IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
___________
No. 98-50787
___________
SOUTHWESTERN BELL TELEPHONE CO.,
Plaintiff-Appellant,
versus
PUBLIC UTILITY COMMISSION OF TEXAS; PAT
WOOD III; JUDY WALSH; BRETT PEARLMAN;
TIME WARNER COMMUNICATIONS OF AUSTIN,
L.P.; TIME WARNER COMMUNICATIONS OF
HOUSTON, L.P.; AND FIBRCOM, INC.,
Defendants-Appellees.
-------------
Appeal from the United States District Court
for the Western District of Texas
-------------
March 30, 2000
Before WIENER and STEWART, Circuit Judges.1
WIENER, Circuit Judge.
This appeal involves a dispute between two interconnecting telephone companies (“carriers”)
in the same local calling areas about whether modem calls placed by local customers of one carrier
to the Internet Service Provider (“ISP”) customers of another carrier should be charged for as a
“local” call. The contracts between the carriers that are parties to this appeal specify that local calls
placed by customers of one carrier to customers of the other are to be “reciprocally compensated.”
In the district court, Plaintiff-Appellant Southwestern Bell Telephone Co. (“Southwestern Bell”)
disavowed any obligation to compensate Defendants-Appellees Time Warner Communications of
Austin, L.P. (collectively “Time Warner”), for calls made by Southwestern Bell’s customers to Time
Warner’s ISP customers as local calls. The district court, like the Texas Public Utilities Commission
1
Senior District Judge John M. Shaw of the Western District of Louisiana was a member of the
panel who heard oral argument on this case. Because of his death on December 24, 1999, he did not
participate in this decision. This appeal has been decided by a quorum pursuant to 28 U.S.C. §46(d).
(“PUC”) before it, held that the carriers’ contracts require such calls to be treated as local calls and
as such, to be compensated for reciprocally. The procedural history of this case also presents thorny
jurisdictional questions at the state regulatory commission and federal district court levels.
Concluding that the PUC and the district court had jurisdiction to adjudicate the merits of this case,
and agreeing with their dispositions of it, we affirm.
I.
FACTS AND PROCEEDINGS
In the interest of opening previously monopolistic local telephone markets to competition, the
Federal Telecommunications Act of 1996 (the “Act”) requires all telecommunications carriers to
interconnect their networks so that customers of different carriers can call one another. 47 U.S.C.
§ 251(a)(1) (West Supp. 1999). Both Southwestern Bell and Time Warner are local exchange
carriers (“LECs”). Having historically held monopolies in the subject markets, Southwestern Bell is
the incumbent LEC or ILEC, and Time Warner is a competing LEC or CLEC. The Act requires
ILECs to negotiate reciprocal compensation arrangements or interconnection agreements with
CLECs to establish the terms by which they will compensate each other for the use of the other’s
networks. 47 U.S.C. § 251(b)(5), (c)(1). When an LEC’s customer places a local call to a customer
of another LEC, the LEC whose customer initiated the call compensates the receiving LEC for
transporting and terminating the call through its network. See 47 U.S.C. § 251(b)(5); 47 C.F.R. §
51.701(e) (1998).
In two reciprocal compensation agreements (one executed in 1996 and the other in 1997),
Time Warner and Southwestern Bell agreed to base reciprocal compensation on minutes of use. That
way each party would pay the other a fixed rate for each minute that one of its customers used the
other’s network for “Local Traffic.” The instant dispute originated when Southwestern Bell refused
to pay Time Warner reciprocal compensation for modem calls that Southwestern Bell’s customers
made to Time Warner’s ISP customers. ( ISPs typically purchase local business phone service from
LECs for a flat monthly fee that allows unlimited incoming calls.) An Internet user can, through use
2
of a modem, dial an ISP’s local phone number without incurring long-distance tolls, but can
nevertheless access websites around the globe. Southwestern Bell based its refusal to pay reciprocal
compensation to Time Warner on the theory that, because modem calls to ISPs involve the
continuous transmission of information across state lines, such calls are interstate and thus should not
be billed as Local Traffic.
In response, Time Warner filed a complaint with the PUC alleging that Southwestern Bell
breached its interconnection agreements when it refused to pay reciprocal compensation for those
calls that its customers made to Time Warner’s ISP customers. The PUC sided with Time Warner,
ruling that calls made by Southwestern Bell’s customers to Time Warner’s ISP customers are Local
Traffic, and as such generate reciprocal compensation obligations.
Southwestern Bell then sought relief in the district court, continuing to insist that Internet calls
are not “local” and therefore should not fall under the reciprocal compensation provisions of the
interconnection agreements applicable to local calls. The district court upheld the PUC’s decision,
agreeing that, under the interconnection agreements, “Local Traffic” includes calls to ISPs. Both the
PUC and the district court were impressed by the notion that a “call” from a Southwestern Bell’s
customer to a Time Warner ISP customer terminates locally at the ISP’s facility. They considered
such telecommunication service to be a component of the call separate and distinct from the
information service, which begins at the ISP’s facility and continues to distant websites.
Subsequent to the filing of this appeal, the FCC handed down a ruling pertinent to reciprocal
compensation for ISP-bound calls, entitled Implementation of the Local Competition Provisions in
the Telecommunications Act of 1996; Inter-Carrier Compensation for ISP-Bound Traffic, 14
F.C.C.R. 3689 (1999) (the “Reciprocal Compensation Ruling”). Holding that it has jurisdiction over
calls to ISPs as interstate calls, the FCC declined to separate ISP-bound traffi c into two distinct
components (intrastate telecommunications service, provided by the LEC, which goes from a user’s
modem to the local ISP, and interstate information service, provided by the ISP, which goes from the
ISP to the websites). Reciprocal Compensation Ruling ¶¶ 1, 13. Although the FCC determined the
3
jurisdictional nature of the ISP-bound traffic by the end-to-end analysis of the transmission (from the
user to the Internet), it held that LECs are nevertheless controlled by interconnection agreements that
include ISP-bound traffic in their reciprocal compensation provisions in the same manner as they
include other local traffic. Id. ¶¶ 13, 16, 18, 22-24. Taking a hands-off approach, the FCC
announced that it will not interfere with state commission determinations of whether reciprocal
compensation provisions of interconnection agreements apply to ISP-bound traffic. Id. ¶¶ 21-22.2
II.
ANALYSIS
A. Jurisdiction
The substantive question that we are asked today is whether, for purposes of one LEC paying
reciprocal compensation to another, a call from the first LEC’s customer to the second LEC’s ISP
customer in the same local exchange area is “Local Traffic” as the term is used in these LECs’
interco nnection agreements. Before addressing that question, though, we must answer several
questions regarding jurisdiction.
The easy one is appellate jurisdiction: We clearly have it under 28 U.S.C. § 1291.
Jurisdictional questions arising from the presence of this case first before the PUC and subsequently
before the district court are not so simple.
As a general proposition, jurisdiction to entertain such matters is conferred on the district
court by the judicial review provisions of the Act, which state:
2
Less than a week ago the Court of Appeals for the District of Columbia decided Bell Atlantic
Telephone Companies v. FCC, 2000 WL 273383 (D.C. Cir) March 24, 2000, vacating this ruling and
remanding it to the FCC with instructions to pro vide a satisfactory explanation why LECs that
terminate calls to ISPs are not properly seen as terminating local telecommunications traffic, and why
such traffic is “exchange access” rather than “telephone exchange service.” The focus of that opinion
is the unexplained (or underexplained) use of the “end-to-end” analysis to determine whether calls
to ISPs are interstate or intrastate. Given the FCC’s hands-off policy, even if the FCC should
continue to deem such calls to be interstate and should satisfy the D.C. Circuit following remand, we
do not view the court’s remand as necessarily forecasting a different result on the question of PUC
jurisdiction over such calls in the context of interpreting and enforcing existing reciprocal
compensation agreements. This would be doubly so if the remand eventually results in the FCC’s
concluding that local calls to ISPs are intrastate.
4
In any case in which a State commission makes a determination under this section,
any party aggrieved by such determination may bring an action in an appropriate
Federal district court to determine whether the agreement or statement meets the
requirements of section 251 of this title and this section [252].
47 U.S.C. § 252(e)(6) (emphasis ours).3 With respect to the interconnection agreements, the Act
confers jurisdiction on the district court to review the PUC’s determination for compliance with the
Act, specifically sections 251 and 252. Our chore today is to determine whether the Act, which
admittedly provides for federal district court review of some state commission dispositions implicating
interconnection agreements, provides for such review in this instance. This determination comprises
two parts: (1) the PUC’s own jurisdiction to determine the questions presented to it, and (2) the
scope of federal review. As to the first part, the Act provides commission jurisdiction in cases “in
which a State commission makes a determination under this section,” meaning section 252. That
section sets forth procedures for negotiation, arbitration, and approval of interconnection agreements.
It also requires LECs to enter into interconnection agreements with each other, through either
voluntary negotiation or compulsory arbitration. 47 U.S.C. § 252(a), (b). The Act specifies that,
regardless of how they are confected, all interconnection agreements must be approved by the
appropriate state commission. 47 U.S.C. § 252(e)(1). Here, the parties had voluntarily negotiated
their interconnection agreements, and the PUC had approved them; no one is here seeking district
court review of those approvals. It was not until several months after the PUC granted its approvals
that Time Warner filed the complaint with the PUC pertaining to reciprocal compensation under those
agreements, precipitating the declaratory action in federal court and ultimately this appeal.
The Act’s reference to “a State commission . . . determination under this section [252],”
could, if construed quite narrowly, limit state commission jurisdiction to decisions approving or
disapproving, or arbitrating, an interconnection agreement. Under such a narrow construction,
commission jurisdiction would not extend to interpreting or enforcing a previously approved contract.
3
The mention of a statement refers to “a statement of the terms and conditions that [an LEC]
generally offers within that State to comply with the requirements of section 251.” 47 U.S.C. §
252(f)(1).
5
We do not think so narrow a construction was intended. Rather, we are satisfied that the Act’s grant
to the state commissions of plenary authority to approve or disapprove these interconnection
agreements necessarily carries with it the authority to interpret and enforce the provisions of
agreements that state commissions have approved. See Iowa Utils. Bd. v. FCC, 120 F.3d 753, 804
(8th Cir. 1997), aff’d in part, rev’d in part on other grounds,4 AT&T Corp. v. Iowa Utils. Bd., 525
U.S. 366, 119 S. Ct. 721, 142 L. Ed.2d 835 (1999). We believe that the FCC plainly expects state
commissions to decide intermediation and enforcement disputes that arise after the approval
procedures are complete. See, e.g., Reciprocal Compensation Ruling ¶ 22 (noting that parties are
bound by their interconnection agreements “as interpreted and enforced by the state commissions”)
(emphasis ours); id. ¶21 (referring to state commission “findings” as to whether reciprocal
compensation provisions of interconnection agreements apply to ISP-bound traffic); id. ¶ 24
(discussing factors state commissions should consider when “construing the parties’ agreements”);
see also Illinois Bell Tel. Co. v. Worldcom Techs., Inc., 179 F.3d 566, 573 (7th Cir. 1999) (noting
that in determining contractual intent under interconnection agreements, a state commission “was
doing what it is charged with doing” in the Act and the FCC’s Recipro cal Compensation Ruling).
Deferring to the pronouncements of the FCC and its reasonable interpretations of the Act, see, e.g.,
Illinois Bell Tel. v. WorldCom, 179 F.3d at 571, we hold that the PUC acted within its jurisdiction
in addressing the questions pertaining to interpretation and enforcement of the previously approved
interconnection agreements at issue here.
Southwestern Bell poses yet another challenge to the PUC’s jurisdiction, urging that, because
Internet traffic is interstate, as a matter of federal law state commissions such as the PUC lack
jurisdiction to impose reciprocal compensation liability for such traffic. We disagree. The Supreme
4
The part of the Circuit Court’s decision eventually reversed pertained to the conclusion that the
FCC does not have jurisdiction under 47 U.S.C. § 208 to hear appeals of state commission decisions
(and that 47 U.S.C. § 252(e)(6) co nfers t his power exclusively on federal district courts). Iowa
Utils., 120 F.3d at 804. The Supreme Court reversed in part, ruling that the issue was not yet ripe
for review. AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 119 S. Ct. 721, 733, 142 L. Ed.2d 834
(1999).
6
Court has recognized that the Act cannot divide the world of domestic telephone service “neatly into
two hemispheres,” one consisting of interstate service, over which the FCC has plenary authority, and
the other consisting of intrastate service, over which the states retain exclusive jurisdiction.
Louisiana Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 360, 106 S. Ct. 1890, 1894, 90 L. Ed. 2d 369
(1986). Rather, observed the Court, “the realities of technology and economics belie such a clean
parceling of responsibility.” Id. The FCC too has rejected the argument advanced by Southwestern
Bell, noting that “state commission authority over interconnection agreements pursuant to section
252 ‘extends t o both interstate and intrastate matters.’” Reciprocal Compensation Ruling ¶ 25,
quoting Implementation of the Local Competition Provisions in the Telecommunications Act of
1996, First Report and Order, 11 F.C.C.R. 15499 ¶ 84 (1996). Accordingly, we hold that here the
PUC properly exercised its jurisdiction regardless of any interstate aspect of the subject
telecommunications.5
We also hold that the district courts have jurisdiction to review such interpretation and
enforcement decisions of the state commissions. See Iowa Utilities Bd., 120 F.3d at 804 & n.24
(holding that federal court review in section 252(e)(6) encompasses review of enforcement decisions
of state commissions and is the exclusive means of obtaining review of such determinations). We will
not read section 252(e)(6) so narrowly as to limit its grant of federal district court jurisdiction to
review decisions of state commissions only to those decisions that either approve or reject
interconnection agreements. We conclude that federal court jurisdiction extends to review of state
commission rulings on complaints pertaining to interconnection agreements and that such jurisdiction
is not restricted to mere approval or rejection of such agreements. See also Illinois Bell Tel. v.
Worldcom, 179 F.3d at 571 (recognizing exclusive federal jurisdiction to review “actions” by state
commissions).
5
The district court was of the opinion that if calls to ISPs were not local, the PUC would have no
jurisdiction, and jurisdiction would be exclusive in the FCC. This was erroneous but harmless dicta,
because the district court ultimately concluded, as we do today, that the PUC had jurisdiction.
7
A similar jurisdictional question asks whether subsection 252(e)(6) limits federal review of
a state commission’s actions with respect to an interconnection agreement to those commission
decisions that concern only compliance with the requirements of sections 251 and 252 of the Act,
and does not extend to review of a commission’s actions implicating compliance with state law. In
this case the parties have framed issues of both federal and state law. Our focus, however, concerns
only the clause of the Act granting jurisdiction over an “action . . . to determine whether the
agreement . . . meets the requirements of section 251 [and section 252].” 47 U.S.C. § 252(e)(6).
Time Warner urges us to read section 252(e)(6) literally and narrowly, so as to limit federal review
to only the issue whether the interconnection agreements, as interpreted by the PUC, meet the
requirements of federal law, specifically, sections 251 and 252. These sections impose specific fair
compensation requirements.6 Under such a narrow construction, section 252(e)(6) would limit
federal court review of the PUC’s decision to such questions as whether the PUC’s interpretation of
the Time Warner/Southwestern Bell interconnection agreements adequately allow the parties to
recover their costs. A federal court lacks jurisdiction, insists Time Warner, to address state law
matters such as, for example, a contractual dispute regarding meeting of the minds.
The Act obviously allows a state commission to consider requirements of state law when
approving or rejecting interconnection agreements. 47 U.S.C. § 252(e)(3), (f)(2). But whether, in
addition to jurisdiction to review for compliance with requirements of the Act, a federal court is
authorized to review any and every question of state law that a state commission may have addressed
6
For example, the Act requires that
a State commission shall not consider the terms and conditions for
reciprocal compensation to be just and reasonable unless —
(I) such terms and conditions provide for the mutual and
reciprocal recovery by each carrier of costs associated with
the transport and termination on each carrier’s network
facilities of calls that originate on the network facilities of the
other character; and
(ii) such terms and conditions determine such costs on the
basis of a reasonable approximation of the additional costs of
terminating such calls.
47 U.S.C. § 252(d)(2)(A).
8
is an issue on which the circuits are split. The Seventh Circuit takes the position that in examining
a state commission order, the court’s task is “not to determine whether [state commission] correctly
applied principles of state contract law, but to see whether its decision violates federal law, as set out
in the Act or in the FCC’s interpretation.” Illinois Bell Tel. v. Worldcom, 179 F.3d at 572. Under
this reading, our scope of review would be quite narrow indeed; the only issue before us would be
whether the PUC, in determining that the parties intended for calls to ISPs to be subject to reciprocal
compensation, violated federal law. See id. at 571. Any issues of state law, such as contract
interpretation, would remain open for determination in another forum.7 The Seventh Circuit also
finds significant the contrast in the Act between state commission determinations (subsections
252(e)(3)( and (f)(2), allowing consideration of state law questions) and federal court determinations
(subsection 252(e)(6), allowing consideration of only “whether the agreement or statement meets the
requirements of section 251 and this section”). To the Seventh Circuit, this juxtaposition confirms
that federal courts “may review a state commission’s actions with respect to an agreement only for
compliance with the requirements of § 251 and § 252 of the [FTA], and not for compliance with
state law.” MCI Telecomms. Corp. v. Illinois Commerce Comm’n, 168 F.3d 315, 320 (7th Cir.)
(emphasis ours), amended on reh’g by 183 F.3d 558 (7th Cir.), reh’g granted, 183 F.3d 567 (7th Cir.
1999)(on Eleventh Amendment grounds).
The Ninth and Fourth Circuits have taken a more expansive view of federal jurisdiction under
the Act, narrowed only by the proper standard of review. These circuits would permit district courts
to consider de novo whether the agreements are in compliance with the Act and the implementing
7
The Seventh Circuit recognized that this allocation of authority “has a potential to cause
problems,” but would leave them to Congress to resolve:
Federal jurisdiction under § 252(c)(6) is exclusive when it exists. Thus every time a
carrier complains about a state agency’s action concerning an agreement, it must start
in federal court (to find out whether there has been a violation of federal law) and
then may move to state court if the first suit yields the answer “no.” This system may
not have much to recommend it, but, as the Supreme Court observed in Iowa Utilities
Board, the 1996 Act has its share of glitches, and if this is another, then legislature
can provide a repair.
Illinois Bell Tel. v. Worldcom, 179 F.3d at 574 (Westmate* version only).
9
regulations, but to review all other issues decided by a state commission under a more deferential
standard, either arbitrary and capricious or substantial evidence. See US West Communications v.
MFS Intelenet, Inc., 193 F.3d 1112, 1117, 1124 n.15 (9th Ci r. 1999) (considering de novo
agreement’s compliance with the Act and regulations and considering “all other issues” under
arbitrary and capricious standard); GTE South, Inc. v. Morrison, 199 F.3d 733, 745 (4th Cir. 1999)
(reviewing de novo the state commission’s interpretations of the Act and reviewing state commission
fact finding under the substantial evidence standard).8
In the case now before us, the district court embraced the broader view, considering de novo
whether the agreements comply with sections 251 and 252, and reviewing “all other issues” under
an arbitrary-and-capricious standard. We find this approach appropriate. This standard comports
with United States v. Carlo Bianchi and Co., 373 U.S. 709, 715, 83 S.Ct. 1409, 10 L. Ed 2d. 652
(1963), and Abbeville General Hospital v. Ramsey, 3 F.3d 797, 802-03 (5th Cir. 1993) (conducting
de novo review of procedural question whether state agency made finding required by federal law and
arbitrary-and-capricious review of the findings themselves). We shall therefore review de novo
whether the interconnection agreements as interpreted by the PUC meet the requirements of the Act,
but our review of the PUC’s state law determinations will be under the more deferential arbitrary-and-
capricious standard.
B. The Merits
We first examine the PUC order to see whether it violates federal law, as reflected in the Act
and in the FCC’s regulations or rulings. We conduct this examination de novo.
The PUC concluded that “a call between two end users in the same local calling area is local
traffic.” Agreeing with the FCC’s then-prevailing view that providing of Internet service involved
8
The Fourth Circuit expressed its awareness that other courts have used the “arbitrary and
capricious” standard of review, quoting, inter alia, U.S. West v. MFS Intelenet, 193 F.3d at 1116, but
stated that, as regarding review of fact findings, “there is no meaningful difference between this
standard and the substantial evidence standard we apply.” GTE South, 199 F.3d at 745 n.5.
10
“multiple components,”9 the PUC declared that “it is the telecommunications service component,
rather than the information service component, that constitutes the basis for determining the
jurisdiction of the traffic involved in calls to ISPs. When a transmission path is established between
two subscribers in the same mandatory calling area, traffic carried on that path is local traffic, with
the telecommunications service component of the call terminating at the ISP location.”
The FCC has now definitively established that modem calls to ISPs constitute jurisdictionally
mixed, largely interstate, traffic. Reciprocal Compensation Ruling ¶¶ 1, 13, 18-19. In its 1999
ruling, the FCC concluded that ISP-bound traffic for “jurisdictional purposes [is] a continuous
transmission from the end user to a distant Internet site.” Id. ¶ 13. Having thus determined its own
jurisdiction over ISP calls, the FCC then discussed regulation of the calls, beginning with the
proclamation that it “has no rule governing inter-carrier compensation for ISP-bound traffic.” Id. ¶
9. The FCC continued: “We find no reason to interfere with state commission findings as to whether
reciprocal compensation provisions of interconnection agreements apply to ISP-bound traffic,
pending adoption of a rule establishing an appropriate interstate compensation mechanism.” Id. ¶
21.10 The FCC reasoned that “parties should be bound by their existing interconnection agreements,
as interpreted by state commissions.” Id. ¶ 1.
Clearly, then, whether voluntarily negotiated or confected through arbitration, commission-
approved agreements requiring payment of reciprocal compensation for calls made to ISPs do not
conflict with §§ 251 and 252 of the Act or with the FCC’s regulations or rulings. Even if ISP traffic
is largely interstate, a state commission may lawfully interpret an agreement as requiring reciprocal
compensation for such traffic. See id. at ¶ 26 (“Although reciprocal compensation is mandated under
9
The PUC quoted the FCC’s Report and Order on Universal Service, CC Docket No. 96-45, FCC
97-157 at ¶ 83 (1997), noting, however, t hat the FCC had recognized that its position should be
reviewed in a future FCC proceeding.
10
In the Reciprocal Compensation Ruling, the FCC gave notice of a proposed rul emaking
regarding inter-carrier compensation for ISP-bound traffic. The obligation to pay such compensation
in existing interconnection agreements could be altered by future rules promulgated by the FCC. See
U.S. West v. AFS Intelenet, 193 F.3d at 1123 n.10.
11
section 251(b)(5) only for the transport and termination of local traffic, neither the statute nor our
rules prohibit a state commission from concluding in an arbitration that reciprocal compensation is
appropriate in certain instances.”); Illinois Bell Tel. v. Worldcom, 179 F.3d at 572 (“The FCC could
not have made clearer that . . . a state agency’s interpretation of an agreement so as to require
payment of reciprocal compensation does not necessarily violate federal law.”).
Additionally, the FCC acknowledged that it had historically “directed states to treat ISP traffic
as if it were local.” Reciprocal Compensation Ruling ¶ 21. Nothing in the Reciprocal Compensation
Ruling prohibits a call from being “a local call for some, but not all, purposes.” Illinois Bell Tel. v.
Worldcom, 179 F.3d at 574. Finally, the FCC understood that its “policy of treating ISP-bound
traffic as local for purposes of interstate access charges would, if applied in the separate context of
reciprocal compensation, suggest that [reciprocal] compensation is due for that traffic.” Reciprocal
Compensation Ruling ¶ 25 (emphasis added).
Accordingly, we hold that the PUC’s determination that reciprocal compensation obligations
encompass ISP-bound traffic does not conflict with the Act or with any FCC rule regarding such
traffic. As the Seventh Circuit observed,
The FCC could not have made clearer its willingness—at least until the time
a rule is promulgated—to let state commissions make the call. We see no violation of
the Act in giving such deference to state commissions; in fact, the Act specifically
provides state commissions with an important role to play in the field of
interconnection agreements. . . . In short, nothing in what the [state commission] said
violates federal law in existence at this time.
Illinois Bell Tel. v. Worldcom, 179 F.3d at 574. It follows that we should affirm the district court’s
ruling that the order of the PUC did not violate federal law.
That brings us to the substantive question whether the PUC correctly interpreted the
interconnection agreements. A threshold issue bearing on our standard of review is whether federal
or state law controls this interpretation.11 We therefore begin by examining how the state law issues
11
As determined above, we review the interconnection agreements for compliance with the Act
de novo, and for compliance with state law matters under the more deferential abuse of discretion
standard.
12
pertaining to the interpretation of contracts relate to the Act and to FCC pronouncements, for
example, with respect to the definitions of key terms such as “local” and “terminate.”
Southwestern Bell contends that the proper understanding of these contracts turns on whether
Internet communications are “local” under federal law and that the definition of “local traffic” in
section 251(b)(5) of the Act should govern the contract. In another argument Southwestern Bell
urges that the Act and the FCC’s rulings on whether reciprocal compensation is required for Internet
traffic det ermine whether, as a matter of federal law, reciprocal compensation is due under the
contracts. Southwestern Bell argues that the language in the agreements12 parallels the reciprocal
compensation requirement in section 251(b)(5) of the Act13; that the FCC has declared that Internet
traffic is not encompassed within section 251(b)(5) of the Act14; ergo, as a matter of federal law, the
calls are not “local” and reciprocal compensation is therefore not required. We disagree.
As the Seventh Circuit said, in succinctly rejecting a similar argument, “[t]he syllogism is an
oversimplification.”
That the Act does not require reciprocal compensation for calls to ISPs is not to say
that it prohibits it. The Act simply sets out the obligations of all local exchange
carriers to provide for reciprocal compensation. . . . Then in § 252(d)(2) state
commissions are instructed that terms and conditions for reciprocal compensation are
not to be considered reasonable unless they provide “for the mutual and reciprocal
recovery by each carrier of costs associated with the transport and termination on
each carrier’s network facilities of calls that originate on the network facilities of the
other carrier” and that the costs be determined on the basis of a “reasonable
approximation of the additional costs of terminating such calls.” The Act clearly does
not set out specific conditions which one party could enforce against the other. The
details are left to the parties, or the commissions, to work out.
12
Under both agreements, reciprocal compensation applies to transport and termination of “Local
Traffic.”
13
Section 251(b)(5) imposes on LECs the duty “to establish reciprocal compensation arrangements
for the transport and termination of telecommunications.”
14
In the Reciprocal Compensation Ruling, the FCC concluded that “ISP-bound traffic is non-local
interstate traffic,” and noted that “the reciprocal compensation requirements of section 251(b)(5) of
the Act and Section 51, subpart H (Reciprocal Compensation for Transport and Termination of Local
Telecommunications Traffic) of the Commission’s rules do not govern inter-carrier compensation for
this traffic.” Reciprocal Compensation Ruling n. 87.
13
Illinois Bell Tel. v. Worldcom, 179 F.3d at 573 (emphasis added). The FCC expressly ruled that
“parties may voluntarily include [ISP-bound] traffic within the scope of their interconnection
agreements under sections 251 and 252 of the Act, even if these statutory provisions do not apply
as a matter of law. Where parties have agreed to include this traffic . . . they are bound by those
agreements, as interpreted and enforced by the state commissions.” Reciprocal Compensation Ruling
¶ 22.
In light of the foregoing, we hold that the agreements themselves and st ate law principles
govern the questions of interpretation of the contracts and enforcement of their provisions. We
therefore decline Southwestern Bell’s invitation to determine the contractual issues as a facet of
federal law.15 Also, in accordance with the standards discussed above, we defer to the PUC’s
determinations on such issues, upholding them unless they are arbitrary and capricious or unsupported
by substantial evidence.
As for interpretation of the contracts, we begin by noting that the Time Warner/Southwestern
Bell interconnection agreements require the payment of reciprocal compensation for “Local Traffic.”
“Local traffic” is defined by the agreements as traffic that both “originates” and “terminates” in the
same local calling area.16 Where a modem call “originates” is not disputed. In contrast, where such
a call to an ISP “terminates” is the nub of the argument.
The agreements neither define “terminate” nor specifically mention the Internet or ISPs.
Southwestern Bell insists that the term “Local Traffic” does not include modem calls to ISPs because
15
Although we may refer to FCC pronouncements as part of our consideration of what is usage
or custom in the telecommunications industry, we do so only as the contracts and state law might
require.
16
“Local Traffic” is defined in the first agreement as “traffic which originates and terminates within
a [Southwestern Bell] exchange including mandatory local calling arrangements.
Mandatory Local Calling Area is an arrangement that requires end users to subscribe to a local calling
area beyond their basic exchange serving area.” The second agreement provides similarly that “Local
Traffic, for purposes of intercompany compensation, is if (i) the call originates and terminates in the
same [Southwestern Bell] exchange area; or (ii) originates and terminates within different
[Southwestern Bell] Exchanges that share a common mandatory local calling area.”
14
they do not terminate locally at the ISP’s facility; however, both the PUC and the district court
determined that such calls do terminate at the ISP facility.
Under Texas law, unambiguous contracts must be enforced as written, with the intent of the
parties being derived from the agreement itself. Intratex Gas Co. v. Puckett, 886 S.W.2d 274, 277-78
(Tex. App.-El Paso 1994). The first agreement between these parties specifies that calls “originated
by one Party’s end users and terminated to the other Party’s end users shall be classified as Local
Traffic under this Agreement if the call originates and terminates in the same [Southwestern Bell]
exchange area . . . or originates and terminates within different [Southwestern Bell] exchanges which
share a common mandatory local calling area.” An “End User” is defined as “a third-Party residence
or business that subscribes to telecommunications services provided by either of the Parties.” The
parties’ second agreement adds the phrase “or by another telecommunications service provider.”
These contractual provisions lend additional support to the conclusions of the PUC and the
district court. The ISPs, as business subscribers to Time Warner services, are indeed end users under
the agreements. The PUC classified “a call between two end users in the same local calling area” as
“Local Traffic” and concluded that the interconnection agreements unambiguously include ISP traffic
within the definition of “Local Traffic.” The PUC ruled that, “[w]hen a transmission path is
established between two subscribers in the same mandatory calling area, traffic carried on that path
is local traffic, with the telecommunications service component of the call terminating at the ISP
location.” The district court noted that “as end users, ISPs may receive local calls that terminate
within the local exchange network.” (emphasis in original). The court concluded that a modem call
to an ISP terminates at the ISP’s facility within the local exchange network, basing its conclusion in
part on the FCC’s treatment of ISPs as end users lying within the local exchange. The FCC treats
ISPs as “end users” for pricing purposes, permitting them to purchase telephone service at local
business rates rather than interstate access tariffs. Reciprocal Compensation Ruling ¶¶ 5, 17, 23. We
conclude that the PUC’s consideration of the end-user status of an ISP is appropriate in light of the
contractual provision mentioning “termination to [an] end user[].”
15
Both of the instant interconnection agreements provide that undefined terms—such as
“terminate”—are to be “construed in accordance with their end user usage in the telecommunications
industry as of the effective date of [these] Agreement[s].” This provision, which is common to both
agreements, tracks well-established rules of contract interpretation. See KMI Continental Offshore
Prod. Co. v. ACF Petroleum Co., 746 S.W.2d 238, 241 (Tex. App.-Houston 1987), writ denied.
“Beyond the four corners of the parties’ agreement, their intent may be evidenced from the
surrounding facts and circumstances when the contract was entered. The court may consider. . .
ordinary terms, customs and usages then in effect. . . .” Intratex Gas, 886 at 278. The parties
obviously agreed that “terminate” would mean whatever the telecommunications industry took it to
mean at the time they signed the agreements, i.e., in 1996 and 1997.
A 1996 FCC Report defined “termination,” for purposes of section 251(b)(5), as “the
switching of traffic that is subject to section 251(b)(5) at the terminating carrier’s end office switch
(or equivalent facility) and delivery of that traffic from that switch to the called party’s premises.”17
Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First
Report and Order, 11 F.C.C.R. 15,499 ¶ 1040 (1996), aff’d in part, vacated in part on other
grounds, Iowa Utils. Bd., 120 F.3d 753. As for the modem calls here at issue, the ISPs are Time
Warner’s customers, making Time Warner the terminating carrier. So, under the foregoing definition,
“termination” occurs when Time Warner switches the call at its facility and delivers the call to “the
called party’s premises,” which is the ISP’s local facility. Under t his usage, the call indeed
“terminates” at the ISP’s premises.
Both the FCC and Southwestern Bell have heretofore embraced a custom of treating calls to
ISPs as though they were local, terminating within the same local exchange network. The FCC
recognized that agreements negotiated prior to the Reciprocal Compensation Ruling, as were the ones
17
More recently, in discussing where a modem call “terminates,” the FCC has remarked, “An
Internet communication does not necessarily have a point of ‘termination’ in the traditional sense.”
Reciprocal Compensation Ruling ¶ 18. But the FCC’s view at the time of these agreements was
clear, as discussed next.
16
at issue here, had been negotiated in the “context of this Commission’s longstanding policy of treating
this traffic as local.” Reciprocal Compensation Ruling ¶ 24.18 In fact, the FCC noted that its historic
“policy of treating ISP-bound traffic as local for purposes of interstate access charges would, if
applied in the separate context of reciprocal compensation, suggest that [reciprocal] compensation
is due for that traffic.” Id. ¶ 25 (emphasis added).
We are convinced that the PUC considered ample evidence that both the telecommunications
industry as a whole and the parties to this dispute in particular treated ISP-bound calls as terminating
locally at the time the interconnection agreements were being negotiated. By the end of 1996, five
State commissions had already ruled that modem calls to ISPs are subject to reciprocal compensation.
For years, Southwestern Bell had recorded calls made to ISPs as “local” in internal reports and
bookkeeping records. Southwestern Bell did not change this practice until 1998, well after entering
the instant interconnection agreements. An internal Southwestern Bell memorandum acknowledged
that, under then-current FCC rulings, it expected to pay reciprocal compensation for modem calls:
“As long as the ‘ESP’ exemption19 remains in tact we can anticipate . . . that we will compensate
other [LECs] for traffic they terminate to internet access providers.” And for some time
Southwestern Bell has run an ISP of its own, despite the fact that as an incumbent LEC it is forbidden
to offer long-distance/interstate service. It has justified its running of an ISP to the FCC by arguing
that ISPs provide local, not interstate, service.
Southwestern Bell makes much over the fact that the PUC and the district court divided
Internet traffic into two “components,” one local and one interstate, to determine where the call
“terminates.” Despite its recent Reciprocal Compensation Ruling that Internet traffic is a continuous
transmission for jurisdictional purposes—no t terminating at the ISP’s local server—the FCC
18
The FCC also acknowledged that it had historically “directed states to treat ISP traffic as if it
were local.” Id. ¶ 21.
19
The FCC has exempted Enhanced Service Providers, a category which includes ISPs, from
payment of interstate access charges.
17
recognized that, for purposes other than jurisdiction,20 such calls can be treated in the same manner
as local traffic. Reciprocal Compensation Ruling ¶ 12, 24. Perceiving such calls as terminating
locally for compensation purposes is clearly condoned by the FCC.
We note finally that the FCC listed several fact ors that state commissions may consider in
deciding whether an interconnection agreement should be construed to classify calls to ISPs as local
for purposes of reci procal compensation. Id. ¶ 24. The PUC has already considered most of the
factors. Moreover, the FCC declared that “state commissions, not this Commission, are the arbiters
of what factors are relevant in ascertaining the parties’ intentions.” Id. at ¶ 24.
The district court held that the PUC did not act arbitrarily and capriciously because a
reasonable interpretation of the interconnection agreements is that the parties were to treat calls to
ISPs like calls to other end users. We agree. The conclusion that modem calls terminate locally for
purposes of compensation is both well-reasoned and supported by substantial evidence. We therefore
affirm the PUC’s decision to include ISP-bound traffic within the reciprocal compensation provisions
of the subject interconnection agreements.
Undaunted, Southwestern Bell goes on to contend on appeal that there was no meeting of the
minds with regard to the issue of reciprocal compensation for local calls made to ISPs. A review of
the record reveals that Southwestern Bell did not raise this issue during the administrative hearing so
as to preserve it for judicial review.21 The failure to raise an issue at the administrative level waives
20
We are cognizant of the fact that the PUC used its two-component theory as the basis both for
determining jurisdiction as well as for determining reciprocal compensation. To view the call as two
components for jurisdictional purposes runs counter to the FCC’s Reciprocal Compensation Ruling
as discussed above. Nevertheless, we have today held for different reasons that the PUC properly
exercised its jurisdiction in spite of any interstate aspect of the telecommunications. In this part of
our opinion, we are addressing only the compensation aspect of the PUC’s analysis.
21
Southwestern Bell points for support to a few sentences in the PUC arbitrator’s initial opinion
in which the arbitrator questioned whether there had been a meeting of the minds between the parties
with respect to the issue of reciprocal compensation. The record reveals, however, that the language
in the arbitrator’s opinion was mere dicta, and that the arbitrator was not addressing any arguments
actually raised by the parties. The Act limits the issues that may be decided in arbitration to those set
forth by the parties. 47 U.S.C. § 252(b)(4)(A). Southwestern Bell’s argument that it has preserved
the issue is unconvincing.
18
the right to appellate review of that issue. See Institute for Tech. Dev. v. Brown, 63 F.3d 445, 449
n. 3 (5th Cir. 1995). Except to the extent that we have already discussed the parties intentions, we
will not review separately the meeting-of-the-minds argument that was waived by Southwestern Bell.
III.
CONCLUSION
For the foregoing reasons, we hold that the PUC had jurisdiction to determine the issues
discussed abo ve, and that the district court had jurisdiction under the Act to hear the matters
presented to it. On the merits, we affirm the district court’s order denying Southwestern Bell’s
request for declaratory and injunctive relief. And, like the district court before us, we affirm the
PUC’s order requiring Southwestern Bell to comply with reciprocal compensation provisions in the
instant interconnection agreements with respect to termination of calls to ISPs.
AFFIRMED.
19