1

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

ELECTRONIC CITATION: 2004 FED App. 0232P (6th Cir.)

File Name: 04a0232p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

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.

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No. 03-3525

Appeal from the United States District Court

for the Southern District of Ohio at Columbus.

No. 97-00721—Edmund A. Sargus, Jr., District Judge.

2 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

*

The Honorable Robert H. Cleland, United States District Judge for

the Eastern District of Michigan, sitting by designation.

Submitted: June 15, 2004

Decided and Filed: July 20, 2004 

Before: GILMAN and COOK, Circuit Judges; CLELAND,

District Judge.*

_________________

COUNSEL

ON BRIEF: Dennis G. Friedman, MAYER, BROWN,

ROWE & MAW, Chicago, Illinois, Daniel R. Conway,

PORTER, WRIGHT, MORRIS & ARTHUR, Columbus,

Ohio, for Appellant. Donald B. Verrilli, Jr., JENNER &

BLOCK, Washington, D.C., Terri L. Mascherin, Daniel J.

Weiss, JENNER & BLOCK, Chicago, Illinois, Duane W.

Luckey, Columbus, Ohio, Steven T. Nourse, Jodi J. Bair,

OFFICE OF THE ATTORNEY GENERAL, Columbus,

Ohio, for Appellees.

_________________

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
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

3

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 (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

4 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

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
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

5

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 symmetricalbetween

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.

6 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

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
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

7

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 switch.” In the Matter of

Implementation of the Local Competition Provisions in the

Telecommunications Act of 1996, 11 F.C.C.R. at 16042. The

FCC also recognized that new entrants may utilize new

technology other than the two switches commonly used by

incumbent providers. “In such event, states shall also

consider whether [these] new technologies (e.g., fiber ring or

wireless networks) perform functions similar to those

performed by an incumbent LEC's tandem switch and thus,

whether some or all calls terminating on the new entrant's

network should be priced the same as the sum of transport and

termination via the incumbent LEC's tandem switch.” Id.

Most important to the issue currently before the court, the

FCC established a rule for determining whether the new

provider’s switch generally serves the same role as a tandem

switch serves in the incumbent’s network (i.e., whether the

entrant can charge the tandem rate when employing new

technology). Rule 711(a)(3) provides: “Where the switch of

a carrier other than an incumbent LEC serves a geographic

area comparable to the area served by the incumbent LEC's

tandem switch, the appropriate rate for the carrier other than

an incumbent LEC is the incumbent LEC's tandem

interconnection rate.” 47 C.F.R. § 51.711(3).

The Interconnection Agreement Between SBC and MCI

In this case, MCI was beginning to offer local telephone

service in Ohio and sought an interconnection agreement

from the incumbent provider, SBC. n 1994, under pre-Act

pro-competitive state regulations, MCI applied to PUCO for

permission to offer local service in three Ohio counties:

Cuyahoga, Franklin, and Montgomery. PUCO examined

MCI’s business and technical capabilities and, on December

31, 1996, certified MCI to provide local service in the three

counties.

8 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

One of the sticking points during negotiation of the

interconnection agreement was the appropriate reciprocal

compensation rate that SBC would pay MCI when MCI

incurred costs by transporting and terminating a call on its

network that originated from SBC’s network. Rather than

using a series of tandem switches and end-office switches,

MCI utilized new technology, especially fiber optic rings, to

reach all of its customers in a local service area by using only

one switch--a “Siemen’s Class 5" telecommunications switch

located in Cleveland, Ohio. The parties could not agree upon

the appropriate reciprocal compensation rate to compensate

MCI for transporting and terminating calls that originate on

SBC’s network, and thus submitted this issue, along with

nearly 50 others, to PUCO for arbitration pursuant to

47 U.S.C. § 252.

PUCO considered the parties’ positions and accepted both

written and live testimony during the arbitration proceeding,

and, on January 9, 1997, issued its Arbitration Award. In the

Award, PUCO decided all outstanding issues and directed the

parties to submit a modified interconnection agreement.

PUCO decided that MCI could charge SBC the tandem

reciprocal compensation rate rather than the lower end office

reciprocal compensation rate. PUCO considered the prefiled

testimony of Maria Marzulla, a senior manager of MCI’s

Local Network Engineering Group, who described MCI’s

technology and network capabilities. She testified that

“MCI’s switches all serve areas at least equal in size if not

greater than the serving area of the [incumbent provider’s]

tandem [switch],” and cited to examples of MCI’s network in

Baltimore and New York. Although during live testimony,

Ms. Marzulla was unable to give an estimate of actual

customers being served by MCI’s switch at the time of the

hearing, she reemphasized that the MCI switch is capable of

serving a geographic area comparable to the area served by

SBC’s tandem switch. SBC did not offer testimony or

evidence regarding the geographical reach of MCI’s switch,
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

9

but instead argued that MCI was required to show that it was

already servicing customers in a geographic area comparable

to SBC.

PUCO rejected SBC’s argument:

The fundamental question then becomes: does MCI’s

switch located in Cleveland serve an area comparable to

that served by Ameritech’s tandem switch. We turn our

attention to MCI’s conditional certificate approved in

Case No. 94-2012-TP-ACE, wherein the Commission

granted MCI authority to provide local

telecommunications service in Cuyahoga, Franklin, and

Montgomery counties. We will presume, given the startup nature of MCI’s operations, that MCI shall serve the

area for which we found it worthy of a certificate. In our

view, that is a comparable service area.

In the Matter of Petition of MCI Telecommunications Corp.

for Arbitration Pursuant to Section 252(b) of the

Telecommunications Act of 1996 to Establish an

InterconnectionAgreementwith Ameritech Ohio, No. 96-888-

TP-ARB (Jan. 9, 1997) (“PUCO Arbitration”). PUCO based

its decision on the “best information” it had and asked the

parties to “provide regular reports to the Commission’s

telecommunications staff so that [it] may receive ongoing

information.” (Id.)

Appeal of The Arbitration Decision

Pursuant to 47 U.S.C. § 252(e)(6), SBC sought review of

the arbitration determination in the United States District

Court (S.D. Ohio), challenging various aspects of PUCO’s

decision, including the reciprocal compensation rate finding.

SBC claimed that, to the extent MCI was permitted to charge

the tandem reciprocal compensation rate, the agreement

(entered into after the arbitration) violated 47 U.S.C.

§ 252(d)(2) because MCI had not shown that its switch

10 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

1

The matter remained pending before the district court for

approximately six years. The district court stayed the action, awaiting

decisions from the FCC and United States Supreme Court that could have

had a bearing on the case. In the meantime, while the action was pending,

the parties’ interconnection agreement expired and the parties entered into

a new agreement in early 2003.

actually served customers in a comparable geographic area as

SBC.

On March 21, 2003,1 the district court affirmed PUCO’s

decision awarding MCI the tandem reciprocal compensation

rate. The court concluded that PUCO applied the correct

legal test because it considered the appropriate regulation, 47

C.F.R. § 51.711(a). It then went on to conclude, under the

arbitrary and capricious standard, that PUCO did not err in

finding that “MCI had the capacity to serve a region in

northeastern Ohio for which it had applied and obtained a

Certificate of Operation.” (03/19/03 Order at 11.) The court

deferred to PUCO’s previous determination that “MCI [was]

able to serve the area in question” and the issuance of an

operating license to MCI. (Id.) Accordingly, SBC’s claim

was dismissed.

II. JURISDICTION

This case arises under the Telecommunications Act of

1996, which permits a party to appeal the final arbitration

decision of the state utilities commission to a federal district

court. 47 U.S.C. § 252(e)(6). Generally, this court has

jurisdiction over an appeal from the district court’s order

pursuant to 28 U.S.C. § 1291.

Appellee PUCO, however, argues that jurisdiction is

lacking because the case is either moot or because the

majority of SBC’s challenge to the reciprocal compensation

rate is not yet ripe for decision.
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

11

First, we disagree with the contention that this case has

been rendered moot by the parties’ 1997 interconnection

agreement or the superseding interconnection agreement in

2003. The fact that the parties accepted PUCO’s arbitration

decisions and incorporated them into their 1997

interconnection agreement, and thus agreed to operate under

such terms during the pendency of this appeal, does not

preclude SBC from seeking reimbursement based on the

lower rate. MCI, a party to the 1997 agreement, agrees. If we

were to hold otherwise and find that the interconnection

agreement rendered the appeal from the arbitration decision

moot, telecommunication companies would be forced to forgo

entering into interconnection agreements in order to preserve

their appeal. The new entrant to the market would not be able

to efficiently serve its customers (without an interconnection

agreement) until the appellate process ran its course, further

entrenching the incumbent provider and creating the risk that

the new entrant’s technology could become outdated in the

meantime. Parties are free to continue business relations with

an understanding that one party might pursue appeal, and thus

seek reimbursement, through the process permitted by federal

law. See 47 U.S.C. § 252(e)(6). MCI maintained its

relationship with SBC with this understanding. See Indiana

Bell Tel. Co. Inc. v. McCarty, 362 F.3d 378 (7th Cir. 2004)

(considering the merits of an appeal from the arbitration

decision despite the fact that the parties entered into, and

operated under, an interconnection agreement that

incorporated the arbitrator’s disputed decisions).

Similarly, the parties’ most recent interconnection

agreement, entered into in 2003, does not affect the

justiciability of SBC’s appeal. The contract expressly permits

either party to seek a judicial order revising the agreement

and authorizes retroactive relief (i.e., reimbursement for rates

paid). The parties reserved all rights and remedies with

respect to collection of rates and charges under the

interconnection agreement. Accordingly, by its express

12 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

terms,the 2003 interconnection agreement does not render the

instant appeal moot.

PUCO next argues that a refund, or retroactive relief, is not

available to SBC under the “filed rate doctrine.” The classic

example of application of the filed rate doctrine, often

referred to as the filed tariff doctrine, can be found in the

Supreme Court’s decision in Louisville & Nashville R. Co. v.

Maxwell, 237 U.S. 94 (1915). In that case, the Supreme

Court held that a passenger who purchased a train ticket at a

rate misquoted by the ticket agent did not have a defense

against the subsequent collection of the higher tariff rate by

the railroad.

Under the Interstate Commerce Act, the rate of the

carrier duly filed is the only lawful charge. Deviation

from it is not permitted upon any pretext. Shippers and

travelers are charged with notice of it, and they as well as

the carrier must abide by it, unless it is found by the

Commission to be unreasonable. Ignorance or

misquotation of rates is not an excuse for paying or

charging either less or more than the rate filed. This rule

is undeniably strict and it obviously may work hardship

in some cases, but it embodies the policy which has been

adopted by Congress in the regulation of interstate

commerce in order to prevent unjust discrimination.

Id. at 97. The filed rate doctrine requires that common

carriers and their customers adhere to tariffs filed and

approved by the appropriate regulatory agencies. In essence,

PUCO argues that SBC cannot obtain a refund for rates paid

to MCI in the past under this doctrine. We disagree.

First, and most importantly, SBC is not arguing that the

tandem rate itself should be different (i.e., SBC is not arguing

that the rate is incorrect or was unreasonably set) or that it is

per se unreasonable. The issue is whether SBC is required to

pay the tandem rate or the end office rate, which may depend
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

13

2

There is also no real dispute that SBC, if successful on appeal, may

also be entitled to prospective relief. We reject PUCO’s misplaced

argument that SBC’s claim for prospective relief is not yet ripe because

the issue is currently fit for judicial review and will clarify not only future

decisions affecting the interconnection agreement, but also the past and

current agreements. Moreover, SBC’s arguments regarding the potential

that this issue could evade judicial review because of the relatively quick

turnover of interconnection agreements further persuades the court to

render a decision in this matter.

upon the interpretation of the regulations governing

symmetrical rates. A ruling by this court will have no effect

on the filed tariff or rate. Thus, SBC is not challenging the

filed tariff, but is merely appealing the arbitration decision

that applied one rate rather than another. Such appeals are

expressly permitted under the Telecommunications Act and

the parties agreed that a refund could be sought in their most

recent interconnection agreement. PUCO has cited no

persuasive authority otherwise.

Further, the two most important purposes for the filed rate

doctrine are not implicated if the court reviews PUCO’s

decision and the resulting rate terms of the interconnection

agreement. The filed rate doctrine prevents carrier

discrimination by committing the carriers to one set tariff and

preserves the role of administrative agencies in approving and

setting rates, a practice at which they are particularly adept.

See Fax Telecommunications Inc. v. A.T.&T., 138 F.3d 479,

489 (2d Cir. 1998) (describing the two principles emanating

from the filed rate doctrine). Neither of these principles are

threatened in this case, nor is there a potential that SBC is

vying for a lower rate in some unfair manner or for some

ulterior motive. Rather, SBC merely wants the court to

review PUCO’s and the district court’s interpretation (and

possibly application) of the regulations. The filed rate

doctrine does not reach a circumstance such as this one, and

thus SBC is entitled to seek retroactive relief.2

14 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

3

SBC agrees that, under an interpretation that does not require actual

service to customers (the interpretation that it argues against), there is no

challenge to the factual finding that MCI’s switch can serve a geographic

area equal in coverage to SBC’s.

III. STANDARD OF REVIEW

We review the district court’s interpretation of Rule

711(a)(3) de novo and its ultimate factual findings under the

arbitrary and capricious standard of review. Although the

district court reviewed PUCO’s arbitration decision strictly

under the arbitrary and capricious standard of review, the

primary issue before that court, and currently before this

court, is a question of law--whether FCC Rule 711(a)(3)

requires that the new market entrant’s switch actually serve

customers across a comparable geographic area in order for

the new entrant to charge the incumbent’s tandem

interconnection rate.3 The interpretation of the rule, a

question of law, must be reviewed de novo. See Michigan

Bell Tel. Co. v. Strand, 305 F.3d 580, 586 (6th Cir. 2002).

IV. DISCUSSION

Although PUCO’s and the district court’s decisions are

somewhat equivocal, the court accepts SBC’s proposition that

both PUCO and the district court issued their decisions,

awarding MCI tandem reciprocal compensation, based upon

an interpretation of Rule 711(a)(3) that merely requires MCI’s

switch to have the ability to serve a comparable geographic

area rather than a requirement that MCI actually serve

customers over the same geographic area. Rule 711(a)(3)

provides:

Where the switch of a carrier other than an incumbent

LEC serves a geographic area comparable to the area

served by the incumbent LEC's tandem switch, the

appropriate rate for the carrier other than an incumbent
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

15

4

Perhaps a fitting example for illustrative (or grammatical) purposes

is a city fire department. Although the department may have never had

to put out a fire or respond to a call on a particular block or locale within

the city, it still “serves” the entire city.

5

The court is not persuaded by SBC’s argument that the tandem

interconnection rate is an unfair rate to charge when MCI has fewer

customers than SBC. If MCI has few customers, SBC will rarely have to

pay the tandem interconnection rate because few calls would be

transmitted from SBC’s network to MCI’s network. Conversely, as

LEC is the incumbent LEC's tandem interconnection

rate.

47 C.F.R. § 51.711(a)(3). The court must decide whether this

rule requires the new entrant to be actually serving customers

over a comparable geographic area before charging the

tandem interconnection rate or whether the new entrant’s

capability to serve customers over a comparable geographic

area suffices. For the reasons set forth below, we affirm the

district court’s decision and interpret Rule 711(a)(3) as

requiring the new entrant’s switch to be capable of serving a

comparable geographic area, as opposed to a requirement that

the new entrant actually serve customers in that area.

First, the language of Rule 711(a)(3) does not require the

switch to be serving customers dispersed over a certain

geographic area. As MCI notes, “[n]othing in the text of Rule

711(a)(3) refers to the physical location of a carrier’s

customers. The grammatical object of the regulation’s

language--the thing ‘served’ by the competing carrier’s

switch--is the ‘geographic area,’ not particular customers.”

The focus of Rule 711(a)(3) is on the switch’s ability to

transmit communication over a certain area.4 If a new entrant

can offer a comparable area for switching and terminating

calls that originate on the incumbent’s network, the tandem

interconnection rate applies so that the new entrant may

recoup its approximate costs.5

16 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

MCI’s customer base expands, SBC will surely have to pay the tandem

reciprocal rate more frequently because more calls will be exchanged, but

it will also reap the benefits of more calls being transferred from MCI’s

network to SBC’s for termination. Thus, the size of MCI’s customer base,

even if much smaller than SBC’s, does not appear to create such a

dramatic inequity in costs.

6

The FCC delegated the task of arbitrating an interconnection

agreement dispute, similar to the one in this case, to the Bureau. The

Bureau “advises and makes recommendations to the Commission, or acts

for the Commission under delegated authority, in all matters pertaining to

the regulation and licensing of communications common carriers and

ancillary operations (other than matters pertaining exclusively to the

regulation and licensing of wireless telecommunications services and

facilities).” 47 C.F.R. § 0.91. “As such, it has unique expertise in the

area of interpreting rules promulgated by the FCC.” Indiana Bell Tel.

Co., Inc. v. McCarty, 362 F.3d 378, 386 (7th Cir. 2004).

As a practical matter, a new entrant to the

telecommunications market will not have as large a customer

base as an incumbent that has operated as a monopoly for a

number of years. Under SBC’s interpretation, a new entrant

would operate under a significant disadvantage when it first

enters a particular market, and possibly forever, because it

would not be permitted to charge the higher tandem reciprocal

rate for its new technology even though that technology is

able to carry communications over expansive geographic

areas. In essence, if a new entrant could not charge the

tandem rate until it had nearly as many customers as the

incumbent, the new entrant may be hampered in gaining

market share (i.e., obtaining customers) because it may not be

able to obtain full compensation for its switch and thus be

unable to competitively charge its customers. This would

thwart the main purpose behind the 1996 Act, the opening of

local telecommunications markets to competition.

The FCC’s Wireline Competition Bureau6 recognized this

in its Virginia Arbitration Order, in which it held that “the

determination whether a [new entrant’s] switch ‘serves’ a
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

17

certain geographic area does not require an examination of the

competitor’s customer base.” Virginia Arbitration Order, 17

FCC Rec. at ¶ 307. The Bureau rejected the incumbent’s

argument that the new entrant had to actually be serving

customers dispersed over a comparable geographic area to

charge the tandem reciprocal rate under Rule 711(a)(3).

Instead, it stated:

The tandem rate rule recognizes that new entrants may

adopt network architecture different from those deployed

by the incumbent; it does not depend upon how

successful the [new entrant] has been in capturing a

‘geographically dispersed’ share of the [incumbent’s]

customers, a standard that would penalize new entrants.

We agree . . . therefore, that the requisite comparison

under the tandem rate rule is whether the [new entrant’s

switch is capable of serving a geographic area that is

comparable to the architecture served by the

[incumbent’s] tandem switch.

Id.

As the Seventh Circuit recently held, the Bureau’s

interpretation should be afforded deference and thus result in

affirmance of the decisions below. In Indiana Bell Telephone

Company v. McCarty, the Seventh Circuit, sitting en banc,

held that the decision of the Bureau outlined above is entitled

to deference as a decision of the FCC interpreting its own

rules. 362 F.3d at 386 (“We find the [Bureau’s]

pronouncement on this issue not only persuasive, given the

Act’s overarching goal of promoting competition and the

[Bureau’s] expertise in this area, but one requiring deference

as the voice of the FCC interpreting its own rules.”) (citing

Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S.

837 (1984)). The Seventh Circuit acknowledged that the

Bureau’s decision was subject to review by the FCC, but held

that, “[w]hen, as here, Congress has expressly permitted

delegation of authority by statute, see 47 U.S.C. § 155(c), and

18 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

No. 03-3525

the agency delegates authority to a subdivision, ‘the decision

of the subdivision is entitled to the same degree of deference

as if it were made by the agency itself.’” Id. at 387 (citing

MCI Metro Access Transmission Servs., Inc. v. BellSouth

Telecommunications, Inc., 352 F.3d 872, 880 n.8 (4th Cir.

2003)). Accordingly, the Seventh Circuit held that it was

required to follow the Bureau’s interpretation until the FCC

ruled otherwise. We are not aware of FCC authority to the

contrary and we are convinced, as was the Seventh Circuit,

that the Bureau’s decision is not only persuasive, but also

entitled to deference under Chevron. See 47 U.S.C.

§ 155(c)(3).

Under this interpretation of Rule 711(a)(3), the district

court did not err in affirming the arbitration panel’s factual

finding that MCI’s switch covered a geographic area

comparable to SBC’s. MCI described its technological

capabilities to the panel and offered the testimony of a senior

manager from MCI who testified that MCI’s switches serve

areas equal in size, if not greater than those served by the

incumbents. Finally, PUCO relied on the fact that MCI had

obtained approval from PUCO to serve the three relevant

counties in Ohio. In light of the set-up costs and the

procedures that MCI had already followed, the panel

determined that MCI was capable and ready to serve a

comparable geographic area. Thus, PUCO’s decision was not

arbitrary and capricious and the district court correctly

affirmed PUCO’s decision.

V. CONCLUSION

PUCO and the district court applied the correct legal test--

whether MCI, the new market entrant, had the ability to serve

customers in the same geographic area as SBC, the

incumbent--and PUCO’s decision that MCI satisfied this test
No. 03-3525 Ohio Bell Telephone Co. v. MCI

Telecommunications Corp., et al.

19

was not arbitrary and capricious. Accordingly, the judgment

of the district court is AFFIRMED.