B. Background
The complaint in this case alleges that defendant AT&T Communications of California, Inc. and three of its subsidiaries (collectively, AT&T) have refused to pay the complainant, Pac-West Telecomm, Inc. (Pac-West), the charges lawfully due for calls that AT&T originates for its local exchange customers and routes to Pac-West through the tandem switches of incumbent local exchange carriers (ILECs).
The complaint notes that while Pac-West and AT&T each have interconnection agreements with California's two principal ILECs, Pacific Bell Telephone Company1 and Verizon California, they do not have an interconneection agreement with each other. In the absence of such an agreement, Pac-West contends, it is entitled to the termination charges set forth in its intrastate tariffs for traffic that originates with AT&T customers and is transmitted to Pac-West by the ILECs. Pac-West alleges that AT&T has refused to pay any of the statements it has rendered for these charges, which now total about $6 million.2 As relief, Pac-West asks not only that AT&T be ordered to pay all the charges for which it has been invoiced, but also to pay all future charges based on Pac-West's intrastate tariffs "unless and until the AT&T Companies enter into a direct interconnection agreement with Pac-West."
In its answer, AT&T contends that no charges are due. Since the overwhelming majority of the traffic that ILECs transmit to Pac-West for AT&T is bound for Internet service providers (ISPs), AT&T argues, this case is governed by the so-called "ISP Remand Order" issued by the Federal Communications Commission (FCC) in April 2001. 3 In the ISP Remand Order, the FCC concluded that because of the regulatory arbitrage that had arisen as a result of certain competitive local exchange carriers (CLECs) targeting ISPs as their customers (thus entitling these CLECs to substantial amounts of reciprocal compensation),4 the FCC should use its authority to preempt this area and require the affected carriers to make a three-year transition to the "bill and keep" compensation system.5
AT&T especially relies on ¶ 81 of the ISP Remand Order, which states that for carriers not having an interconnection agreement in effect on the issuance date of the ISP Remand Order (as AT&T and Pac-West did not), ISP-bound traffic must be exchanged on a bill-and-keep basis.6 AT&T concludes that since the ISP Remand Order preempts state law in this area (including any charges in intrastate tariffs), and since AT&T has met its obligation to exchange traffic on a bill-and-keep basis, it owes Pac-West nothing. AT&T also contends that as a CLEC rather than an ILEC, it has no obligation under the Telecommunications Act of 1996 to enter into an interconnection agreement with Pac-West. Thus, AT&T contends, the complaint herein should be dismissed.
1 Pacific Bell Telephone Company now does business as SBC California, the name by which it is referred to in the complaint.
2 Paragraph 5 of the complaint alleged that "the AT&T Companies have refused to pay over $3.5 million of applicable tariffed Pac-West charges that they have incurred." In an e-mail message sent to the Administrative Law Judge on December 21, 2004, Pac-West's counsel stated that she had discovered this amount was incorrect, that errors had been made by the billing company used by Pac-West to prepare the bills submitted to AT&T, and that the amount that should have been billed to AT&T under Pac-West's theory of the case was closer to $6 million. As explained in the text, Pac-West has been instructed to set forth in its testimony on relief the amount it contends is actually due from AT&T.
3 Order on Remand and Report and Order, CC Docket Nos. 96-98 and 99-68 (FCC 01-131), released April 27, 2001, 16 FCC Rcd 9151. AT&T acknowledges that the United States Court of Appeals for the District of Columbia Circuit subsequently found that the statutory provisions relied on by the FCC did not support the ISP Remand Order, but points out that the D.C. Circuit remanded the order to the FCC for further consideration without vacating it. Worldcom, Inc. v. FCC, 288 F.3d 429, 434 (D.C. Cir 2002), cert. denied sub nom. Core Communications, Inc. v. FCC, 538 U.S. 1012 (2003). As a result of this unusual procedural posture, other courts (including the Ninth Circuit) have noted that the provisions of the ISP Remand Order remain in effect despite the D.C. Circuit's conclusions about the deficiencies in its statutory analysis. See, e.g., Pacific Bell v. Pac-West Telecomm, Inc., 325 F.3d 1114, 1122-23 (9th Cir. 2003).
4 In the ISP Remand Order, after noting (in ¶ 20) that reciprocal compensation had grown up because of the assumption that "traffic back and forth on . . . interconnected networks would be relatively balanced," the FCC described the problem of regulatory arbitrage connected with ISPs as follows: "Internet usage has distorted the traditional assumptions because traffic to an ISP flows exclusively in one direction, creating an opportunity for regulatory arbitrage and leading to uneconomical results. Because traffic to ISPs flows one way, so does money in a reciprocal compensation regime. It was not long before some LECs saw the opportunity to sign up ISPs as customers and collect, rather than pay, compensation because ISP modems do not generally call anyone in the exchange. In some instances, this led to classic regulatory arbitrage that had two troubling effects: (1) it created incentives for inefficient entry of LECs intent on serving ISPs exclusively and not offering viable local telephone competition, as Congress had intended to facilitate with the 1996 Act; (2) the large one-way flows of cash made it possible for LECs serving ISPs to afford to pay their own customers to use their services, potentially driving ISP rates to consumers to uneconomical levels. These effects prompted the Commission to consider the nature of ISP-bound traffic and to examine whether whether there was any flexibility under the statute to modify and address the pricing mechanisms for this traffic . . ." (ISP Remand Order ¶ 21; 16 FCC Rcd at 9162.)
5 Footnote 6 of the ISP Remand Order defines "bill and keep" as follows: "'Bill and keep' refers to an arrangement in which neither of two interconnecting networks charges the other for terminating traffic that originates on the other network. Instead, each network recovers from its own end-users the cost of both originating traffic that it delivers to the other network and terminating traffic that it receives from the other network . . . Bill and keep does not, however, preclude intercarrier charges for transport of traffic between carriers' networks." (16 FCC Rcd at 9153; citations omitted.)
6 ¶81 of the ISP Remand Order states in pertinent part: "[A] different rule applies in the case where carriers are not exchanging traffic pursuant to interconnection agreements prior to adoption of this Order . . . In such a case, as of the effective date of this Order, carriers shall exchange ISP-bound traffic on a bill-and-keep basis during this interim period. We adopt this rule for several reasons. First, our goal here is to address and curtail a pressing problem that has created opportunities for regulatory arbitrage and distorted the operation of competitive markets. In so doing, we seek to confine these market problems to the maximum extent while seeking an appropriate long-term resolution in the proceeding initiated by the companion [notice of proposed rulemaking]. Allowing carriers in the interim to expand into new markets using the very intercarrier compensation mechanisms that have led to the existing problems would exacerbate the market problems we seek to ameliorate. For this reason, we believe that a standstill on any expansion of the old compensation regime into new markets is the more appropriate interim answer. Second, unlike most carriers that are presently serving ISP customers under existing interconnection agreements, carriers entering new markets to serve ISPs have not acted in reliance on reciprocal compensation revenues and thus have no need of a transition during which to make adjustments in their business plans." (16 FCC Rcd at 9188-89; footnote omitted.)
