PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
OCTOBER 11, 2001
_______________
THOMAS K. KAHN
CLERK
No. 00-16459
_______________
D. C. Docket No. 97-00262-CV-4-RH
AT&T COMMUNICATIONS OF THE SOUTHERN STATES, INC.,
Plaintiff-Counter-Defendant-Cross-
Claimant-Appellee,
versus
BELLSOUTH TELECOMMUNICATIONS, INC.,
Defendant-Counter-Claimant-Counter-
Defendant-Appellant,
FLORIDA PUBLIC SERVICE COMMISSION and
COMMISSIONERS OF THE FLORIDA PUBLIC SERVICE
COMMISSION, in their official capacities,
Defendants-Cross-Defendants-
Appellants.
______________________________
Appeal from the United States District Court
for the Northern District of Florida
______________________________
(October 11, 2001)
Before EDMONDSON, BIRCH and WILSON, Circuit Judges.
BIRCH, Circuit Judge:
This appeal requires us to address whether, under the Telecommunications
Act of 1996, an incumbent local exchange carrier must exclude its operator
services from its local telephone services package offered to new market entrants
for resale. Because we disagree with the district court’s determination that an
incumbent carrier does have to exclude operator services from its complete
services package made available for resale, we REVERSE.
I. BACKGROUND
Congress enacted the Telecommunications Act of 1996 (the “Act”)1 to
instigate competition in local and long distance telephone markets by “lifting the
shackles of monopoly regulation.” H.R. Rep. No. 104-204, at 48 (1995), reprinted
in 1996 U.S.C.C.A.N. 10, 11. Accordingly, the Act imposes certain duties upon
incumbent local exchange carriers. These carriers who historically had a
monopoly over local markets because they owned the physical networks needed in
supplying telecommunication services. Of particular importance to this appeal is
the “resale” duty, which requires incumbents to provide their complete retail
package of services to prospective entrants in the intrastate telephone market. 47
1
Pub. L. No. 104-104, 110 Stat. 56 (1996) (codified in scattered sections of 47 U.S.C.).
2
U.S.C. § 251(c)(4) (Supp. V 1999). Entrants then can compete with incumbents by
reselling these services to their own customers. Id.
To effectuate their resale and other enumerated duties under the Act,
incumbents must negotiate interconnection agreements with prospective market
entrants. § 252. Incumbent carriers and new entrants are first to enter into good
faith negotiations to detail the terms for such interconnection. § 252(a). Should
the parties fail to reach agreement on all terms, the Act provides for binding
arbitration before the relevant state public service commission. § 252(b)-(c). Once
the state commission approves the arbitration agreement, an aggrieved party may
bring an action in district court “to determine whether the agreement . . . meets the
requirements” of the Act. § 252(e)(6).
Appellant, BellSouth Telecommunications, Inc., (“BellSouth”), is an
incumbent carrier in the Florida intrastate telephone market, and Appellee, AT&T
Communications of the Southern States, Inc., (“AT&T”), is a prospective entrant
into that market. Pursuant to the 1996 Act, BellSouth and AT&T began
negotiations over an interconnection agreement, but the parties could not agree on
all terms, including the particular services BellSouth would offer to AT&T for
resale. As a result, AT&T and BellSouth entered into binding arbitration before
the Florida Public Service Commission (the “Commission” or “FPSC”). The
3
Commission concluded, among other things, that if AT&T wanted to purchase
BellSouth’s local telephone services for resale, it would have to purchase
BellSouth’s operator services, which were part of the basic package of telephone
services BellSouth offered to its own retail customers.
Unsatisfied with the FPSC’s conclusions, AT&T commenced this action
under § 252(e)(6) against BellSouth, the FPSC, and the FPSC commissioners in
their official capacities in the Northern District of Florida. The district court
reversed the FPSC on the operator services issue based on its interpretation of the
1996 Act and on accompanying Federal Communication Commission (“FCC”)
regulations. The district court concluded that BellSouth had to eliminate its
operator services from its services package offered to AT&T for resale. Upon
entry of judgment, BellSouth, the FPSC, and the FPSC commissioners sought
review from this court on the limited question of whether the district court erred
with regard to the operator services issue.
II. DISCUSSION
A. The Standard of Review
Whether the 1996 Act and accompanying FCC regulations require operator
services to be eliminated from an incumbent’s local telephone services package
offered to new entrants for resale is a purely legal question. Consequently, we
4
review de novo the district court’s determinations on this issue. United States v.
Plummer, 221 F.3d 1298, 1302 (11th Cir. 2000).
B. The Telecommunications Statutory Landscape
Historically, states exclusively regulated intrastate telephone service, and the
FCC generally lacked jurisdiction over such service. See 47 U.S.C. § 152(b)(1).
States like Florida treated local telephone service networks as natural monopolies
and granted certain exchange carriers exclusive franchises for providing local
services. As the FCC explains, “[i]n the old regulatory regime government
encouraged monopolies. . . . State and federal regulators devoted their efforts over
many decades to regulating the prices and practices of . . . [telecommunications]
monopolies and protecting them against competitive entry.”2
In return for an exclusive franchise, Florida local carriers had their telephone
rates regulated and were required to provide “universal service,”3 which “mandates
2
First Report and Order, In re Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, 11 F.C.C.R. 15499, 15505, ¶ 1 (1996) (“First Report and Order”),
aff’d in part, vacated in part, Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997), aff’d in part,
rev’d in part, AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 119 S. Ct. 721 (1999).
3
“[T]he term ‘universal service’ means an evolving level of access to telecommunications services
that, taking into account advances in technologies, services, and market demand for essential
services, the commission determines should be provided at just, reasonable, and affordable rates to
customers, including those in rural, economically disadvantaged, and high-cost areas.” 13B Fla.
Stat. Ann. § 364.025(1) (1999). For a concise history of state implementation of universal service
mechanisms prior to the Act, see Peter W. Huber et al., Federal Telecommunications Law § 6.2 (2d
ed. 1999).
5
lower-than-market local phone rates” based on the “policy that local phone service
should be affordable by all who wish it” and “subsidized from some other source,
including long-distance and business service.” See AT&T Communications of the
Southern States, Inc. v. Marks, 515 So.2d 741, 742 (Fla. 1987). Florida
implemented its universal service framework through “tariff” agreements instituted
between the FPSC and local carriers.4 Under this tariff regime, monopoly carriers
were to provide affordable local telephone service to residential customers where
the expense would otherwise create economic discentives to providing service.
This rate / subsidy framework ensured that affordable telephone service was
available in all locales throughout the state.
The telecommunications structure premised on exclusive franchises and
subsidized local services began to undergo rapid change in the 1990s. The goals of
the Act included opening local telephone markets to competition and eliminating
the exclusive franchise system. See 47 U.S.C. § 253(a). The Act aimed “to shift
monopoly markets to competition as quickly as possible.” H.R. Rep. No. 104-204,
at 89, reprinted in 1996 U.S.C.C.A.N. at 55. In lieu of exclusive local carriers, the
4
“A ‘tariff’ is a public document setting forth the services of the [telecommunications] carrier being
offered, the rates and charges with respect to the services and the governing rules, regulations and
practices relating to those services.” International Tel. & Tel. Corp. v. United Tel. Co. of Fla., 433
F. Supp. 352, 357 n.4 (M.D. Fla. 1975).
6
Act institutes a regulatory framework that encourages new entrants to enter local
markets. To facilitate new entry, the Act provides three distinct entry paths for
potential competitors. First, the new entrant can build new network facilities to
compete with the facilities already owned by incumbent local carriers. AT&T, 525
U.S. at 371-73 & n.1, 119 S. Ct. at 726-27 & n.1. Second, it can buy access to
network elements owned by incumbents on an unbundled basis by purchasing
access to individual pieces of an incumbent’s telecommunications network, such as
local loops and local switching devices, that can then be used by the entrant to
offer competing local services. 47 U.S.C. § 251(c)(3) (unbundled access
provision). Third, it can buy retail telephone services offered by incumbents and
then resell these services to its own customers. § 251(c)(4) (resale provision).
Because the unbundled access provision and resale provision are particularly
significant to this case, we will discuss each in turn.
Under the unbundled access provision, incumbent carriers have “[t]he duty
to provide[] to . . . [new entrants] nondiscriminatory access to network elements on
an unbundled basis at any technically feasible point.” § 251(c)(3). “[N]etwork
element[s]” are defined broadly to include any “facility or equipment used in the
provision of a telecommunications service,” as well as “features, functions, and
capabilities provided” by any “facility or equipment.” § 153(29). Unbundled
7
access “permit[s] new entrants to offer competing local services by purchasing
from incumbents at cost-base prices, access to elements which they do not already
possess, unbundled from those elements that they do not need.” 11 F.C.C.R. at
15617-18, ¶ 231 (emphasis added). To use a simple analogy, the unbundled access
provision is akin to requiring one car manufacturer to sell a competitor access not
to one of its completed vehicles, but to the individual elements of the vehicle, such
as the engine, radiator, and tires, all of which the manufacturer has unbundled, or
segregated out, for the competitor’s convenience.
Additionally, the Act provides a distinct pricing mechanism for purchase of
network elements from incumbents. New entrants are to obtain access to these
elements at “rates, terms, and conditions that are just, reasonable, and
nondiscriminatory.” § 251(c)(3). In turn, these rates are to be “based on the cost
(determined without reference to a rate-of-return or other rate-based proceeding) of
providing” network elements and “may include a reasonable profit.” §
252(d)(1)(A)(1) & (B).
The resale provision creates a separate set of duties for incumbents.
Incumbent carriers must “offer for resale at wholesale rates any
telecommunications service that the carrier provides at retail to subscribers who are
not telecommunications carriers. § 251(c)(4)(A) (emphasis added). To continue
8
our previous analogy, the resale provision is akin to requiring the car manufacturer
only to provide its competitor access to the completed vehicle itself without
permitting separate, unbundled purchase of individual vehicle parts.
Congress also provided a completely separate and distinct pricing
methodology for the resale provision. This methodology provides that incumbent
carriers are to recoup the full retail rate they currently charge customers for
complete telephone services minus “any marketing, billing, collection, and other
costs that will be avoided by the local exchange carrier” in selling at wholesale to a
new entrant. § 252(d)(3). Thus, unlike the pricing rule for the unbundled access
provision, the resale pricing rule begins with the current retail rate as the proper
baseline for calculation, not with cost.
The Act and its introduction of these new entry paths into local
telecommunications markets revolutionized the telecommunications industry. The
Act’s implementation, however, continues to operate against a backdrop of state
tariff arrangements and universal service mechanisms that create a potential
“patchwork quilt” of state subsidies “intended to promote telephone
subscribership.” 11 F.C.C.R. at 15506, ¶ 5. Indeed, although Congress intended
for the Act to facilitate competition, at the same time it specifically codified its
commitment to universal service mechanisms. See 47 U.S.C. § 254. The Act itself
9
contemplates a federal-state partnership to sustain universal service. See §
254(b)(5) (“There should be specific, predictable and sufficient Federal and State
mechanisms to preserve and advance universal service.”); § 254(f) (“Every
telecommunications carrier that provides intrastate communications services shall
contribute . . . in a manner determined by the State to the preservation and
advancement of universal service in that State.”). Thus, even in the present
deregulatory climate, states still play a major role in implementing tariff
agreements that ensure universal service in intrastate telephone markets.
Like other states, Florida continues in its commitment to universal service.
See 13B Fla. Stat. Ann. § 364.025(1) (“It is the intent of the Legislature that
universal service objectives be maintained after the local exchange market is
opened to competitively provided services.”). Consequently, Florida law requires
that “[f]or a period of 8 years after January 1, 1996, each local exchange
telecommunications company . . . furnish basic local exchange telecommunications
service within a reasonable time period to any person requesting such service
within the company’s service territory.” Id. “Basic local telecommunications
service” includes, among other things, 911 emergency services, directory
assistance, and operator services. § 364.02(2) (emphasis added). Moreover,
telecommunications carriers still must file tariff schedules detailing the rates
10
charged for service and the carriers’ service obligations with the FPSC. See §
364.04;5 25 Fla. Admin. Code Ann. r. 25-4.034(1).6 Local telephone rates also
remain subject to FPSC oversight.7
In sum, although the Act fosters competition, the Act continues to operate in
a Florida telecommunications landscape affected by a history of universal service
implemented through required tariff filings. This clash between the Act and
traditional state pricing regimes can distort competition. As the FCC has noted,
“[s]ome policies that traditionally have been justified on universal service
considerations place competitors at a disadvantage. Other universal service
5
Section 364.04(1) provides: “Upon order of the commission, every telecommunications company
shall file with the commission, and shall print and keep open to public inspection, schedules
showing the rates, tolls, rentals, contracts, and charges of that company for service to be performed
within the state.”
6
25 Fla. Admin. Code Ann. r. 25-4.034(1) provides in part: “Each telecommunications company
shall maintain on file with the Commission tariffs which set forth all rates and charges for customer
services, the classes and grades of service available to subscribers, the conditions and circumstances
under which service will be furnished, and all general rules and regulations governing the relation
of customer and utility.”
7
Florida local exchange carriers can opt for regulation under FPSC “price cap” rules pursuant to
§ 364.051 or continue under “rate-of-return” rules and other requirements associated therewith
pursuant to §§ 364.03 (reasonableness of rates, performance of service, and maintenance of
facilities), 364.035 (rate fixing), 364.037 (telephone directory advertising revenues), 364.05
(changes in rates), 364.055 (interim rates), 364.14 (readjustment of rates), 364.17 (required reports,
accounts, records and memoranda), and 364.18 (inspection of accounts and records). For a
discussion differentiating “price cap” and “rate-of-return” regulatory methodologies, see Federal
Telecommunications Law § 2.2.3.
11
policies place the incumbent . . . at a competitive disadvantage.” 11 F.C.C.R. at
15506, ¶ 5.
This distortion is particularly cogent when a new entrant gains access to an
incumbent’s retail services package under the Act’s resale provision. For instance,
new entrants can target for purchase an incumbent’s retail services in Florida
markets where the incumbent historically has charged above-cost rates because of
universal service objectives. Then the entrant can resale those services at a rate
that undercuts the incumbent’s artificially high rates. While good for certain
consumers, this entry strategy undercuts the incumbent’s ability to subsidize and
recover its historical investments in markets where universal service commitments
led to below-cost pricing.
Conversely, new entrants can use the resale provision to take advantage of
artificially low prices in Florida markets where service traditionally has been
subsidized. Because the resale pricing rule uses retail rates as the baseline for
determining the compensation owed to incumbents, entrants can purchase from
incumbents those complete services offered in markets where retail prices are
artificially low because of the historical subsidy system. Thus, the new entrant
potentially can use the resale pricing mechanism to obtain a cost advantage over an
incumbent in markets where retail prices are lower than they otherwise would be
12
absent Florida’s traditional commitment to universal service as reflected in the
FPSC set tariff.
C. Operator Services Relevant to this Case
Against this statutory backdrop, the district court interpreted the Act’s resale
provision to require the incumbent carrier, BellSouth, to eliminate operator
services from its retail telephone services package offered to the new entrant,
AT&T, for resale. AT&T Communications of the Southern States, Inc. v.
BellSouth Telecommunications, Inc., 122 F. Supp. 2d 1305, 1314-16 (N.D. Fla.
2000) (“AT&T Communications”). The court concluded that the FPSC erred by
failing to require BellSouth to exclude the cost of such services from the price
charged to AT&T for access to BellSouth’s complete services package. Id.
The district court reached this conclusion for two reasons. First, the court
determined that operator services constitute “other costs” under 47 U.S.C. §
252(d)(3) and consequently should be eliminated from BellSouth’s complete
services package offered to AT&T for resale. Id. at 1315. Second, the court relied
on two FCC customized routing provisions, 47 C.F.R. § 51.319(c)(1)(iii)(B) and
11 F.C.C.R. at 15772-73, ¶ 536, as a basis for requiring BellSouth to eliminate
operator services from its resold services package. Id. We reject the district
court’s reasoning.
13
1. “Other Costs” under 47 U.S.C. § 252(d)(3)
The district court premised its decision in part on its finding that operator
services are “other costs” under 47 U.S.C. § 252(d)(3), the pricing rule for the
resale provision. AT&T Communications, 122 F. Supp. 2d at 1315. Section
252(d)(3) provides that “marketing, billing, collection, and other costs that will be
avoided” by the incumbent should be eliminated from the price of retail services
offered to new entrants for resale. (emphasis added). The court analogized
operator services costs to billing costs and concluded that, like the latter, the
former are costs that BellSouth can avoid when it offers its services at wholesale to
AT&T rather than at retail to consumers. Id. at 1315. This conclusion is untenable
for several reasons.
Of primary importance is the district court’s failure to interpret the Act’s
resale provision in light of the backdrop of historical state universal service
commitments and accompanying tariff filing requirements. We have explained
that traditional state universal service objectives can distort competition and offer
competitive advantages to new entrants like AT&T who strategically use the resale
provision. AT&T can purchase access to BellSouth services offered in markets
where rates are artificially high because of a history of subsidized universal
service, and then AT&T can resell those services at a reduced rate. Thus, AT&T
14
can undercut BellSouth’s ability to use an above-cost pricing structure to recover
historical investments in other Florida markets where services have been offered at
rates below-cost. Conversely, AT&T can obtain the benefits of Florida’s
traditional universal service framework by using the Act’s resale provisions to
acquire access to BellSouth’s services offered in markets where the retail rate is
artificially low because of a history of subsidy arrangements. Therefore, AT&T
can obtain potential cost advantages over BellSouth.
AT&T’s strategy in this case suggests that it plans to use the Act’s resale
provisions to exploit these advantages. Regarding the operator services issue,
AT&T has insisted on proceeding under the resale provision and its retail rate
pricing methodology. AT&T proceeds in this manner despite the fact that
BellSouth concedes that if AT&T proceeded under the unbundled access provision,
BellSouth would have to exclude operator services facilities from other network
elements offered to AT&T for resale. AT&T’s refusal to so proceed suggests that
the company is taking advantage of competitive distortions caused by Florida’s
history of universal service and accompanying tariff regimes.
Although AT&T is attentive to how artificial prices caused by a history of
universal service in Florida can accrue to its benefit under the resale provision,
AT&T simultaneously ignores this framework whenever it might suggest a need
15
for constrictions on its entry path. Thus, in AT&T’s argument over whether
operator services constitute “other costs” under § 252(d)(3), the history of
universal service in Florida goes unmentioned. We find that just the opposite
should be the case. The meaning of “other costs” should be historically
contextualized and read in view of the costs imposed on local carriers because of a
history in Florida of universal service and an accompanying tariff regime.
Otherwise, new entrants like AT&T can benefit from traditional state subsidy
arrangements while ignoring the costs they impose on BellSouth and other local
carriers. Such a result would conflict with the Act’s commitment to ensuring that
incumbents receive fair compensation for providing access to their services for
resale. See 47 U.S.C. § 252.
Consequently, in determining whether operator services constitute “other
costs” under § 252(d)(3), we must consider BellSouth’s universal service
commitments under Florida law. As part of Florida’s commitment to universal
service, each local carrier in Florida is required to provide basic local telephone
service within a reasonable time to anyone who requests it within the carrier’s
service area for an eight-year period after January 1, 1996. 13B Fla. Stat. Ann. §
364.025(1). Basic local phone service includes operator services. § 364.02(2). At
oral argument, counsel for BellSouth stated that BellSouth’s tariff agreement
16
requires it to provide operator services in Florida. That operator services are a
required element of BellSouth’s local telephone services package indicates that
such services are not mere costs akin to “marketing, billing, [and] collection” under
47 U.S.C. § 252(d)(3). It instead suggests that operator services are an essential
component to BellSouth’s local service, inextricably interwoven with the proper
transmission of telephone communications, not a cost rightly viewed as avoidable
or ancillary to basic telephone service. Section 364.02(2) also states that Florida
considers operator services a necessity, an integral service conducive to the smooth
operation of a carrier’s telecommunication platform. It follows that the district
court erred in conflating operator services with more peripheral costs like
marketing, billing and collection by requiring BellSouth to extricate operator
services from its complete services package made available to AT&T for resale.
Apart from our decision based on the tradition of universal service in
Florida, we conclude that the district court misinterpreted § 252(d)(3) for two
additional reasons. The first is based on a proper interpretation of that section
according to the principle that “general terms following a series of more
specifically enumerated terms refer to items similar in structure and function to the
enumerated terms.” United States v. Sepulveda, 115 F.3d 882, 886 n.8 (11th Cir.
1997). In view of this principle, the specifically enumerated terms under §
17
252(d)(3)—marketing, billing, and collection—should encompass the scope of
what constitutes “other costs.” That is, “other costs” should be read as referencing
activities “similar in structure and function,” Sepulveda 115 F.3d at 886 n.8, to the
three specific activities listed. Marketing, billing, and collection are activities that
center on the promotion of telephone services and on generating and collecting
revenue from such services. Operator services are not similar in structure or
function to promotional or revenue-related activities; such services instead are
activities that shore up the smooth operation and transmission of
telecommunications over the service network. It follows that operator services
cannot be deemed “other costs” under § 252(d)(3).
We also disagree with the district court because, in interpreting § 252(d)(3),
the court improperly focused on the resold services package the new entrant,
AT&T, wanted to offer to its own customers, not on the services package offered
by the incumbent, BellSouth, to its current retail customers. The district court
observed that operator services generate costs akin to billing because “[b]oth are
features that a reseller might reasonably choose to provide for itself.” AT&T
Communications, 122 F. Supp. 2d at 1315(emphasis added). Section 253(d)(3),
however, states that “other costs” include only those “that will be avoided by the
local exchange carrier,” here BellSouth. (emphasis added.) As the FCC has
18
explained, other costs are “those that an incumbent . . . would no longer incur if it
were to cease retail operations and instead provide all of its services through
resellers.” 11 F.C.C.R. at 15956, ¶ 911.8 Thus, the standard for what constitutes
“other costs” is the services package offered by the incumbent to its current retail
customers, irrespective of the services package the new entrant wants to offer to its
own customers when it resells incumbent’s services. It is undisputed that
BellSouth offers operator services as part of its basic services package to retail
customers. Whether AT&T wants to offer its own operator services to prospective
customers does not change this fact. The district court therefore erred in its
interpretation of § 252(d)(3) by focusing on AT&T’s desire to offer its own
operator services instead of on BellSouth’s current retail package, which includes
such services.
2. “Customized Routing” under 47 C.F.R. § 51.319(c)(1)(iii)(B) and 11
F.C.C.R. at 15772-73, ¶ 536
8
The Eighth Circuit vacated the FCC cost methodology because it focused on costs avoidable in
theory versus costs actually avoided in practice. See Iowa Utils. Bd. v. F.C.C., 219 F.3d 744 (8th
Cir. 2000), 755, cert. granted on other grounds, __ U.S. __, 121 S. Ct. 877 (2001). This distinction,
however, does not affect our present discussion.
19
Beyond the “other costs” argument under § 252(d)(3), the district court
relied on 47 C.F.R. § 51.319 and 11 F.C.C.R. at 15772-73, ¶ 5369 to justify its
decision regarding operator services. The court observed that under these two
FCC provisions, BellSouth, as an incumbent carrier, has a duty to provide new
entrants like AT&T with “customized routing.”10 AT&T Communications, 122 F.
Supp. 2d at 1315. From the district court’s perspective, customized routing is “the
functional equivalent of requiring BellSouth to provide AT&T local service
without operator services” for resale. Id. The district court’s reliance on the two
customized routing provisions in concluding that BellSouth had to eliminate
operator services from its resold services package, however, is misplaced.
9
In August 1996, the FCC issued its First Report and Order on the Implementation of the Local
Competition Provisions of the Act. Challenges to the rules were consolidated and assigned to the
Eighth Circuit under 28 U.S.C. § 2112(a)(3). The Eighth Circuit vacated all of the FCC’s pricing
regulations on jurisdictional grounds as well as several nonpricing provisions. Iowa Utils. Bd.,120
F.3d at 819 & n.39. The Supreme Court reversed on the jurisdictional issue and held that the FCC
had jurisdiction to issue pricing regulations. AT&T, 525 U.S. at 385, 392-96, 119 S. Ct. at 733, 736-
38. The Court’s decision in effect reinstated almost all of the FCC’s pricing and nonpricing
regulations. On remand, however, the Eighth Circuit struck down the FCC’s pricing methodology
rules on the merits. Iowa Utils. Bd., 219 F.3d 744. The Court granted certiorari to review the
Eighth Circuit’s determination regarding the pricing regulations for the unbundled access provision,
but not the pricing regulations for the resale provision. U.S. , 121 S. Ct. 877. The panalopy
of challenges to the FCC’s First Report and Order does not affect the operator services issue or the
specific FCC provisions addressed in this case.
10
“Customized routing” refers to the process by which incumbent carriers route calls to operators
of competing carriers. Such routing occurs when a competitor’s customers who are served over the
incumbent’s telecommunications facilities request to speak with the competitor’s operators. See
Brief for Appellant BellSouth Communications, Inc., at 8.
20
The primary problem with the district court’s customized routing discussion
is that such routing is an obligation placed on incumbents under the unbundled
access provision, not the resale provision, and so it is inapplicable to the present
action. We turn first to 47 C.F.R. § 51.319(c)(1)(iii)(B). Section 51.319 does
address an incumbent’s customized routing obligations to new entrants,11 but the
section is titled “Specific unbundling requirements.” (emphasis added). This
reference to “unbundling” contextualizes § 51.319 because “unbundling” is a term
of art under 47 U.S.C. §§ 251-52; the reference indicates that the FCC is discussing
an incumbent’s obligations when a new entrant purchases access to the
incumbent’s facilities under the unbundled access provision, not the resale
provision. Indeed, § 51.319 is contained in subpart D of the FCC interconnection
rules, but “the rules governing resale of services by an incumbent . . . are set forth
in subpart G [§§ 51.601-51.617].” § 51.201. It follows that § 51.319(c)(1)(iii)(B)
11
47 C.F.R. § 51.319(c) states that “an incumbent . . . shall provide nondiscriminatory access, in
accordance with § 51.311 and section 251(c)(3) of the Act, to local circuit switching capability.”
“Local circuit switching capability,” § 51.319(c)(1), includes, but is not limited to, “any technically
feasible customized routing functions provided by the switch,” § 51.319(c)(1)(iii)(B). In citing to
particular subsections of § 51.319, we have used the subsections as they are delineated in the 2000
version of the C.F.R. AT&T and Bellsouth negotiated and entered into their interconnection
agreement in 1996-97. As a result, we have reviewed the version of § 51.319 applicable at that time.
Although the substantive language of § 51.319 at issue here is the same in the earlier version, the
internal organization of the section is different. We have used the current subsection delineations
for the convenience of the reader.
21
is inapplicable to the present dispute over operator services between BellSouth and
AT&T, a dispute that only concerns the Act’s resale provision.
We reach a similar conclusion with regard to 11 F.C.C.R. at 15772-73, ¶
536. Paragraph 536 provides that “incumbent[s] . . . must unbundle the facilities
and functionalities providing operator services and directory assistance from resold
services and other unbundled network elements to the extent technically feasible.”
Id. at 15773. (emphasis added). As with § 51.319, the reference here to
“unbundle” indicates that paragraph 536 refers to an incumbent’s obligations under
the unbundled access provision. Unlike § 51.319, however, there is reference in
paragraph 536 to “resold services,” which at first glance might suggest that the
paragraph also creates incumbent obligations under the resale provision. Upon
closer inspection, this suggestion proves erroneous.
Paragraph 536 is found in section V of the FCC First Report and Order,
entitled “ACCESS TO UNBUNDLED NETWORK ELEMENTS,” not section
VIII, entitled “RESALE.” The reference to the term of art “unbundled” in the
section title again suggests that paragraph 536 only concerns obligations under the
unbundled access provision. Moreover, if the FCC meant the paragraph to impose
obligations under the resale provision, the paragraph would have appeared, or one
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akin to it would have appeared, in section VIII, “RESALE.” There is no
paragraph, however, that is analogous to 536 found in the “RESALE” section.
In fact, in AT&T’s own comments to the FCC’s proposed order, AT&T
called for the FCC to adopt a rule directing incumbents to make local service
available for resale without operator services. See Reply Brief for Appellant
BellSouth, Addendum at 81 n.123, (Comments of AT&T Corp. in In re
Implementation of the Local Competition Provisions in the Telecommunications
Act of 1996, CC. Docket No. 96-98, (FCC May 16, 1996)) (“The Commission
should . . . consider adopting a rule requiring that resellers be permitted to provide
their own operator services in conjunction with resale of the [incumbent’s] local
service. . . .”). The FCC explicitly took note of AT&T’s request, but the FCC
referenced it in paragraph 870 of section VIII, “RESALE,” not in paragraph 536 of
section V. 11 F.C.C.R. at 15933, ¶ 870 (“AT&T specifically argues that it should
be allowed to purchase local exchange service without operator services.”).
Further, the FCC specifically refused to grant AT&T’s request: “We need not
prescribe a minimum list of services that are subject to the resale requirement.” Id.
at 15934, ¶ 872. That the FCC specifically referenced the operator services issue
in the “RESALE” section, yet explicitly declined to settle the matter, strongly
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militates against reading paragraph 536, which is vague and amorphous compared
to paragraph 872, as dispositive of the same issue.
We therefore conclude that the district court erred in interpreting paragraph
536 of the FCC First Report and Order as bearing upon the operator services issue
in the resale context. Instead, we read the paragraph as stating that when a new
entrant, pursuant to the unbundled access provision, seeks to purchase access to
elements of an incumbent’s telephone network, the incumbent, when technically
feasible, must unbundle operator services from other network elements and from
the complete service it has otherwise made available for resale. Put another way,
paragraph 536 states that, irrespective of whether operator services were included
in the incumbent’s services package offered for resale, if the new entrant seeks
network elements under the unbundled access provision, then the incumbent must
segregate out operator services elements so that the new entrant has more options
in choosing which elements to include in its own network. Paragraph 536 does not
speak to the fate of operator services under the resale provision, and so, by
extension, does not speak to the case at bar.
The district court, by misinterpreting an incumbent’s customized routing
obligations under 47 C.F.R. § 51.319(c)(1)(iii)(B) and 11 F.C.C.R. at 15772-73, ¶
536, essentially conflated an incumbent’s obligations under the unbundled access
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provision with the separate and distinct obligations imposed under the resale
provision of the Act. The court’s conflation of an incumbent’s obligations under
the two provisions, besides resting on a misinterpretation of the relevant FCC
regulations, fails to give effect to an integral difference between those two
provisions and leads to serious cost implications, which we now address.
With regard to unbundled access, 47 U.S.C. 251(c)(3) states that “[a]n
incumbent local exchange carrier shall provide such unbundled network elements
in a manner that allows the requesting carriers to combine such elements in order
to provide such telecommunications service.” (emphasis added). Section
251(c)(3) permits a new entrant to purchase access to individual parts of the
incumbent’s network elements, but to do so the entrant itself must incur the costs
of “rebundling” these individual pieces into a complete service offered to its own
local customers. Thus, under the unbundled access provision, BellSouth must set
apart operator service elements and offer AT&T access to individual parts of its
local telephone network, but, in turn, AT&T must bear the costs of recombining
those parts into a services package that it then can market to its own customer base.
In contrast, with regard to the resale provision, incumbents are only required
to offer to new entrants the local telephone services package they already offer to
their customers “at retail.” 47 U.S.C. § 251(c)(4)(A). That is, the resale provision
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only requires incumbents to offer bundled, or prepackaged, services to new
entrants. Thus, if an incumbent like BellSouth does not offer a services package to
its retail customers that lacks operator services, it is not required to offer to new
entrants a services package that lacks such services. Otherwise, incumbents would
be forced to offer to new entrants a telephone services package different from that
offered at retail, which collapses the distinction between the unbundled service
elements offered under the unbundled access provision and the bundled service
elements offered under the resale provision.
Eliminating the distinction between unbundled and bundled services has
serious cost implications. We have explained that a new entrant, pursuant to the
unbundled access provision, is entitled to purchase access to individual pieces of
an incumbent’s service network, but the entrant must incur the costs of rebundling
those pieces to form its own network. If the new entrant instead can use the resale
provision to require incumbents to offer services packages for resale different from
the complete packages incumbents already offer to retail customers, the entrant can
shift the costs of rebundling to the incumbent. In effect, the incumbent would
have to unbundle its current services package offered at retail and then bear the
costs of rebundling its service elements to fit the new entrant’s specifications.
Such cost shifting under the resale provision would undercut the cost methodology
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of unbundled access, a methodology under which new entrants are to incur the
costs of creating new service configurations out of unbundled network elements
provided by the incumbent.
Applying these considerations to the case at hand, we find that AT&T
should not be able to circumvent the costs imposed by unbundled access by
attempting to require BellSouth to unbundle operator services under the resale
provision. If AT&T desires individual parts of BellSouth’s local network without
operator service elements, it must incur the costs of recombining those parts into a
workable telecommunications system. What AT&T cannot do is proceed under the
resale provision and require BellSouth to unbundle its current retail services
package–which both parties agree does not include a services package lacking
operator services– and then require BellSouth to reconfigure that package to
exclude operator services per AT&T’s own desired specifications. This cost-
shifting ploy would permit AT&T to obtain unbundled services at the bundled
services price. Not only would AT&T be able to take advantage of any
artificialities in price created by a history of universal service in Florida, which we
have explained, but also it would simultaneously obtain the functional equivalent
of unbundling in the resale context. We refuse to interpret the distinct unbundled
access and resale provisions under 47 U.S.C. § 251 in a manner that would create
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such an inequitable and anticompetitive result. Consequently, we hold that the
district court erred in interpreting FCC customized routing provisions to require
BellSouth to unbundle its operator services from its complete services package
offered to AT&T for resale.
III. CONCLUSION
This appeal involved a challenge to a final judgment in which the district
court held that, under the Act, BellSouth, as an incumbent local exchange carrier,
had to exclude its operator services from its complete services package offered to
AT&T for resale. As we have explained, the district court erred in so holding
because the court, failing to interpret the resale provision in view of the historical
backdrop of universal service and its accompanying tariff regime in Florida,
improperly concluded that operator services constitute “other costs” under 47
U.S.C. § 252(d)(3). In addition, we have concluded that the district court
improperly linked operator services to the customized routing obligations
enunciated in 47 C.F.R. § 51.319(c)(1)(iii)(B) and 11 F.C.C.R. at 15772-73, ¶ 536.
Accordingly, we REVERSE the judgment and REMAND for further proceedings
consistent with this opinion.
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