1 Senior District Judge John M. Shaw of the Western District of Louisiana was a member of the

panel who heard oral argument on this case. Because of his death on December 24, 1999, he did not

participate in this decision. This appeal has been decided by a quorum pursuant to 28 U.S.C. §46(d).

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

___________

No. 98-50787

___________

SOUTHWESTERN BELL TELEPHONE CO.,

Plaintiff-Appellant,

versus

PUBLIC UTILITY COMMISSION OF TEXAS; PAT

WOOD III; JUDY WALSH; BRETT PEARLMAN;

TIME WARNER COMMUNICATIONS OF AUSTIN,

L.P.; TIME WARNER COMMUNICATIONS OF

HOUSTON, L.P.; AND FIBRCOM, INC.,

Defendants-Appellees.

------------- Appeal from the United States District Court

for the Western District of Texas

------------- March 30, 2000

Before WIENER and STEWART, Circuit Judges. 1

WIENER, Circuit Judge.

This appeal involves a dispute between two interconnecting telephone companies (“carriers”)

in the same local calling areas about whether modem calls placed by local customers of one carrier

to the Internet Service Provider (“ISP”) customers of another carrier should be ch arged for as a

“local” call. The contracts between the carriers that are parties to this appeal specify that local calls

placed by customers of one carrier to customers of the other are to be “reciprocally compensated.”

In t he district court, Plaintiff-Appellant Southwestern Bell Telephone Co. (“Southwestern Bell”)

disavowed any obligation to compensate Defendants-Appellees Time Warner Communications of

Austin, L.P. (collectively “Time Warner”), for calls made by Southwestern Bell’s customers to Time

Warner’s ISP customers as local calls. The district court, like the Texas Public Utilities Commission2

(“PUC”) before it, held that the carriers’ contracts require such calls to be treated as local calls and

as such, to be compensated for reciprocally. The procedural history of this case also presents thorny

j urisdictional questions at the state regulatory commission and federal district cou rt levels.

Concluding that the PUC and the district court had jurisdiction to adjudicate the merits of this case,

and agreeing with their dispositions of it, we affirm.

I.

FACTS AND PROCEEDINGS

In the interest of opening previously monopolistic local telephone markets to competition, the

Federal Telecommunications Act o f 1996 (the “Act”) requires all telecommunications carriers to

interconnect their networks so that customers of different carriers can call one another. 47 U.S.C.

§ 251(a)(1) (West Supp. 1999). Bot h So ut hwestern Bell and Time Warner are local exchange

carriers (“LECs”). Having historically held monopolies in the subject markets, Southwestern Bell is

the incumbent LEC or ILEC, and Time Warner is a competing LEC or CLEC. The Act requires

ILECs to negotiate reciprocal compensation arr angement s or interconnection agreements with

CLECs to establish t he t erms by which they will compensate each other for the use of the other’s

networks. 47 U.S.C. § 251(b)(5), (c)(1). When an LEC’s customer places a local call to a customer

of another LEC, the LEC whose customer initiated the call compensates the receiving LEC for

transporting and terminating the call through its network. See 47 U.S.C. § 251(b)(5); 47 C.F.R. §

51.701(e) (1998).

In two reciprocal compensation agreements (one executed in 1996 and the other in 1997),

Time Warner and Southwestern Bell agreed to base reciprocal compensation on minutes of use. That

way each party would pay the other a fixed rate for each minute that one of its customers used the

other’s network for “Local Traffic.” The instant dispute originated when Southwestern Bell refused

to pay Time Warner reciprocal compensation for modem calls that Southwestern Bell’s customers

made to Time Warner’s ISP customers. ( ISPs typically purchase local business phone service from

LECs for a flat monthly fee that allows unlimit ed incoming calls.) An Internet user can, through use3

o f a modem, dial an ISP’s local phone number without incurring long-distance tolls, but can

nevertheless access websites around the globe. Southwestern Bell based its refusal to pay reciprocal

compensation to Time Warner on the theory that, becau se mo dem calls to ISPs involve the

continuous transmission of information across state lines, such calls are interstate and thus should not

be billed as Local Traffic.

In re spo nse, Time Warner filed a complaint with the PUC alleging that Southwestern Bell

breached its interconnection agreements when it refused to pay reciprocal compensati on for those

calls that its customers made to Time Warner’s ISP customers. The PUC sided with Time Warner,

ruling that calls made by Southwestern Bell’s customers to Time Warner’s ISP customers are Local

Traffic, and as such generate reciprocal compensation obligations.

Southwestern Bell then sought relief in the district court, continuing to insist that Internet calls

are not “local” and therefore should not fall under the reciprocal compensation provisi ons of the

interconnection agreements applicable to local calls. The district court upheld the PUC’s decision,

agreeing that, under the interconnection agreements, “Local Traffic” includes calls to ISPs. Both the

PUC and the district co urt were impressed by the notion that a “call” from a Southwestern Bell’s

customer to a Time Warner ISP customer terminates locally at the ISP’s facility. They considered

such telecommunication service to be a component of t he call separate and distinct from the

information service, which begins at the ISP’s facility and continues to distant websites.

Subsequent to the filing of this appeal, the FCC handed down a ruling pertinent to reciprocal

compensation for ISP-bound calls, entitled Implementation of the Local Competition Provisions in

the Telecommunications Act of 1996; Inter-Carrier Compensation for ISP-Bound Traffic , 14

F.C.C.R. 3689 (1999) (the “Reciprocal Compensation Ruling”). Holding that it has jurisdiction over

calls to ISPs as interstate calls, the FCC declined to separate ISP-bound traffi c i nto two di sti nct

components ( intra state telecommunications service, provided by the LEC, which goes from a user’s

modem to the local ISP, and inter state information service, provided by the ISP, which goes from the

ISP to the websites). Reciprocal Compensation Ruling ¶¶ 1, 13. Although the FCC determined the2 Less than a week ago the Court of Appeals for the District of Columbia decided Bell Atlantic

Telephone Companies v. FCC

, 2000 WL 273383 (D.C. Cir) March 24, 2000, vacating this ruling and

remanding it to the FCC with instructio ns t o pro vide a satisfactory explanation why LECs that

terminate calls to ISPs are not properly seen as terminating local telecommunications traffic, and why

such traffic is “exchange access” rather than “telephone exchange service.” The focus of that opinion

is the unexplained (or underexplained) use of the “end-to-end” analysis to determine whether calls

t o ISPs are interstate or intrastate. Given the FCC’s hands-off policy, even if the FCC sho uld

continue to deem such calls to be inter state and should satisfy the D.C. Circuit following remand, we

do not view the court’s remand as necessarily forecasting a different result on the question of PUC

jurisdiction over such calls in the context of interpreting and enforcing existing reciprocal

c o mpensation agreements. This would be doubly so if the remand eventually results in the FCC’s

concluding that local calls to ISPs are intra state.

4 jurisdictional nature of the ISP-bound traffic by the end-to-end analysis of the transmission (from the

user to the Internet), it held that LECs are nevertheless controlled by interconnection agreements that

include ISP-bound traffic in their reciprocal compensation provision s in t he same manner as they

includ e o t her local traffic. I d. ¶¶ 13, 16, 18, 22-24. Taking a hands-off approach, the FCC

announced that it will not interfere with state commission determinations of whether recipro cal

compensation provisions of interconnection agreements apply to ISP-bound traffic. Id. ¶¶ 21-22. 2

II.

ANALYSIS

A. Jurisdiction

The substantive question that we are asked today is whether, for purposes of one LEC paying

reciprocal compensation to another, a call from the first LEC’s customer to the second LEC’s ISP

customer in the same local exchange area is “Local Traffic” as the term is used in these LECs’

int erco nnection agreements. Before addressing that question, though, we must answer several

questions regarding jurisdiction.

The easy one is appellate jurisdiction: We clearly have it under 28 U.S.C. § 1291.

Jurisdictional questions arising from the presence of this case first before the PUC and subsequently

before the district court are not so simple.

As a genera l proposition, jurisdiction to entertain such matters is conferred on the district

court by the judicial review provisions of the Act, which state:3 The mention of a statement refers to “a s t at ement of the terms and conditions that [an LEC]

generally offers within that State to comply with the requiremen ts of secti on 251.” 47 U.S.C. §

252(f)(1).

5 In any case in which a State commission makes a determination under this section

, any party aggrieved by such determination may bring an action in an appropriate

Federa l district court t o determine whether the agreement or statement meets the

requirements of section 251 of this title and this section [252].

47 U.S.C. § 252(e)(6) (emphasis ours). 3 With respect to the interconnection agreements, the Act

confers jurisdiction on the district court to review the PUC’s determination for compliance with the

Act, specifically sections 251 and 252. Our chore today is to determine whether the Act, which

admittedly provides for federal district court review of some state commission dispositions implicating

interconnection agreements, provides for such review in this instance. This determination comprises

two parts: (1) t he PUC’s own jurisdiction to determine the questions presented to it, and (2) the

scope of federal review. As to the first part, the Act provides commission jurisdiction in cases “in

which a State commission makes a determination under this section,” meaning section 252. That

section sets forth procedures for nego ti ation, arbitration, and approval of interconnection agreements.

It also requires LECs to enter into interconnection agreements with each other, through either

volun t ary negotiation or compulsory arbitration. 47 U.S.C. § 252(a), (b). The Act specifies that,

regardless of how they are confected, all interconnect ion agreements must be approved by the

appropriate state commission. 47 U.S.C. § 252(e)(1). Here, the parties had voluntarily negotiated

their interconnection agreements, and the PUC had approved them; no one is here seeking district

court review of those approvals. It was not until several months after the PUC granted its approvals

that Time Warner filed the complaint with the PUC pertaining to reciprocal compensation under those

agreements, precipitating the declaratory action in federal court and ultimately this appeal.

The A ct ’s reference to “a State commission . . . determination under this section [252],”

could, if construed quite narrowly, limit st at e commission jurisdiction to decisions approving or

disapproving, or arbitrating, an interconnection agreement. Under such a narrow construction,

commission jurisdiction would not extend to interpreting or enforcing a previously approved contract.4 The part of the Circuit Court’s decision eventually reversed pertained to the conclusion that the

FCC does not have jurisdiction under 47 U.S.C. § 208 to hear appeals of state commission decisions

(and that 47 U.S.C. § 252(e)( 6) co nfers t his power exclusively on federal district courts). I owa

Utils. , 120 F.3d at 804. The Supreme Court reversed in part, ruling that the issue was not yet ripe

for review. AT& T Corp. v. Iow a Utils. Bd. , 525 U.S. 366, 119 S. Ct. 721, 733, 142 L. Ed.2d 834

(1999).

6 We do not think so narrow a construction was intended. Rather, we are satisfied that the Act’s grant

t o the state commissions of plenary authority to approve or disapprove these interconnection

agreements necessarily carries with it the authority to interpret and enforc e t he provisions of

agreements that state commissions have approved. See Iowa Utils. Bd. v. FCC

, 120 F.3d 753, 804

(8th Cir. 1997), aff’d in part, rev’d in part on other grounds

, 4 AT& T Corp. v. Iowa Utils. Bd.

, 525

U.S. 366, 119 S. Ct. 721, 142 L. Ed.2d 835 (1999). We believe that the FCC plainly expects state

commissions to decide intermediation and enforcement disput es that arise after the approval

procedures are complete. S ee, e.g., Reciprocal Compensation Ruling ¶ 22 (noting that parties are

bound by their interconnection agreements “as interpreted and enforced by the state commissions”)

(emphasis ours); id. ¶21 (referring to state commission “findings” as to whether reciprocal

compensation provisions of interconnection agreements apply to ISP-bound traffic); id

. ¶ 24

(discussing factors state commissions should consider when “construing the parties’ agreements”);

see also Illinois Bell Tel. Co. v. Worldcom Techs., Inc. , 179 F.3d 566, 573 (7th Cir. 1999) (noting

that in determin ing co nt ractual intent under interconnection agreements, a state commission “was

doing what it is charged with doing” in the Act and the FCC’s Recipro cal Compensation Ruling).

Deferring to the pronouncements of the FCC and its reasonable interpretations of the Act, see, e.g.,

Illinois Bell Tel. v. WorldCom, 179 F.3d at 571, we hold that the PUC acted within its jurisdiction

in addressing the questions pertaining to interpretation and enforcement of the previously approved

interconnection agreements at issue here.

Southwestern Bell poses yet another challenge to the PUC’s jurisdiction, urging that, because

Internet traffic is int erstate, as a matter of federal law state commissions such as the PUC lack

jurisdiction to impose reciprocal compensation liabilit y for such traffic. We disagree. The Supreme5 The district court was of the opinion that if calls to ISPs were not local, the PUC would have no

jurisdiction, and jurisdiction would be exclusive in the FCC. This was erroneous but harmless dicta,

because the district court ultimately concluded, as we do today, that the PUC had jurisdiction.

7 Court has recognized that the Act cannot divide the world of domestic telephone service “neatly into

two hemispheres,” one consisting of interstate service, over which the FCC has plenary authority, and

the other consisting of intrastate service, over which the states re t ain exclusive jurisdiction.

Louisiana Pub. Serv. Comm'n v. FCC

, 476 U.S. 355, 360, 106 S. Ct. 1890, 1894, 90 L. Ed. 2d 369

(1986). Rather, observed the Court, “the realities of technology and economics belie such a clean

parceling of responsibility.” I d. The FCC too has rejected the argument advanced by Southwestern

Bell, noting that “state commission authority over interconnection agree m ents pursuant to section

252 ‘e xt ends t o both interstate and intrastate matters.’” Reciprocal Compensation Ruling ¶ 25,

quoting Implementation of the Local Competition Provisions in the Telec ommunications Act of

1996, First Report and Order

, 11 F.C.C.R. 15499 ¶ 84 (1996). Accordingly, we hold that here the

PUC properly exe rcised its jurisdiction regardless of any interstate aspect of the subject

telecommunications. 5

We also hold that the district courts have jurisdiction t o review such interpretation and

enforcement decisions of the state c ommissions. S ee Iowa Utilities Bd

., 120 F.3d at 804 & n.24

(holding that federal court review in section 252(e)(6) encompasses review of enforcement decisions

of state commissions and is the exclusive means of obtaining review of such determinations). We will

n ot read section 252(e)(6) so narrowly as to limit its grant of federal district court jurisdi ction to

review decisions of state commissions only to those decisions that either approve or rej ect

interconnection agreements. We conclude that federal court jurisdiction extends to review of state

commission rulings on complaints pertaining to interconnection agreements and that such jurisdiction

is not restricted to mere approval or rejection of such agreem ents. See also Illinois Bell Tel. v.

Worldcom, 179 F.3d at 571 (recognizing exclusive federal jurisdiction to review “actions” by state

commissions).6 For example, the Act requires that

a State commissi o n shall not consider the terms and conditions for

reciprocal compensation to be just and reasonable unless —

(I) su ch t erms and conditions provide for the mutual and

reciprocal recovery by each carrier of costs a ssociated with

the transport and termination on eac h carrier’s network

facilit ies of calls that originate on the network facilit ies of the

other character; and

(ii) such terms and conditions det ermine such costs on the

basis of a reasonable approximation of the additional costs of

terminating such calls.

47 U.S.C. § 252(d)(2)(A).

8 A similar jurisdictional question asks whether subsection 252(e)(6) limits federal review of

a state commission’s actions with respect to an interconnection agreement to those commission

decisions that concern only compliance with the requirements of sect io ns 251 and 252 of the Act,

and does not extend to review of a commission’s actions implicat ing compliance with state law. In

this case the parties have framed issues of both federal and state law. Our focus, however, concerns

o nly t he clause of the Act granting jurisdiction over an “action . . . t o determine whether the

agreement

. . . meets the requirements of section 251 [and section 252] .” 47 U.S.C. § 252(e)(6).

Time Warner urges us to read section 252(e)(6) literally and narrowly, so as to limit federal review

to only the issue whether the interconnec t ion agreements, as interpreted by the PUC, meet the

requirements of federal law, specifically, sections 251 and 252. These sections impose specific fair

compensation requirements. 6 Under such a narrow construction, section 252(e)(6) would limit

federal court review of the PUC’s decision to such questions as whether the PUC’s interpretation of

t he Time Warner/Southwestern Bell interconnection agreements adequately allow the parties t o

recover their costs. A federal court lacks jurisdiction, insist s Time Warner, to address state law

matters such as, for example, a contractual dispute regarding meeting of the minds.

The Act obviously allows a state commission to consider requirements of state law when

approving or rejecting interconnection agreements. 47 U.S.C. § 252(e)(3), (f)(2). But whether, in

addition to jurisdiction to review for compliance with requ irement s of the Act, a federal court is

authorized to review any and every question of state law that a state commission may have addressed7 The Seventh Circuit recognized that this a llocat ion of authority “has a potential to cause

problems,” but would leave them to Congress to resolve:

Federal jurisdiction under § 252(c)(6) is exclusive when it exists. Thus every time a

carrier complains about a state agency’s action concerning an agreement, it must start

in federal court (to find out whether there has been a violati o n of federal law) and

then may move to state court if the first suit yields the answer “no.” This system may

not have much to recommend it, but, as the Supreme Court observed in Iowa Utilities

Board

, the 1996 Act has its share of glitches, and if t his is another, then legislature

can provide a repair.

Illinois Bell Tel. v. Worldcom , 179 F.3d at 574 (Westmate* version only).

9 is an issue on which the circuits are split. The Seventh Circuit takes the position that in examining

a state commission order, the court’s task is “not to determine whether [state commission] correctly

applied principles of state contract law, but to see whether its decision violates federal law, as set out

in the Act or in the FCC’s interpretation.” Illinois Bell Tel. v. Worldcom, 179 F.3d at 572. Under

this reading, our scope of review would be quite narrow indeed; the only issue before us would be

whether the PUC, in determining that the parties intended for calls to ISPs to be subject to reciprocal

c o mpensat ion, violated federal law. S ee id. at 571. Any issues of state law, such as contract

interpretation, would remain open for determination in another forum. 7 The Seventh Circuit also

finds significant the cont rast in the Act between state commission determinations (subsections

252(e)(3)( and (f)(2), allowing consideration of state law questions) and federal court determinations

(subsection 252(e)(6), allowing consideration of only “whether the agreement or statement meets the

requirements of section 251 and this section”). To the Seventh Circuit, this juxtaposition confirms

that federal courts “may review a state commission’s actions with respect to an agreement only for

compliance with the requirements of § 251 and § 252 of the [FTA], and not fo r compliance w ith

state law .” M CI Telecomms. Corp. v. Illinois Commerce Comm’n , 168 F.3d 315, 320 (7th Cir.)

(emphasis ours), amended on reh’g by 183 F.3d 558 (7th Cir.), reh’g granted

, 183 F.3d 567 (7th Cir.

1999)(on Eleventh Amendment grounds).

The Ninth and Fourth Circuits have taken a more expansive view of federal jurisdiction under

the Act, narrowed only by the proper standard of review. These circuits would permit district courts

t o consider de novo whether the agreements are in compliance with the Act and the implementi n g8 The Fourth Circuit expressed its awareness that other courts have used the “arbitrary and

capricious” standard of review, quoting, inter alia, U.S. West v. MFS Intelenet

, 193 F.3d at 1116, but

st at ed that, as regarding review of fact findings, “there is no meaningful difference between this

standard and the substantial evidence standard we apply.” GTE South , 199 F.3d at 745 n.5.

10 regulations, but to review all other issues deci ded by a state commission under a more deferential

standard, either arbitrary and capricious or substantial evidence. See US West Communications v.

MFS Intelenet, Inc.

, 193 F.3d 1112, 1117, 11 24 n.15 (9th Ci r. 1999) (consi deri ng d e novo

agreement’s comp liance with the Act and regulations and considering “all other issues” under

arbitrary and capricious standard); GTE South, Inc. v. Morrison, 1 99 F.3d 733, 745 (4th Cir. 1999)

(reviewing de novo the state commission’s interpretations of the Act and reviewing state commission

fact finding under the substantial evidence standard). 8

In the case now before us, the district court embraced the broader view, considering de novo

whether the agreements comply with sections 251 and 252, and reviewing “all other issues” under

an arbitrary-and-capricious standard. We find this approach appropriate. This standard comports

with United States v. Carlo Bianchi and Co. , 373 U.S. 709, 715, 83 S.Ct. 1409, 10 L. Ed 2d. 652

(1963), and Abbeville General Hospital v. Ramsey

, 3 F.3d 797, 802-03 (5th Cir. 1993) (conducting

de novo review of procedural question whether state agency made finding required by federal law and

arbitrary-and-capricious review of t he findings themselves). We shall therefore review d e novo

whether the interconnection agreements as interpreted by the PUC meet the requirements of the Act

,

but our review of the PUC’s state law determinations will be under the more deferential arbitrary-andcapricious standard.

B. The Merits

We first examine the PUC order to see whether it violates federal law, as reflected in the Act

and in the FCC’s regulations or rulings. We conduct this examination de novo

.

The PUC concluded that “a call between two end users in the same local calling area is local

traffic.” Agreeing with the FCC’s then-prevailing view that providing of Internet service involved9 The PUC quoted the FCC’s Report and Order on Universal Service

, CC Docket No. 96-45, FCC

97-157 at ¶ 83 (1997), noting, howev er, t hat t he FCC had recognized that its position should be

reviewed in a future FCC proceeding.

1 0 In the Reciprocal Compensation Ruling, the FCC gave notice of a proposed rul em aki ng regarding inter-carrier compensation for ISP-bound traffic. The obligation to pay such compensation

in existing interconnection agreements could be altered by future rules promulgated by the FCC. S ee

U.S. West v. AFS Intelenet , 193 F.3d at 1123 n.10.

11 “mult iple components,” 9 the PUC declared that “it is the telecommunicati ons service component,

r ather than the information service component, that constitutes the basis for determi ning the

jurisdiction of the traffic involved in calls to ISPs. When a transmission path is established between

two subscribers in the same mandatory calling area, traffic carried on that path is local traffic, with

the telecommunications service component of the call terminating at the ISP location.”

The FCC has now definit ively established that modem calls to ISPs constitute jurisdictionally

mixed, largely interstate, traffic. Reciprocal Compensation Ruling ¶¶ 1, 13, 18-19. In its 1999

ruling, the FCC concluded that ISP-bound traffic for “jurisdictional purposes [is] a continuous

transmission from the end user to a distant Internet site.” Id . ¶ 13. Having thus determined its own

jurisdiction ove r ISP calls, the FCC then discussed regulation of the calls, beginning with the

proclamation that it “has no rule governing inter-carrier compensation for ISP-bound traffic.” I d. ¶

9. The FCC continued: “We find no reason to interfere with state commission findings as to whether

reciprocal compensation provisions of interconnection agreements apply to ISP-bound traf fic,

pending adoption of a rule establishing an appropriate interstate compensation mechanism.” Id . ¶

21. 10 The FCC reasoned that “parties should be bound by their existing interconnection agreements,

as interpreted by state commissions.” Id . ¶ 1.

Clearly, then, whether voluntarily negotiated or confected through arbitration, commissionapproved agreements requiring payment of reciprocal compensation for calls made to ISPs do not

conflict with §§ 251 and 252 of the Act or with the FCC’s regulations or rulings. Even if ISP traffic

is largely interstate, a state commission may lawfully interpret an agreement as requiring reciprocal

compensation for such traffic. S ee id. at ¶ 26 (“Although reciprocal compensation is mandated under11 As determined above, we review the interconnection agreements for compliance with the Act

de novo

, and for compliance with state law matters under the more deferential abuse of discretion

standard.

12 section 251(b)(5) only for the transport and termination of local traffic, neither the statute nor our

rules prohibit a state commission from concluding in an arbitration that reciprocal compensation is

appropriate in certain instances.”); Illinois Bell Tel. v. Worldcom

, 179 F.3d at 572 (“The FCC could

not have made clearer that

. . . a state agency’s interpretatio n of an agreement so as to requi re

payment of reciprocal compensation does not necessarily violate federal law.”).

Additionally, the FCC acknowledged that it had historically “directed states to treat ISP traffic

as if it were local.” Reciprocal Compensation Ruling ¶ 21. Nothing in the Reciprocal Compensation

Ruling prohibits a call from being “a local call for some, but not all, purposes.” Illinois Bell Tel. v.

Worldcom

, 179 F.3d at 574. Finally, the FCC understood that its “policy of treating ISP-bound

traffic as local for purposes of interstate access charges would, if applied in the separate context of

reciprocal compensation, suggest that [reciprocal] compensation is due for that traffic .” Reciprocal

Compensation Ruling ¶ 25 (emphasis added).

Accordingly, we hold that the PUC’s determination that reciprocal compensation obligations

encompass ISP-bound traffic does not conflict with the A ct o r with any FCC rule regarding such

traffic. As the Seventh Circuit observed,

The FCC could not have made clearer its willingness—at least until the time

a rule is promulgated—to let state commissions make the call. We see no violation of

the Act in giving such deference t o st at e commissions; in fact, the Act specifically

provides state commissions with an important role to play in the field of

interconnection agreements.

. . . In short, nothing in what the [state commission] said

violates federal law in existence at this time.

Illinois Bell Tel. v. Worldcom

, 179 F.3d at 574. It follows that we should affirm the district court’s

ruling that the order of the PUC did not violate federal law.

That brings us to the substantive question whether the PUC correctly interpreted the

interconnection agreements. A threshold issue bearing on our standard of review is whether federal

or state law controls this interpretation. 11 We therefore begin by examining how the state law issues1 2 Under both agreements, reciprocal compensation applies to transport and termination of “Local

Traffic.”

1 3 Section 251(b)(5) imposes on LECs the duty “to establish reciprocal compensation arrangements for the transport and termination of telecommunications.”

1 4 In the Reciprocal Compensation Ruling, the FCC concluded that “ISP-bound traffic is non-local

interstate traffic,” and noted that “the reciprocal compensation requirements of section 251(b)(5) of

the Act and Section 51, subpart H (Reciprocal Compensation for Transport and Termination of Local

Telecommunications Traffic) of the Commission’s rules do not govern inter-carrier compensation for

this traffic.” Reciprocal Compensation Ruling n. 87.

13 pertaining to the interpretation of contracts relate to the Act and to F CC pronouncements, for

example, with respect to the definitions of key terms such as “local” and “terminate.”

Southwestern Bell contends that the proper understanding of these contracts turns on whether

Internet communications are “local” under fed eral law and that the definition of “local traffic” in

sect ion 251(b)(5) of the Act should govern the contract. In another argument Southwest ern Bell

urges that the Act and the FCC’s rulings on whether reciprocal compensation is required for Internet

t raffic det ermine whether, as a matter of federal law, reciprocal compensation is due under the

contracts. Southwestern Bell argues that the language in the agreements 1 2 parallels the reciprocal

compensation requirement in section 251(b)(5) of the Act 13 ; that the FCC has declared that Internet

traffic is not encompassed within section 251(b)(5) of the Act 14 ; ergo, as a matter of federal law, the

calls are not “local” and reciprocal compensation is therefore not required. We disagree.

As the Seventh Circuit said, in succinctly rejecting a similar argument, “[t]he syllogism is an

oversimplification.”

That the Act does not require reciprocal compensation for calls to ISPs is not to say

that it prohibits it. The Act simply sets out the obligations o f all local exchange

carriers to provide for reciprocal compensation.

. . . Then in § 252(d)(2) state

commissions are instructed that terms and conditions for reciprocal compensation are

not to be considered reasonable unless they provide “for the mutual and reciprocal

recovery by each carrier of costs associ ated with the transport and term i nati on on

each carrier’s network facilit ies of calls that originate on the network facilit ies of the

other carrier” and that the costs be determined o n t he basis of a “reasonable

approximation of the additional costs of terminating such calls.” The Act clearly does

not set out specific conditions which one party could enforce against the other. The

details are left to the parties, or the commissions, to w ork out.15 Although we may refer to FCC pronouncements as part of our consideration of what is usage

or custom in the telecommunications industry, we do so only as the contracts and state law might

require.

1 6 “Local Traffic” is defined in the first agreement as “traffic which originates and terminates within

a [Southwestern Bell] exchange including mandatory local calling arrangements.

Mandatory Local Calling Area is an arrangement that requires end users to subscribe to a local calling

area beyond their basic exchange serving area.” The second agreement provides similarly that “Local

Traffic, for purposes of intercompany compensation, is if (i) the call originates and terminates in the

same [Southwestern Bell] exchange area; or (ii) originates and terminates wi t hin different

[Southwestern Bell] Exchanges that share a common mandatory local calling area.”

14 Illinois Bell Tel. v. Worldcom

, 179 F.3d at 573 (emphasis added). The FCC expressly ruled that

“parties may voluntarily include [ISP-bound] traffic within the scope of their interconnecti on

agreements under sections 251 and 252 of the Act, even if these statutory provisions do not apply

as a matter of law. Where parties have agreed to include this traffic . . . they are bound by those

agreements, as interpreted and enforced by the state commissions.” Reciprocal Compensation Ruling

¶ 22.

In light of the foregoing, we hold that the agreements themselves and st ate law principles

govern the questions of interpretation of the contracts and enforcement of their provisions. We

therefore decline Southwestern Bell’s invitation to determine th e contractual issues as a facet of

federal law. 15 Also, in accordance with the standards discussed above, we defer to the PUC’s

determinations on such issues, upholding them unless they are arbitrary and capricious or unsupported

by substantial evidence.

As for interpretation of the contracts, we begin by noting that the Time Warner/Southwestern

Bell interconnection agreements require the payment of reciprocal compensation for “Local Traffic.”

“Local traffic” is defined by the agreements as traffic that both “originates” and “terminates” in the

same local calling area. 16 Where a modem call “originates” is not disputed. In contrast, where such

a call to an ISP “terminates” is the nub of the argument.

The agreements neither define “terminate” nor sp ecifically mention the Internet or ISPs.

Southwestern Bell insists that the term “Local Traffic” does not include modem calls to ISPs because15

they do not terminate locally at the ISP’s facilit y; h owever, both the PUC and the di stri ct court

determined that such calls do terminate at the ISP facility.

Under Texas law, unambiguous contracts must be enforced as written, with the intent of the

parties being derived from the agreement itself. I ntratex Gas Co. v. Puckett

, 886 S.W.2d 274, 277-78

(Tex. App.-El Paso 1994). The first agreement between these parties specifies that calls “originated

by one Party’s end users and terminated to the other Party’s end users shall be classified as Local

Traffic under this Agreement if the call originates and term inat es in the same [Southwestern Bell]

exchange area

. . . or originates and terminates within different [Southwestern Bell] exchanges which

share a common mandatory local calling area.” An “End User” is defined as “a third-Party residence

or business that subscribes to telecommunications services provided by either of the Parties.” The

parties’ second agreement adds the phrase “or by another telecommunications service provider.”

These contractual provisions lend additional support to the conclusions of the PUC and the

district court. The ISPs, as business subscribers to Time Warner services, are indeed end users under

the agreements. The PUC classified “a call between two end users in the same local calling area” as

“Local Traffic” and concluded that the interconnection agreements unambiguously include ISP traffic

wit hin t he definition of “Local Traffic.” The PUC ruled that, “[w]hen a transmission path is

established between two subscribers in the same mandatory calling area, traffic carried on that path

is local traffic, with the telecommunications service component of the call termin ating at the ISP

location.” The district court noted that “as end users, ISPs may receive l ocal calls that terminate

within the local exchange network.” (emphasis in original). The court concluded that a modem call

to an ISP terminates at the ISP’s facilit y within the local exchange network, basing its conclusion in

part on the FCC’s treatment of ISPs as end users lying within the local exchange. The FCC treats

ISPs as “end users” for pricing purposes, permitting t hem t o purchase telephone service at local

business rates rather than interstate access tariffs. Reciprocal Compensation Ruling ¶¶ 5, 17, 23. We

conclude that the PUC’s consideration of the end-user status of an ISP is appropriate in light of the

contractual provision mentioning “termination to [an] end user[] .”1 7 More recently, in dis cussing where a modem call “terminates,” the FCC has remarked, “An

Internet communication does not necessarily have a point of ‘termination’ in the traditional sense.”

Reciproc al Co mpensation Ruling ¶ 18. But the FCC’s view at the time of these agreements was

clear, as discussed next.

16 Both of the instant interconnection agreements provide t hat undefined terms—such as

“terminate”—are to be “construed in accordance with their end user usage in the telecommunications

industry as of the effective date of [these] Agreement[s].” This provision, which is common to both

agreements, tracks well-established rules of contract interpretation. S ee KMI Continental Offshore

Prod. Co. v. ACF Petroleum Co. , 746 S.W.2d 238, 241 (Tex. App.-Houston 1987), writ denied

.

“Beyond the four corners of the parties’ agreement, thei r int ent may be evidenced from the

surrounding facts and circumstances when the contract was entered. The court m ay consider. . .

ordinary terms, customs and usages then in effect.

. . .” I ntratex Gas, 88 6 at 278. The parti es

obviously agreed that “terminate” would mean whatever the telecommunications industry took it to

mean at the time they signed the agreements, i.e., in 1996 and 1997.

A 1996 FCC Report defined “termination,” for purposes of se ction 251(b)(5), as “the

switching of traffic that is subject to section 251(b)(5) at the terminating carrier’s end office switch

(or equivalent facilit y) and delivery of that traffic from that switch to the called party’s premises.” 17

Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First

Report and Order, 11 F.C.C.R. 15,4 99 ¶ 1040 (1996), a ff’d in part, vacated in part on other

grounds

, Iowa Utils. Bd. , 120 F.3d 753. As for the modem calls here at issue, the ISPs are Time

Warner’s customers, making Time Warner the terminating carrier. So, under the foregoing definition,

“termination” occurs when Time Warner switches the call at its facility and delivers the call to “the

called party’s premises,” which is the ISP’s local facilit y. Under t his usage, the call indeed

“terminates” at the ISP’s premises.

Both the FCC and Southwestern Bell have heretofore embraced a custom of treating calls to

ISPs as though they were local, terminating within the same local ex change network. The FCC

recognized that agreements negotiated prior to the Reciprocal Compensation Ruling, as were the ones18 The FCC also acknowledged that it had historically “directed states to treat ISP traffic as if it

were local.” Id. ¶ 21.

1 9 T he FCC has exempted Enhanced Service Providers, a category which includes ISPs, from

payment of interstate access charges.

17 at issue here, had been negotiated in the “context of this Commission’s longstanding policy of treating

this traffic as local.” Reciprocal Compensation Ruling ¶ 24. 1 8 In fact, the FCC noted that its historic

“policy of treating ISP-bound traffic as local for p urposes of interstate access charges would, if

applied in the separate context of reciprocal compensation, suggest that [reciprocal] compensation

is due for that traffic .” Id. ¶ 25 (emphasis added).

We are convinced that the PUC considered ample evidence that both the telecommunications

industry as a whole and the parties to this dispute in particular treated ISP-bound calls as terminating

locally at the time the interconnection agreements were being negotiated. By the end of 1996, five

State commissions had already ruled that modem calls to ISPs are subject to reciprocal compensation.

For years, South west ern Bell had recorded calls made to ISPs as “local” in internal reports and

bookkeeping records. Southwestern Bell did not change this practice until 1998, well after entering

the instant interconnection agreements. An internal Southwestern Bell memorandum acknowledged

that, under then-current FCC rulings, it expected to pay reciprocal compensation for modem calls:

“As long as the ‘ESP’ exemption 19 remains in tact we can anticipate . . . t hat we will compensate

other [LECs] for traffic they terminate to internet access providers.” And for some time

Southwestern Bell has run an ISP of its own, despite the fact that as an incumbent LEC it is forbidden

to offer long-distance/interstate service. It has justified its running of an ISP to the FCC by arguing

that ISPs provide local, not interstate, service.

Southwestern Bell makes much over the fact that the PUC and the district court divided

Internet traff

ic int o t wo “components,” one local and one interstate, to determine where the call

“terminates.” Despite its recent Reciprocal Compensation Ruling that Internet traffic is a continuous

transmission for jurisdictional purp o ses—no t terminating at the ISP’s local server—the FCC2 0 We are cognizant of the fact that the PUC used its two-component theory as the basis both for

determining jurisdiction as well as for determining reciprocal compensation. To view the call as two

components for jurisdictional purposes runs counter to the FCC’s Reciprocal Compensation Ruling

as discussed above. Nevertheless, we have today held for different reasons that the PUC properly

exercised its jurisdiction in spite of any interstate aspect of the telecommunications. In this part of

our opinion, we are addressing only the compensation aspect of the PUC’s analysis.

2 1 Southwestern Bell points for support to a few sentences in the PUC arbitrator’s init ial opinion

in which the arbitrator questioned whether there had been a meeting of the minds between the parties

with respect to the issue of reciprocal compensation. The record reveals, however, that the language

in the arbitrator’s opinion was mere dicta, and that the arbitrator was not addressing any arguments actually raised by the parties. The Act limits the issues that may be decided in arbitration to those set

forth by the parties. 47 U.S.C. § 252(b)(4)(A). Southwestern Bell’s argument that it has preserved

the issue is unconvincing.

18 recognized that, for purposes other than jurisdiction, 20 such calls can be treated in the same manner

as local traffic. Reciprocal Compensation Ruling ¶ 12, 24. Perceiving such calls as terminating

locally for compensation purposes is clearly condoned by the FCC.

We note finally that the FCC listed several fact o rs that state commissions may consider in

deciding whether an interconnection agreement should be construed to classify calls to ISPs as local

for purposes of reci procal com pensati on. I d. ¶ 24. The PUC has already considered most of t he

factors. Moreover, the FCC declared that “state commissions, not this Commission, are the arbiters

of what factors are relevant in ascertaining the parties’ intentions.” Id . at ¶ 24.

The district court held that the PUC did not act arbitrarily and capriciously because a

reasonable interpretation of the interconnection agreements is that the parties were to treat calls to

ISPs like calls to other end users. We agree. The conclusion that modem calls terminate locally for

purposes of compensation is both well-reasoned and supported by substantial evidence. We therefore

affirm the PUC’s decision to include ISP-bound traffic within the reciprocal compensation provisions

of the subject interconnection agreements.

Undaunted, Southwestern Bell goes on to contend on appeal that there was no meeting of the

minds with regard to the issue of reciprocal compensation for local calls made to ISPs. A review of

the record reveals that Southwestern Bell did not raise this issue during the administrative hearing so

as to preserve it for judicial review. 21 The failure to raise an issue at the administrative level waives19

the right to appellate review of that issue. See Institute for Tech. Dev. v. Brown , 63 F.3d 445, 449

n. 3 (5th Cir. 1995). Except to the extent that we have already discussed the parties intentions, we

will not review separately the meeting-of-the-minds argument that was waived by Southwestern Bell.

III.

CONCLUSION

For t he fo regoing reasons, we hold that the PUC had jurisdiction to determine the issues

discus sed abo ve, and that the district court had jurisdiction under the Act to hear the matters

presented to it. On the merits, we affirm the district court’s order denying So ut hwestern Bell’s

request for declarato r y and injunctive relief. And, like the district court before us, we affirm the

PUC’s order requiring Southwestern Bell to comply with reciprocal compensation provisions in the

instant interconnection agreements with respect to termination of calls to ISPs.

AFFIRMED.