Indiana Bell Telephone Co. v. Indiana Utility Reg.

• Decision Date: 26 February 2004
• Docket Number: No. 03-1976.,03-1976.
• Citation: 359 F.3d 493
• Parties: INDIANA BELL TELEPHONE COMPANY, INC., Plaintiff-Appellee, v. INDIANA UTILITY REGULATORY COMMISSION, William D. McCarty, David E. Ziegner, in their capacity as Commissioners of the Indiana Utility Regulatory Commission and not as individuals, Defendants-Appellants, and AT & T Communications, Inc. and Worldcom, Inc., Intervening Defendants-Appellants, and Indiana Office of Utility Consumer Counselor, Intervening Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

359 F.3d 493

INDIANA BELL TELEPHONE COMPANY, INC., Plaintiff-Appellee, v. INDIANA UTILITY REGULATORY COMMISSION, William D. McCarty, David E. Ziegner, in their capacity as Commissioners of the Indiana Utility Regulatory Commission and not as individuals, Defendants-Appellants, and AT & T Communications, Inc. and Worldcom, Inc., Intervening Defendants-Appellants, and Indiana Office of Utility Consumer Counselor, Intervening Appellant.

No. 03-1976.

United States Court of Appeals, Seventh Circuit.

Argued October 23, 2003.

Decided February 26, 2004.

Peter J. Rusthoven (argued), Barnes & Thornburg, Indianapolis, IN, for Plaintiff-Appellee.

David L. Steiner (argued), Office of the Attorney General, Indianapolis, IN, for Defendants-Appellants.

Douglas W. Trabaris, American Telephone & Telegraph, John R. Harrington (argued), Jenner & Block, Chicago, IL, Robert G. Mork, Office of Utility Consumer Counselor, Indianapolis, IN, for Intervenors-Appellants.

Before MANION, KANNE, and EVANS, Circuit Judges.

TERENCE T. EVANS, Circuit Judge.

Through the Telecommunications Act of 1996, Congress has had notable success in meeting its goal of fostering competition in the telecommunications industry. But that success has not come without furrowing more than a few brows as lawyers and judges puzzle over the Act's unusual — and unequal — blending of federal and state authority. So it is not surprising to have before us again a preemption issue, this time revolving around the application of a local telephone service provider to enter the long-distance market. The issue is whether, during the long-distance application process, a state regulatory commission has the power to enter an order designed to ensure the applicant will continue to meet its obligations in the local service market.

In the Act, Congress entered what was primarily a state system of regulation of local telephone service and created a comprehensive federal scheme of telecommunications regulation administered by the Federal Communications Commission (FCC). While the state utility commissions were given a role in carrying out the Act, Congress "unquestionably" took "regulation of local telecommunications competition away from the State" on all "matters addressed by the 1996 Act"; it required that the participation of the state commissions in the new federal regime be guided by federal-agency regulations. AT & T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 n. 6, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999). And we recently learned for certain that federal courts can review what the state regulatory agencies do. Verizon Md., Inc. v. Pub. Serv. Comm'n, 535 U.S. 635, 122 S.Ct. 1753, 152 L.Ed.2d 871 (2002). It is not surprising that questions regarding the degree to which the Act preempts state regulation have inevitably grown out of such a scheme.

The issue before us arises as a result of the request of Indiana Bell Telephone Company, Inc. (now SBC Indiana) to be allowed to enter the long-distance market. SBC is what is known as an "incumbent local exchange carrier," as defined in 47 U.S.C. § 251(h); it is also a "Bell operating company," (BOC) as defined in 47 U.S.C. § 153(4) and used in section 271 of the Act, 47 U.S.C. § 271. It is one of the Baby Bells — the descendants of the old monopolist American Telephone & Telegraph Company (AT & T). The defendant is a state agency — the Indiana Utility Regulatory Commission (IURC). The intervener defendants are other competing "local exchange carriers," as defined in 47 U.S.C. § 153(44), including AT & T. As we have previously pointed out, "[o]ne of history's ironies is that AT & T itself, reduced to a long-distance carrier ... has become one of the principal new entrants into local phone service." AT&T Communications of Il. v. Illinois Bell Tel. Co., 349 F.3d 402, 404 (7th Cir.2003). At the same time, the Baby Bells — incumbent local exchange carriers, or Bell operating companies — are attempting to enter the long-distance market.

The Act sets out procedures by which companies enter both the local and long-distance markets. Sections 251 and 252 set out procedures to facilitate entry into local service markets. Section 271 sets forth the process a Bell operating company must go through in applying to the FCC for authority to provide long-distance service.

The Baby Bells have telephone lines and other infrastructure in place. In order to facilitate the entry of competing carriers into the market for local service, the Act requires that incumbent carriers provide "interconnection" and other wholesale services to the competing carriers on a nondiscriminatory basis. Sections 251 and 252 of the Act lay out a process for reaching "interconnection agreements" by which competing carriers can gain interconnection with the incumbent carrier's networks, facilities, and services. The state commissions have a role in helping to negotiate and arbitrate interconnection agreements if private negotiations fail to produce a complete agreement within a specific period of time. Section 252(a),(b). Before any interconnection agreement may be implemented, the state commission must approve it. Section 252(e)(1).

Going in the other direction, section 271 sets out the factors the FCC evaluates in deciding whether to grant the application of an incumbent local exchange carrier to enter the long-distance market. Part of the process is directed at ensuring that the applicant is facilitating competition in the market for local services before it is allowed to enter the long-distance market. To that end, under section 271(d)(2)(B), the FCC consults with the state commission to verify that the BOC has (1) one or more state-approved interconnection agreements with a competitor, pursuant to sections 251 and 252, or a Statement of Generally Available Terms and Conditions (SGAT) under which it will offer local service, and (2) that the interconnection agreements or the SGAT satisfies the 14-point competitive checklist set out in section 271(c)(2)(B). The state commission makes a recommendation, which is merely advisory, as to whether the BOC has satisfied the requirements. The Act reserves to the FCC the authority to decide whether to grant a section 271 application. See MCI Telecomms. Corp. v. Illinois Bell Tel. Co., 222 F.3d 323 (7th Cir.2000).

In this case, SBC initiated a proceeding before the IURC to have the agency evaluate its compliance with section 271 so that the IURC could then consult with the FCC on SBC's proposed application to provide long-distance service. In evaluating SBC's compliance with section 271, IURC set up a collaborative process to allow for the participation of other interested parties, namely, competing local exchange carriers. Several of the competing carriers presented the IURC with proposed "performance assurance" or "remedy" plans to ensure SBC's performance toward the competing carriers and to provide for enforcement of the plan through liquidated damages payable to the competing carriers and assessments payable to the state of Indiana. But no agreement on such a plan was reached.

"Performance assurance" plans are not creatures of the Act. However, the FCC has said that the "existence of a satisfactory performance monitoring and enforcement mechanism is probative evidence that the BOC will continue to meet its section 271 obligations after a grant of [long-distance] authority." In re Joint Application by BellSouth Corp. et al. for Provision of In-Region, InterLATA Servs. in Ga. and La., 17 F.C.C.R. 9018, ¶ 291 (May 15, 2002). It is easy to see why SBC might want to present a plan to the FCC to bolster its application. And, in fact, SBC presented a plan of its own in seeking the IURC's favorable recommendation to the FCC. It was a plan SBC had negotiated with Time-Warner Telcom of Indiana as an amendment to its interconnection agreement with that company. It would be a performance assurance plan that, if the IURC approved, would be available to all other competing local exchange carriers pursuant to section 252(I).

It was not approved, however, and instead the IURC entered an order adopting a remedy plan of its own. It asserted that Indiana state law gave it the authority to adopt the plan and to issue orders regarding the quality of service SBC provided. The IURC said that SBC was "subject to the jurisdiction and oversight" of the IURC and is obligated under Indiana law to "furnish adequate service and facilities." The order it entered was a "stand-alone" document, which the IURC said was available to new entrants into the local service market, "independent of the Sections 251/252 interconnection agreement process."

With this state of affairs, SBC moved to federal court with a complaint, alleging that the IURC order conflicted with and was preempted by sections 251, 252, and 271 of the Act and that the order exceed the IURC's authority under Indiana law. SBC filed a motion for a preliminary injunction, which by agreement was consolidated with a final hearing on the merits of the preemption claims. The parties filed cross-motions for summary judgment, and the district court granted SBC's request for injunctive relief. The IURC and a number of intervener-competing local exchange carriers now appeal that decision.

As a preliminary matter, we note that at first glance it may...