Michigan Bell Telephone Co. D/B/A Ameritech Michigan v. John G. Strand and David A. Svanda, Commissioners of the Michigan Public Service Commission, in Their Official Capacities, and Bre Communications, LLC

Citations: 305 F.3d 580; 2002 U.S. App. LEXIS 20649Docket: 00-1349

Court: Court of Appeals for the Sixth Circuit; September 30, 2002; Federal Appellate Court

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Ameritech Michigan appealed a district court ruling that upheld the Michigan Public Service Commission's (PSC) decision prohibiting Ameritech from charging BRE Communications, LLC, special construction fees associated with unbundling local telephone loops. The court found Ameritech's actions constituted unlawful discrimination under federal law, and Ameritech failed to prove that the PSC acted arbitrarily or capriciously in determining that costs for special construction should be part of long-term charges to BRE. The appellate court affirmed the summary judgment in favor of BRE and the PSC on this issue but reversed the district court's finding regarding discrimination, stating that the PSC improperly compared Ameritech's treatment of BRE with its retail customers. The case was remanded for the PSC to re-evaluate its discrimination findings using the correct standard.

The Telecommunications Act of 1996 (TCA) mandates that Incumbent Local Exchange Carriers (ILECs) like Ameritech provide access and interconnection to Competing Local Exchange Carriers (CLECs) on a nondiscriminatory basis. The Act outlines three methods for competition: interconnection with ILEC networks, access to unbundled network elements, and wholesale pricing for retail services. The obligation to provide these services nondiscriminatorily applies to the terms imposed on third parties as well as the ILEC's own conditions.

Access to an Incumbent Local Exchange Carrier's (ILEC) network facilities is governed by interconnection agreements, which are mandated by federal law. Under 47 U.S.C. § 251(c)(1), ILECs are required to enter into these agreements with Competitive Local Exchange Carriers (CLECs). The law allows parties to form binding agreements independent of specific standards noted in §§ 251(b) and (c) (47 U.S.C. § 252(a)(1)), and mandates that the final agreements be submitted to state commissions for approval (47 U.S.C. § 252(e)(1) and (2)). State commissions have the authority to interpret and enforce these agreements during disputes (47 U.S.C. § 252(c), (e)(1) and (2)), and federal courts can review state commission determinations (47 U.S.C. § 252(e)(6)).

Ameritech Michigan serves as the ILEC in Michigan, while BRE Communications is a competing CLEC aiming to provide local telephone services. They entered into an Interconnection Agreement, allowing BRE to access certain elements of Ameritech's network necessary for service delivery. This agreement aligns with 47 U.S.C. § 251(c)(3), stipulating that Ameritech must provide non-discriminatory access to network elements on fair terms.

A critical facility in this context is a 'loop,' which consists of three elements that connect a customer's premises to a wire center, enabling access to the broader Ameritech network. When a customer switches from Ameritech to BRE, Ameritech typically disconnects the loop from its switch and connects it to BRE's equipment without charge. However, if two elements of the loop are already in place but not connected, or if a third element needs to be added, Ameritech must send a technician for the connection, which they also do free of charge. Nevertheless, advancements in digital technology have rendered some transfers to CLECs like BRE more complex and costly.

Communications from customers previously utilized dedicated copper loops; however, advancements now allow companies to integrate these loops into a digital system, creating a shared high-speed path known as a 'bundled loop.' A customer’s voice or data cannot be transferred from Ameritech to BRE efficiently if the customer relies on this integrated path, as only one company can use it at a time, and the loops cannot be 'unbundled.' If Ameritech continues to serve customers on a bundled loop post-transfer request to BRE, those customers lack viable options. Ameritech assesses access to loops over integrated paths and checks for available non-integrated loops. If a spare loop is available, Ameritech can transfer it without charge; otherwise, it must create a new parallel loop for the CLEC, which it seeks to charge for. 

Additionally, Ameritech’s loops are primarily designed for voice traffic, but CLECs may require upgrades for high-speed data or to consolidate multiple customers onto a single high-capacity loop. Ameritech aims to charge CLECs for these upgrades.

On July 16, 1998, BRE filed a complaint with the MPSC against Ameritech regarding charges for work on 65 loops, claiming these charges violated the Interconnection Agreement and constituted discrimination. The MPSC ruled in favor of BRE on February 9, 1999, determining that the loops were 'available' per the Agreement and that any work done by Ameritech was routine, thus should be covered by standard tariffs. The MPSC found Ameritech's billing practices discriminatory and ordered it to refund charges, halt such billing, cover BRE's legal costs, and pay a $170,000 fine.

In response, Ameritech filed a complaint against BRE and MPSC commissioners on March 11, 1999, in district court to overturn the MPSC's ruling. The district court upheld the MPSC's decision on January 4, 2000, ruling in favor of the defendants, and Ameritech subsequently appealed.

Ameritech initiated a lawsuit under 47 U.S.C. § 252(e)(6) against the Michigan Public Service Commission (MPSC), claiming that the MPSC's order misinterpreted the Telecommunications Act (TCA) and the BRE Ameritech Interconnection Agreement. The district court, which issued a final order on all claims, confirmed its subject-matter jurisdiction under 28 U.S.C. § 1291, a point not contested by BRE. However, the Michigan Commissioners argued that state sovereign immunity bars federal jurisdiction over them in their official roles. The district court countered this claim by referencing Michigan Bell Telephone Company v. MFS Intelenet, Inc., which established that Michigan waived its sovereign immunity by engaging in federal telecommunications regulation. The Commissioners challenged this interpretation on appeal.

The court noted a prior decision in Climax Telephone, affirming that state public service commissioners can be parties in § 252(e)(6) suits under the Ex parte Young doctrine, which allows federal lawsuits against state officials for enforcing unconstitutional state laws. The court cited the Supreme Court's support for this view in Verizon Maryland, Inc. v. Public Service Commission of Maryland. Consequently, the court rejected the Commissioners' argument regarding the lack of subject matter jurisdiction.

Regarding standard of review, the court stated that under 47 U.S.C. § 252(e)(6), any party aggrieved by a state commission's decision can seek federal court review, limited to consistency with sections 251 and 252 of the TCA. The court reviews the MPSC's interpretation of the Act de novo and does not defer to it, though it acknowledges the Federal Communications Commission's interpretations as persuasive. The MPSC is not considered an “agency” under the Administrative Procedure Act, so its interpretations do not receive the same deference as federal agencies.

For factual findings made by the MPSC during its enforcement, the court applies the 'arbitrary and capricious' standard, which is the lowest threshold for judicial review of administrative actions. A decision will be upheld if it follows a reasoned process and is backed by substantial evidence.

Section 251(c)(3) of the Act mandates that Incumbent Local Exchange Carriers (ILECs) must provide Competitive Local Exchange Carriers (CLECs) with nondiscriminatory access to network elements on an unbundled basis at technically feasible points, adhering to just, reasonable, and nondiscriminatory rates, terms, and conditions. Section 252 outlines that state commissions must determine these rates based on the cost of providing network elements without reference to rate-of-return, allowing for reasonable profit. The FCC's First Report and Order discussed cost responsibilities for disaggregating bundled loops, indicating that requesting carriers would bear these costs. Specifically, if a loop requires conditioning for digital signal transmission, the ILEC must facilitate this, but the requesting carrier must compensate the ILEC for the conditioning costs.

Ameritech asserts that the principle of unbundled access places the cost and investment risk on the requesting carrier, contrasting this with resellers who do not control physical assets. Ameritech claims that the Michigan Public Service Commission's (MPSC) Order contradicts FCC principles and the Act, as it imposes the costs of additional provisioning on Ameritech rather than on BRE for unbundled loops. While BRE acknowledges Ameritech's interpretation of the FCC's directive regarding conditioning costs, the FCC did not clarify whether these costs should be classified as special construction charges or included in the overall recurring rates CLECs pay. Ultimately, both parties agree that Ameritech is entitled to recover costs incurred for de-multiplexing and conditioning loops at BRE's request, but there is a dispute over how and when these costs should be recovered, with Ameritech seeking to do so through special construction charges and BRE arguing these costs are already included in existing tariffs.

Ameritech asserts that paragraphs 382 and 384 of the legal framework create exceptions to the general cost-recovery protocols for interconnection, contending that these specific provisions should prevail, allowing ILECs to recover costs from CLECs for provisioning network elements outside standard tariff schemes. However, these paragraphs lack specificity regarding the circumstances under which ILECs can recover such costs, undermining Ameritech's argument.

BRE and the Commissioners argue that permitting Ameritech to impose separate charges for special construction costs results in 'double recovery,' as BRE already covers these costs through its recurring monthly payments tied to Ameritech's standard loop pricing. The MPSC concluded that the special construction charges in question are typically included in the costs reflected in the established rates. This conclusion was supported by expert testimony, indicating that the applicable charges are not justified under the conditions outlined in Ameritech's tariffs.

The MPSC's determination that BRE's monthly fees encompass compensation for the necessary de-multiplexing and conditioning of loops is treated as a factual finding, while legal interpretations regarding payment obligations under the Act or interconnection agreements are distinct. Ameritech’s challenge to the MPSC's finding of substantial evidence regarding the inclusion of these costs in recurring charges introduces a new argument not raised in prior proceedings.

The FCC, in its First Report and Order, clarified that pricing for unbundled network elements should not incorporate costs from existing ILEC infrastructures, advocating for the distribution of construction costs over time through recurring charges. The FCC also established the Total Element Long Run Incremental Cost (TELRIC) methodology, which is based on a hypothetical efficient network. Ameritech claims that Michigan's TELRIC-based tariffs do not account for the costs in question, as such costs would not occur in the theoretical network model presumed by TELRIC.

No hypothetical efficient network would include unbundled elements or traditional load coils for voice quality improvement. Ameritech and BRE's expert witnesses agreed that TELRIC-based tariffs assume the absence of such non-ideal conditions. Ameritech's argument regarding TELRIC was raised for the first time on appeal, lacking mention in its district court brief. The brief did refer to the necessity for compensation to CLECs for access to unbundled loops but contested payment structures based on the First Report and Order rather than TELRIC-based tariffs. The court typically does not consider new arguments presented on appeal, emphasizing that doing so undermines judicial integrity. Consequently, the court declined to address Ameritech's claim regarding TELRIC-based tariffs not compensating for certain costs. However, Ameritech retains the option to modify its cost studies and tariffs if undercompensation is proven. The MPSC found that Ameritech's imposition of special construction charges on BRE constituted discrimination under Michigan law, noting that Ameritech must treat CLECs equally. The MPSC highlighted that Ameritech required BRE to pay special construction charges while it did not impose similar charges on its own retail customers under comparable conditions.

BRE supports the MPSC's finding by highlighting that Ameritech's tariff does not allow recovery of costs associated with conditioning and de-multiplexing loops through special construction charges; instead, these costs are incorporated into recurring service charges or standard line-establishment fees. BRE notes that Ameritech cannot impose special construction charges in certain scenarios, such as when a loop is not connected to the wire center or has a defective segment.

The Commissioners argue that Ameritech's interpretation of "nondiscriminatory" permits it to engage in discriminatory practices as long as all Competitive Local Exchange Carriers (CLECs) are treated equally, which could lead to abusive treatment of all CLECs, disregarding fair treatment towards its retail customers. Ameritech counters that the Commissioners wrongly imposed a condition that prevents discrimination against CLECs versus its retail customers. It asserts that its practices are indeed nondiscriminatory as it incurs costs for conditioning loops and recovers those costs through retail charges, billing BRE similarly.

Ameritech clarifies that the service provided to retail customers differs from that offered to CLECs; retail customers purchase bundled services, which include various features and not just unbundled loops. If BRE wishes to be treated like retail customers, it can opt to pay wholesale rates based on retail pricing and resell the services, according to regulatory provisions. The distinction made by Ameritech emphasizes that retail customers do not lease network components but buy comprehensive services, justifying the absence of special charges on the retail side.

BRE asserts that Ameritech fails to acknowledge the FCC's detailed guidance on nondiscrimination. The FCC's First Report and Order mandates that Incumbent Local Exchange Carriers (ILECs) must offer access to unbundled network elements and related operational support functions to carriers, including new entrants, on the same terms as they do for themselves or their customers. However, BRE argues that this requirement is misapplied because the construction charges in question do not occur within the normal customer service framework; instead, Ameritech performs these tasks internally at its discretion, not providing similar access to BRE. BRE would acquire leasehold interests in the conditioned loops, unlike customers who hold no such interests, as Ameritech retains authority over existing loops.

Furthermore, a subsequent FCC Order clarifies that ordering and provisioning unbundled network elements lack a retail counterpart. The law permits Ameritech to treat Competitive Local Exchange Carriers (CLECs) differently from its retail customers. The Michigan Public Service Commission's (MPSC) ruling that Ameritech's imposition of special construction charges on BRE constitutes discrimination misinterprets federal nondiscrimination requirements. Consequently, the district court's judgment is partially affirmed and partially reversed, specifically enjoining the enforcement of the MPSC's order regarding the $40,000 fine that was based on the discrimination finding.

Fiber optic cables enable a higher capacity for communication than copper wires, allowing customer transmissions to connect solely to one telecommunications provider, as the fiber optic cable's termination point is at the provider’s switch. For competing providers like BRE to offer service, a separate facility must be created, allowing their transmissions to terminate at their own switch. The term "unbundling" in this context refers to a process more accurately described as "disaggregating" or "de-multiplexing," which involves adding extra segments of wire alongside existing cables to create a complete transmission loop to the customer.

The ongoing appeal concerns charges related to 33 loop orders, with the MPSC indicating that BRE had access to approximately 26,000 telecommunications lines in Michigan as of late 1998. BRE initially agreed to pay special charges totaling $60,690.68, with the understanding that it could dispute these charges under the Interconnection Agreement. However, upon receiving notice of these charges from Ameritech, BRE retracted its customer transfer requests, leading to a loss of 15 customers and 85 access lines, as the charges rendered service provision financially unviable.

Section 9.4.2 of the Interconnection Agreement specifies that Ameritech is only obligated to provide Loops and Ports where they are available. Ameritech contested the MPSC order as a misinterpretation of the interconnection agreement but did not assert any rights or obligations beyond those imposed by the Telecommunications Act (TCA) in its appeal. The court's review will focus on whether the MPSC order contravenes the TCA.

The Fourth Circuit applies a de novo review for commission interpretations of federal law and a "substantial evidence" standard for findings of fact, acknowledging minimal distinction between this standard and the "arbitrary and capricious" standard. Additionally, the Supreme Court vacated parts of the First Report and Order in Iowa Utilities Board II, prompting the FCC to reaffirm its principles in a subsequent report.

The excerpt addresses the regulatory landscape concerning interconnection and cost-recovery principles as mandated by the Telecommunications Act of 1996. The District of Columbia Circuit remanded the Third Report and Order to the FCC for reconsideration on an unrelated issue, but this remand does not impact the validity of the cost-recovery principles outlined. It highlights that if Ameritech’s standard rates fail to recover actual costs, the company must propose a new rate schedule to the FCC.

A significant point is the Eighth Circuit's initial invalidation of the TELRIC (Total Element Long Run Incremental Cost) methodology, which was later overturned by the Supreme Court, affirming TELRIC's validity. Ameritech's argument that the Eighth Circuit's ruling undermines the tariffs based on TELRIC is dismissed, as it is contradicted by the Supreme Court's decision.

The FCC emphasized that incumbent Local Exchange Carriers (LECs) have an obligation to provide interconnection on nondiscriminatory terms. It asserts that these terms should apply equally to third parties and the incumbent LEC itself, rejecting previous interpretations that were limited to regulated monopoly environments. Incumbent LECs must not discriminate based on the identity of the carrier and must provide interconnection in a manner that is "just" and "reasonable."

Additionally, the excerpt references a specific FCC Order regarding Bell Atlantic New York, which required the company to demonstrate nondiscrimination in provisioning unbundled local loops to competing carriers compared to its retail customers. However, it notes that no similar process was conducted in the present case, which results in a lack of evidence for a direct comparison of services, thus reinforcing the principle that the provision of unbundled network elements lacks a retail analog in this context.