the FCC’s methodology, the Supreme Court recently held that TELRIC was consistent with the
language of the Act, thereby authorizing its implementation. Verizon, 535 U.S. at 523.
IL. FACTUAL AND PROCEDURAL HISTORY

SBC is an ILEC. That is, it was an existing local exchange carrier when the
Telecommunications Act was enacted. 47 U.S.C. § 251 (h). Pursuant to the Act, in June 1996, the
ICC ordered SBC to provide the local loop, unbundled local switching (“ULS”) and inter-office
transport to requesting CLECs such as AT&T; and in February 1998, the ICC ordered SBC to
provide CLECs the opportunity to use shared or common transport (“ST”). ICC Order at 1.

Also in 1998, SBC Communications, Inc., and Ameritech Corporation announced their
intention to merge. As a condition of the ICC’s approval of the merger, the ICC ordered SBC to file
a tariff offering an interim shared transport solution, followed by a tariff offering a permanent shared
transport solution. (ICC Br. at3.) SBC filed its permanent shared transport tariff, Unbundled Local
Switching with Shared Transport (“ULS-ST”), on August 24, 2000. As part of its proposed final
transport solution, SBC also proposed a new ULS rate structure and ULS rates. The ICC began
investigating this tariff on November 1, 2000, and in June 2001, the ICC held hearings where all
parties were allowed to examine numerous expert witnesses. After further briefing, the ICC issued
the final Order under review in this case. Order, Investigation into Tariff Providing Unbundled
Local Switching with Shared Transport, No. 00-0700 (ICC, July 10, 2002).

In its Order, the ICC found that parts of SBC’s tariff were inconsistent with 47 U.S.C. §§
251-52 and FCC rules implementing those provisions, and the ICC ordered SBC to file a revised
tariff in conformance with the ICC Order. On August 9, 2002, SBC filed an application for

rehearing with the ICC, challenging many of the determinations in the ICC Order. The ICC denied


application process out of SBC's hands and imposes on it unnegotiated obligations
in its provision of local service.

359 F.3d 493, 496-97 (7th Cir. 2004). In that case, the Seventh Circuit held that the Indiana Utility
Commission’s conditioning of SBC’s right to provide long distance service on certain procedures
for entry into the local service market was preempted by Sections 251 and 252 of the Act. Jd. at 497.

In another case in which a tariff was voluntarily filed by a local exchange carrier, the Sixth
Circuit sought to determine whether a state commission order requiring the ILEC to pay certain costs
based upon a tariff unilaterally filed by a CLEC is preempted by the Act. Verizon North, 367 F.3d
at 583, The CLEC, in the absence of an interconnection agreement, filed a tariff contending that the
ILEC was required to pay it certain reciprocal compensation. Verizon North, 367 F.3d at 579-80.
Although the ILEC disagreed, the Michigan Public Service Commission exercised jurisdiction over
the dispute and approved the tariff. Jd. at 580. The Sixth Circuit affirmed the district court’s
decision that the state commission does not have jurisdiction to order an ILEC to pay termination
costs under a state tariff in the absence of an interconnection agreement. Jd. at 580-81. The Sixth
Circuit held that the state commission’s order on the unilateral tariff bypassed the federal statutory
process for reaching an interconnection agreement. Jd. at 584-85. The order “completely obviate[d]
the need for negotiations by allowing the competitor to establish its own rate without any interaction
between the incumbent and the competitor.” Jd. at 585. The court held that this was inconsistent
with and preempted by the statutory framework of § 252. Id.

AT&T would contend that the Sixth Circuit case is not analogous to the instant case because
AT&T and SBC had already entered into an interconnection agreement in 1997 addressing ULS and

ULS-ST services and prices, and the agreement contemplated that SBC might be required to file



action for “compliance with the requirements of § 251 and § 252 of the Telecommunications Act.
..." Ill. Bell Tel, Co. v. Worldcom Tech., Inc., 179 F.3d 566, 570-71 (7th Cir. 1999).
IV. STANDARD OF REVIEW

The standard of review in this case is multi-tiered because SBC seeks summary judgment in
areview of a decision by a state commission. Verizon North, Inc., v. Strand, 367 F.3d 577, 581 (6th
Cir. 2004). The first level of analysis is the traditional summary judgment analysis. Summary
judgment is appropriate when “there is no genuine issue as to any material fact and . . . the moving
party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56 (c). The initial burden is on
the moving party to demonstrate the absence of a genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 324 (1986). The opposing party must then “go beyond the pleadings” and
“designate specific facts showing that there is a genuine [material] issue for trial.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). During its summary judgment analysis, the court
must construe the facts and draw all reasonable inferences in the light most favorable to the
nonmoving party. Bombard v. Fort Wayne Newspapers, Inc., 92 F.3d 560 (7th Cir. 1996).

In the second level of analysis, the Court must determine whether SBC challenges the ICC’s
factual or legal findings. In this case, SBC challenges both findings of fact and conclusions of law
in the ICC Order. Federal district courts review state commissions’ interpretations of the Act and
FCC regulations de novo. Verizon North, 367 F.3d at 581; Mich. Bell Tel. Co. v. Strand, 305 F.3d
580, 586 (6th Cir. 2002). A “state agency’s interpretation of federal statutes is not entitled to the
deference afforded a federal agency’s interpretation of its own statutes under Chevron.” Strand, 305
F.3d at 586 (citing Orthopaedic Hosp. v. Belshe, 103 F.3d 1491, 1495 (9th Cir. 1997)). Accordingly,

this Court reviews the ICC’s interpretation of the Act and FCC regulations de novo.



the application on August 20, 2002. On September 19, 2002, SBC filed this lawsuit for declaratory,
injunctive, and other relief from certain determinations made in the Order.

In this lawsuit, SBC claims that a number of the determinations in the ICC Order violate
federal law: (1) the determination of unbundled local switching and unbundled local switching with
shared transport prices; (2) the determination of the unbundled local switching rate structure; (3) the
determination that SBC is not entitled to measurement and billing costs; and (4) the determination
of prices for custom routing over the advanced intelligence network (“AIN”). SBC asks that this
Court declare the ICC determinations unlawful and reverse them accordingly; enjoin the ICC from
enforcing the provisions in its Order inconsistent with the Court’s decision; and award SBC such
other and further relief as the Court deems just and proper.

lil. THE COURT’S JURISDICTION

SBC filed its complaint pursuant to Section 252(e)(6) of the Telecommunications Act, 47
U.S.C. § 252, and 28 U.S.C. § 1331. This Court has jurisdiction over this matter, and the ICC’s
protestations to the contrary are meritless. Section 1331 states that “{tJhe district courts shall have
original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United
States.” As this action arises under the Act of 1996, there is federal question jurisdiction in this case.
Nothing in the Telecommunications Act strips federal courts of jurisdiction. Verizon Md., Inc. v.
Pub. Serv. Comm’n of Md., 535 U.S. 635 (2002). “Decisions of state agencies implementing the
1996 Act are reviewable in federal district courts.” JI1. Bell Tel. Co. v. WorldCom Tech., Inc., 157
F.3d 500, 501 (7th Cir. 1998). In fact, the Act gives federal courts exclusive jurisdiction to review
FCC or state commission actions relating to interconnection agreements. MCI Telecomm. Corp. v.

Ill, Bell Tel. Co,, 222 F.3d 323, 329 (7th Cir. 2000). Federal courts review a state commission's


Bie, 340 F.3d at 445 (discussing sections 251 and 252). Thus, the Seventh Circuit found the state
commission’s order was preempted because the tariff procedure is inconsistent with Sections 251
and 252 of the Act. See Verizon North, 367 F.3d at 583.

In its supplemental brief, AT&T argues that Bie does not apply, because unlike in Bie, SBC
was not forced to file charges as tariffs, but rather did so voluntarily. AT&T claims the tariff was
voluntary because SBC sought the ICC’s approval for the Ameritech-SBC merger, and SBC
negotiated and accepted the conditions attached to that approval, which included filing a tariff setting
forth unbundled switching and shared transport services on particular terms.’ The Seventh Circuit,
however, disagreed with this analysis in an analogous case. In Jnd. Bell Tel. Co., Inc. v. Ind. Utility
Regulatory Comm'n, the Seventh Circuit held that even though SBC voluntarily issued its own
performance assurance plan, or tariff, in order to obtain the state commission’s approval of its
application to provide long distance service, the state commission had no authority to impose its own
plan upon SBC:

[W]e note that at first glance it may seem disingenuous for SBC to submit its own

performance assurance plan and, when that plan fails to gain approval, to’ say the

TURC has no authority to issue its own plan, a plan to which SBC did not agree. A

closer look, however, reveals the logic in SBC's position. The company was seeking

approval of its application to provide long-distance service. A performance assurance

plan of its own making would be its promise to meet its obligations as to local

service if its application to provide long-distance service were granted. If its plan

were inadequate, SBC would presumably bear the consequences in the form of the
Tejection of its application. To have a plan imposed from the outside takes the

3AT&T also claims that the ICC’s tariff condition was not preempted because an ILEC
may establish terms for its services by filing with the state commission “a statement of terms and
conditions that such company generally offers within that state,” and the state commission has
the authority to continue review of the terms and impose additional requirements under state law.
AT&T Supp. Br. at 3 (citing 47 U.S.C. § 252 (f)). However, the submission or approval of such
a statement does not relieve the ILEC of the duty to negotiate terms and conditions of an
agreement under § 251. 47 U.S.C. § 252 (f)(5).



‘Mintse Order Form (06/97)

Ss ! f ) United States District Court, Northern District of Hlinois
‘Name of Assigned Jud, ili. i Sitting Judge if Othe
Medi ed te 4 William J. Hibbler iting Asioned i ge

CASE NUMBER 02 C 6700 DATE 8/20/2004

CASE Illinois Bell Telephone Company v. Wright, et al.

TITLE

[athe flowing box o indicate the party filing the motion, e.g, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the
MOTION: nature of the motion being presented.)
Illinois Bell’s Motion for Summary Judgment (“Opening Brief on the Merits”) (doc. # 23)
DOCKET ENTRY:
(1) o Filed motion of [ use listing in “Motion” box above.}
(2) o Brief in support of motion due
Q) a Answer brief to motion due. . Reply to answer brief due :
(4) o Ruling/Hearing on set for at
(5) o Status hearing [held/continued to] {set for/re-set for] on set for at
© QO Pretrial conference [held/continued to} [set for/re-set for} on set for at :
” a Trial (set for/re-set for] on at
(8) ij [Bench/Jury trial} [Hearing] held/continued to at
(9) a This case is dismissed [with/without] prejudice and without costs (by/agreement/pursuant to]
CUFRCP4(m) General Rule 21 CERCP4i(a)(1) OC FRCP41(:)(2).
(10) = @ [Other docket entry}. The July 10, 2002 ICC Order, mandating certain modifications to SBC's tariff, is inconsistent
with Sections 251 and 252 of the Telecommunications Act and is thus PREEMPTED.

(iy) oO {For further detail see order on the reverse side of the original minute order.]

No notices required, advised in open court.

No notices required. umber of notices

Notices mailed by judge's staff.

Notified counsel by telephone, AUG a 3 2004
Y | Docketing to mail notices. yr (|
V/ | Mail AO 450 form, ; : iN

Gopy to judge/magistrate judge. ano LoriSia sn

courtroom 61:9 Wd OZ SMV HOD

Jac deputy’s
initials ———— —
ida- tes tks Office snailing deputy initials



the state commission’s modification of a tariff filed by SBC as a precondition to providing long
distance service. 359 F.3d at 496-97. The Seventh Circuit applied Bie in that case and held that the
state commission’s order was preempted. Id.

Finally, AT&T and the ICC claim that SBC waived any preemption argument by not raising
it. The Court, however, has the authority to address the issue of preemption sua sponte as it affects
the subject matter jurisdiction of the district court. Waid v. Merrill Area Pub. Sch.,91 F.3d 857, 860
(7th Cir. 1996). See also Hartranft v. Joliet Township Sch. Dist. 204, No. 96 C 5931, 1998 WL
164876, at *4 (N.D. Ill. Apr. 3, 1998). In the instant case, the subject matter jurisdiction of this
Court has been affected by the ICC Order, and the ICC may not do an end-run around the federal
Jurisdiction mandated by Sections 251 and 252 of the Telecommunications Act by ordering SBC to
modify a tariff as opposed to negotiating interconnection rates with CLECs.

The ICC argues that this Court does not have subject matter jurisdiction under Section 252
because the ICC initiated an investigation of SBC’s tariff pursuant to state law, rather than
approving, rejecting, interpreting or enforcing an interconnection agreement pursuant to § 252. ICC
Supp. Br. at 7; ICC Resp. Br. at 6. Therefore, the ICC claims, SBC’s appeal of a state tariff should
go to state court, not federal court. The ICC, however, is arguing for exactly the type of result that
Bie was trying to avoid. In Bie, the Seventh Circuit held that the tariff requirement:

places a thumb on the negotiating scales by requiring one of the parties to the

negotiation, the local phone company, but not the other, the would-be entrant, to state

its reservation price, so that bargaining begins from there. And it allows the other

party to challenge the reservation price, and try to get it lowered, by challenging the

tariff before the state regulatory commission, with further appeal possible to a state

court--even though Congress, in setting up the negotiation procedure, explicitly

excluded the state courts from getting involved in it. At the very least, the tariff
Tequirement complicates the contractual route by authorizing a parallel proceeding.

11


related tariffs in the future and that future ICC orders would be incorporated into the agreement.
Thus, AT&T claims that the ICC Order merely set rates as contemplated by the parties.

However, AT&T itself points to language in the 1997 agreement stating that in the event of
an ICC order purporting to apply provisions of the Act, “either party may by providing written notice
to the other Party require that the affected provisions be renegotiated in good faith and this
agreement be amended accordingly to reflect the pricing, terms and conditions” set forth in the ICC
order. AT&T Supp. Br. at 7 (emphasis added). In this case, the ICC Order mandated certain pricing
terms and rates that precluded such renegotiation. Furthermore, the tariff at issue here was not
directly related to any prior interconnection agreement between SBC and AT&T, but to the merger
between Ameritech and SBC. SBC was not required to file the tariff to implement terms under the
agreement, but as a pre-condition for its merger, and neither AT&T nor the ICC dispute SBC’s claim
that the rates set in the ICC Order were not based on prices in prior interconnection agreements. As
such, the tariff dictated terms for future negotiations and renegotiations between SBC and CLECs.
Although “it may seem disingenuous for SBC to submit its own performance assurance plan and,
when that plan fails to gain approval, to say the [ICC] has no authority to issue its own plan,” the
ICC only had the authority to reject SBC’s application, not to impose its own plan. Ind. Bell, 359
F.3d at 496-97.

AT&T next argues that the preemption at issue in Bie does not apply to modification of an
existing tariff, but only to requiring the filing of an initial tariff. As explained above, however, the
ICC Order does not appear to be reviewing a modification of an existing tariff, but rather reviewing
a new tariff ordered as a condition to the SBC-Ameritech merger. Regardless, the Seventh Circuit

has applied Bie to modifications of existing tariffs. In Indiana Bell, the Seventh Circuit invalidated

10



A state commission’s findings of fact, however, are reviewed under the arbitrary and
capricious standard. Ind. Bell, Tel. Co v. McCarty, 362 F.3d 378, 385 (7th Cir. 2004); Il. Bell Tel.
Co. v. Wright, 245 F. Supp. 2d 900, 905 (N.D. Ill. 2003); Mich. Bell Tel. Co. v. Chappelle, 222 F.
Supp. 2d 905, 909 (E.D. Mich. 2002). The arbitrary and capricious standard allows the agency wide
discretionary powers. If there is a reasonable basis for the factual determination reached by the state
commission, it will be presumed valid. Strand, 305 F.3d at 586; MCI Telecomm. Corp. v. Mich. Bell
Tel. Co., 79 F. Supp. 2d 768, 773 (E.D. Mich. 1999).?

Vv. PREEMPTION

On October 31, 2003, this Court ordered the parties to file supplemental briefs addressing
the implications on the instant case of the recent Seventh Circuit case, Wis. Bell v. Bie, 340 F.3d441
(7th Cir. 2003). In that case, the Seventh Circuit held that the Wisconsin Public Service
Commission’s order requiring the ILEC, Wisconsin Bell, to file tariffs setting forth the price and
terms on which competitors would be entitled to interconnect with its local telephone network was
preempted by the Telecommunications Act, which explicitly mandates a negotiation process between
ILECs and CLECs. The Seventh Circuit held that:

The tariff procedure short-circuits negotiations, making hash of the statutory

requirement that forbids requests for arbitration until 135 days after the local phone

company is asked to negotiate an interconnection agreement. . . . The negotiation

procedure established by the federal act provides the local phone company with a

degree of protection that it would lack ifthe state commission could, by requiring the

company to file a tariff that the commission might invalidate as unreasonable, enable
would-be entrants to bypass the federally ordained procedure.

2Contrary to SBC’s contentions, the Administrative Procedure Act does not provide the
standard of review for state commission actions. See GTE South, Inc. v. Morrison, 199 F.3d 733,
745 (4th Cir. 1999) (citing 5 U.S.C. § 701(b)(1), which defines agency as “an authority of the
Government of the United States”).



nondiscriminatory.” 47 U.S.C. §251(c)(2)(D) (1996). As such, state communication commissions
are required to set rates for interconnection and UNEs that are (1) “based on the cost (determined
without reference to a rate-of-return or other rate-based proceeding) of providing the interconnection
or network element,” (2) “nondiscriminatory;” and (3) “may include reasonable profit.” 47 U.S.C.
§252 (d)(1)(A-B) (1996). The Act also directs the Federal Communications Commission (“FCC”)
to promulgate regulations implementing the requirements of the statute. To assist the state
commissions in arriving at appropriate rates, the FCC developed a “forward-looking economic cost
pricing methodology.” Jn the Matter of Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, First Report and Order, CC Docket 96-98, 11 F.C.C. Red. 15,499,
29 (rel. Aug 8, 1996) (‘First Report and Order”).

This forward-looking economic cost pricing methodology mandates that incumbents should
provide interconnection and UNEs at a price based on their “Total Element Long Run Incremental
Cost (‘TELRIC’), plus a reasonable share of forward looking joint and common costs.” First Report
and Order § 29. A “reasonable allocation of forward-looking common costs” is defined in the
regulations as those “economic costs efficiently incurred in providing a group of elements or services
that cannot be attributed directly to individual elements or services.” 47 C.F.R. §51.505(a-c) (1997).
TELRIC pricing is based upon the cost of operating a hypothetical network built with the most
efficient technology available. AT & T Corp. v. Iowa Util. Bd., 525 U.S. 366, 375 (1999).

Certain costs may not be incorporated into the TELRIC, including historical or embedded
costs, opportunity costs, and retai costs. 47 C.F.R. §51 -505(d)(1-4) (1997). The FCC explains that
the TELRIC pricing strategy “best replicates, to the extent possible, the conditions of a competitive

market.” First Report and Order 679. Although challenges have been made to the imposition of



of the ICC Order that is inconsistent with the declaratory relief. On January 23, 2003, the Court
granted AT&T Communications of Illinois’ (“AT&T’s”) unopposed motion for leave to intervene
in this case.
L BACKGROUND

At the heart of the Telecommunications Act of 1996 (‘the Act”) lies Congress’ intent to
deregulate the telecommunications industry. By mandating that incumbent, or existing, local
exchange carriers (“ILECs “or incumbents) provide competing local exchange carriers (“CLECs”
or new entrants) access to their vast telephone networks, Congress attempted to foster the growth
of competition in the industry by leveling the playing field. ILECs were required to offer various
elements of their networks on an “unbundled” basis (““UNEs” or unbundled network elements), and
allow CLECs to connect equipment and facilities to their systems. CLECs have several options
concerning the provision of services to their customers: (1) purchase all of the services they intend
to offer from the ILEC at wholesale prices and then resell them to their own customers at retail; (2)
create a network by furnishing certain network elements of their own and leasing the remainder from
the ILEC; or (3) build a proprietary network and simply interconnect it with the ILEC’s system to
provide services to customers across both networks. In mandating such an array of options, the Act
sought to “give aspiring competitors every possible incentive to enter local telephone markets.”
Verizon Communications Inc. v. FCC, 535 U.S. 467, 489 (2002). ILECs and CLECs are to negotiate
interconnection agreements to establish the parameters of the relationship. If the carriers fail to
arrive at agreements independently, the Act authorizes state commissions to mediate through
arbitration. See 47 U.S.C. §§ 251-52.

The Act dictates that the rates for UNEs and interconnection should be “just, reasonable and



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

ILLINOIS BELL TELEPHONE COMPANY,
INCORPORATED, d/b/a/ AMERITECH
ILLINOIS,

Plaintiff,
No. 02 C 6700
v.
Judge William J. Hibbler
KEVIN WRIGHT, ERIN O’CONNELL-DIAZ,
LULA M. FORD, EDWARD C. HURLEY
AND MARY FRANCES SQUIRES in Their
Capacity as Commissioners of the Illinois
Commerce Commission and Not as Individuals,

Q
4, ekenEn

UG 2
Defendants, 3 2004

AT&T COMMUNICATIONS OF ILLINOIS,
INC.

SS SS Se Serer

Intervenor/Defendant.

MEMORANDUM OP! IRDE)

On September 19, 2002, Illinois Bell Telephone Company, Incorporated, d/b/a Ameritech
Illinois (“SBC”) filed a complaint against the Commissioners of the Illinois Commerce Commission
(“ICC”) in their capacity as commissioners. SBC filed its Complaint pursuant to Section 252(e)(6)
of the Telecommunications Act of 1996, alleging that certain determinations made by the ICC in its
Order of July 10, 2002, violated federal law. SBC asks the Court to: (1) declare that the ICC’s
determinations in its July 10, 2002, decision in ICC Docket No. 00-0700 (“ICC Order”) violate

federal law and reverse those determinations; and (2) enjoin the ICC from enforcing any provision

‘At the time Plaintiff filed its Complaint, it did business as “Ameritech Ilinois.” It now
does business as “SBC Iilinois” or “SBC.”



Bie, 340 F.3d at 444 (emphasis added). Failing to address the preemption issues in this case would
defy the congressional mandate requiring the District Court to exercise its original and exclusive
jurisdiction in this matter.
VI. © CONCLUSION

Therefore, the Court finds that the July 10, 2002 ICC Order, mandating certain modifications
to SBC’s tariff, is inconsistent with Sections 251 and 252 of the Telecommunications Act and is thus

PREEMPTED.

IT IS SO ORDERED.

Dated: P fae Jo

ibbler, District Judge

12