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 ("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.
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,
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 WL 98037 (1999) (the "Reciprocal Compensation Ruling"). Holding that it has jurisdiction over calls to ISPs as interstate calls, the FCC declined to separate ISP-bound traffic 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 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.
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' interconnection 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:
47 U.S.C. § 252(e)(6) (emphasis ours).
The Act's reference to "a State commission ... determination under this section ," 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. 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
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 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 to 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 WL 452885 (1996). Accordingly, we hold that here the PUC properly exercised its jurisdiction regardless of any interstate aspect of the subject telecommunications.
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
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.
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 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.
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 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 U.S. West Communications v. MFS Intelenet, Inc., 193 F.3d 1112, 1117, 1124 n. 15 (9th Cir.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).
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
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.
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 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,
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.
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 determine whether, as a matter of federal law, reciprocal compensation is due under the contracts. Southwestern Bell argues that the language in the agreements
As the Seventh Circuit said, in succinctly rejecting a similar argument, "[t]he syllogism is an oversimplification."
Illinois Bell Tel. v. Worldcom, 179 F.3d at 573 (emphasis added). The FCC expressly
In light of the foregoing, we hold that the agreements themselves and state 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.
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.
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 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
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 (1 Dist.) 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."
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 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.
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—not terminating at the ISP's local server—the FCC recognized that, for purposes other than jurisdiction,
We note finally that the FCC listed several factors that state commissions may consider in deciding whether an interconnection agreement should be construed to classify calls to ISPs as local for purposes of reciprocal 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.
For the foregoing reasons, we hold that the PUC had jurisdiction to determine the issues discussed above, 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.
47 U.S.C. § 252(d)(2)(A).
Illinois Bell Tel. v. Worldcom, 179 F.3d at 574 (Westmate* version only).