element provided under an agreement approved under this section to which it is a party to any other requesting telecommunications carrier upon the same terms and conditions as those provided in the agreement. (j) “Incumbent local exchange carrier” defined For purposes of this section, the term “incumbent local exchange carrier” has the meaning provided in section 251(h) of this title.
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47 C.F.R. § 51.701. Scope of transport and termination pricing rules. (a) The provisions of this subpart apply to reciprocal compensation for transport and termination of telecommunications traffic between LECs and other telecommunications carriers. (b) Telecommunications traffic. For purposes of this subpart, telecommunications traffic means:
(1) Telecommunications traffic exchanged between a LEC and a telecommunications carrier other than a CMRS provider, except for telecommunications traffic that is interstate or intrastate exchange access, information access, or exchange services for such access (see FCC 01-131, paragraphs 34, 36, 39, 42-43); or
(2) Telecommunications traffic exchanged between a LEC and a CMRS provider that, at the beginning of the call, originates and terminates within the same Major Trading Area, as defined in § 24.202(a) of this chapter.
(c) Transport. For purposes of this subpart, transport is the transmission and any necessary tandem switching of telecommunications traffic subject to section 251(b)(5) of the Act from the interconnection point between the two carriers to the terminating carrier's end office switch that directly serves the called party, or equivalent facility provided by a carrier other than an incumbent LEC. (d) Termination. For purposes of this subpart, termination is the switching of telecommunications traffic at the terminating carrier's end office switch, or equivalent facility, and delivery of such traffic to the called party's premises. (e) Reciprocal compensation. For purposes of this subpart, a reciprocal compensation arrangement between two carriers is one in which each of the two carriers receives compensation from the other carrier for the transport and termination on each carrier's network facilities of telecommunications traffic that originates on the network facilities of the other carrier
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47 C.F.R. § 51.703. Reciprocal compensation obligation of LECs. (a) Each LEC shall establish reciprocal compensation arrangements for transport and termination of telecommunications traffic with any requesting telecommunications carrier. (b) A LEC may not assess charges on any other telecommunications carrier for telecommunications traffic that originates on the LEC's network.
LA1 1387275v.3
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