Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 06 C 3550-Virginia M. Kendall, Judge.
The opinion of the court was delivered by: Easterbrook, Chief Judge.
Before EASTERBROOK, Chief Judge, and WOOD and TINDER, Circuit Judges.
The Telecommunications Act of 1996 directs established local phone companies- successors to the Bell Operating Companies that were subsidiaries of AT&T before its breakup in 1983-to lease parts of their networks to rivals on an à la carte basis. 47 U.S.C. §251(c)(3). Particular circuits or services, called unbundled network elements, must be furnished at a price, and under conditions, specified by the Federal Communications Commission. Its method of setting the price, called TELRIC (for total element long-run incremental cost), was approved by Verizon Communications Inc. v. FCC, 535 U.S. 467 (2002). That decision disapproved some of the FCC's views about which elements must be made available, however, and many questions remained open until the FCC's regulations in the wake of its third Triennial Review were approved by the D.C. Circuit. Covad Communications Co. v. FCC, 450 F.3d 528 (D.C. Cir. 2006).
Today's case poses two questions about incumbents' obligations under the FCC's regulations. The first is whether these firms, called ILECs (for incumbent local exchange carriers), must allow their rivals, called CLECs (for competitive local exchange carriers), to use "entrance facilities" at TELRIC prices for interconnection (that is, transferring voice and data traffic from a CLEC's network to the ILEC's, and the reverse). The second is whether ILECs must lease fiber-optic circuits to deliver voice and data services to the CLECs' business customers. The 1996 Act provides that, when phone companies cannot agree on the answer to questions such as these, state public-utility commissions may decide. 47 U.S.C. §252(b). The statute misleadingly calls this process "arbitration," but it bears none of the features-such as voluntary consent, a privately chosen adjudicator, and finality-that marks normal arbitration. See generally AT&T Communications of Illinois, Inc. v. Illinois Bell Telephone Co., 349 F.3d 402 (7th Cir. 2003); Mpower Communications Corp. v. Illinois Bell Telephone Co., 457 F.3d 625 (7th Cir. 2006). The state commission's decisions don't implement private agreements; they subject unwilling ILECs to public commands.
The Illinois Commerce Commission concluded that Illinois Bell, the ILEC in northern Illinois-which does business as AT&T following a series of corporate transactions that need not be recounted-must allow CLECs to use entrance facilities at TELRIC prices. It also concluded that AT&T must allow the CLECs to use its fiber-optic loops, except for service to "mass-market customers." The 1996 Act allows such decisions by state agencies to be reviewed by federal courts. See Verizon Maryland Inc. v. Public Service Commission of Maryland, 535 U.S. 635 (2002). The district judge concluded that the state commission was right about entrance facilities and wrong about fiber-optic loops. See 2007 U.S. Dist. LEXIS 70551 (N.D. Ill. Sept. 21, 2007). AT&T has appealed on the entrance-facility issue; the commission has appealed on the local-loops issue.
An "entrance facility" is a connection between a switch maintained by an ILEC and a switch maintained by a CLEC. In other words, it is a means of transferring traffic from one carrier's network to another. The connection may be by copper cable, fiber-optic cable, or radio-frequency link. The connection may be long or short; multiple carriers' switches may even be in the same building (this is known as co-location). ILECs built entrance facilities to comply with their obligation to interchange traffic among networks. 47 U.S.C. §251(c)(2). Once the links between ILECs and CLECs networks existed, CLECs began to use them to transport traffic from the customers of one CLEC to the customers of another, using the ILEC's circuits as intermediaries. A given CLEC also might route traffic among its own customers over the ILEC's network. Using an entrance facility to move voice or data traffic among CLEC customers has come to be known as "backhauling," though again the nomenclature is misleading: intra-CLEC traffic is related only loosely to loading freight on a truck, train, or boat at its destination for delivery to the vehicle's point of origin.
In the third Triennial Review Remand Order, the FCC concluded that CLECs do not need entrance facilities for backhauling and should build their own equipment for handling CLEC--to--CLEC traffic. ILECs need not provide unbundled network elements to CLECs that can serve customers without "impairment" through their own network elements. 47 U.S.C. §251(d)(2)(B). ("Impairment" is a complex concept that need not be explicated here.) No one contests the FCC's conclusion in this litigation.
What then of the original (and principal) use of an entrance facility: linking networks to allow CLEC--to--ILEC traffic (and ILEC--to--CLEC traffic)? The FCC stated:
[O]ur finding of non-impairment with respect to entrance facilities does not alter the right of [CLECs] to obtain interconnection facilities pursuant to section 251(c)(2) for the transmission and routing of telephone exchange service and exchange access service. Thus, [CLECs] will have access to these facilities at cost-based rates to the extent that they require them to interconnect with the [ILEC's] network.
Triennial Review Remand Order at ¶140. The state com-mission relied on this passage when ordering AT&T to make entrance facilities available at TELRIC prices to CLECs for interconnection.
AT&T protests that this nullifies the FCC's order. What's the point of specifying that CLECs cannot demand access to entrance facilities as unbundled network elements, AT&T inquires, if state commissions can turn around and require the same access at the same price anyway? The answer, as the district court observed, is that CLECs do not enjoy the "same" access to entrance facilities under the state commission's decision as they did before the FCC's order. Until then CLECs could use entrance facilities for both interconnection and backhauling. Under the state's order, CLECs use entrance facilities exclusively for interconnection, just as the FCC said in ¶140. The state commission tells us that ILECs can detect and block any attempted use of an entrance facility for backhauling. (Every carrier, ILEC or CLEC, must be able to determine the traffic's destination in order to route it accurately.)
Section 251(c)(2) allows a CLEC to interconnect at any technologically feasible place. An entrance facility, designed for the very purpose of linking two carriers' networks, meets the requirement of feasibility, so a CLEC is entitled to hand off traffic to an ILEC at any entrance facility. The real dispute is not whether entrance facilities will be used for interconnection, but how much the ILEC can charge. Apparently AT&T has filed tariffs for the use of entrance facilities as interconnection gateways, and the tariffs specify prices exceeding the fee calculated according to TELRIC. AT&T wants to be able to charge the tariff price. Whether it can do so is not related to the scope of an ILEC's obligations under §251(c)(3) to furnish unbundled network elements.
What the FCC said in ¶140 is that ILECs must allow use of entrance facilities for interconnection at "cost-based rates". TELRIC is a cost-based rate, though not the only one. We asked at oral argument whether anything in the 1996 Act or the FCC's regulations prohibits a state commission from using TELRIC to tell ILECs what they may charge for interconnection. Counsel for AT&T allowed that the state commission could do this. Well, that is effectively what the state commission has done. Instead of suspending AT&T's tariff for interconnection services and ordering a rate reduction, the state commission has reached the same result by an "arbitration" under the 1996 Act. If there is any objection to this procedure, it must rest on state rather than federal law. Whether the state commission has followed the requirements that Illinois imposes for overriding a utility's published tariff is of no ...