Mci Telecommunications v. Ohio Bell Telephone

• Decision Date: 20 July 2004
• Docket Number: No. 03-3525.,03-3525.
• Citation: 376 F.3d 539
• Parties: MCI TELECOMMUNICATIONS CORP., Plaintiff-Appellee, v. The OHIO BELL TELEPHONE COMPANY, d/b/a SBC Ohio, Defendant-Appellant, Alan R. Schriber, Rhonda Hartman Fergus, Judy A. Jones, Donald L. Mason, and Clarence D. Rogers, Jr., in their Official Capacities as Commissioners of the Public Utilities Commission of Ohio, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

376 F.3d 539

MCI TELECOMMUNICATIONS CORP., Plaintiff-Appellee, v. The OHIO BELL TELEPHONE COMPANY, d/b/a SBC Ohio, Defendant-Appellant Alan R. Schriber, Rhonda Hartman Fergus, Judy A. Jones, Donald L. Mason, and Clarence D. Rogers, Jr., in their Official Capacities as Commissioners of the Public Utilities Commission of Ohio, Defendants-Appellees.

No. 03-3525.

United States Court of Appeals, Sixth Circuit.

Submitted: June 15, 2004.

Decided and Filed: July 20, 2004.

Appeal from the United States District Court for the Southern District of Ohio, Edmund A. Sargus, Jr., J.

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Terri L. Mascherin (briefed), Daniel J. Weiss (briefed), John R. Harrington, (briefed), Jenner & Block, Chicago, IL, Jeffrey A. Rackow, Washington, DC, Donald B. Verrilli, Jr. (briefed), Washington, DC, for Plaintiff-Appellee.

Daniel R. Conway (briefed), Porter, Wright, Morris & Arthur, Columbus, OH, Dennis G. Friedman (briefed), Mayer, Brown, Rowe & Maw, Chicago, IL, for Defendant-Appellant.

Duane W. Luckey (briefed), Columbus, OH, Steven T. Nourse (briefed), Jodi J. Bair (briefed), Office of the Attorney General, Columbus, OH, William Single, IV, Allison M. Ellis, MCI Inc., Washington, DC, for Defendant-Appellee.

Before GILMAN and COOK, Circuit Judges; CLELAND, District Judge.^*

OPINION

CLELAND, District Judge.

Defendant-Appellant Ohio Bell Telephone Company ("SBC") appeals the district court's order affirming the arbitration decision of the Public Utilities Commission of Ohio ("PUCO"). Although PUCO arbitrated over 40 open issues between SBC and Appellee MCI Telecommunications Corp. ("MCI"), SBC appeals only one issue: whether the district court erred in its interpretation of FCC Rule 711(a)(3) and in affirming PUCO's decision to award MCI the tandem reciprocal compensation rate for calls that originate on SBC's network and terminate on MCI's. We AFFIRM the judgment of the district court.

I. FACTS AND PROCEDURAL HISTORY Telecommunications Act of 1996 and Implementing Regulations

In 1996, pursuant to the Telecommunications Act of 1996 (the "1996 Act" or "Act"), MCI began negotiating an "interconnection agreement" with SBC for telephone service in Northeastern Ohio. Such agreements were made possible by the 1996 Act, which Congress enacted to "promote competition in all telecommunications markets, including the local service market." Michigan Bell Tel. Co. v. Climax Tel. Co., 202 F.3d 862, 865 (6th Cir.1999). Congress sought to eliminate state-sanctioned monopolies and adopt a national policy for telecommunication competition in local markets. See AT & T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 370, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999) ("The Telecommunications Act of 1996 (1996 Act or Act), Pub.L. 104-104, 110 Stat. 56, fundamentally restructures local telephone markets. States may no longer enforce laws that impede competition, and incumbent [local exchange carriers] are subject to a host of duties intended to facilitate market entry. Foremost among these duties is the [Local Exchange Carrier's (LEC's)] obligation under 47 U.S.C. § 251(c) (1994 ed., Supp. II) to share its network with competitors.").

Before the Act, local telephone service was mostly provided by state-regulated monopolies, now commonly referred to as incumbent local exchange carriers ("incumbent providers"). In this case, SBC is the incumbent provider for telephone service in Northeast Ohio.

In order to promote competition in the telecommunications market, the 1996 Act requires incumbent providers to allow new market entrants, such as MCI in this case, to utilize the incumbent provider's network and buy the incumbent provider's telecommunication services for a fair price. See 47 U.S.C. §§ 251(a)(1) & (c). These arrangements were necessary to minimize the barriers to market entry erected during the period in which the incumbent provider functioned as a monopoly. Pursuant to the Act, the incumbent provider is required to negotiate an agreement, referred to as an "interconnection agreement," with a new market entrant, or a competing local exchange carrier ("competing provider"). If the parties cannot agree upon certain terms in the agreement, either party can petition the state utility commission to arbitrate the open issues. See id. at § 252(b)(1). The state commissions arbitrate the dispute, ensuring that its resolution of the open issues meets the requirements of the 1996 Act and the Federal Communication Commission's ("FCC's") implementing regulations. Id. at § 252(c).

After the state utilities commission arbitrates the open issues, the parties submit the completed interconnection agreement to the state commission, which either approves the final agreement or rejects it. The state commission may reject the agreement if it does not comply with the 1996 Act or the FCC's regulations, discriminates against other non-party telecommunications providers, or is inconsistent with the public interest. Id. at § 252(e). If either or both parties disagree with the interconnection agreement, as arbitrated by the state commission, they may seek review in federal district court. Id. at § 252(e)(6).

In the new competitive telecommunications marketplace, a customer who places a call through his provider may be routed from his provider's network to another provider's network in order to complete the call. This typically occurs when a person places a local call to someone who receives local telephone service from a different provider than that of the caller (e.g., an SBC customer calls an MCI customer). In this situation, the calling party's provider would require the assistance of the called party's provider in switching the call over to the separate network. Although the calling party pays only its provider for the call, the called party's provider incurs costs in transporting and terminating the call. In the absence of an agreement with the calling party's provider, the called party's provider would go uncompensated for its service.

Through interconnection agreements, the providers agree to a compensation structure that allows parties from different providers to seamlessly complete calls to one another. The 1996 Act requires providers to enter into "reciprocal compensation arrangements" to compensate each other when inter-network calls are completed. Id. at § 251(b)(5). The reciprocal compensation rates are to be based upon a "reasonable approximation of the additional costs" incurred by the provider that transports and terminates the call that originates on another network. Id. at § 252(d)(2)(A)(ii). Congress, however, elected to avoid in-depth inquiries into the actual costs incurred by providers. Id. at § 252(d)(2)(B)(ii) (the provision regarding reciprocal compensation shall not be construed "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."). Instead, Congress left the task of implementing the 1996 Act, including the reciprocal rate provision, to the FCC. Id. at § 251(d)(1).

In 1996, the FCC published its governing regulations regarding reciprocal compensation. The FCC concluded that reciprocal compensation rates should be symmetrical between interconnected telecommunications carriers and based on the incumbent provider's cost studies. See 47 C.F.R. § 51.711(a). Thus, the state commission should apply the same rate no matter which provider, the incumbent or competitor, transports and terminates a call originating from the other's network.

This regulation is based on the FCC's conclusion that the incumbent provider's costs for transporting and terminating a call should be a reasonable approximation, or "presumptive proxy" of the costs for other providers. In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, 16,040 (1996) ("Both the incumbent LEC and the interconnecting carriers usually will be providing service in the same geographic area, so the forward-looking economic costs should be similar in most cases. We also conclude that using the incumbent LEC's forward-looking costs for transport and termination of traffic as a proxy for the costs incurred by interconnecting carriers satisfies the requirement of section 252(d)(2) that costs be determined `on the basis of a reasonable approximation of the additional costs of terminating such calls.' Using the incumbent LEC's cost studies as proxies for reciprocal compensation is consistent with section 252(d)(2)(B)(ii), which prohibits `establishing with particularity the additional costs of transporting or terminating calls.'"). The incumbent's economic cost study is relied upon to determine the appropriate costs because smaller new entrants are typically not in a position to conduct a "forward-looking economic cost study." Id.

Recognizing the intricacies of local telecommunications networks, beyond the general policy of symmetrical rates, the FCC established a more detailed two-tier scheme for determining reciprocal compensation rates. The two-tiered approach takes into account the telecommunications equipment used to transfer and complete a particular call — either "tandem" or "end-office" switches. Historically, incumbent providers used these two switches to route calls. A tandem switch acts as a hub connecting other switches and is generally able to handle calls over a broad geographic area. End-office switches typically serve smaller geographic areas and fewer customers. Acknowledging that the cost associated with transferring calls differs depending on the type of switch used, the FCC held that "states may establish transport and termination rates in the arbitration process that vary according to whether the traffic is routed through a tandem switch or directly to the end-office...