IN Bell Tele Co v. McCarty, William D.

In the
United States Court of Appeals
For the Seventh Circuit
____________

Nos. 03-1123, 03-1122 & 03-1124
INDIANA BELL TELEPHONE COMPANY, INCORPORATED
d/b/a Ameritech Indiana,
Plaintiff-Appellant, Cross-Appellee,

v.

WILLIAM D. MCCARTY, DAVID W. HADLEY, and
DAVID E. ZEIGNER, in their capacity as
Commissioners of the Indiana Utility Regulatory
Commission and not as individuals,
Defendants-Appellees, Cross-Appellants,

and

AT&T COMMUNICATIONS OF INDIANA, GP,
and TCG INDIANAPOLIS,
Defendants-Appellees, Cross-Appellants.

____________
Appeals from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 01 C 1690—Larry J. McKinney, Chief Judge.
____________
ARGUED SEPTEMBER 12, 2003—DECIDED MARCH 5, 2004
____________
2 Nos. 03-1123, 03-1122 & 03-1124

Before BAUER, KANNE and EVANS, Circuit Judges.
KANNE, Circuit Judge. This appeal stems from the inter-
connection agreement established between Indiana Bell
Telephone Company, Incorporated d/b/a Ameritech Indiana
(“Ameritech”) and AT&T Communications of Indiana, GP
and TCG Indianapolis (collectively “AT&T”) pursuant to the
Telecommunications Act of 1996 (“Act”).1 Because the
parties could not reach a consensus regarding the content
of the agreement, they submitted it to arbitration before the
Indiana Utility Regulatory Commission (“IURC”). 47 U.S.C.
§ 252(b) (2001). The IURC hammered out the differences
and ordered that the agreement be amended to reflect its
determinations. The parties redrafted the agreement as
directed, and it was approved by the IURC.2
Ameritech then sought declaratory and injunctive re-
lief from the district court. It argued that various provisions
established by the IURC through arbitration and incorpo-
rated into the approved agreement violated the Act. The
district court granted the request for an injunction in part
and denied it in part, remanding certain issues to the IURC
for further findings. Ameritech, the IURC Commissioners,
and AT&T appealed portions of the district court’s order,

1
The Telecommunications Act of 1996, Pub. L. 104-104, 110 Stat.
56 (1996) is codified as amended in scattered sections of Title 47,
United States Code.
2
The IURC actually arbitrated two agreements—one between
AT&T Communications of Indiana, GP and Ameritech and the
other between TCG Indianapolis and Ameritech. Both agreements
are identical in all material respects and are challenged on
identical grounds. For simplicity’s sake, we will follow the parties’
and district court’s lead and refer to the agreements at issue in
the singular.
Nos. 03-1123, 03-1122 & 03-1124 3

and those appeals were consolidated for our review.3 We
affirm in part and reverse in part.

I. Background
The Telecommunications Act of 1996 seeks primarily
to promote competition in the previously monopoly-
driven local telephone service market. See Verizon
Communications, Inc. v. FCC, 535 U.S. 467, 475-76 (2002).
It requires the incumbent local telephone service provider4
(here, Ameritech) to allow new market entrants5 (here,
AT&T) to interconnect with and access the incumbent’s
network for a fair price. 47 U.S.C. § 251(c); See Verizon, 535
U.S. at 491. Congress recognized that without allowing new
entrants to use the incumbents’ local exchange networks6
and other technology and services, the incumbents would
maintain a stranglehold on local telephone service: no new

3
The IURC Commissioners, although named in the underlying
complaint for declaratory and injunctive relief and appealing
separately here, provided no briefing or oral argument separate
from AT&T’s. References in this opinion to AT&T as a party
should also be understood to include the Commissioners.
4
In the parlance of the Act, incumbent local telephone service
providers are called “incumbent local exchange carriers,” abbre-
viated “ILECs” or “incumbent LECs.” 47 U.S.C. § 251(h); see MCI
Telecomms. Corp. v. Mich. Bell Tel. Co., 79 F. Supp. 2d 768, 772
(E.D. Mich. 1999).
5
Similarly, new market entrants are commonly referred to as
“competing local exchange carriers,” abbreviated “CLECs” or
“competing LECs.” See MCI Telecomms. Corp., 79 F. Supp. 2d at
772.
6
Local exchange networks consist of local loops (the cables that
connect telephones to switches), switches (computers that direct
calls to their destinations), and transport facilities (equipment
that directs calls between switches). Id. at 771.
4 Nos. 03-1123, 03-1122 & 03-1124

entrant could realistically afford to build from the ground
up the massive communications grid the incumbents had
developed through years of monopolistic advantage. See
Verizon, 535 U.S. at 490.
The Act seeks, with regard to its rate-setting and other
features, to “give aspiring competitors every possible in-
centive to enter local retail telephone markets, short of
confiscating the incumbents’ property.” Id. at 489. It also
requires incumbents to negotiate an agreement, referred to
as an “interconnection agreement,” with new entrants at
their request. 47 U.S.C. § 252(a); See Ill. Bell Tel. Co.
v. Worldcom Techs., Inc., 179 F.3d 566, 568-69 (7th Cir.
1999) (describing the procedure by which interconnection
agreements are reached). The agreement’s purpose is to lay
out in specific detail what access to network elements the
new entrant wishes to purchase from the incumbent, the
price to be paid, and other parameters of their relationship.
If the parties to the agreement can’t come to resolution
within a statutorily specified time frame, either party can
petition the state utility commission (here, the IURC) to
arbitrate the open issues, or, if the state commission refuses
to do so, the Federal Communications Commission (“FCC”
or “Commission”) can step in and resolve the differences
between the parties. 47 U.S.C. § 252(b)(1), (e)(5). The duty
of the state commissions in arbitration is to uphold the Act
and the FCC regulations promulgated under it, ensuring
that the interconnection agreement works to foster competi-
tion and benefit the public, without discriminating against
other would-be entrants. See 47 U.S.C. § 252(c)(1).
After a state commission arbitrates the open issues,
the parties submit their interconnection agreement re-
flecting the arbitrated resolutions to the state commission
for approval. 47 U.S.C. § 252(e). If either or both parties
disagree with the interconnection agreement arbitrated
by the state commission, they may seek review in federal
district court, as Ameritech did here. 47 U.S.C. § 252(e)(6).
Nos. 03-1123, 03-1122 & 03-1124 5

The district court’s sole responsibility is to determine
whether the interconnection agreement meets the require-
ments of sections 251 and 252 of the Act. Id. On appeal, we
review the district court’s interpretation of the Act de novo.
US W. Communications v. Jennings, 304 F.3d 950, 956 (9th
Cir. 2002).

II. Analysis
We turn now to the issues before us on appeal. Each of
these issues was contested during the IURC arbitration and
decided by the arbitrator, then ordered to become part of
the interconnection agreement between the parties.
Ameritech argues that the district court erred when it af-
firmed (1) the IURC’s decision to award AT&T the “tandem
reciprocal compensation rate” rather than the lower “end-
office rate;” and (2) the IURC’s determination that
Ameritech must splice “dark fiber” for AT&T upon request.
As we lay out below, we affirm the district court on both
issues appealed by Ameritech.
AT&T appeals three of the district court’s decisions. First,
AT&T argues that the district court erred in remanding for
further findings the agreement provisions requiring
Ameritech to provide AT&T with combinations of network
elements that Ameritech ordinarily combines for itself as
well as combinations that it ordinarily does not combine for
itself. Second, AT&T states that the district court erred in
enjoining the portion of the interconnection agreement
requiring Ameritech to perform “acceptance testing” before
opening a loop circuit requested by AT&T. Third, AT&T
contests the district court’s order remanding for further
findings the IURC’s decision requiring Ameritech to
unbundle packet switching. While we affirm the district
court’s remand on issues one (combination of network
elements) and three (packet switching), we reverse on issue
6 Nos. 03-1123, 03-1122 & 03-1124

two, reinstating the IURC’s decision with respect to accep-
tance testing.

A. Ameritech’s Appeal
1. Tandem Reciprocal Compensation Rate
One term of the interconnection agreement between
Ameritech and AT&T covers the price to be paid when a
telecommunication (e.g. telephone call, facsimile, modem
dial-up, etc.) originates on the network Ameritech built but
terminates on AT&T’s equipment. Under the Act, not only
can AT&T pay to use certain elements of Ameritech’s vast
telecommunications network, AT&T can build switches of
its own, which Ameritech then must allow to interconnect
with its network. That way, consumers who use AT&T as
their local telephone service provider may call consumers
who use Ameritech as their local telephone service provider.
However, AT&T must pay Ameritech for its costs in allow-
ing the call to travel through its switch and arrive at its
customer’s receiver and vice versa. See Ill. Bell Tel. Co., 179
F.3d at 568; 47 U.S.C. § 251(b)(5). The compensation paid
by AT&T and Ameritech to each other for transport and
termination of telecommunications is called “reciprocal
compensation.” 47 U.S.C. § 251(b)(5).
Problems in calculating the reciprocal compensation rate
arise because, as the FCC has recognized, new entrants
design their networks and deploy their switches differently
than incumbents due to changes in technology. See In re
Implementation of the Local Competition Provisions of
the Telecomms. Act of 1996, 11 FCC Rcd. 15,499, 16,042,
¶ 1090 (Aug. 8, 1996) (“Local Competition Order”). Incum-
bents, which usually have older networks and thus older
technology, typically route calls from new entrants’ cus-
tomers either through an “end-office switch” (a computer
that directly serves the Ameritech customer being called) or
a “tandem switch” (a computer hub that connects end-office
Nos. 03-1123, 03-1122 & 03-1124 7

switches). If Ameritech routes an AT&T customer’s call
directly through Ameritech’s end-office switch, AT&T is
charged the “end-office rate.” The end-office rate is a lower
rate that compensates Ameritech for the cost of end-office
switching alone. But, if Ameritech must route the call
through a tandem switch, then AT&T pays Ameritech the
higher “tandem rate.” The tandem rate compensates
Ameritech for (1) the tandem switching it performs to route
the call to the end-office switch; (2) the transport between
the tandem switch and the end-office switch; and (3) the
end-office switching that delivers the call to the customer.
See MCI Telecomms. Corp., 79 F. Supp. 2d at 790 (E.D.
Mich. 1999).
New entrants cannot hope to replicate the incumbents’
network switch for switch but, as stated before, have the
advantage of newer technology. Thus, a new entrant can
typically deploy a single switch in a central location, then
lease various elements from the incumbent in order to
connect the new entrant’s customers to its central switch
and the incumbent’s end-office switches. In this way, the
new entrant is able to serve with one switch a geographic
area that the incumbent would serve with a minimum of
ten-to-fifteen end-office switches. The new entrant’s central
switch and leased transport facilities, therefore, “perform
functions similar to those performed by an [incumbent’s]
tandem switch.” Local Competition Order, 11 FCC Rcd. at
16,042, ¶ 1090. Hence, if a new entrant can show that its
one switch “serves a geographic area comparable to the area
served by the [incumbents’] tandem switch,” 47 C.F.R. §
51.711(a)(3) (2003), then the new entrant can charge the
incumbent the higher tandem rate for calls terminating on
the new entrant’s network. Otherwise, the new entrant
receives the lower end-office rate.
8 Nos. 03-1123, 03-1122 & 03-1124

The IURC determined that AT&T met the geographic
coverage test established by 47 C.F.R. § 51.711(a)(3)7 and
that Ameritech owed AT&T the tandem rate for calls
terminating on AT&T’s network. Ameritech argues that
in awarding AT&T the higher tandem reciprocal compensa-
tion rate, the IURC misinterpreted Rule 711(a)(3) to mean
that AT&T only had to have the ability to serve and not
actually be serving the same geographic area as Ameritech.
Because of this purported misapplication of the geographic
coverage test, Ameritech argued below that the portion of
the interconnection agreement establishing AT&T’s entitle-
ment to the tandem reciprocal compensation rate should be
enjoined. The district court disagreed and affirmed the
IURC’s determination.
Ameritech first challenges the affirmance of the tan-
dem reciprocal compensation rate award on the basis that
the district court applied the wrong standard of review. The
district court found that whether AT&T met the geographic
coverage test established by 47 C.F.R. § 51.711(a)(3) was a
question of fact to be overturned only if the IURC’s determi-
nation was arbitrary or capricious. Questions of fact,
Ameritech agrees, are reviewed by the district court under
the arbitrary and capricious standard. Southwestern Bell
Tel. Co. v. Apple, 309 F.3d 713, 717-18 (10th Cir. 2002); US
W. Communications, Inc. v. Hamilton, 224 F.3d 1049, 1052
(9th Cir. 2000). But, Ameritech argues, whether the IURC
properly interpreted the FCC regulation to require an
examination into AT&T’s “ability to serve” the same
geographic area as Ameritech rather than AT&T’s “actual

7
Rule 711(a)(3) reads in full:
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.
Nos. 03-1123, 03-1122 & 03-1124 9

service” of the same geographic area was a question of law
to be reviewed de novo. See Hamiliton, 224 F.3d at 1052
(stating that courts consider de novo a state commission’s
interpretation of the Act and the FCC’s regulations).
We agree with the argument advanced by Ameritech that
the district court should have conducted a de novo review of
the IURC’s interpretation of the regulation in question. See,
e.g., MCI Telecomms. Corp., 79 F. Supp. 2d at 791 (applying
a de novo standard of review to the new entrant’s challenge
to the state commission’s interpretation of 47 C.F.R. §
51.711(a)(3)). However, we affirm the district court judge’s
decision because the IURC interpreted the regulation
correctly to mean that the tandem reciprocal rate applies
when the new market entrant’s network has the ability to
serve, although may not yet be actually serving, the same
geographic area as the incumbent.
There is precious little case law interpreting 47 C.F.R.
§ 51.711(a)(3), and the few district court cases dealing spe-
cifically with the issue before us are either inapposite or
unpersuasive. For guidance, we turn to the Memorandum
Opinion and Order issued by the Chief of the Wireline
Competition Bureau, acting with authority delegated by the
FCC to forge an interconnection agreement between
telecommunications providers in Virginia. See In re Petition
of WorldCom, Inc., 17 FCC Rcd. 27,039 (Jul. 17, 2002)
(“Virginia Arbitration Order”). There, the FCC delegated
authority to the chief of one of its subdivisions, the Wireline
Competition Bureau (“WCB”), to arbitrate interconnection
agreement disputes between Verizon, the incumbent local
telephone service provider, and three new entrants—AT&T
Communications of Virginia, Inc., WorldCom, Inc. and Cox
Virginia Telcom, Inc.—when the Virginia State Corporation
10 Nos. 03-1123, 03-1122 & 03-1124

Commission refused to do so.8 Virginia Arbitration Order,
17 FCC Rcd at 27,044-45, ¶¶ 6, 7; see also 47 U.S.C. §
252(e)(5) (giving the FCC authority to preempt the arbitra-
tion authority of state commissions). The purpose of the
WCB is to “advise[] and make[] recommendations to the
Commission, or act [] for the Commission under delegated
authority, in all matters pertaining to the regulation and
licensing of communications common carriers.” 47 C.F.R. §
0.91. As such, it has unique expertise in the area of inter-
preting rules promulgated by the FCC.9

8
In refusing to arbitrate the providers’ interconnection agree-
ment disputes, the Virginia State Corporation Commission stated
that it could not apply federal standards as required by the Act in
arbitrating interconnection agreements without potentially
waiving its Eleventh Amendment sovereign immunity, which it
did not have the authority to do. Virginia Arbitration Order, 17
FCC Rcd. at 27,045, ¶ 6.
9
According to 47 C.F.R. § 0.91, some additional functions of the
WCB are as follows:
The Bureau will, among other things:
(a) Develop and recommend policy goals, objectives, programs
and plans for the Commission in rulemaking and adjudicatory
matters concerning wireline telecommunications, drawing on
relevant economic, technological, legislative, regulatory and
judicial information and developments. Overall objectives
include meeting the present and future wireline telecommuni-
cations needs of the Nation; fostering economic growth;
ensuring choice, opportunity, and fairness in the development
of wireline telecommunications; promoting economically
efficient investment in wireline telecommunications infra-
structure; promoting the development and widespread
availability of wireline telecommunications services; and
developing deregulatory initiatives where appropriate.
(b) Act on requests for interpretation or waiver of rules.
(c) Administer the provisions of the Communications Act
(continued...)
Nos. 03-1123, 03-1122 & 03-1124 11

The Virginia Arbitration Order addresses the precise
issue before us—whether the geographic area test outlined
in Rule 711(a)(3) requires the new entrant to actually serve,
as opposed to merely be capable of serving, the same
geographic area as the incumbent. 17 FCC Rcd. at 27,182-
83, ¶ 304. In siding with the new entrants and determining
that Rule 711(a)(3) requires that new entrants demonstrate
only that they are capable of serving the same geographic
area as the incumbent, the WCB stated:
[T]he determination whether a [new entrant’s] switch
“serves” a certain geographic area does not require
an examination of the competitor’s customer base. . . .
The tandem rate rule recognizes that new entrants may
adopt network architecture different from those de-
ployed 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 en-
trants. We agree . . ., therefore, that the requisite
comparison under the tandem rate rule is whether
the [new entrant’s] switch is capable of serving a geo-
graphic area that is comparable to the architecture
served by the [incumbent’s] tandem switch.
Id. at 27,186-87, ¶ 309 (emphasis added).
We find the WCB’s pronouncement on this issue not only
persuasive, given the Act’s overarching goal of promoting
competition and the WCB’s expertise in this area, but one
requiring deference as the voice of the FCC interpreting its
own rules. See Chevron, U.S.A., Inc. v. Natural Res. Def.
Council, 467 U.S. 837 (1984); US W. Communications, Inc.

(...continued)
requiring that the charges, practices, classifications, and reg-
ulations of communications common carriers providing in-
terstate and foreign services are just and reasonable. . . .
12 Nos. 03-1123, 03-1122 & 03-1124

v. Pub. Serv. Comm’n of Utah, 75 F. Supp. 2d 1284, 1287 (D.
Utah 1999) (“[I]f the FCC were to act for a state commission
that did not accept its responsibilities under the Act, a
reviewing court would give deference to the FCC, as a
federal agency, under Chevron.”); see also Ill. Bell Tel. Co.,
179 F.3d at 571 (“We have long given deference to the
pronouncements of the FCC.”).
According to the FCC’s rules on delegation of authority,
the WCB literally stepped into the shoes of the FCC when
it assumed responsibility of the Virginia arbitration:
(a) The person, panel, or board to which functions are
delegated shall, with respect to such functions, have all
the jurisdiction, powers, and authority conferred by law
upon the Commission, and shall be subject to the same
duties and obligations.
(b) . . . any action taken pursuant to delegated authority
shall have the same force and effect and shall be made,
evidenced, and enforced in the same manner as actions
of the Commission.
47 C.F.R. § 0.203. See also 47 U.S.C. § 155(c)(3) (“Any order,
decision, report, or action made or taken pursuant to any
such delegation [of authority] . . . shall have the same force
and effect, and shall be made, evidenced, and enforced in
the same manner, as orders, decisions, reports, or other
actions of the Commission.”). When, as here, Congress has
expressly permitted delegation of authority by statute, see
47 U.S.C. § 155(c), and 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.” MCIMetro Access Transmission Servs., Inc.
v. BellSouth Telecomms., Inc., 352 F.3d 872, 880 n.8 (4th
Cir. 2003) (citing Ford Motor Credit Co. v. Milhollin, 444
U.S. 555, 566 n.9 (1980)).
Although we recognize that actions decided by delega-
tion of authority are subject to review by the FCC under
Nos. 03-1123, 03-1122 & 03-1124 13

47 U.S.C. § 155(c) and 47 C.F.R. § 1.115, we do not believe,
as Ameritech urges, that this deprives the Virginia
Arbitration Order of the FCC’s imprimatur as outlined
above in 47 U.S.C. § 155(c)(3) and 47 C.F.R. § 0.203. Unless
and until the FCC modifies the Order, it remains in effect
and is entitled to our deference. 47 C.F.R. § 1.102(b)
(stating that non-hearing actions such as the Virginia
Arbitration Order are effective upon release and are not
stayed pending a petition for reconsideration by the FCC,
except in limited circumstances not present here).10 See also
MCIMetro Access Transmission Servs., Inc., 352 F.3d at 880
n.8 (according the Virginia Arbitration Order the same def-
erence as if it had been rendered by the FCC itself).
Ameritech does not make the alternative argument that
even if the IURC applied the test appropriately, which
we have found it did, the evidence presented by AT&T
fails to establish that its switches have the ability to serve
the same areas served by the Ameritech tandem switches.
Indeed, Ameritech concedes that AT&T provided evidence
supporting the IURC’s findings on this issue. (See, e.g.,
App. Opening Br. p. 20.) Because the IURC correctly in-
terpreted the geographic coverage test established in
Rule 711(a)(3), and because Ameritech does not contest the
IURC’s findings of fact showing that AT&T met the test, the
district court’s decision upholding the IURC’s determination

10
We note that on August 16, 2002, Verizon filed a petition
seeking reconsideration of portions of the Virginia Arbitration
Order, including the interpretation of Rule 711(a)(3). See Verizon’s
Petition for Clarification and Reconsideration of July 17, 2002
Memorandum Opinion and Order, p. 23, available at
http://gullfoss2.fcc.gov/prod/ecfs/ retrieve.cgi?native_or_pdf=pdf
&id_ document= 6513288259. However, the FCC has not yet ruled
on the petition, and the Virginia Arbitration Order remains in
effect.
14 Nos. 03-1123, 03-1122 & 03-1124

that AT&T is entitled to the tandem reciprocal compensa-
tion rate was correct.

2. Dark Fiber
“Dark fiber” is excess cable laid in anticipation of future
use, but not currently connected to electronics, or “lit,”
enabling it to carry telecommunications signals. In re
Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, 15 FCC Rcd. 3696, 3776,
¶ 174 (Nov. 5, 1999) (“UNE Remand Order”). The act of
connecting dark fiber to electronics so that it can carry a
signal is called “splicing.” Ameritech conceded in one of its
several Federal Rule of Appellate Procedure 28(j) letters
that the FCC’s newest formal rulemaking, the Triennial
Review Order,11 released August 21, 2003, was “incon-
sistent” with its appeal arguing that it was not required to
splice dark fiber upon AT&T’s request because to do so
would be concomitant to providing AT&T with superior, not
just nondiscriminatory, access to Ameritech’s network. The
Triennial Review Order foreclosed that argument by
explicitly stating:
We require incumbent LECs to make routine network
modifications to unbundled transmission facilities used
by requesting carriers where the requested transmis-
sion facility has already been constructed. By “routine
network modifications” we mean that incumbent LECs
must perform those activities that incumbent LECs
regularly undertake for their own customers.
***

11
See In re Review of the Section 251 Unbundling Obligations of
Incumbent Local Exchange Carriers, 2003 FCC LEXIS 4697 (Aug.
21, 2003) (“Triennial Review Order”); see also 68 Fed. Reg. 52,276
(Sept. 2, 2003).
Nos. 03-1123, 03-1122 & 03-1124 15

By way of illustration, we find that loop modification
functions that the incumbent LECs routinely perform
for their own customers, and therefore must perform for
competitors, include, but are not limited to, rearrange-
ment or splicing of cable . . . .
2003 FCC LEXIS 4697 at *1025, 1027-28, ¶¶ 632, 634.
Ameritech appropriately observed in its Rule 28(j) letter
that if the Triennial Review Order was in effect upon the
rendering of our decision, it must be applied in this case.
See Jennings, 304 F.3d at 956 (“Because the role of the
federal courts is to determine whether the agreements
comply with the Act, and because the FCC properly has
exercised its authority to implement the Act by means of
promulgating regulations, we conclude that we must ensure
that the interconnection agreements comply with current
FCC regulations, regardless of whether those regulations
were in effect when the [state commission] approved the
agreements.”). The Triennial Review Order took effect on
October 2, 2003. FCC Public Notice, DA 03-2844, 18 FCC
Rcd. 18,516 (Sept. 8, 2003). The district court very properly
analyzed the dark fiber situation, as confirmed by the
Triennial Review Order.12
B. AT&T’s Appeal
1. New Combinations of Network Elements
Before the IURC and in its opening brief before the dis-
trict court, Ameritech argued that Iowa Utilities Board v.

12
As this case was going to press, the D.C. Circuit decided U.S.
Telecom Assoc. v. FCC, F.3d ___, 2004 U.S. App. LEXIS 3960 (D.C.
Cir. Mar. 2, 2004), which reviewed the legality of certain provi-
sions of the Triennial Review Order, including the network modi-
fication requirements cited above. The D.C. Circuit expressly
upheld the Order’s requirement that incumbents provide new
entrants with routine network modifications that incumbents
regularly undertake for their own customers, such as splicing
dark fiber. Id. at ___, *58-59.
16 Nos. 03-1123, 03-1122 & 03-1124

FCC, 219 F.3d 744 (8th Cir. 2000) (“IUB III”)13 relieved it
from its obligation under 47 C.F.R. § 51.315(c) to create new
combinations of “unbundled network elements” (“UNEs”) for
AT&T. The term “network element” means a facility or
equipment used in the provision of a telecommunications
service, including “features, functions, and capabilities that
are provided by means of such facility or equipment,
including subscriber numbers, databases, signaling sys-
tems, and information sufficient for billing and collection or
used in the transmission, routing, or other provision of a
telecommunications service.” 47 U.S.C. § 153(29).
“Unbundling” refers to “giv[ing] separate prices for equip-
ment and supporting services.” AT&T Corp. v. Iowa Utils.
Bd., 525 U.S. 366, 394 (1999) (quoting Webster’s Ninth New
Collegiate Dictionary 1283 (1988)).

13
After the FCC promulgated its initial regulations under the Act
in 1996, several parties filed petitions for review of those reg-
ulations in several different federal circuits. Under the Hobbs Act,
the Federal Courts of Appeals have exclusive jurisdiction over
challenges to FCC regulations. See 28 U.S.C. § 2342; 47 U.S.C. §
402(a). And, when agency regulations are challenged in more than
one court of appeals, 28 U.S.C. § 2112 requires that the panel on
multi-district litigation consolidate the petitions and assign them
to a single circuit—here, the Eighth Circuit. It issued its first
opinion in 1997, vacating certain contested FCC regulations. See
Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997) (“IUB I”). The
Supreme Court granted certiorari, reinstated all but one of the
previously vacated regulations, and remanded to the Eighth
Circuit for additional proceedings. See AT&T Corp. v. Iowa Utils.
Bd., 525 U.S. 366 (1999) (“IUB II”). The Eighth Circuit then
issued Iowa Utils. Bd. v. FCC, 219 F.3d 744 (8th Cir. 2000) (“IUB
III”), which was subsequently reviewed and reversed in part in
Verizon Communications Inc. v. FCC, 535 U.S. 467 (2002). See
MCI Telecomms. Corp. v. US W. Communications, 204 F.3d 1262,
1267 (9th Cir. 2000) (describing in part the history of the Eighth
Circuit litigation).
Nos. 03-1123, 03-1122 & 03-1124 17

The Supreme Court’s decision in Verizon Communications
Inc. v. FCC, 535 U.S. 467 (2002), released midway through
the briefing before the district court, reinstated Rule 315(c),
which IUB III had vacated. Realizing the Supreme Court’s
decision invalidated its prior arguments, Ameritech shifted
position in its district court reply brief, urging that those
contested portions of the interconnection agreement dealing
with unbundled network elements should be remanded for
further consideration by the IURC in light of Verizon. The
district court agreed, noting that the Court in Verizon
recognized four limitations on Rule 315(c), that the agree-
ment did not reflect the Court’s decision regarding those
limitations, and was thus inconsistent with the Act.
As a threshold matter, AT&T argues Ameritech has
waived its right to rely on the Supreme Court’s decision
in Verizon. Even though Verizon was not decided until
midway through briefing before the district court, AT&T
argues that Ameritech should have anticipated its holding
and presented alternative arguments before the IURC
and the district court, instead of relying exclusively on IUB
III, the relevant portion of which Verizon subsequently
reversed. Because it did not make its Verizon-based argu-
ments before the IURC, AT&T contends Ameritech was
prohibited from doing so when it sought review from the
district court. See, e.g., Southwestern Bell Tel. Co. v. Pub.
Util. Comm’n of Tex., 208 F.3d 475, 487-88 (5th Cir. 2000)
(“The failure to raise an issue at the administrative level
waives the right to appellate review of that issue.”). We
disagree.
“[W]here the Supreme Court decides a relevant case while
litigation is pending . . . omission of an argument based on
the Supreme Court’s reasoning does not amount to a waiver
. . . .” Old Ben Coal Co. v. Dir., Office of Worker’s Comp.
Programs, 62 F.3d 1003, 1007 (7th Cir. 1995) (quotation
omitted). This is especially true where, as here, once
Ameritech discovered that Verizon foreclosed the previous
18 Nos. 03-1123, 03-1122 & 03-1124

arguments made before the IURC with respect to combina-
tions at issue in the interconnection agreement, it requested
only that the district court remand the relevant sections of
the interconnection agreement to the IURC for reconsidera-
tion in light of Verizon. See id. (“Moreover, waiver is a
flexible doctrine, too, so that when all the claimant asks for
is a remand to permit the agency to consider an intervening
decision—a decision the agency couldn’t have considered
earlier—the doctrine does not stand in the way.” (quotation
omitted)).
AT&T next argues that remand is unnecessary as the
IURC’s decision accurately tracks Verizon. Again, we disa-
gree. Verizon reinstated the combination rules invalidated
in IUB III, 219 F.3d at 758-59, but in so doing, added an
interpretive gloss to Rule 315(c) not reflected in the parties’
interconnection agreement.
On its face Rule 315(c) contains only two limitations to an
incumbent’s duty to perform combinations of unbundled
network elements—technical feasibility and discriminatory
impact. It states:
(c) Upon request, an incumbent LEC shall perform the
functions necessary to combine unbundled network ele-
ments in any manner, even if those elements are not
ordinarily combined in the incumbent LEC’s network,
provided that such combination:
(1) Is technically feasible; and
(2) Would not undermine the ability of other car-
riers to obtain access to unbundled network ele-
ments or to interconnect with the incumbent LEC’s
network.
47 C.F.R. § 51.315(c). However, the Supreme Court noted
that four sets of limitations applied to the combination
requirements based on the language of the rules and the
FCC’s interpretation of them: (1) the incumbent’s duty to
Nos. 03-1123, 03-1122 & 03-1124 19

combine only arose when the new entrant was “unable to do
the job itself;” (2) the incumbent only had to “perform the
functions necessary to combine” and not necessarily
complete the actual combination; (3) the new entrant must
pay “a reasonable cost based fee” for the incumbent’s com-
bination efforts; and (4) the incumbent only had to perform
technically feasible combinations that would not discrim-
inate against other new entrants (the two limitations spe-
cifically listed in Rule 315(c)(1) and (2)). Verizon, 535 U.S.
at 535. The Court stated:
In sum, what we have are rules that say an incumbent
shall, for payment, “perform the functions necessary,”
47 C.F.R. §§ 51.315(c) and (d) (1997), to combine net-
work elements to put a competing carrier on an equal
footing with the incumbent when the requesting carrier
is unable to combine, First Report and Order ¶ 294,
when it would not place the incumbent at a disadvan-
tage in operating its own network, and when it would
not place other competing carriers at a competitive
disadvantage, 47 C.F.R. § 51.315(c)(2).
Id. at 538. In so doing, the Supreme Court more clearly
delineated under what circumstances an incumbent can be
required to combine unbundled network elements.
When the IURC approved the interconnection agreement
between the parties, it did not have the benefit of the
Supreme Court’s Verizon opinion. Of the limitations in-
corporated by Verizon into Rule 315(c), AT&T admits that
the interconnection agreement fails to reflect any finding by
the IURC that Ameritech must provide combination of
unbundled network elements because AT&T cannot do
them itself. AT&T posits that such a limitation should be
read into the agreement based on certain findings by the
IURC in the arbitration order and based on testimony
accepted by the IURC in making those findings. We decline
20 Nos. 03-1123, 03-1122 & 03-1124

to do so. The interconnection agreement as approved is in-
consistent with the Act as interpreted in Verizon, and
should be remanded to the IURC for reconsideration.14

2. Acceptance testing
AT&T next argues that the district court’s finding
that Ameritech need not perform “acceptance testing” at
AT&T’s request because it results in providing AT&T with
a network superior in quality to Ameritech’s own in dero-
gation of the Act. Acceptance testing involves Ameritech’s
field technician conducting a noise and frequency response
test prior to opening a loop circuit requested by AT&T. The
purpose of the acceptance test is to ensure the line is error-
free, resulting in better quality and reliability for custom-
ers.
Ameritech argued before the IURC that because it doesn’t
provide acceptance testing for its own retail customers, it
shouldn’t have to provide it for AT&T. The IURC ordered

14
Other limitations delineated by the Supreme Court appear
on the face of the interconnection agreement provisions in issue
or are otherwise satisfied. For example, subsection 9.3.3 of the
interconnection agreement addressing the combination of ele-
ments not ordinarily combined specifically states that Ameritech
shall perform the functions necessary to combine its network
elements, but only if technically feasible and non-discriminatory.
Although subsection 9.3.3 does not specifically mention payment
for the combination efforts, that issue is clearly addressed else-
where in the interconnection agreement.
We also note that Ameritech argues that subsection 9.3.2.1 of
the interconnection agreement addressing combinations of ele-
ments ordinarily combined has also been called into question
under Verizon. We leave it to the IURC to determine in the first
instance whether this section comports with the Act as inter-
preted by the Supreme Court.
Nos. 03-1123, 03-1122 & 03-1124 21

Ameritech to perform acceptance testing anyway, finding it
to be in the public interest because it could reduce the need
for later line maintenance, would ensure reliable, quality
service to customers, and would promote competition. In
doing so, the IURC acknowledged that such a requirement
made Ameritech provide AT&T with better service than it
provides for its own customers and that the Eighth Circuit
voided the FCC rule requiring incumbents to provide
superior quality networks to new entrants. See IURC
Arbitration Order, No. 40571-INT-03, p. 76 (Nov. 20, 2000);
IUB I, 120 F.3d at 812-13; see also IUB III, 219 F.3d at 758.
To avoid the federal ban on superior quality requirements,
the IURC relied on its authority under state law as pre-
served by the Act to independently impose the acceptance
testing requirement on Ameritech. IURC Arbitration Order
at 76-77 (relying upon 47 U.S.C. § 251(d)(3) and citing MCI
Telecomms. Corp. v. US W. Communications, 204 F.3d 1262,
1265 (9th Cir. 2000)). It stated:
Therefore, while the FCC is limited to promulgating
rules that are not contrary to the plain meaning of the
Act, as a state commission we must only prescribe reg-
ulations that are consistent with the Act. States can
“raise the bar” of the telecommunications providers[’]
standards, provided the bar does not conflict with the
Act.
Id. at 77-78 (emphasis in original).
The district court disagreed with the IURC’s interpre-
tation of the power granted to it under the Act in this
instance and reversed the acceptance testing requirement
as being in conflict with the Act, relying upon IUB III’s
statement that “[s]uperior quality requirements ‘violate the
plain language of the Act.’ ” (Dist. Ct. Op. at 16) (quoting
IUB III, 219 F.3d at 758). The district court criticized the
IURC for advancing the seemingly incompatible theorem
22 Nos. 03-1123, 03-1122 & 03-1124

that “state commissions can order requirements that
‘violate’ the Act, as long as the requirements do not ‘conflict’
with the Act.” Id. (citing IURC Arbitration Order at 77-78).
The IURC’s recitation of the role reserved for it under the
Act was, as the district acknowledged, inartful, but its
decision to require Ameritech to provide acceptance testing
neither conflicts with nor violates the Act. It thus must be
reinstated.
Prior to the passage of the Act, the states had primary
regulatory control over local telecommunications markets.
Ill. Bell. Tel. Co., 179 F.3d at 568. Although it now feder-
alizes regulation of the telecommunications field in the
name of competition, the Act recognizes and specifically
preserves state authority to continue to regulate locally, as
long as the regulations promote, and do not conflict with,
the stated goals and requirements of the Act on its face or
as interpreted by the FCC:
Nothing in this part precludes a State from imposing
requirements on a telecommunications carrier for in-
trastate services that are necessary to further competi-
tion in the provision of telephone exchange service or
exchange access, as long as the State’s requirements
are not inconsistent with this part or the Commission’s
regulations to implement this part.
47 U.S.C. § 261(c). Conversely, the FCC, in implementing
regulations animating the Act, cannot scuttle state reg-
ulations consistent with the Act:
In prescribing and enforcing regulations to implement
the requirements of this section, the Commission shall
not preclude the enforcement of any regulation, order,
or policy of a State Commission that—
(A) establishes access and interconnection obliga-
tions of local exchange carriers;
Nos. 03-1123, 03-1122 & 03-1124 23

(B) is consistent with the requirements of this sec-
tion; and
(C) does not substantially prevent implementation
of the requirements of this section and the pur-
poses of this part.
47 U.S.C. § 251(d)(3). The Act provides specifically, with
regard to the state’s role in approving interconnection
agreements, that “[n]othing in this section shall prohibit a
State commission from establishing or enforcing other
requirements of State law in its review of an agreement,
including requiring compliance with intrastate telecommu-
nications service quality standards or requirements.” 47
U.S.C. § 252(e)(3).
Based on the plain language of the Act, it’s clear the
IURC had independent authority preserved under the Act
to impose acceptance testing requirements on Ameritech by
way of the interconnection agreement. As the IURC found,
the requirement promoted competition and enhanced
service quality for Indiana consumers and thus was consis-
tent with the Act. Cf. Ill. Bell Tel. Co., 179 F.3d at 574
(noting that deference to state commission decisions is not
improper considering the “important role” left to them by
the Act in the field of interconnection agreements).
Ameritech argued, and the district court found, that re-
gardless of any independent state authority that may have
survived the Act, the IURC’s imposition of acceptance test-
ing is barred by the logic of the Eighth Circuit’s decisions
relating to the now void FCC “superior quality” regulation.
According to the Act, incumbents must provide intercon-
nection to new entrants “that is at least equal in quality” to
that enjoyed by the incumbent itself. 47 U.S.C.
§ 251(c)(2)(C) (emphasis added). The FCC promulgated a
regulation requiring that the incumbent provide superior
quality interconnection upon the new entrant’s request.
24 Nos. 03-1123, 03-1122 & 03-1124

IUB I, 120 F.3d at 812 (citing now vacated 47 C.F.R.
§ 51.305(a)(4)). The Eighth Circuit found that the plain
language of the Act could not support a superior quality
requirement; rather, the phrase “at least equal” mandated
only that the quality be equal, not superior. Id. at 812-13.
“In other words, it establishes a floor below which the
quality of the interconnection may not go.” Id. at 812. The
regulation, on the other hand, inappropriately substituted
the ceiling (superior quality) for the floor (equal quality), by
requiring superior quality upon request. The Eighth Circuit
reaffirmed its position on the superior quality rules in IUB
III, 219 F.3d at 758.
As already explained, the roles—and the authority—of
the state commissions and the FCC are distinct under the
Act. Hence, we do not agree with the premise advanced by
Ameritech that because the FCC may not implement a
blanket regulation requiring superior quality, the IURC
may not require acceptance testing when, after individual-
ized review, it finds it to be in the public interest and a
means of promoting competition in Indiana. The Eighth
Circuit’s prohibition of superior quality mandates applied
only to the FCC in its role as federal regulator, not to the
IURC in its role as state regulator. We find that the IURC’s
imposition of the acceptance testing requirement does not
conflict with the spirit and purpose of the Act and is an
appropriate use of the state law authority left to it under
the Act.
Further, the IURC’s requirement that Ameritech provide
acceptance testing does not “violate” the plain meaning
of the Act, since the Act states that the quality provided
by the incumbent must be “at least equal.” 47 U.S.C.
§ 251(c)(2)(C). The “at least” indicates that something more
than equal is allowable. See IUB I, 120 F.3d at 812; see also
MCI Telecomms. Corp. v. N. Y. Tel. Co., 134 F. Supp. 2d
490, 506 (N.D.N.Y. 2001) (determining that Act’s “at least
equal” language allows state commissions to set quality
Nos. 03-1123, 03-1122 & 03-1124 25

guidelines superior to those the incumbent provides itself);
AT&T Communications of the S. States, Inc. v. GTE Fla.,
Inc., 123 F. Supp. 2d 1318, 1329 (N.D. Fla. 2000) (upholding
imposition of superior quality interconnection in part
because Act’s “at least equal” provision does not mean “no
greater than”).
Because the IURC acted under authority preserved by the
Act and required Ameritech to provide superior quality
access allowed under the Act, the district court’s determina-
tion otherwise must be reversed.

3. Packet Switching
As we have discussed, the Act is dynamic legislation,
subject to ever-evolving interpretation based on FCC and
court pronouncements. The parties’ dispute with regard
to the IURC’s “packet switching” unbundling requirement
highlights the fluidity of the law, resulting in our affirm-
ance of the learned district judge’s remand order on this
issue, but on different grounds.
The IURC considered “packet switching,” a type of net-
work element, to be one that must be made available by
Ameritech to AT&T on an unbundled basis. According to
the FCC regulations in effect at the time the parties entered
into the interconnection agreement, packet switching
unbundling was required only when four specific conditions
were met. 47 C.F.R. § 51.319(c)(5)(i)-(iv). The district court
observed that the IURC did not appear to consider those
four factors in ordering the unbundling of packet switching
and remanded so that the proper inquiry could be made.
AT&T appealed, arguing that the regulation did not
foreclose states from ordering unbundling in circumstances
other than those listed in the regulation.
The FCC regulation in question, 47 C.F.R. § 51.319(c)(5)
(i)-(iv), has since been remanded to the FCC by the D.C.
Circuit. See U.S. Telecom Ass’n v. FCC, 290 F.3d 415 (D.C.
26 Nos. 03-1123, 03-1122 & 03-1124

Cir. 2002), cert. denied, Worldcom, Inc. v. U.S. Telecom
Ass’n, 538 U.S. 940 (2003). After the parties finished brief-
ing their appeals in the instant case, the FCC issued its
Triennial Review Order. As required by the D.C. Circuit,
the Order specifically addressed packet switching unbun-
dling determining that it need never be unbundled, even in
the limited circumstance previously outlined in 47 C.F.R.
§ 51.319(c)(5):
We find, on a national basis, that competitors are not
impaired without access to packet switching, including
routers and DSLAMs. Accordingly, we decline to un-
bundle packet switching as a stand-alone network ele-
ment. We further find that the Commission’s limited
exception to its packet-switching unbundling exemption
is no longer necessary.
Triennial Review Order, 2003 FCC LEXIS 4697, at *888, ¶
537. The FCC based its determination on evidence that
competitors regularly deployed their own packet switches
without significant barriers, making unbundled access to
the incumbents’ unnecessary. Id. at *889-92, ¶¶ 538-39.
In spite of the Order, AT&T continues to argue that states
still maintain authority to order the unbundling of packet
switching and that, in any event, we are obligated to apply
the law as it existed at the time of the agreement. As to the
latter point, AT&T makes much of the Order’s refusal to
unilaterally change all interconnection agreements to
comply with the new unbundling requirements. The FCC
defers instead to telecommunications providers’ intercon-
nection agreement provisions establishing procedures for
dealing with changes in the law; where the providers have
not negotiated the procedure to follow when the law
changes, the FCC directs providers to the default provisions
of the Act regarding the same. Id. at *1112-13, ¶ 701. By
favoring change through the interactive process espoused by
Nos. 03-1123, 03-1122 & 03-1124 27

the Act, we do not understand the FCC to advocate a bar to
this court’s ability to apply the law as it currently stands.
Further, we are obligated to do so:
Because the role of the federal courts is to determine
whether the agreements comply with the Act . . ., we
conclude that we must ensure that the interconnection
agreements comply with current FCC regulations,
regardless of whether those regulations were in effect
when the [state commission] approved the agreements.
See Jennings, 304 F.3d at 956.
As to AT&T’s insistence that the Triennial Review Order
does not preempt the state’s authority under state law to
order packet switching unbundling, we find that the Order
does not entirely foreclose this argument. The Order expli-
citly states: “We do not agree with incumbent LECs that
argue that the states are preempted from regulating in this
area as a matter of law.” Triennial Review Order, 2003 FCC
LEXIS 4697, at *305, ¶ 192.
Therefore, we affirm the district court’s remand of this
issue to the IURC. We note, however, that the IURC’s
further findings should be guided by the Triennial Review
Order, not the now invalid 47 C.F.R. § 51.319(c)(5) as or-
dered by the district court.
That said, we observe that only in very limited circum-
stances, which we cannot now imagine, will a state be able
to craft a packet switching unbundling requirement that
will comply with the Act. As stated by the FCC:
If a decision pursuant to state law were to require
the unbundling of a network element for which the
Commission has either found no impairment—and thus
has found that unbundling that element would conflict
with the limits in section 251(d)(2)—or otherwise de-
clined to require unbundling on a national basis, we
believe it unlikely that such a decision would fail to
28 Nos. 03-1123, 03-1122 & 03-1124

conflict with and “substantially prevent” implementa-
tion of the federal regime, in violation of section
251(d)(3)(c).
Id. at *311, ¶ 195.

III. Conclusion
We AFFIRM the district court’s determinations as to
tandem reciprocal compensation rates, dark fiber, new
combinations of network elements, and packet switching on
the grounds, and with the caveats, discussed above. We
REVERSE the district court’s determination on acceptance
testing, reinstating that provision of the interconnection
agreement as a valid exercise of state authority preserved
under the Act.
Nos. 03-1123, 03-1122 & 03-1124 29

A true Copy:
Teste:

________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—3-5-04