III. Discussion

Although there are ambiguities in the key paragraphs of the ISP Remand Order, we conclude that on balance, Pac-West's reading of these paragraphs more accurately reflects the FCC's intent than does AT&T's reading.  Accordingly, we conclude that AT&T cannot rely on ¶ 81 of the ISP Remand Order as a justification for insisting that the ISP-bound traffic it exchanges with Pac-West must be handled on a bill-and-keep basis, because we agree with
Pac-West that only ILECs that have made the mirroring offer described in ¶ 89 of the Remand Order are free to invoke the bill-and-keep arrangements set forth in ¶ 81.  As a CLEC, AT&T cannot make a mirroring offer, and so cannot invoke ¶ 81. Moreover, AT&T offered no evidence to support its claim that the common practice within the telecommunications industry is for CLECs to exchange traffic among themselves on a bill-and-keep basis.

We also conclude that Pac-West's intrastate tariff is the appropriate source to look to for the compensation that AT&T must pay Pac-West for terminating ISP-bound calls.  As the T-Mobile Ruling indicates, properly-filed state tariffs are an appropriate source to consult where reliance on them would not undermine the policy in the 1996 Telecommunications Act favoring voluntary interconnection agreements.  Since both parties here acknowledge that AT&T cannot be forced to enter into an interconnection agreement with Pac-West (because AT&T is a CLEC), no interference with the Act's statutory scheme would result from applying Pac-West's intrastate tariff here. To rule to the contrary and in AT&T's favor on this issue would be to hold that despite the FCC's decision in the Core Order to forbear from enforcing the New Markets Rule after October 8, 2004, Pac-West would still not be entitled to receive any compensation for terminating AT&T's ISP-bound calls, simply because Pac-West had previously been compelled by law to accept a bill-and-keep arrangement.  In our opinion, such a ruling would stand the Core Order on its head.

As noted in the description of the parties' positions, AT&T relies heavily on the fact that ¶ 81 refers to "carriers" - a term that encompasses both ILECs and CLECs - to justify its argument that bill-and-keep should apply to its traffic exchanges with Pac-West.  We acknowledge that, as the complete quotation of ¶ 81 in footnote 8 of this decision shows, nothing within the language of ¶ 81 itself expressly limits the New Markets Rule to exchanges of ISP-bound traffic between ILECs and CLECs. Since AT&T did not have an interconnection agreement with Pac-West on the effective date of the ISP Remand Order, the language of ¶ 81, standing alone, therefore seems to support AT&T's argument that it is entitled to exchange ISP-bound traffic with Pac-West on a bill-and-keep basis. 

However, applying ¶ 81 in this fashion would ignore the concerns about possible ILEC arbitrage expressed in ¶ 89 of the ISP Remand Order, which sets forth the mirroring rule.  ¶ 89 makes it clear that if an ILEC wants to invoke the interim compensation plan in the Remand Order, including the New Markets Rule of ¶ 81, the ILEC must first make a mirroring offer that will foreclose the possibility of profiting from arbitrage when the ILEC is terminating ISP-bound traffic. Paragraph 89 provides in full:

"It would be unwise as a policy matter, and patently unfair, to allow incumbent LECs to benefit from reduced intercarrier compensation rates for ISP-bound traffic, with respect to which they are net payors, while permitting them to exchange traffic at state reciprocal compensation rates, which are much higher than the caps we adopt here, when the traffic imbalance is reversed.  Because we are concerned about the superior bargaining power of incumbent LECs, we will not allow them to `pick and choose' intercarrier compensation regimes, depending on the nature of the traffic exchanged with another carrier.  The rate caps for ISP-bound traffic that we adopt here apply, therefore, only if an incumbent LEC offers to exchange all traffic subject to Section 251(b)(5) at the same rate . . .  For those incumbent LECs that choose not to offer to exchange Section 251(b)(5) traffic subject to the same rate caps we adopt for
ISP-bound traffic, we order them to exchange ISP-bound traffic at the state-approved or state-arbitrated reciprocal compensation rates reflected in their contracts.  This `mirroring' rule ensures that incumbent LECs will pay the same rates for ISP-bound traffic that they receive for Section 251(b)(5) traffic."  (ISP Remand Order ¶ 89; 16 FCC Rcd at 9194-94; footnotes omitted, italics in original, underlining supplied.)

In view of the concern about arbitrage that pervades the ISP Remand Order, we believe that if the FCC had intended that order to cover exchanges of ISP-bound traffic between CLECs, the FCC would have explicitly addressed the obligations of a CLEC that wished to invoke the New Markets Rule.  The fact that the FCC remained silent on this question, coupled with the repeated references in ¶ 89 to ILECs, supports Pac-West's argument that the interim compensation plan in the Remand Order - including the New Markets Rule of ¶ 81 -- is intended to apply only to exchanges of ISP-bound traffic between ILECs and CLECs.

AT&T has offered two arguments in support of its position that the bill-and-keep language in ¶ 81 is not limited by the requirement of a mirroring offer in ¶ 89.  First, AT&T argues that to apply ¶ 81 as Pac-West suggests "would require the Commission to accept the premise that the FCC has bifurcated its jurisdictional holding by predicating its jurisdiction on the type of the carrier carrying the traffic rather than the nature of the traffic itself."  Asserting that the FCC has "(1) found that all ISP-bound traffic is within [FCC] jurisdiction as interstate traffic; (2) found it is in the public interest to establish a bill-and-keep reciprocal compensation mechanism for ISP terminating traffic; and (3) [has] precluded state commissions from independently applying a compensation rate that conflicts with the FCC's pricing scheme," AT&T continues that there is "no exception" from these rulings for ISP-bound traffic exchanged between CLECs.  (AT&T Reply Brief on Legal Issues, pp. 2-3.)  Second, AT&T points out that since ¶ 89 directs ILECs that have not made a mirroring offer to "exchange ISP-bound traffic at the state-approved or state-arbitrated reciprocal compensation rates reflected in their contracts," this language lends no support to Pac-West's argument that, as a CLEC, its compensation for terminating AT&T's calls should be determined according to its intrastate tariff. We consider each of these arguments in turn.

As noted in the description of AT&T's position on the Remand Order, AT&T's jurisdictional argument relies heavily on the Ninth Circuit's decision in Pacific Bell v. Pac-West Telecomm.  In that case, as noted above, the Ninth Circuit invalidated two decisions issued in a Commission rulemaking proceeding which had held that the reciprocal compensation provisions in all interconnection agreements arbitrated in California applied to ISP-bound traffic.  The basis for the Ninth Circuit's ruling was that, apart from the powers conferred by § 252 of the Telecommunications Act, the Commission does not have jurisdiction under the 1996 Act to promulgate rules regarding traffic that the FCC has declared to be interstate.  However, in the same decision, the Ninth Circuit upheld the Commission's decision that ISP-bound traffic exchanged between Pacific Bell and Pac-West was subject to the reciprocal compensation provisions in the companies' 1999 interconnection agreement.  This latter decision by the Commission, the Ninth Circuit ruled, was consistent with the powers conferred on state public service commissions by § 252 to interpret and enforce specific interconnection agreements.

In essence, AT&T argues that the relief Pac-West is seeking here cannot be reconciled with the jurisdictional boundaries laid out by the Ninth Circuit in Pacific Bell v. Pac-West Telecomm.  According to AT&T, "exercising general regulatory authority over interstate traffic is exactly what Pac-West would have this Commission do in this complaint case.  It not only asks the Commission to ignore the clear language of the ISP Remand Order, it asks the Commission to authorize fees for terminating traffic outside the bounds of an interconnection agreement arbitration and pursuant to generic state authority (i.e., state tariffs)."  (AT&T Opening Brief on Legal Issues, pp. 5-6.)

We disagree with this contention for several reasons.  First, we believe that AT&T reads the holding in Pac-West Telecomm too broadly.  As described above, that decision was entirely concerned with whether the reciprocal compensation provisions in California interconnection agreements between ILECs and CLECs applied to ISP-bound traffic.  The Ninth Circuit held that the Commission did not have the power to promulgate a general rule on this question, but did have authority under the Telecommunications Act to determine whether the reciprocal compensation provisions in a specific interconnection agreement applied to such traffic.  Contrary to AT&T's suggestion, the Ninth Circuit's decision is silent about the extent of the Commission's powers where the exchange of ISP-bound traffic takes place between two CLECs, a type of carrier that - as both parties here acknowledge - clearly does not have the right under the 1996 Act to compel another CLEC to negotiate an interconnection agreement.

We also believe that AT&T gives too broad a reading to the language in ¶ 82 of the ISP Remand Order, on which AT&T also relies to support its jurisdictional argument.  AT&T points to the language in ¶ 82 stating that "because [the FCC] now exercise[s its] authority under Section 201 to determine the appropriate intercarrier compensation for ISP-bound traffic . . . state commissions will no longer have authority to address this issue."  The thrust of ¶ 82, however, is not broad jurisdictional pronouncements, but the timing of the implementation of the Remand Order's interim compensation plan.  Thus, the FCC noted in ¶ 82 that the interim plan "applies as carriers re-negotiate expired or expiring interconnection agreements,"¹³ and ruled that as of the publication date of the Remand Order, "carriers may no longer invoke Section 252(i) to opt into an existing interconnection agreement with regard to the rates paid for the exchange of ISP-bound traffic."  In view of these statements directed at timing, we conclude that ¶ 82 simply does not address the applicability of the interim compensation plan to situations in which both parties are CLECs and do not have an interconnection agreement in effect between them.

Of course, having decided that AT&T cannot invoke ¶ 81 of the Remand Order because it is a CLEC, we are left with the question of what compensation Pac-West should receive for the ISP-bound calls that it terminates for AT&T. As noted above, AT&T argues that ¶ 89 of the Remand Order sheds no light on this question, because in cases where a mirroring offer has not been made, ¶ 89 directs ILECs to "exchange ISP-bound traffic at the state-approved or state-arbitrated reciprocal compensation rates reflected in their contracts." Since AT&T and Pac-West are both CLECs and there is no interconnection agreement in effect between them, AT&T argues that Pac-West can take no comfort from this language in ¶ 89.

Even though we agree with AT&T that ¶ 89 does not resolve the question of what compensation should be paid here, we agree with Pac-West that the question of what compensation it should receive is best determined by resorting to the general principles that support the division of state and federal authority in the Telecommunications Act. We also agree that the FCC's recent ruling in the T-Mobile case furnishes useful guidance because it dealt with a compensation issue analogous to the one here, even though we are not bound to apply T-Mobile to the facts before us.

In T-Mobile, the FCC dealt with a situation in which CLECs and commercial mobile radio service (CMRS) providers were exchanging traffic indirectly without the benefit of interconnection agreements by using the transit services of ILECs. Disputes arose when the ILECs refused to compensate the CLECs for terminating the CMRS traffic, arguing that this was transit traffic and that the CMRS providers were required to pay reciprocal compensation. The
T-Mobile Ruling described the disputes as follows:

"For instance, many CMRS providers argue that intra[Major Trading Area, or MTA] traffic routed from a CMRS provider through a [Bell Operating Company, or BOC] tandem to another LEC is subject to the reciprocal compensation regime because it originates and terminates in the same MTA. Some LECs, however, contend that this traffic is more properly subject to access charges because it originates outside the local calling area of the LEC, is being carried by a toll provider, i.e., the BOC, and is routed to the LEC via access facilities. When a LEC seeks payment of access charges from a BOC in these circumstances, the BOC often refuses to pay such charges on the basis that (1) it is merely transiting traffic subject to reciprocal compensation, and (2) the originating carrier is responsible for the reciprocal compensation due." (T-Mobile Ruling, ¶ 6, 20 FCC Rcd. at 4858; footnotes omitted.)

T-Mobile noted that because of such disputes (which had necessitated rulings by several state public service commissions), the CLECs had begun to file wireless termination tariffs with the state commissions "that apply only in the situation where there is no interconnection agreement or reciprocal compensation arrangement between the parties." (Id. at ¶ 7.) The CMRS providers challenged the validity of these tariffs, arguing that the CLECs "engage[] in bad faith by unilaterally filing wireless termination tariffs without first negotiating in good faith with CMRS providers." (Id. at 20 FCC Rcd 4855, n. 1.)

In its ruling, the FCC noted that "because the existing rules are silent as to the type of arrangement necessary to trigger payment obligations," there was no basis for finding bad faith, and that "it would not have been unlawful for incumbent LECs to assess transport and termination charges based upon a state tariff," because the FCC had been aware of this practice when it last amended the CMRS rules, prior to the passage of the 1996 Telecommunications Act. (Id. at ¶ 10; 20 FCC Rcd at 4860-61.)

The FCC decided, however, that the best solution was to amend its CMRS rules on a prospective basis, and held as follows:

"In light of existing carrier disputes, we find it necessary to clarify the type of arrangement necessary to trigger payment obligations. Because the existing rules do not explicitly preclude tariffed compensation arrangements, we find that incumbent LECs were not prohibited from filing state termination tariffs and CMRS providers were obligated to accept the terms of applicable state tariffs. Going forward, however, we amend our rules to make clear our preference for contractual arrangements by prohibiting LECs from imposing compensation obligations for non-access CMRS traffic pursuant to tariff. In addition, we amend our rules to clarify that an incumbent LEC may request interconnection from a CMRS provider and invoke the negotiation and arbitration procedures set forth in Section 252 of the Act." (Id. at ¶ 9, 20 FCC Rcd at 4860; footnote omitted.)

In view of the fact that the ISP Remand Order is silent on the issue of what compensation should be paid when one CLEC exchanges ISP-bound traffic with another CLEC and no interconnection agreement is in effect between them, and the fact that this Commission has previously held that the CLEC's intrastate tariff is applicable to exchanges with an ILEC where the ILEC has not yet made a mirroring offer as required by ¶ 89, we conclude that -- subject to the limitations below -- it is appropriate to apply the CLEC's intrastate tariff for termination services where no interconnection agreement is in effect.

Having reached this conclusion, the computation of the amount payable to Pac-West by AT&T is straight-forward. In the testimony she submitted on behalf of Pac-West on March 7, 2005, Mart McCann calculated the total amount of termination charges that AT&T owed to Pac-West (pursuant to the latter's tariff) for the period July 1, 2001 to January 31, 2005 at $7,115,014.16. (Attachment to Exhibit 1, p. 6.) In the opening brief it filed on compensation issues on May 11, 2005, AT&T expressly stated that "AT&T does not challenge the calculation of the claimed invoices of Pac-West in Exhibit 1 . . . of $7,115,014.16." (AT&T Opening Brief on Evidentiary Issues, p. 3.)¹⁴ Thus, the basic amount of termination charges that AT&T owes to Pac-West under the latter's tariff for the period in question¹⁵ is not in dispute.

However, a further question is whether Pac-West should be able to recover "accrued late charges and interest" on the basic amount due, as Pac-West's brief requests.¹⁶ We conclude that, as a matter of equity, AT&T should not be required to pay interest and late charges to Pac-West.

We reach this conclusion for several related reasons. First, as noted above, while the issues presented in the T-Mobile Ruling are analogous to the ones here, nothing in T-Mobile or in any other federal decision we are aware of requires that in cases where the FCC has not prescribed the appropriate form of reciprocal compensation, the intrastate tariffs of the carrier seeking such compensation must be applied. In choosing to follow T-Mobile and apply Pac-West's tariff in this situation, we are therefore exercising our equitable remedial powers - powers on which Pac-West also relies¹⁷ - and those powers include the authority to apply less than all of the otherwise-applicable tariff provisions.

Second, we note that the usage charges in Pac-West's tariff are somewhat higher than those in the FCC's interim compensation plan in the ISP Remand Order. As noted in ¶ 8 of the Remand Order, the FCC's interim plan provided that for the period after April 18, 2003 (i.e., two years after adoption of the order), the rate for ISP-bound traffic would be capped at $.0007 per minute-of-use (MOU). The pages from Pac-West's tariff attached to the October 18, 2004 affidavit of John Sumpter (an affidavit that accompanied the complaint in this case) indicate that for most of the time since October 20, 2001, Pac-West's MOU rate has been $.0010. In view of the unusually long time that elapsed between AT&T's initial refusal to pay Pac-West's invoices and the filing of the instant complaint, as well as Pac-West's admission that its business plan relies on targeting ISPs¹⁸ - the situation that gave rise to the arbitrage opportunities that motivated the FCC to issue the ISP Remand Order - we conclude it is an appropriate exercise of our remedial powers to relieve AT&T of the burden of having to pay interest and late charges. By ruling in this fashion, we also bring the amount due more into line with what would have been owed if the FCC's interim compensation plan had governed this case.

As we have observed in other decisions, the payment of interest is not mandatory when a utility seeks unpaid tariff charges pursuant to Pub.Util.Code § 737. (Re Western Union Telegraph Company, D.87-05-063, 24 CPUC2d 350, 364.) See also, Air-Way Gins, Inc. v. Pacific Gas and Electric Company, D.03-04-059 (interest not awarded to utility customers who sought to recover under Pub. Util. Code § 736 overcharges paid as a result of the utility's application of the wrong tariff).¹⁹

¹³ This is consistent with the Ninth Circuit's observation in Pacific Bell v. Pac-West Telecomm that "the interim alternative payment scheme for ISP-bound traffic established in the Remand Order applies only prospectively, when existing interconnection agreements expire."  (325 F.3d at 1131.)