Court Opinion

ID: 2971302
Source: CourtListenerOpinion
Date Created: 2015-09-22 16:32:39.906647+00
Date Added: 2024-06-11T15:29:37.670199
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RECOMMENDED FOR FULL-TEXT PUBLICATION
            Pursuant to Sixth Circuit Rule 206            2       Ohio Bell Telephone Co. v. MCI                 No. 03-3525
    ELECTRONIC CITATION: 2004 FED App. 0232P (6th Cir.)           Telecommunications Corp., et al.
                File Name: 04a0232p.06
                                                                             Submitted: June 15, 2004
UNITED STATES COURT OF APPEALS                                          Decided and Filed: July 20, 2004
               FOR THE SIXTH CIRCUIT
                 _________________                        Before: GILMAN and COOK, Circuit Judges; CLELAND,
                                                                           District Judge.*
MCI TELECOMMUNICATIONS            X                                             _________________
CORP .,                            -
              Plaintiff-Appellee, -                                                  COUNSEL
                                   -    No. 03-3525
                                   -                      ON BRIEF: Dennis G. Friedman, MAYER, BROWN,
             v.                     >                     ROWE & MAW, Chicago, Illinois, Daniel R. Conway,
                                   ,                      PORTER, WRIGHT, MORRIS & ARTHUR, Columbus,
                                   -
THE OHIO BELL TELEPHONE                                   Ohio, for Appellant. Donald B. Verrilli, Jr., JENNER &
                                   -                      BLOCK, Washington, D.C., Terri L. Mascherin, Daniel J.
COMPANY , d/b/a SBC OHIO ,         -                      Weiss, JENNER & BLOCK, Chicago, Illinois, Duane W.
          Defendant-Appellant, -                          Luckey, Columbus, Ohio, Steven T. Nourse, Jodi J. Bair,
                                   -                      OFFICE OF THE ATTORNEY GENERAL, Columbus,
                                   -
ALAN R. SCHRIBER, RHONDA                                  Ohio, for Appellees.
                                   -
HARTMAN FERGUS, JUDY A.            -
JONES, DONALD L. MASON,                                                         _________________
                                   -
and CLARENCE D. ROGERS ,           -                                                OPINION
JR., in their Official             -                                            _________________
Capacities as Commissioners        -
                                   -                         CLELAND, District Judge. Defendant-Appellant Ohio
of the Public Utilities            -                      Bell Telephone Company (“SBC”) appeals the district court’s
Commission of Ohio,                -                      order affirming the arbitration decision of the Public Utilities
         Defendants-Appellees. -                          Commission of Ohio (“PUCO”). Although PUCO arbitrated
                                   -                      over 40 open issues between SBC and Appellee MCI
                                  N                       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
      Appeal from the United States District Court
     for the Southern District of Ohio at Columbus.
 No. 97-00721—Edmund A. Sargus, Jr., District Judge.
                                                              *
                                                               The Honorable Robert H. Cleland, United States District Judge for
                                                          the Eastern District of Michigan, sitting by designation.

                             1
No. 03-3525           Ohio Bell Telephone Co. v. MCI        3    4    Ohio Bell Telephone Co. v. MCI              No. 03-3525
                     Telecommunications Corp., et al.                 Telecommunications Corp., et al.

award MCI the tandem reciprocal compensation rate for calls      incumbent provider’s network and buy the incumbent
that originate on SBC’s network and terminate on MCI’s. We       provider’s telecommunication services for a fair price. See 47
AFFIRM the judgment of the district court.                       U.S.C. §§ 251(a)(1) & (c). These arrangements were
                                                                 necessary to minimize the barriers to market entry erected
      I. FACTS AND PROCEDURAL HISTORY                            during the period in which the incumbent provider functioned
                                                                 as a monopoly. Pursuant to the Act, the incumbent provider
  Telecommunications Act of 1996 and Implementing                is required to negotiate an agreement, referred to as an
                   Regulations                                   “interconnection agreement,” with a new market entrant, or a
                                                                 competing local exchange carrier (“competing provider”). If
   In 1996, pursuant to the Telecommunications Act of 1996       the parties cannot agree upon certain terms in the agreement,
(the “1996 Act” or “Act”), MCI began negotiating an              either party can petition the state utility commission to
“interconnection agreement” with SBC for telephone service       arbitrate the open issues. See id. at § 252(b)(1). The state
in Northeastern Ohio. Such agreements were made possible         commissions arbitrate the dispute, ensuring that its resolution
by the 1996 Act, which Congress enacted to “promote              of the open issues meets the requirements of the 1996 Act and
competition in all telecommunications markets, including the     the Federal Communication Commission’s (“FCC’s”)
local service market.” Michigan Bell Tel. Co. v. Climax Tel.     implementing regulations. Id. at § 252(c).
Co., 202 F.3d 862, 865 (6th Cir. 1999). Congress sought to
eliminate state-sanctioned monopolies and adopt a national          After the state utilities commission arbitrates the open
policy for telecommunication competition in local markets.       issues, the parties submit the completed interconnection
See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 370 (1999)      agreement to the state commission, which either approves the
(“The Telecommunications Act of 1996 (1996 Act or Act),          final agreement or rejects it. The state commission may reject
Pub.L. 104-104, 110 Stat. 56, fundamentally restructures local   the agreement if it does not comply with the 1996 Act or the
telephone markets. States may no longer enforce laws that        FCC’s regulations, discriminates against other non-party
impede competition, and incumbent [local exchange carriers]      telecommunications providers, or is inconsistent with the
are subject to a host of duties intended to facilitate market    public interest. Id. at § 252(e). If either or both parties
entry. Foremost among these duties is the [Local Exchange        disagree with the interconnection agreement, as arbitrated by
Carrier’s (LEC's)] obligation under 47 U.S.C. § 251(c) (1994     the state commission, they may seek review in federal district
ed., Supp. II) to share its network with competitors.”).         court. Id. at § 252(e)(6).
   Before the Act, local telephone service was mostly              In the new competitive telecommunications marketplace, a
provided by state-regulated monopolies, now commonly             customer who places a call through his provider may be
referred to as incumbent local exchange carriers (“incumbent     routed from his provider’s network to another provider’s
providers”). In this case, SBC is the incumbent provider for     network in order to complete the call. This typically occurs
telephone service in Northeast Ohio.                             when a person places a local call to someone who receives
                                                                 local telephone service from a different provider than that of
  In order to promote competition in the telecommunications      the caller (e.g., an SBC customer calls an MCI customer). In
market, the 1996 Act requires incumbent providers to allow       this situation, the calling party’s provider would require the
new market entrants, such as MCI in this case, to utilize the    assistance of the called party’s provider in switching the call
No. 03-3525             Ohio Bell Telephone Co. v. MCI          5    6    Ohio Bell Telephone Co. v. MCI              No. 03-3525
                       Telecommunications Corp., et al.                   Telecommunications Corp., et al.

over to the separate network. Although the calling party pays           This regulation is based on the FCC’s conclusion that the
only its provider for the call, the called party’s provider incurs   incumbent provider’s costs for transporting and terminating
costs in transporting and terminating the call. In the absence       a call should be a reasonable approximation, or “presumptive
of an agreement with the calling party’s provider, the called        proxy” of the costs for other providers. In the Matter of
party’s provider would go uncompensated for its service.             Implementation of the Local Competition Provisions in the
                                                                     Telecommunications Act of 1996, 11 F.C.C.R. 15,499, 16,040
  Through interconnection agreements, the providers agree to         (1996) (“Both the incumbent LEC and the interconnecting
a compensation structure that allows parties from different          carriers usually will be providing service in the same
providers to seamlessly complete calls to one another. The           geographic area, so the forward-looking economic costs
1996 Act requires providers to enter into “reciprocal                should be similar in most cases. We also conclude that using
compensation arrangements” to compensate each other when             the incumbent LEC's forward-looking costs for transport and
inter-network calls are completed. Id. at § 251(b)(5). The           termination of traffic as a proxy for the costs incurred by
reciprocal compensation rates are to be based upon a                 interconnecting carriers satisfies the requirement of section
“reasonable approximation of the additional costs” incurred          252(d)(2) that costs be determined ‘on the basis of a
by the provider that transports and terminates the call that         reasonable approximation of the additional costs of
originates on another network. Id. at § 252(d)(2)(A)(ii).            terminating such calls.’ Using the incumbent LEC's cost
Congress, however, elected to avoid in-depth inquiries into          studies as proxies for reciprocal compensation is consistent
the actual costs incurred by providers.              Id. at          with section 252(d)(2)(B)(ii), which prohibits ‘establishing
§ 252(d)(2)(B)(ii) (the provision regarding reciprocal               with particularity the additional costs of transporting or
compensation shall not be construed “to authorize the                terminating calls.’”). The incumbent’s economic cost study
Commission or any State commission to engage in any rate             is relied upon to determine the appropriate costs because
regulation proceeding to establish with particularity the            smaller new entrants are typically not in a position to conduct
additional costs of transporting or terminating calls, or to         a “forward-looking economic cost study.” Id.
require carriers to maintain records with respect to the
additional costs of such calls.”). Instead, Congress left the           Recognizing the intricacies of local telecommunications
task of implementing the 1996 Act, including the reciprocal          networks, beyond the general policy of symmetrical rates, the
rate provision, to the FCC. Id. at § 251(d)(1).                      FCC established a more detailed two-tier scheme for
                                                                     determining reciprocal compensation rates. The two-tiered
   In 1996, the FCC published its governing regulations              approach takes into account the telecommunications
regarding reciprocal compensation. The FCC concluded that            equipment used to transfer and complete a particular call--
reciprocal compensation rates should be symmetrical between          either “tandem” or “end-office” switches. Historically,
interconnected telecommunications carriers and based on the          incumbent providers used these two switches to route calls.
incumbent provider’s cost studies. See 47 C.F.R. § 51.711(a).        A tandem switch acts as a hub connecting other switches and
Thus, the state commission should apply the same rate no             is generally able to handle calls over a broad geographic area.
matter which provider, the incumbent or competitor,                  End-office switches typically serve smaller geographic areas
transports and terminates a call originating from the other’s        and fewer customers. Acknowledging that the cost associated
network.                                                             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         7    8    Ohio Bell Telephone Co. v. MCI               No. 03-3525
                      Telecommunications Corp., et al.                  Telecommunications Corp., et al.

termination rates in the arbitration process that vary according     One of the sticking points during negotiation of the
to whether the traffic is routed through a tandem switch or        interconnection agreement was the appropriate reciprocal
directly to the end-office switch.” In the Matter of               compensation rate that SBC would pay MCI when MCI
Implementation of the Local Competition Provisions in the          incurred costs by transporting and terminating a call on its
Telecommunications Act of 1996, 11 F.C.C.R. at 16042. The          network that originated from SBC’s network. Rather than
FCC also recognized that new entrants may utilize new              using a series of tandem switches and end-office switches,
technology other than the two switches commonly used by            MCI utilized new technology, especially fiber optic rings, to
incumbent providers. “In such event, states shall also             reach all of its customers in a local service area by using only
consider whether [these] new technologies (e.g., fiber ring or     one switch--a “Siemen’s Class 5" telecommunications switch
wireless networks) perform functions similar to those              located in Cleveland, Ohio. The parties could not agree upon
performed by an incumbent LEC's tandem switch and thus,            the appropriate reciprocal compensation rate to compensate
whether some or all calls terminating on the new entrant's         MCI for transporting and terminating calls that originate on
network should be priced the same as the sum of transport and      SBC’s network, and thus submitted this issue, along with
termination via the incumbent LEC's tandem switch.” Id.            nearly 50 others, to PUCO for arbitration pursuant to
                                                                   47 U.S.C. § 252.
  Most important to the issue currently before the court, the
FCC established a rule for determining whether the new               PUCO considered the parties’ positions and accepted both
provider’s switch generally serves the same role as a tandem       written and live testimony during the arbitration proceeding,
switch serves in the incumbent’s network (i.e., whether the        and, on January 9, 1997, issued its Arbitration Award. In the
entrant can charge the tandem rate when employing new              Award, PUCO decided all outstanding issues and directed the
technology). Rule 711(a)(3) provides: “Where the switch of         parties to submit a modified interconnection agreement.
a carrier other than an incumbent LEC serves a geographic
area comparable to the area served by the incumbent LEC's            PUCO decided that MCI could charge SBC the tandem
tandem switch, the appropriate rate for the carrier other than     reciprocal compensation rate rather than the lower end office
an incumbent LEC is the incumbent LEC's tandem                     reciprocal compensation rate. PUCO considered the prefiled
interconnection rate.” 47 C.F.R. § 51.711(3).                      testimony of Maria Marzulla, a senior manager of MCI’s
                                                                   Local Network Engineering Group, who described MCI’s
The Interconnection Agreement Between SBC and MCI                  technology and network capabilities. She testified that
                                                                   “MCI’s switches all serve areas at least equal in size if not
  In this case, MCI was beginning to offer local telephone         greater than the serving area of the [incumbent provider’s]
service in Ohio and sought an interconnection agreement            tandem [switch],” and cited to examples of MCI’s network in
from the incumbent provider, SBC. n 1994, under pre-Act            Baltimore and New York. Although during live testimony,
pro-competitive state regulations, MCI applied to PUCO for         Ms. Marzulla was unable to give an estimate of actual
permission to offer local service in three Ohio counties:          customers being served by MCI’s switch at the time of the
Cuyahoga, Franklin, and Montgomery. PUCO examined                  hearing, she reemphasized that the MCI switch is capable of
MCI’s business and technical capabilities and, on December         serving a geographic area comparable to the area served by
31, 1996, certified MCI to provide local service in the three      SBC’s tandem switch. SBC did not offer testimony or
counties.                                                          evidence regarding the geographical reach of MCI’s switch,
No. 03-3525           Ohio Bell Telephone Co. v. MCI           9   10       Ohio Bell Telephone Co. v. MCI                    No. 03-3525
                     Telecommunications Corp., et al.                       Telecommunications Corp., et al.

but instead argued that MCI was required to show that it was       actually served customers in a comparable geographic area as
already servicing customers in a geographic area comparable        SBC.
to SBC.
                                                                      On March 21, 2003,1 the district court affirmed PUCO’s
  PUCO rejected SBC’s argument:                                    decision awarding MCI the tandem reciprocal compensation
                                                                   rate. The court concluded that PUCO applied the correct
  The fundamental question then becomes: does MCI’s                legal test because it considered the appropriate regulation, 47
  switch located in Cleveland serve an area comparable to          C.F.R. § 51.711(a). It then went on to conclude, under the
  that served by Ameritech’s tandem switch. We turn our            arbitrary and capricious standard, that PUCO did not err in
  attention to MCI’s conditional certificate approved in           finding that “MCI had the capacity to serve a region in
  Case No. 94-2012-TP-ACE, wherein the Commission                  northeastern Ohio for which it had applied and obtained a
  granted MC I authority to provide local                          Certificate of Operation.” (03/19/03 Order at 11.) The court
  telecommunications service in Cuyahoga, Franklin, and            deferred to PUCO’s previous determination that “MCI [was]
  Montgomery counties. We will presume, given the start-           able to serve the area in question” and the issuance of an
  up nature of MCI’s operations, that MCI shall serve the          operating license to MCI. (Id.) Accordingly, SBC’s claim
  area for which we found it worthy of a certificate. In our       was dismissed.
  view, that is a comparable service area.
                                                                                          II. JURISDICTION
In the Matter of Petition of MCI Telecommunications Corp.
for Arbitration Pursuant to Section 252(b) of the                    This case arises under the Telecommunications Act of
Telecommunications Act of 1996 to Establish an                     1996, which permits a party to appeal the final arbitration
Interconnection Agreement with Ameritech Ohio, No. 96-888-         decision of the state utilities commission to a federal district
TP-ARB (Jan. 9, 1997) (“PUCO Arbitration”). PUCO based             court. 47 U.S.C. § 252(e)(6). Generally, this court has
its decision on the “best information” it had and asked the        jurisdiction over an appeal from the district court’s order
parties to “provide regular reports to the Commission’s            pursuant to 28 U.S.C. § 1291.
telecommunications staff so that [it] may receive ongoing
information.” (Id.)                                                  Appellee PUCO, however, argues that jurisdiction is
                                                                   lacking because the case is either moot or because the
           Appeal of The Arbitration Decision                      majority of SBC’s challenge to the reciprocal compensation
                                                                   rate is not yet ripe for 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.           1
                                                                         The matter remained pending before the district court for
SBC claimed that, to the extent MCI was permitted to charge        app roxim ately six years. The district court stayed the action, awaiting
the tandem reciprocal compensation rate, the agreement             decisions from the FCC and United States Supreme Court that could have
(entered into after the arbitration) violated 47 U.S.C.            had a bearing on the case. In the meantime, while the action was pending,
§ 252(d)(2) because MCI had not shown that its switch              the parties’ interconnection agreement expired and the parties entered into
                                                                   a new agreement in early 2003.
No. 03-3525            Ohio Bell Telephone Co. v. MCI        11    12    Ohio Bell Telephone Co. v. MCI               No. 03-3525
                      Telecommunications Corp., et al.                   Telecommunications Corp., et al.

   First, we disagree with the contention that this case has       terms, the 2003 interconnection agreement does not render the
been rendered moot by the parties’ 1997 interconnection            instant appeal moot.
agreement or the superseding interconnection agreement in
2003. The fact that the parties accepted PUCO’s arbitration          PUCO next argues that a refund, or retroactive relief, is not
decisions and incorporated them into their 1997                    available to SBC under the “filed rate doctrine.” The classic
interconnection agreement, and thus agreed to operate under        example of application of the filed rate doctrine, often
such terms during the pendency of this appeal, does not            referred to as the filed tariff doctrine, can be found in the
preclude SBC from seeking reimbursement based on the               Supreme Court’s decision in Louisville & Nashville R. Co. v.
lower rate. MCI, a party to the 1997 agreement, agrees. If we      Maxwell, 237 U.S. 94 (1915). In that case, the Supreme
were to hold otherwise and find that the interconnection           Court held that a passenger who purchased a train ticket at a
agreement rendered the appeal from the arbitration decision        rate misquoted by the ticket agent did not have a defense
moot, telecommunication companies would be forced to forgo         against the subsequent collection of the higher tariff rate by
entering into interconnection agreements in order to preserve      the railroad.
their appeal. The new entrant to the market would not be able
to efficiently serve its customers (without an interconnection       Under the Interstate Commerce Act, the rate of the
agreement) until the appellate process ran its course, further       carrier duly filed is the only lawful charge. Deviation
entrenching the incumbent provider and creating the risk that        from it is not permitted upon any pretext. Shippers and
the new entrant’s technology could become outdated in the            travelers are charged with notice of it, and they as well as
meantime. Parties are free to continue business relations with       the carrier must abide by it, unless it is found by the
an understanding that one party might pursue appeal, and thus        Commission to be unreasonable.               Ignorance or
seek reimbursement, through the process permitted by federal         misquotation of rates is not an excuse for paying or
law. See 47 U.S.C. § 252(e)(6). MCI maintained its                   charging either less or more than the rate filed. This rule
relationship with SBC with this understanding. See Indiana           is undeniably strict and it obviously may work hardship
Bell Tel. Co. Inc. v. McCarty, 362 F.3d 378 (7th Cir. 2004)          in some cases, but it embodies the policy which has been
(considering the merits of an appeal from the arbitration            adopted by Congress in the regulation of interstate
decision despite the fact that the parties entered into, and         commerce in order to prevent unjust discrimination.
operated under, an interconnection agreement that
incorporated the arbitrator’s disputed decisions).                 Id. at 97. The filed rate doctrine requires that common
                                                                   carriers and their customers adhere to tariffs filed and
   Similarly, the parties’ most recent interconnection             approved by the appropriate regulatory agencies. In essence,
agreement, entered into in 2003, does not affect the               PUCO argues that SBC cannot obtain a refund for rates paid
justiciability of SBC’s appeal. The contract expressly permits     to MCI in the past under this doctrine. We disagree.
either party to seek a judicial order revising the agreement
and authorizes retroactive relief (i.e., reimbursement for rates     First, and most importantly, SBC is not arguing that the
paid). The parties reserved all rights and remedies with           tandem rate itself should be different (i.e., SBC is not arguing
respect to collection of rates and charges under the               that the rate is incorrect or was unreasonably set) or that it is
interconnection agreement. Accordingly, by its express             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                 13     14       Ohio Bell Telephone Co. v. MCI                     No. 03-3525
                           Telecommunications Corp., et al.                                Telecommunications Corp., et al.

upon the interpretation of the regulations governing                                              III. STANDARD OF REVIEW
symmetrical rates. A ruling by this court will have no effect
on the filed tariff or rate. Thus, SBC is not challenging the                       We review the district court’s interpretation of Rule
filed tariff, but is merely appealing the arbitration decision                    711(a)(3) de novo and its ultimate factual findings under the
that applied one rate rather than another. Such appeals are                       arbitrary and capricious standard of review. Although the
expressly permitted under the Telecommunications Act and                          district court reviewed PUCO’s arbitration decision strictly
the parties agreed that a refund could be sought in their most                    under the arbitrary and capricious standard of review, the
recent interconnection agreement. PUCO has cited no                               primary issue before that court, and currently before this
persuasive authority otherwise.                                                   court, is a question of law--whether FCC Rule 711(a)(3)
                                                                                  requires that the new market entrant’s switch actually serve
  Further, the two most important purposes for the filed rate                     customers across a comparable geographic area in order for
doctrine are not implicated if the court reviews PUCO’s                           the new entrant to charge the incumbent’s tandem
decision and the resulting rate terms of the interconnection                      interconnection rate.3 The interpretation of the rule, a
agreement.       The filed rate doctrine prevents carrier                         question of law, must be reviewed de novo. See Michigan
discrimination by committing the carriers to one set tariff and                   Bell Tel. Co. v. Strand, 305 F.3d 580, 586 (6th Cir. 2002).
preserves the role of administrative agencies in approving and
setting rates, a practice at which they are particularly adept.                                            IV. DISCUSSION
See Fax Telecommunications Inc. v. A.T.&T., 138 F.3d 479,
489 (2d Cir. 1998) (describing the two principles emanating                         Although PUCO’s and the district court’s decisions are
from the filed rate doctrine). Neither of these principles are                    somewhat equivocal, the court accepts SBC’s proposition that
threatened in this case, nor is there a potential that SBC is                     both PUCO and the district court issued their decisions,
vying for a lower rate in some unfair manner or for some                          awarding MCI tandem reciprocal compensation, based upon
ulterior motive. Rather, SBC merely wants the court to                            an interpretation of Rule 711(a)(3) that merely requires MCI’s
review PUCO’s and the district court’s interpretation (and                        switch to have the ability to serve a comparable geographic
possibly application) of the regulations. The filed rate                          area rather than a requirement that MCI actually serve
doctrine does not reach a circumstance such as this one, and                      customers over the same geographic area. Rule 711(a)(3)
thus SBC is entitled to seek retroactive relief.2                                 provides:
                                                                                    Where the switch of a carrier other than an incumbent
                                                                                    LEC serves a geographic area comparable to the area
    2                                                                               served by the incumbent LEC's tandem switch, the
      There is also no real dispute that SBC, if successful on appeal, may          appropriate rate for the carrier other than an incumbent
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 agreem ent, but also the past and              3
current agreements. Moreo ver, SB C’s arguments regarding the potential                 SBC agrees that, under an interpretation that does not require actual
that this issue could evade judicial review because of the relatively quick       service to customers (the interpretation that it argues against), there is no
turnover of interconnection agreements further persuades the co urt to            challenge to the factua l finding that MCI’s switch ca n serve a geographic
render a decision in this matter.                                                 area equ al in coverage to SBC’s.
No. 03-3525                 Ohio Bell Telephone Co. v. MCI                15     16       Ohio Bell Telephone Co. v. MCI                   No. 03-3525
                           Telecommunications Corp., et al.                               Telecommunications Corp., et al.

  LEC is the incumbent LEC's tandem interconnection                                 As a practical matter, a new entrant to the
  rate.                                                                          telecommunications market will not have as large a customer
                                                                                 base as an incumbent that has operated as a monopoly for a
47 C.F.R. § 51.711(a)(3). The court must decide whether this                     number of years. Under SBC’s interpretation, a new entrant
rule requires the new entrant to be actually serving customers                   would operate under a significant disadvantage when it first
over a comparable geographic area before charging the                            enters a particular market, and possibly forever, because it
tandem interconnection rate or whether the new entrant’s                         would not be permitted to charge the higher tandem reciprocal
capability to serve customers over a comparable geographic                       rate for its new technology even though that technology is
area suffices. For the reasons set forth below, we affirm the                    able to carry communications over expansive geographic
district court’s decision and interpret Rule 711(a)(3) as                        areas. In essence, if a new entrant could not charge the
requiring the new entrant’s switch to be capable of serving a                    tandem rate until it had nearly as many customers as the
comparable geographic area, as opposed to a requirement that                     incumbent, the new entrant may be hampered in gaining
the new entrant actually serve customers in that area.                           market share (i.e., obtaining customers) because it may not be
                                                                                 able to obtain full compensation for its switch and thus be
   First, the language of Rule 711(a)(3) does not require the                    unable to competitively charge its customers. This would
switch to be serving customers dispersed over a certain                          thwart the main purpose behind the 1996 Act, the opening of
geographic area. As MCI notes, “[n]othing in the text of Rule                    local telecommunications markets to competition.
711(a)(3) refers to the physical location of a carrier’s
customers. The grammatical object of the regulation’s                              The FCC’s Wireline Competition Bureau6 recognized this
language--the thing ‘served’ by the competing carrier’s                          in its Virginia Arbitration Order, in which it held that “the
switch--is the ‘geographic area,’ not particular customers.”                     determination whether a [new entrant’s] switch ‘serves’ a
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
                                                                                 MCI’s custom er base exp ands, SB C will surely have to pay the tandem
calls that originate on the incumbent’s network, the tandem                      reciprocal rate more frequently because more calls will be exchanged, but
interconnection rate applies so that the new entrant may                         it will also reap the benefits of more calls being transferred from M CI’s
recoup its approximate costs.5                                                   network to SB C’s for termination. Th us, the size of MCI’s customer base,
                                                                                 even if much smaller than SBC’s, does not appear to create such a
                                                                                 drama tic inequity in costs.
    4                                                                                 6
      Perhaps a fitting example for illustrative (or grammatical) purposes              The FCC d elegated the task of arbitrating an interconnection
is a city fire department. Although the department may have never had            agreement dispute, similar to the one in this case, to the Bureau. The
to put ou t a fire or respond to a call on a particular block or locale within   Bureau “advises and makes recommendations to the Co mmission, or acts
the city, it still “serves” the entire city.                                     for the Commission under delegated authority, in all matters pertaining to
    5
                                                                                 the regulation and licensing of communications common carriers and
      The court is not persuaded by SBC’s argument that the tandem               ancillary operations (other than matters pertaining exclusively to the
interconnection rate is an unfair rate to charge when MCI has fewer              regulation and licensing of wireless telecommunications services and
customers than SB C. If M CI has few custome rs, SB C will rarely have to        facilities).” 47 C.F.R. § 0.91. “As such, it has unique expertise in the
pay the tand em interconnection rate because few calls would be                  area of interpreting rules promulgated b y the FCC.” Indiana Bell Tel.
transmitted from SB C’s network to MCI’s network. Conversely, as                 Co., Inc. v. M cCa rty, 362 F.3d 37 8, 386 (7th Cir. 2004).
No. 03-3525            Ohio Bell Telephone Co. v. MCI       17    18   Ohio Bell Telephone Co. v. MCI              No. 03-3525
                      Telecommunications Corp., et al.                 Telecommunications Corp., et al.

certain geographic area does not require an examination of the    the agency delegates authority to a subdivision, ‘the decision
competitor’s customer base.” Virginia Arbitration Order, 17       of the subdivision is entitled to the same degree of deference
FCC Rec. at ¶ 307. The Bureau rejected the incumbent’s            as if it were made by the agency itself.’” Id. at 387 (citing
argument that the new entrant had to actually be serving          MCI Metro Access Transmission Servs., Inc. v. BellSouth
customers dispersed over a comparable geographic area to          Telecommunications, Inc., 352 F.3d 872, 880 n.8 (4th Cir.
charge the tandem reciprocal rate under Rule 711(a)(3).           2003)). Accordingly, the Seventh Circuit held that it was
Instead, it stated:                                               required to follow the Bureau’s interpretation until the FCC
                                                                  ruled otherwise. We are not aware of FCC authority to the
  The tandem rate rule recognizes that new entrants may           contrary and we are convinced, as was the Seventh Circuit,
  adopt network architecture different from those deployed        that the Bureau’s decision is not only persuasive, but also
  by the incumbent; it does not depend upon how                   entitled to deference under Chevron. See 47 U.S.C.
  successful the [new entrant] has been in capturing a            § 155(c)(3).
  ‘geographically dispersed’ share of the [incumbent’s]
  customers, a standard that would penalize new entrants.            Under this interpretation of Rule 711(a)(3), the district
  We agree . . . therefore, that the requisite comparison         court did not err in affirming the arbitration panel’s factual
  under the tandem rate rule is whether the [new entrant’s        finding that MCI’s switch covered a geographic area
  switch is capable of serving a geographic area that is          comparable to SBC’s. MCI described its technological
  comparable to the architecture served by the                    capabilities to the panel and offered the testimony of a senior
  [incumbent’s] tandem switch.                                    manager from MCI who testified that MCI’s switches serve
                                                                  areas equal in size, if not greater than those served by the
Id.                                                               incumbents. Finally, PUCO relied on the fact that MCI had
                                                                  obtained approval from PUCO to serve the three relevant
  As the Seventh Circuit recently held, the Bureau’s              counties in Ohio. In light of the set-up costs and the
interpretation should be afforded deference and thus result in    procedures that MCI had already followed, the panel
affirmance of the decisions below. In Indiana Bell Telephone      determined that MCI was capable and ready to serve a
Company v. McCarty, the Seventh Circuit, sitting en banc,         comparable geographic area. Thus, PUCO’s decision was not
held that the decision of the Bureau outlined above is entitled   arbitrary and capricious and the district court correctly
to deference as a decision of the FCC interpreting its own        affirmed PUCO’s decision.
rules. 362 F.3d at 386 (“We find the [Bureau’s]
pronouncement on this issue not only persuasive, given the                            V. CONCLUSION
Act’s overarching goal of promoting competition and the
[Bureau’s] expertise in this area, but one requiring deference      PUCO and the district court applied the correct legal test--
as the voice of the FCC interpreting its own rules.”) (citing     whether MCI, the new market entrant, had the ability to serve
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S.      customers in the same geographic area as SBC, the
837 (1984)). The Seventh Circuit acknowledged that the            incumbent--and PUCO’s decision that MCI satisfied this test
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
No. 03-3525          Ohio Bell Telephone Co. v. MCI     19
                    Telecommunications Corp., et al.

was not arbitrary and capricious. Accordingly, the judgment
of the district court is AFFIRMED.