Verizon California, Inc. v. Peevey

• Decision Date: 07 September 2006
• Docket Number: No. 04-16382.,No. 04-16394.,04-16382.,04-16394.
• Citation: 462 F.3d 1142
• Court: U.S. Court of Appeals — Ninth Circuit
• Parties: VERIZON CALIFORNIA, INC., Plaintiff-Appellant, v. Michael R. PEEVEY; Loretta M. Lynch; Carl W. Wood; Geoffrey F. Brown; Susan P. Kennedy, in their official capacities as Commissioners of the Public Utilities Commission of the State of California, and not as individuals; Pac-West Telecomm, Inc., Defendants-Appellees. Pac-West Telecomm, Inc., Counter-claimant-Appellant, v. Verizon California, Inc., Counter-defendant-Appellee, v. Pac-West Telecomm, Inc., Cross-claimant-Appellant, v. Michael R. Peevey; Loretta M. Lynch; Carl W. Wood; Geoffrey F. Brown; Susan P. Kennedy, in their official capacities as Commissioners of the Public Utilities Commission of the State of California, and not as individuals, Cross-defendants-Appellees.

462 F.3d 1142

VERIZON CALIFORNIA, INC., Plaintiff-Appellant, v. Michael R. PEEVEY; Loretta M. Lynch; Carl W. Wood; Geoffrey F. Brown; Susan P. Kennedy, in their official capacities as Commissioners

of the Public Utilities Commission of the State of California, and not as individuals; Pac-West Telecomm, Inc., Defendants-Appellees.

Pac-West Telecomm, Inc., Counter-claimant-Appellant, v. Verizon California, Inc., Counter-defendant-Appellee, v. Pac-West Telecomm, Inc., Cross-claimant-Appellant, v. Michael R. Peevey; Loretta M. Lynch; Carl W. Wood; Geoffrey F. Brown; Susan P. Kennedy, in their official capacities as Commissioners of the Public Utilities Commission of the State of California, and not as individuals, Cross-defendants-Appellees.

No. 04-16382.

No. 04-16394.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 12, 2006.

Filed September 7, 2006.

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Burton A. Gross, Munger, Tolles & Olson, San Francisco, CA, for the plaintiff-appellant/cross-appellee.

D. Anthony Rodriguez, Morrison & Foerster, San Francisco, CA, for defendant-appellee/cross-appellant Pac-West Telecomm, Inc.

Lindsay M. Brown, California Public Utilities Commission, San Francisco, CA, for defendants-appellees/cross-appellees Commissioners of the Public Utilities Commission.

Appeals from the United States District Court for the Northern District of California, Claudia Wilken, District Judge, Presiding. D.C. No. CV-03-03441-CW.

Before: RYMER, T.G. NELSON, and W. FLETCHER, Circuit Judges.

RYMER, Circuit Judge:

These appeals arise out of a dispute between local exchange carriers over the identification of internet-bound traffic, and compensation for delivery of telephone calls to internet service providers and for calls that appear to the customer to be made within a local area code but in fact are not. One of the carriers, Verizon California, Inc., had an exclusive franchise within California before passage of the Telecommunications Act of 1996, 47 U.S.C. § 151 et seq. However, the Act established a competitive system whereby "incumbent" local exchange carriers such as Verizon must share their networks with "competitive" carriers such as Pac-West Telecomm, Inc. It also provides that disagreements are to be referred for arbitration to the state public utility commission, in this case, the California Public Utilities Commission (CPUC). Verizon and Pac-West entered into an interconnection agreement in 1996, but when they reached an impasse in negotiating a new agreement in 2001 and referred the dispute to the CPUC, the commission ruled in Pac-West's favor that (1) during the interim period before a new agreement was in place, the parties' 1996 agreement continued in force such that Verizon must continue to pay reciprocal compensation for delivery of internet-bound calls at pre-existing rates rather than at the lower capped rates set by the Federal Communications Commmission (FCC) that apply to new contractual obligations; (2) Pac-West could exclude calls to paging services before applying an FCC presumption that when terminated calls are more than three times the number of originated calls, the excess calls are bound for internet service providers; and (3) Pac-West is entitled to reciprocal compensation for traffic that appears to originate and terminate within a single exchange by virtue of Pac-West's assignment of a number that appears to be "local," but in fact is not—so-called "Virtual Local" or "VNXX" traffic. The CPUC ruled in Verizon's favor that Verizon is entitled to collect call origination charges for its cost of transporting Virtual Local traffic to a distant point of interconnection. The district court found that the commission's decision was not arbitrary or capricious. Both parties appeal. We agree with the district court, and therefore affirm all rulings except for the commission's determination that Pac-West may disregard paging traffic for purposes of computing the presumptive volume of traffic bound for an internet service provider (ISP). As to that issue, federal law is to the contrary. Accordingly, we reverse and remand the ruling on calls to paging customers.

I

A

Until passage of the Telecommunications Act, local telephone service was provided primarily by a single company within each local area that had an exclusive franchise to serve an authorized territory within the state. The Act replaced this system with a competitive regime under which incumbent local exchange carriers, or ILECs, such as Verizon, are obliged to permit competitive local exchange carriers, or CLECs, such as Pac-West, to interconnect "at any technically feasible point within the [ILEC's] network." 47 U.S.C. § 251(c)(2)(B). Interconnection allows customers of one LEC to call the customers of another, with the calling party's LEC (the "originating" carrier) transporting the call to the connection point, where the called party's LEC (the "terminating" carrier) takes over and transports the call to its end point. To ensure that each LEC is fairly compensated for such calls, the Act requires interconnected LECs to "establish reciprocal compensation arrangements" with one another "for the transport and termination of telecommunications." 47 U.S.C. § 251(b)(5). Under a reciprocal compensation arrangement, the originating LEC must compensate the terminating LEC for delivering its customer's call to the end point. The FCC has determined that this reciprocal compensation requirement applies only "to traffic that originates and terminates within a local area." In re Implementation of the Local Competition Provisions in the Telecomms. Act of 1996, 11 F.C.C. Rcd. 15499, 16013, ¶ 1034, 1996 WL 452885 (Aug. 8, 1996) (subsequent history omitted) (the Local Competition Order). Thus, "[t]he Act preserves the legal distinctions between charges for transport and termination of local traffic and interstate and intrastate charges for terminating long-distance traffic." Id. at 16013, ¶ 1033.

Under the Act, ILECs and CLECs have a duty to negotiate in good faith the terms of their network sharing, including rates of reciprocal compensation. 47 U.S.C. § 251(c)(1). A voluntary agreement reached by the parties need not conform to all of the requirements of § 251, 47 U.S.C. § 252(a)(1), and the state public utility commission reviews voluntary agreements only for limited purposes, 47 U.S.C. § 252(e)(2)(A). However, if the state public utility commission is asked to resolve open issues by means of compulsory arbitration, 47 U.S.C. § 252(b)(1), the Act requires that it "ensure that such resolution and conditions meet the requirements of section 251 [of the Act], including the regulations prescribed by the [FCC] pursuant to section 251 . . . ." 47 U.S.C. § 252(c)(1); see also 47 U.S.C. § 252(e)(2)(B).

Two wrinkles in the reciprocal compensation regime of § 251 are at the crux of this appeal. First, there was confusion from day one about whether the reciprocal compensation requirement should apply to local calls made via modem to an ISP. Following a tortured history that we do not detail, the issue was resolved (for now) when the FCC concluded in 2001 that ISP-bound calls are not subject to reciprocal compensation. In re Implementation of the Local Competition Provisions in the Telecomms. Act of 1996; Intercarrier Compensation for ISP-Bound Traffic, 16 F.C.C. Rcd. 9151, 9189, ¶ 82, 2001 WL 455869 (Apr. 27, 2001) (the ISP Remand Order).¹ In the ISP Remand Order, the FCC held that § 251(g) carves out a category of telecommunications traffic not subject to the reciprocal compensation requirement of § 251(b)(5), id. at 9165-66, ¶¶ 31-32, and that ISP-bound traffic is within this category, id. at 9166-67, ¶ 34. The FCC prohibited reciprocal compensation for termination of calls to an ISP for carriers that did not exchange traffic prior to the order. Id. at 9188-89, ¶ 81. For carriers that were already exchanging traffic prior to the order, the FCC established an interim regime according to which reciprocal compensation rates for ISP-bound calls were capped, with the rate cap declining over time toward zero. Id. at 9155-57, ¶¶ 7-8, 9186-87, ¶¶ 77-78. This was done to eliminate the regulatory arbitrage opportunity available to CLECs. Also, "[i]n order to limit disputes and costly measures to identify ISP-bound traffic," the FCC adopted

a rebuttable presumption that traffic exchanged between LECs that exceeds a 3:1 ratio of terminating to originating traffic is ISP-bound traffic subject to the compensation mechanism set forth in this Order. . . . Carriers that seek to rebut this presumption, by showing that traffic above the ratio is not ISP-bound traffic or, conversely, that traffic below the ratio is ISP-bound traffic, may seek appropriate relief from their state commissions pursuant to section 252 of the Act.

Id. at 9157, ¶ 8. Finally, the FCC stated that "[t]he interim compensation regime we establish here applies as carriers renegotiate expired or expiring interconnection agreements. It does not alter existing contractual obligations, except to the extent that parties are entitled to invoke contractual change-of-law provisions." Id. at 9189, ¶ 82. With the promulgation of these rate caps, "state commissions will no longer have authority to address this issue" after June 14, 2001.² Id.

The second wrinkle in the reciprocal compensation regime concerns VNXX traffic. Telephone numbers generally consist of ten digits in the form of NPA-NXX-XXXX. The first three digits indicate the Numbering Plan Area (or NPA), commonly known as the area code, and the next three digits refer to the exchange code. Under standard industry practice, area codes and exchange codes generally correspond to a particular geographic area served by an LEC. These codes serve two functions: the routing of calls to their intended destinations, and the rating of calls for purposes of charging consumers. Each NPA-NXX code is assigned to a rate center, and calls...