Opinion
No C-OO-2171 VRW
March 19, 2002
Plaintiff MCI WorldCom Communications, Inc (WorldCom) and defendant Public Utilities Commission of the State of California (Commission) both move for summary judgment. See Pl Br (Doc * 62); Def Comm'n Br (Doc # 65). Defendant Pacific Bell Telephone Co (Pacific Bell) opposes WorldCom's motion for summary judgment, but does not join in the cross-motion brought by the Commission. See Def Pac Bell Opp Br (Doc # 68).
I
This case involves review of the Commission's decision interpreting and arbitrating an agreement between Pacific Bell and WorldCom pursuant to the Telecommunications Act of 1996 (Act), Pub L No 104-104, 110 Stat 56, 56 (1996). Congress enacted the Telecommunications Act of 1996 to foster competition in the local and long distance telecommunications markets. See US West Communications v MFS Intelenet, Inc, 193 F.3d 1112, 1116 (9th Cir 1999). Traditionally, local telecommunications networks were organized as state regulated monopolies. To encourage local competition, the Act requires these regulated monopolies, termed incumbent local exchange carriers (ILECs), to provide new entrants, termed competing local exchange carriers (CLECs), access to their preexisting network. 47 U.S.C. § 251.
The Act puts into place a procedural mechanism for ILECs and CLECs to create agreements that give CLECs access to an ILEC's preexisting network on fair terms consistent with the Act's provisions. 47 U.S.C. § 252. Specifically, upon request, an ILEC must negotiate in good faith with a CLEC to create an agreement allowing interconnection of networks, access to the ILEC network and payment for these services. 47 U.S.C. § 252(c) (1). If the parties cannot reach agreement on all issues, the state utility commission regulating the ILEC arbitrates the disputes, creating an interconnection agreement that contains both the arbitrated and negotiated terms. 47 U.S.C. § 252(b)-(c). The interconnection agreement is then submitted for approval to the state utility commission. 47 U.S.C. § 252(e)(1). Finally, any party not satisfied that the interconnection agreement complies with the Act and its implementing federal regulations may appeal the state utility commission's determinations in federal court. 47 U.S.C. § 252(e) (6). Section 252(e)(6) reads: "[i]n 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 [and section 252]".
Having successfully maneuvered through this detailed procedure, WorldCom appeals the decision of the Commission upholding the arbitrated interconnection agreement between Pacific Bell and WorldCom. In order to describe the parties' dispute, some technical background regarding how Pacific Bell and WorldCom route telephone calls is necessary.
In order for a WorldCom local telephone customer to call a Pacific Bell customer, WorldCom must originate the call on its network, connect the call to Pacific Bell, and then Pacific Bell must "transport and terminate", i e complete, the call. In general, the WorldCom customer pays only WorldCom for this service and the Pacific Bell customer is not charged for receiving the call. Without more, Pacific Bell would receive no compensation for transporting and terminating the call. The Act steps in to fix this situation by requiring WorldCom to pay Pacific Bell for the service of transporting and terminating these calls. 47 U.S.C. § 251(b)(5). Similarly, when a Pacific Bell customer calls a WorldCom customer, Pacific Bell must pay WorldCom for WorldCom's transport and termination costs. The implementing regulations require such compensation to be symmetric and reciprocal. 47 C.F.R. § 51.711. The parties disagree regarding the rate of this compensation.
No parties object to the Commission's ruling that WorldCom should pay Pacific Bell the "tandem switch" rate (tandem rate) when Pacific Bell transports and terminates a WorldCom call connected through one of Pacific Bell's tandem switches and that WorldCom should pay Pacific Bell the "end office switch" rate (end- office rate) to transport and terminate a call through an end office switch only. Pacific Bell contends that it need only pay the lower "end office" rate when WorldCom transports and terminates a Pacific Bell call. Def Pac Bell Opp Br (Doc # 68) at 10. The Commission adopted Pacific Bell's view in its order and defends that order to this court. In re Pet of Pacific Bell for Arbitration of an Interconnection Agreement with MFS/WorldCom, App No 99-03-47, Decision No 99-09-069 (Cal Pub Utils Comm'n Setp 16, 1999)), Pl Br, App 2 (Doc # 64), Exh 19 (hereinafter Decision); Def Comm'n Br (Doc # 66) at 2. WorldCom contends that it is entitled to charge the higher "tandem switch" rate. Pl Br (Doc # 63) at 2.
The difference between these two rates reflects the difference in the use of each type of switch. Pacific Bell organizes its network switches hierarchically, as is traditional. Sigle Test, Pl Br App 2 (Doc # 65), Exh 7 at 3. End office switches transfer calls to and from customers within a small geographic area; tandem switches aggregate and transfer calls to and from end switches. See US West Communications, Inc v Public Service Commission of Utah, 75 F. Supp.2d 1284, 1289 (D Utah 1999) (discussing the functions of end office and tandem switches). When routing a call, Pacific Bell transports the call from its origin to an end office switch; if possible, the end office switch connects the call directly to its recipient. If, however, the same end office switch does not serve the recipient of the call, the call must be routed to a tandem switch, which gathers traffic from many end office switches and routes each call back to the end office switch which serves the call's recipient. Finally, this second end office switch completes the call. In sum, Pacific Bell transports a call through only an end office switch if possible; otherwise, it must transport the call through two end office switches and one tandem switch. Id. Because of the extra switches involved, routing a call through a tandem switch and two end office switches costs significantly more than routing a call through an end office switch only. While a local access and transport area (LATA), such as the San Francisco LATA served by Pacific Bell, may have many end office switches, it generally has only a few tandem switches. Pacific Bell's San Francisco LATA has 6 tandem switches. Sigle Test, Pl Br App 2 (Doc # 65), Exh 7 at 3.
In contrast, WorldCom does not use a hierarchical network of switches. Instead, WorldCom's network consists of one switch and several optical fiber rings which aggregate traffic and transfer it to the appropriate customer. Id. Because it is difficult to compare directly the costs of such different technologies, the FCC allows CLECs to receive the higher "tandem switch" rate if the CLEC serves a geographic area comparable to one served by a tandem switch. 47 C.F.R. § 51.711(a)(3). Section 51.711 provides:
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.
C.F.R. § 51.711(a)(3).
Worldcom argues that because its optical fiber rings serve a comparable geographic area, WorldCom is entitled to charge the tandem switch rate. See Pl Br (Doc # 63) at 3. The Commission argues that WorldCom did not provide persuasive evidence that WorldCom's network serves a comparable geographic area, and thus its factual determinations that WorldCom is not entitled to the tandem switch rate is not arbitrary and capricious. See Def Comm'n Br (Doc # 66) at 2.
II
In reviewing a decision of a state agency, the district court looks only to the administrative record. See Camp v Pitts, 411 U.S. 138, 142 (1973). State commission interpretations of federal law are reviewed de novo. See Orthopaedic Hospital v Belshe, 103 F.3d 1491, 1495 (9th Cir 1997). The court reviews the state commission's factual findings under the arbitrary and capricious standard. See US West Communications, Inc v MFS Intelenet, 193 F.3d 1112, 1124, n15 (9th Cir 1999) (MFS Intelenet). An agency is not arbitrary and capricious in its factual determination if there is substantial evidence supporting its decision. Id.
WorldCom asserts three separate arguments that the Commission misinterpreted the Act and the FCC's implementing regulations in its arbitration order. First, WorldCom argues that the Commission erred by using the functional equivalence test in addition to the geographic area test in deciding whether WorldCom was entitled to charge the tandem switch rate. Second, WorldCom argues that the Commission erred by applying an incorrect legal standard for the comparable geographic area test. Third, WorldCom argues that the Commission's decision violates the symmetric reciprocal compensation requirement of the FCC's implementing regulations. The court evaluates each of these arguments in turn.
A
WorldCom argues that the Commission erroneously required WorldCom to satisfy both the geographic scope test and the "functional equivalency" test in order to prove that WorldCom was entitled to charge the tandem switch rate. The function equivalency test requires that a CLEC's switch function like a tandem switch. See US West Communications, Inc v Public Services Commission of Utah, 75 F. Supp.2d 1284, 1289 (D Utah 1999). InUS West Communications, Inc v Washington Utilities and Transportation Commission, 255 F.3d 990, 995-96 (9th Cir 2001) (Washington Utilities), the Ninth Circuit held that the functional equivalency test is irrelevant to whether a CLEC is entitled to charge the tandem switch rate. The Commission argues that the FCC regulation implementing the reciprocal compensation provisions of the Act allows the Commission to perform the functional equivalency test. It points to an earlier Ninth Circuit case that upheld the use of both the functional equivalency test and the geographic scope test in deciding whether a CLEC was entitled to the tandem rate. See MFS Intelenet, 193 F.3d at 1124.
In MFS Intelenet, neither party questioned whether the functional equivalency test was appropriate. The issue that the Ninth Circuit resolved was the factual determination that the MFS switch functioned like a tandem switch. In contrast, in Washington Utilities, the Ninth Circuit held that the functional equivalency test was irrelevant to the determination whether the CLEC was entitled to the tandem rate. 255 F.3d at 995-96. Relying on irrelevant factors in making factual determinations is error. Long v United States Internal Revenue Service, 932 F.2d 1309 (9th Cir 1990). To this extent, Washington Utilities overrules MFS Intelenet. As further support that the functional equivalency test is inappropriate, the FCC states that the only test required is the geographic equivalency test:
[A]lthough there has been some confusion stemming from additional language in the text of the Local Competition Order regarding functional equivalency, section 51.711(a)(3) requires only a geographic area test.
Letter from Thomas J Sugrue, Chief, Wireless Telecommunications Bureau of the FCC, and Dorothy Attwood, Chief, Common Carrier Bureau of the FCC, to Charles McKee, Senior Attorney, Sprint PCS (May 9, 2001) (internal citations omitted). As the FCC's interpretation of its own regulations, this opinion letter is afforded significant deference by the court. SeeWashington Utilities, 255 F.3d at 998. The court therefore rules that the Commission erred when it required WorldCom to satisfy the functional equivalency test in order to receive the tandem switch rate.
Pacific Bell concedes this point, but argues that the Commission's separate factual determination of the geographic scope test may still stand despite this error. See Pac Bell Br (Doc # 68) at 12. Pacific Bell therefore argues that the court may still uphold the decision if the Commission's determination relied on the correct legal standard and its decision was supported by substantial evidence. Without deciding this issue, this brings the court to WorldCom's second argument, that the Commission's formulation of the geographic equivalence test was incorrect.
B
WorldCom argues that the Commission improperly relied on factors that are not relevant to the geographic equivalence test in its factual determination and therefore erred as a matter of law. The Commission's decision is actually two separate decisions: first, the final arbitration report, see In re Petition of Pacific Bell for Arbitration of an Interconnection Agreement with MFS/WorldCom, Application No 99-03-47, Final Arbitrator's Report, Pl Br App 2 (Doc # 65), Exh 18 (hereinafter, FAR), creating the arbitrated agreement; and second, the Commission's decision upholding the FAR and the arbitrated agreement, see Decision, Def Comm'n Br (Doc # 66), Exh A). These two decisions relied on somewhat different rationales in deciding that WorldCom would not receive the tandem switch rate.
The FAR based its finding that WorldCom does not serve an equivalent geographic area on three factors. FAR, Pl Br App 2 (Doc # 65), Exh 18 at 80. First, the Commission found that because WorldCom forced Pacific Bell to provide the bulk of the transport by interconnecting at only one point, it did not serve an equivalent geographic area. Id. Second, the FAR found that any similarity in geographic scope would soon disappear when WorldCom adds more switches to its network. Id. Finally, the FAR reasoned that the fact that WorldCom serves many of its customers directly at its connection point to Pacific Bell, rather than via its fiber rings, limits the geographic scope of the customer base it serves. Id.
The Decision did not rely on the FAR's first point, that Pacific Bell provides the bulk of the transport. This fact is relevant to Pacific Bell's costs, but not to the geographic scope of a WorldCom switch. While the FAR improperly relied on this irrelevant factor, and therefore improperly discounted the actual geographic scope of WorldCom's switch, the Decision did not uphold the FAR on this basis, and therefore any error was corrected.
The Decision did rely on the second two factors the FAR cited. The Decision states that "[a]ny similarity in the size of serving areas will soon go away when [WorldCom's] new switches are in place.". Decision, at 12. At least one court has held that future events are not relevant to the geographic scope test, which asks only if the CLEC's switch serves the same geographic area as the incumbent's tandem switch. MCI Telecommunications v Michigan Bell Telephone, 79 F. Supp.2d 768, 791 (ED Mich 1999). In MCI Telecommunications, the court stated that the geographic scope test "focuses on the area currently being served by the competing carrier, not that area the competing carrier may in the future serve. To interpret the rule [in this manner] would require the state commission to speculate about the future." Id. The implicit assumption in the Decision is that the geographic scope of WorldCom's network will not grow as WorldCom adds more switches; thus, each switch will serve a smaller area. Such speculation is improper. See id. The court finds that the Commission committed legal error when it relied upon this future speculation.
WorldCom further argues that the Commission erred by relying upon the fact that WorldCom's customers were concentrated at WorldCom's switch, so that the scope of the fiber rings overestimated WorldCom's actual service area. The court cannot say that it was error to include as a factor the concentration and location of customers served when considering the geographic scope test. WorldCom argues that this position puts WorldCom in a catch-22: if WorldCom's customers are too widely dispersed, WorldCom does not serve the area between the customers; if WorldCom's customers are concentrated, then WorldCom does not serve the area beyond its customer base. While WorldCom persuasively argues that an appropriate balance of these two competing strategies is difficult, WorldCom takes the argument a step too far. These factors are relevant to the geographic area a WorldCom switch serves. If WorldCom wants to take advantage of the higher tandem rate as the FCC regulation allows, it must find an appropriate balance between these two extremes.
In relying on speculation regarding future events, the Commission erred and applied an incorrect legal standard for the scope test. The court GRANTS plaintiff WorldCom's geographic motion for summary judgment (Doc #63-1), and DENIES defendant Commission's summary judgment motion (Doc #66-1).
C
Finally, WorldCom's third argument is that the Commission violated the Act's requirement of symmetric reciprocal compensation for transport and termination services when it ordered Pacific Bell a rate lower than the rate charged to WorldCom. Because the court grants plaintiff's motion for summary judgment on other grounds, this argument need not be addressed.
III
Having found that the Commission erred in its interpretation of the geographic equivalency test, the question remains as to the appropriate remedy for such error. WorldCom urges the court to decide the matter itself and order Pacific Bell to pay the tandem switch rate. The Commission and Pacific Bell suggest that remand to the Commission for further proceedings is more appropriate.
In general, courts remand decisions to allow the state agency to apply the correct standard. The Act specifically contemplated that state utility boards would be the fact finders in these proceedings. 47 U.S.C. § 252(b). WorldCom cites Washington Utilities for the proposition that remand is not required. While an accurate statement of procedure used in Washington Utilities, the analogy is inapposite here. InWashington Utilities, ATT, the CLEC, provided significant evidence that it met the geographic equivalency test; there was no rebuttal evidence. As only one disposition was possible as a matter of law, the Ninth Circuit held that ATT was entitled to the tandem switch rate.
In contrast, WorldCom has not demonstrated that only one disposition is possible. WorldCom points to Sigle's testimony to demonstrate that it satisfies the geographic equivalency test. Both the Decision and the FAR discounted Sigle's testimony as "unpersuasive." WorldCom further points to the testimony of Ball and Murray. All three witnesses' testimony consists primarily of conclusory statements that WorldCom's switch serves a geographic area comparable to a Pacific Bell tandem switch. Little factual evidence has been presented to this court. Cf MCI Telecommunications v Illinois Bell, 1999 US Dist LEXIS 11418 (ND Ill 1999). The court will not second guess what the Commission would have done if it had not improperly relied on irrelevant factors in applying the geographic scope test. The court therefore remands the case to the Public Utilities Commission of the State of California for proceedings consistent with this order.
IV
In sum, plaintiff WorldCom's motion for summary judgment (Doc # 63-1) is GRANTED; defendant Commission's motion for summary judgment (Doc # 66-1) is DENIED. The court remands the case to the Public Utilities Commission of the State of California for proceedings consistent with this order. The clerk is ordered to close the file and terminate any pending motions.
IT IS SO ORDERED.