The Federal Communications Commission Order and the ALJ Ruling

On April 27, 2001, the FCC released its Order on Remand³ establishing a new intercarrier rate structure for Internet service provider (ISP) traffic. The order was published in the Federal Register on May 15, 2001, and became effective on June 14, 2001. In its Order, the FCC declared that ISP-bound traffic constitutes "information access" and thus is not subject to the reciprocal compensation requirement of Section 251(b)(5) of the Communications Act⁴ (the Act). The FCC concluded that it has the authority under Section 201 of the Act to regulate ISP-bound calls and to set the intercarrier compensation rules for such calls.

Under the FCC plan, reciprocal compensation rates for ISP-bound traffic are subject to declining rate caps over a 36-month period. Traffic exceeding a three-to-one ratio of terminating to originating traffic is presumed, unless proven otherwise, to be ISP-bound traffic subject to the FCC's rate structure. After the 36-month period, bill-and-keep compensation would apply to such traffic instead of reciprocal compensation.

While the new rate structure went into effect on June 14, 2001, for carriers entering into new or renegotiated interconnection agreements, the FCC envisioned prospective application of the new rates for existing interconnection agreements. The FCC held:

"The interim compensation regime we establish here applies as carriers renegotiate expired or expiring interconnection agreements. It does not alter existing contractual obligations, except to the extent that parties are entitled to invoke contractual change-of-law provisions. This Order does not preempt any state commission decision regarding compensation for ISP-bound traffic for the period prior to the effective date of the interim regime we adopt here."⁵

Verizon notified Pac-West by letter dated May 14, 2001 that the FCC Order constituted a material change of law, and advised it would "not pay any amounts invoiced by [Pac-West] that exceed the applicable rate caps or payment limits" prescribed by the Order, effective June 14, 2001. Before the ALJ presiding over the dispute resolution, Verizon argued that the FCC plan "is self-effect[uat]ing by operation of the provisions of Pac-West's interconnection agreement, including its change-of-law provisions."⁶ Verizon identified the relevant change-of-law provision in the Agreement to be:

"This Agreement shall at all times be subject to such changes or modifications by the California Public Utilities Commission (CPUC or Commission) or Federal Communication [sic] Commission as either may, from time to time, direct [sic] the exercise its jurisdiction. If any such modifications render the Agreement inoperable or create any ambiguity or requirement for further amendment to the Agreement, the Parties will negotiate in good faith to agree upon any necessary amendments to the Agreement."⁷

The ALJ Ruling distilled the essence of the Verizon/Pac-West dispute to be whether the Agreement contains a "change of law provision" that would authorize Verizon, without any other triggering event, to impose on Pac-West the intercarrier rate structure set out in the FCC Order. It found the language in question, which appears in the preamble to the Agreement, to suggest " a statement of jurisdiction more than it does a change of law."⁸ More importantly, the Ruling noted, the preamble paragraph looks to a change or modification of the interconnection agreement when the FCC directs it. Regarding the existing pact, the FCC's "direction" is to make the change in ISP-bound rates when the two carriers renegotiate their agreement. The ALJ Ruling held that by the express terms of the Agreement, Verizon is not free on its own to amend the terms of its agreement with Pac-West until notice of cancellation and renegotiation. The FCC Order is not self-executing for existing interconnection agreements.

Verizon's Complaint and Pac-West's Response

Contesting the ALJ Ruling, Verizon insists that the language in the second introductory paragraph of the Agreement is "the first substantive provision" and a "classic change-of-law provision" within the meaning of the FCC's Order. Verizon Complaint, ¶ 39 at 18. It argues that Pac-West may have distracted and confused the ALJ with selective quotes from the Order and last-minute comparisons between the general change-of-law provisions in the Agreement and more specific ones drafted years later. Verizon further maintains that Pac-West's refusal to agree to Verizon's wording of amendments incorporating the Order, and countering with submission of its own preferred language, is evidence of Pac-West's failure to negotiate in good faith and determination to delay the Order's implementation. Verizon emphasizes the good public policy objective of the FCC's action, and urges the Commission to look to the plain meaning of the Order and the Agreement.

Pac-West responds that the "[p]reamble paragraph is not a change of law provision," and Verizon may not unilaterally impose the rate structure set forth in the FCC Order upon it until such time as the Agreement expires or is replaced with a new interconnection agreement. Citing California case law, Pac-West asserts that language in a preamble "cannot create any right beyond those arising from the operative terms of the document".⁹ It notes that the Agreement contains a specific operative provision (Section 9.02), which includes language very similar to that in the preamble, but expressly excludes any reference to FCC decisions, and applies to Commission decisions only. Pac-West contends that the language in the preamble paragraph is merely a general jurisdictional statement, while Section 9.02 is a substantive contractual provision binding both parties with respect to changes ordered by the Commission, but not the FCC.

It submits that nothing in the FCC Order authorizes any party to impose the Order unilaterally if the effective interconnection agreement provides to the contrary, or requires written amendments. Article 16 of the Verizon/Pac-West Agreement requires "[a]ny amendment, modification, or supplement" be in writing. Pac-West argues that under the instant dispute resolution process, Verizon bears a heavy burden of proof in this proceeding that it has not met. Finally, Pac-West asks the Commission to adopt and approve the ALJ Ruling in its entirety, and explicitly order Verizon to make immediate payment of all amounts owed; notwithstanding any intentions to further appeal or seek rehearing of this matter.

Discussion

The language of the preamble paragraph in the Verizon/Pac-West agreement does not constitute a change-of-law provision within the meaning of the FCC's Order. As the ALJ Ruling spelled out, the question is not whether the agreement here is subject to the FCC rates - clearly it is. The question is when this interconnection agreement will be subject to those rates.

We note, as Pac-West points out, that Section 9.02 of the Agreement includes specific language that binds both parties regarding changes ordered by this Commission, but excludes any reference to FCC decisions. We disagree with Verizon's argument that California law requires the preamble paragraph to be given effect over Section 9.02 of the Agreement. Such an interpretation would nullify the explicit language of not only Section 9.02, which expressly excludes FCC orders from its scope, but also Section 16, which requires that amendments to the agreement be in writing.¹⁰

The FCC Order provides that the Agreement will be subject to its restructured rates at the time "carriers renegotiate expired or expiring interconnection agreements." To find otherwise, requires the Commission to adopt an interpretation of the Agreement that is unreasonable and strained at best. Instead, we adopt and approve the ALJ Ruling in its entirety.