McI Telecommunications Corp. v. the Ohio Bell Telephone Company, d/b/a SBC OHIO

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2004 FED App. 0232P (6th Cir.)
File Name: 04a0232p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
MCI TELECOMMUNICATIONS
CORP.,
Plaintiff-Appellee,
v.
THE OHIO BELL TELEPHONE
COMPANY, d/b/a SBC OHIO,
Defendant-Appellant,
ALAN R. SCHRIBER, RHONDA
HARTMAN FERGUS, JUDY A.
JONES, DONALD L. MASON,
and CLARENCE D. ROGERS,
JR., in their Official
Capacities as Commissioners
of the Public Utilities
Commission of Ohio,
Defendants-Appellees.
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No. 03-3525
Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 97-00721—Edmund A. Sargus, Jr., District Judge.
2 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
*The Honorable Robert H. Cleland, United States District Judge for
the Eastern District of Michigan, sitting by designation.
Submitted: June 15, 2004
Decided and Filed: July 20, 2004
Before: GILMAN and COOK, Circuit Judges; CLELAND,
District Judge.*
_________________
COUNSEL
ON BRIEF: Dennis G. Friedman, MAYER, BROWN,
ROWE & MAW, Chicago, Illinois, Daniel R. Conway,
PORTER, WRIGHT, MORRIS & ARTHUR, Columbus,
Ohio, for Appellant. Donald B. Verrilli, Jr., JENNER &
BLOCK, Washington, D.C., Terri L. Mascherin, Daniel J.
Weiss, JENNER & BLOCK, Chicago, Illinois, Duane W.
Luckey, Columbus, Ohio, Steven T. Nourse, Jodi J. Bair,
OFFICE OF THE ATTORNEY GENERAL, Columbus,
Ohio, for Appellees.
_________________
OPINION
_________________
CLELAND, District Judge. Defendant-Appellant Ohio
Bell Telephone Company (“SBC”) appeals the district court’s
order affirming the arbitration decision of the Public Utilities
Commission of Ohio (“PUCO”). Although PUCO arbitrated
over 40 open issues between SBC and Appellee MCI
Telecommunications Corp. (“MCI”), SBC appeals only one
issue: whether the district court erred in its interpretation of
FCC Rule 711(a)(3) and in affirming PUCO’s decision to

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No. 03-3525 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
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award MCI the tandem reciprocal compensation rate for calls
that originate on SBC’s network and terminate on MCI’s. We
AFFIRM the judgment of the district court.
I. FACTS AND PROCEDURAL HISTORY
Telecommunications Act of 1996 and Implementing
Regulations
In 1996, pursuant to the Telecommunications Act of 1996
(the “1996 Act” or “Act”), MCI began negotiating an
“interconnection agreement” with SBC for telephone service
in Northeastern Ohio. Such agreements were made possible
by the 1996 Act, which Congress enacted to “promote
competition in all telecommunications markets, including the
local service market.” Michigan Bell Tel. Co. v. Climax Tel.
Co., 202 F.3d 862, 865 (6th Cir. 1999). Congress sought to
eliminate state-sanctioned monopolies and adopt a national
policy for telecommunication competition in local markets.
See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 370 (1999)
(“The Telecommunications Act of 1996 (1996 Act or Act),
Pub.L. 104-104, 110 Stat. 56, fundamentally restructures local
telephone markets. States may no longer enforce laws that
impede competition, and incumbent [local exchange carriers]
are subject to a host of duties intended to facilitate market
entry. Foremost among these duties is the [Local Exchange
Carrier’s (LEC's)] obligation under 47 U.S.C. § 251(c) (1994
ed., Supp. II) to share its network with competitors.”).
Before the Act, local telephone service was mostly
provided by state-regulated monopolies, now commonly
referred to as incumbent local exchange carriers (“incumbent
providers”). In this case, SBC is the incumbent provider for
telephone service in Northeast Ohio.
In order to promote competition in the telecommunications
market, the 1996 Act requires incumbent providers to allow
new market entrants, such as MCI in this case, to utilize the
4 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
incumbent provider’s network and buy the incumbent
provider’s telecommunication services for a fair price. See 47
U.S.C. §§ 251(a)(1) & (c). These arrangements were
necessary to minimize the barriers to market entry erected
during the period in which the incumbent provider functioned
as a monopoly. Pursuant to the Act, the incumbent provider
is required to negotiate an agreement, referred to as an
“interconnection agreement,” with a new market entrant, or a
competing local exchange carrier (“competing provider”). If
the parties cannot agree upon certain terms in the agreement,
either party can petition the state utility commission to
arbitrate the open issues. See id. at § 252(b)(1). The state
commissions arbitrate the dispute, ensuring that its resolution
of the open issues meets the requirements of the 1996 Act and
the Federal Communication Commission’s (“FCC’s”)
implementing regulations. Id. at § 252(c).
After the state utilities commission arbitrates the open
issues, the parties submit the completed interconnection
agreement to the state commission, which either approves the
final agreement or rejects it. The state commission may reject
the agreement if it does not comply with the 1996 Act or the
FCC’s regulations, discriminates against other non-party
telecommunications providers, or is inconsistent with the
public interest. Id. at § 252(e). If either or both parties
disagree with the interconnection agreement, as arbitrated by
the state commission, they may seek review in federal district
court. Id. at § 252(e)(6).
In the new competitive telecommunications marketplace, a
customer who places a call through his provider may be
routed from his provider’s network to another provider’s
network in order to complete the call. This typically occurs
when a person places a local call to someone who receives
local telephone service from a different provider than that of
the caller (e.g., an SBC customer calls an MCI customer). In
this situation, the calling party’s provider would require the
assistance of the called party’s provider in switching the call

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No. 03-3525 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
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over to the separate network. Although the calling party pays
only its provider for the call, the called party’s provider incurs
costs in transporting and terminating the call. In the absence
of an agreement with the calling party’s provider, the called
party’s provider would go uncompensated for its service.
Through interconnection agreements, the providers agree to
a compensation structure that allows parties from different
providers to seamlessly complete calls to one another. The
1996 Act requires providers to enter into “reciprocal
compensation arrangements” to compensate each other when
inter-network calls are completed. Id. at § 251(b)(5). The
reciprocal compensation rates are to be based upon a
“reasonable approximation of the additional costs” incurred
by the provider that transports and terminates the call that
originates on another network. Id. at § 252(d)(2)(A)(ii).
Congress, however, elected to avoid in-depth inquiries into
the actual costs incurred by providers. Id. at
§ 252(d)(2)(B)(ii) (the provision regarding reciprocal
compensation shall not be construed “to authorize the
Commission or any State commission to engage in any rate
regulation proceeding to establish with particularity the
additional costs of transporting or terminating calls, or to
require carriers to maintain records with respect to the
additional costs of such calls.”). Instead, Congress left the
task of implementing the 1996 Act, including the reciprocal
rate provision, to the FCC. Id. at § 251(d)(1).
In 1996, the FCC published its governing regulations
regarding reciprocal compensation. The FCC concluded that
reciprocal compensation rates should be symmetrical between
interconnected telecommunications carriers and based on the
incumbent provider’s cost studies. See 47 C.F.R. § 51.711(a).
Thus, the state commission should apply the same rate no
matter which provider, the incumbent or competitor,
transports and terminates a call originating from the other’s
network.
6 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
This regulation is based on the FCC’s conclusion that the
incumbent provider’s costs for transporting and terminating
a call should be a reasonable approximation, or “presumptive
proxy” of the costs for other providers. In the Matter of
Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, 11 F.C.C.R. 15,499, 16,040
(1996) (“Both the incumbent LEC and the interconnecting
carriers usually will be providing service in the same
geographic area, so the forward-looking economic costs
should be similar in most cases. We also conclude that using
the incumbent LEC's forward-looking costs for transport and
termination of traffic as a proxy for the costs incurred by
interconnecting carriers satisfies the requirement of section
252(d)(2) that costs be determined ‘on the basis of a
reasonable approximation of the additional costs of
terminating such calls.’ Using the incumbent LEC's cost
studies as proxies for reciprocal compensation is consistent
with section 252(d)(2)(B)(ii), which prohibits ‘establishing
with particularity the additional costs of transporting or
terminating calls.’”). The incumbent’s economic cost study
is relied upon to determine the appropriate costs because
smaller new entrants are typically not in a position to conduct
a “forward-looking economic cost study.” Id.
Recognizing the intricacies of local telecommunications
networks, beyond the general policy of symmetrical rates, the
FCC established a more detailed two-tier scheme for
determining reciprocal compensation rates. The two-tiered
approach takes into account the telecommunications
equipment used to transfer and complete a particular call--
either “tandem” or “end-office” switches. Historically,
incumbent providers used these two switches to route calls.
A tandem switch acts as a hub connecting other switches and
is generally able to handle calls over a broad geographic area.
End-office switches typically serve smaller geographic areas
and fewer customers. Acknowledging that the cost associated
with transferring calls differs depending on the type of switch
used, the FCC held that “states may establish transport and

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No. 03-3525 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
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termination rates in the arbitration process that vary according
to whether the traffic is routed through a tandem switch or
directly to the end-office switch.” In the Matter of
Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, 11 F.C.C.R. at 16042. The
FCC also recognized that new entrants may utilize new
technology other than the two switches commonly used by
incumbent providers. “In such event, states shall also
consider whether [these] new technologies (e.g., fiber ring or
wireless networks) perform functions similar to those
performed by an incumbent LEC's tandem switch and thus,
whether some or all calls terminating on the new entrant's
network should be priced the same as the sum of transport and
termination via the incumbent LEC's tandem switch.” Id.
Most important to the issue currently before the court, the
FCC established a rule for determining whether the new
provider’s switch generally serves the same role as a tandem
switch serves in the incumbent’s network (i.e., whether the
entrant can charge the tandem rate when employing new
technology). Rule 711(a)(3) provides: “Where the switch of
a carrier other than an incumbent LEC serves a geographic
area comparable to the area served by the incumbent LEC's
tandem switch, the appropriate rate for the carrier other than
an incumbent LEC is the incumbent LEC's tandem
interconnection rate.” 47 C.F.R. § 51.711(3).
The Interconnection Agreement Between SBC and MCI
In this case, MCI was beginning to offer local telephone
service in Ohio and sought an interconnection agreement
from the incumbent provider, SBC. n 1994, under pre-Act
pro-competitive state regulations, MCI applied to PUCO for
permission to offer local service in three Ohio counties:
Cuyahoga, Franklin, and Montgomery. PUCO examined
MCI’s business and technical capabilities and, on December
31, 1996, certified MCI to provide local service in the three
counties.
8 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
One of the sticking points during negotiation of the
interconnection agreement was the appropriate reciprocal
compensation rate that SBC would pay MCI when MCI
incurred costs by transporting and terminating a call on its
network that originated from SBC’s network. Rather than
using a series of tandem switches and end-office switches,
MCI utilized new technology, especially fiber optic rings, to
reach all of its customers in a local service area by using only
one switch--a “Siemen’s Class 5" telecommunications switch
located in Cleveland, Ohio. The parties could not agree upon
the appropriate reciprocal compensation rate to compensate
MCI for transporting and terminating calls that originate on
SBC’s network, and thus submitted this issue, along with
nearly 50 others, to PUCO for arbitration pursuant to
47 U.S.C. § 252.
PUCO considered the parties’ positions and accepted both
written and live testimony during the arbitration proceeding,
and, on January 9, 1997, issued its Arbitration Award. In the
Award, PUCO decided all outstanding issues and directed the
parties to submit a modified interconnection agreement.
PUCO decided that MCI could charge SBC the tandem
reciprocal compensation rate rather than the lower end office
reciprocal compensation rate. PUCO considered the prefiled
testimony of Maria Marzulla, a senior manager of MCI’s
Local Network Engineering Group, who described MCI’s
technology and network capabilities. She testified that
“MCI’s switches all serve areas at least equal in size if not
greater than the serving area of the [incumbent provider’s]
tandem [switch],” and cited to examples of MCI’s network in
Baltimore and New York. Although during live testimony,
Ms. Marzulla was unable to give an estimate of actual
customers being served by MCI’s switch at the time of the
hearing, she reemphasized that the MCI switch is capable of
serving a geographic area comparable to the area served by
SBC’s tandem switch. SBC did not offer testimony or
evidence regarding the geographical reach of MCI’s switch,

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Telecommunications Corp., et al.
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but instead argued that MCI was required to show that it was
already servicing customers in a geographic area comparable
to SBC.
PUCO rejected SBC’s argument:
The fundamental question then becomes: does MCI’s
switch located in Cleveland serve an area comparable to
that served by Ameritech’s tandem switch. We turn our
attention to MCI’s conditional certificate approved in
Case No. 94-2012-TP-ACE, wherein the Commission
granted MC I authority to provide local
telecommunications service in Cuyahoga, Franklin, and
Montgomery counties. We will presume, given the start-
up nature of MCI’s operations, that MCI shall serve the
area for which we found it worthy of a certificate. In our
view, that is a comparable service area.
In the Matter of Petition of MCI Telecommunications Corp.
for Arbitration Pursuant to Section 252(b) of the
Telecommunications Act of 1996 to Establish an
Interconnection Agreement with Ameritech Ohio, No. 96-888-
TP-ARB (Jan. 9, 1997) (“PUCO Arbitration”). PUCO based
its decision on the “best information” it had and asked the
parties to “provide regular reports to the Commission’s
telecommunications staff so that [it] may receive ongoing
information.” (Id.)
Appeal of The Arbitration Decision
Pursuant to 47 U.S.C. § 252(e)(6), SBC sought review of
the arbitration determination in the United States District
Court (S.D. Ohio), challenging various aspects of PUCO’s
decision, including the reciprocal compensation rate finding.
SBC claimed that, to the extent MCI was permitted to charge
the tandem reciprocal compensation rate, the agreement
(entered into after the arbitration) violated 47 U.S.C.
§ 252(d)(2) because MCI had not shown that its switch
10 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
1The matter remained pending before the district court for
app roxim ately six years. The district court stayed the action, awaiting
decisions from the FCC and United States Supreme Court that could have
had a bearing on the case. In the meantime, while the action was pending,
the parties’ interconnection agreement expired and the parties entered into
a new agreement in early 2003.
actually served customers in a comparable geographic area as
SBC.
On March 21, 2003,1 the district court affirmed PUCO’s
decision awarding MCI the tandem reciprocal compensation
rate. The court concluded that PUCO applied the correct
legal test because it considered the appropriate regulation, 47
C.F.R. § 51.711(a). It then went on to conclude, under the
arbitrary and capricious standard, that PUCO did not err in
finding that “MCI had the capacity to serve a region in
northeastern Ohio for which it had applied and obtained a
Certificate of Operation.” (03/19/03 Order at 11.) The court
deferred to PUCO’s previous determination that “MCI [was]
able to serve the area in question” and the issuance of an
operating license to MCI. (Id.) Accordingly, SBC’s claim
was dismissed.
II. JURISDICTION
This case arises under the Telecommunications Act of
1996, which permits a party to appeal the final arbitration
decision of the state utilities commission to a federal district
court. 47 U.S.C. § 252(e)(6). Generally, this court has
jurisdiction over an appeal from the district court’s order
pursuant to 28 U.S.C. § 1291.
Appellee PUCO, however, argues that jurisdiction is
lacking because the case is either moot or because the
majority of SBC’s challenge to the reciprocal compensation
rate is not yet ripe for decision.

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Telecommunications Corp., et al.
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First, we disagree with the contention that this case has
been rendered moot by the parties’ 1997 interconnection
agreement or the superseding interconnection agreement in
2003. The fact that the parties accepted PUCO’s arbitration
decisions and incorporated them into their 1997
interconnection agreement, and thus agreed to operate under
such terms during the pendency of this appeal, does not
preclude SBC from seeking reimbursement based on the
lower rate. MCI, a party to the 1997 agreement, agrees. If we
were to hold otherwise and find that the interconnection
agreement rendered the appeal from the arbitration decision
moot, telecommunication companies would be forced to forgo
entering into interconnection agreements in order to preserve
their appeal. The new entrant to the market would not be able
to efficiently serve its customers (without an interconnection
agreement) until the appellate process ran its course, further
entrenching the incumbent provider and creating the risk that
the new entrant’s technology could become outdated in the
meantime. Parties are free to continue business relations with
an understanding that one party might pursue appeal, and thus
seek reimbursement, through the process permitted by federal
law. See 47 U.S.C. § 252(e)(6). MCI maintained its
relationship with SBC with this understanding. See Indiana
Bell Tel. Co. Inc. v. McCarty, 362 F.3d 378 (7th Cir. 2004)
(considering the merits of an appeal from the arbitration
decision despite the fact that the parties entered into, and
operated under, an interconnection agreement that
incorporated the arbitrator’s disputed decisions).
Similarly, the parties’ most recent interconnection
agreement, entered into in 2003, does not affect the
justiciability of SBC’s appeal. The contract expressly permits
either party to seek a judicial order revising the agreement
and authorizes retroactive relief (i.e., reimbursement for rates
paid). The parties reserved all rights and remedies with
respect to collection of rates and charges under the
interconnection agreement. Accordingly, by its express
12 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
terms, the 2003 interconnection agreement does not render the
instant appeal moot.
PUCO next argues that a refund, or retroactive relief, is not
available to SBC under the “filed rate doctrine.” The classic
example of application of the filed rate doctrine, often
referred to as the filed tariff doctrine, can be found in the
Supreme Court’s decision in Louisville & Nashville R. Co. v.
Maxwell, 237 U.S. 94 (1915). In that case, the Supreme
Court held that a passenger who purchased a train ticket at a
rate misquoted by the ticket agent did not have a defense
against the subsequent collection of the higher tariff rate by
the railroad.
Under the Interstate Commerce Act, the rate of the
carrier duly filed is the only lawful charge. Deviation
from it is not permitted upon any pretext. Shippers and
travelers are charged with notice of it, and they as well as
the carrier must abide by it, unless it is found by the
Commission to be unreasonable. Ignorance or
misquotation of rates is not an excuse for paying or
charging either less or more than the rate filed. This rule
is undeniably strict and it obviously may work hardship
in some cases, but it embodies the policy which has been
adopted by Congress in the regulation of interstate
commerce in order to prevent unjust discrimination.
Id. at 97. The filed rate doctrine requires that common
carriers and their customers adhere to tariffs filed and
approved by the appropriate regulatory agencies. In essence,
PUCO argues that SBC cannot obtain a refund for rates paid
to MCI in the past under this doctrine. We disagree.
First, and most importantly, SBC is not arguing that the
tandem rate itself should be different (i.e., SBC is not arguing
that the rate is incorrect or was unreasonably set) or that it is
per se unreasonable. The issue is whether SBC is required to
pay the tandem rate or the end office rate, which may depend

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No. 03-3525 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
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2There is also no real dispute that SBC, if successful on appeal, may
also be entitled to prospective relief. We reject PUCO ’s misplaced
argument that SBC’s claim for prospective relief is not yet ripe because
the issue is currently fit for judicial review and will clarify not only future
decisions affecting the interconnection agreement, but also the past and
current agreements. Moreo ver, SB C’s arguments regarding the potential
that this issue could evade judicial review because of the relatively quick
turnover of interconnection agreements further persuades the co urt to
render a decision in this matter.
upon the interpretation of the regulations governing
symmetrical rates. A ruling by this court will have no effect
on the filed tariff or rate. Thus, SBC is not challenging the
filed tariff, but is merely appealing the arbitration decision
that applied one rate rather than another. Such appeals are
expressly permitted under the Telecommunications Act and
the parties agreed that a refund could be sought in their most
recent interconnection agreement. PUCO has cited no
persuasive authority otherwise.
Further, the two most important purposes for the filed rate
doctrine are not implicated if the court reviews PUCO’s
decision and the resulting rate terms of the interconnection
agreement. The filed rate doctrine prevents carrier
discrimination by committing the carriers to one set tariff and
preserves the role of administrative agencies in approving and
setting rates, a practice at which they are particularly adept.
See Fax Telecommunications Inc. v. A.T.&T., 138 F.3d 479,
489 (2d Cir. 1998) (describing the two principles emanating
from the filed rate doctrine). Neither of these principles are
threatened in this case, nor is there a potential that SBC is
vying for a lower rate in some unfair manner or for some
ulterior motive. Rather, SBC merely wants the court to
review PUCO’s and the district court’s interpretation (and
possibly application) of the regulations. The filed rate
doctrine does not reach a circumstance such as this one, and
thus SBC is entitled to seek retroactive relief.2
14 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
3SBC agrees that, under an interpretation that does not require actual
service to customers (the interpretation that it argues against), there is no
challenge to the factual finding that MCI’s switch can serve a geographic
area equal in coverage to SBC’s.
III. STANDARD OF REVIEW
We review the district court’s interpretation of Rule
711(a)(3) de novo and its ultimate factual findings under the
arbitrary and capricious standard of review. Although the
district court reviewed PUCO’s arbitration decision strictly
under the arbitrary and capricious standard of review, the
primary issue before that court, and currently before this
court, is a question of law--whether FCC Rule 711(a)(3)
requires that the new market entrant’s switch actually serve
customers across a comparable geographic area in order for
the new entrant to charge the incumbent’s tandem
interconnection rate.3 The interpretation of the rule, a
question of law, must be reviewed de novo. See Michigan
Bell Tel. Co. v. Strand, 305 F.3d 580, 586 (6th Cir. 2002).
IV. DISCUSSION
Although PUCO’s and the district court’s decisions are
somewhat equivocal, the court accepts SBC’s proposition that
both PUCO and the district court issued their decisions,
awarding MCI tandem reciprocal compensation, based upon
an interpretation of Rule 711(a)(3) that merely requires MCI’s
switch to have the ability to serve a comparable geographic
area rather than a requirement that MCI actually serve
customers over the same geographic area. Rule 711(a)(3)
provides:
Where the switch of a carrier other than an incumbent
LEC serves a geographic area comparable to the area
served by the incumbent LEC's tandem switch, the
appropriate rate for the carrier other than an incumbent

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4Perhaps a fitting example for illustrative (or grammatical) purposes
is a city fire department. Although the department may have never had
to put ou t a fire or respond to a call on a particular block or locale within
the city, it still “serves” the entire city.
5The court is not persuaded by SBC’s argument that the tandem
interconnection rate is an unfair rate to charge when MCI has fewer
customers than SB C. If M CI has few customers, SB C will rarely have to
pay the tand em interconnection rate because few calls would be
transmitted from SB C’s network to MCI’s network. Conversely, as
LEC is the incumbent LEC's tandem interconnection
rate.
47 C.F.R. § 51.711(a)(3). The court must decide whether this
rule requires the new entrant to be actually serving customers
over a comparable geographic area before charging the
tandem interconnection rate or whether the new entrant’s
capability to serve customers over a comparable geographic
area suffices. For the reasons set forth below, we affirm the
district court’s decision and interpret Rule 711(a)(3) as
requiring the new entrant’s switch to be capable of serving a
comparable geographic area, as opposed to a requirement that
the new entrant actually serve customers in that area.
First, the language of Rule 711(a)(3) does not require the
switch to be serving customers dispersed over a certain
geographic area. As MCI notes, “[n]othing in the text of Rule
711(a)(3) refers to the physical location of a carrier’s
customers. The grammatical object of the regulation’s
language--the thing ‘served’ by the competing carrier’s
switch--is the ‘geographic area,’ not particular customers.”
The focus of Rule 711(a)(3) is on the switch’s ability to
transmit communication over a certain area.4 If a new entrant
can offer a comparable area for switching and terminating
calls that originate on the incumbent’s network, the tandem
interconnection rate applies so that the new entrant may
recoup its approximate costs.5
16 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
MCI’s custom er base exp ands, SB C will surely have to pay the tandem
reciprocal rate more frequently because more calls will be exchanged, but
it will also reap the benefits of more calls being transferred from M CI’s
network to SB C’s for termination. Th us, the size of MCI’s customer base,
even if much smaller than SBC’s, does not appear to create such a
dramatic inequity in costs.
6The FCC d elegated the task of arbitrating an interconnection
agreement dispute, similar to the one in this case, to the Bureau. The
Bureau “advises and makes recommendations to the Co mmission, or acts
for the Commission under delegated authority, in all matters pertaining to
the regulation and licensing of communications common carriers and
ancillary operations (other than matters pertaining exclusively to the
regulation and licensing of wireless telecommunications services and
facilities).” 47 C.F.R. § 0.91. “As such, it has unique expertise in the
area of interpreting rules promulgated b y the FCC.” Indiana Bell Tel.
Co., Inc. v. M cCa rty, 362 F.3d 37 8, 386 (7th Cir. 2004).
As a practical matter, a new entrant to the
telecommunications market will not have as large a customer
base as an incumbent that has operated as a monopoly for a
number of years. Under SBC’s interpretation, a new entrant
would operate under a significant disadvantage when it first
enters a particular market, and possibly forever, because it
would not be permitted to charge the higher tandem reciprocal
rate for its new technology even though that technology is
able to carry communications over expansive geographic
areas. In essence, if a new entrant could not charge the
tandem rate until it had nearly as many customers as the
incumbent, the new entrant may be hampered in gaining
market share (i.e., obtaining customers) because it may not be
able to obtain full compensation for its switch and thus be
unable to competitively charge its customers. This would
thwart the main purpose behind the 1996 Act, the opening of
local telecommunications markets to competition.
The FCC’s Wireline Competition Bureau6 recognized this
in its Virginia Arbitration Order, in which it held that “the
determination whether a [new entrant’s] switch ‘serves’ a

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Telecommunications Corp., et al.
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certain geographic area does not require an examination of the
competitor’s customer base.” Virginia Arbitration Order, 17
FCC Rec. at ¶ 307. The Bureau rejected the incumbent’s
argument that the new entrant had to actually be serving
customers dispersed over a comparable geographic area to
charge the tandem reciprocal rate under Rule 711(a)(3).
Instead, it stated:
The tandem rate rule recognizes that new entrants may
adopt network architecture different from those deployed
by the incumbent; it does not depend upon how
successful the [new entrant] has been in capturing a
‘geographically dispersed’ share of the [incumbent’s]
customers, a standard that would penalize new entrants.
We agree . . . therefore, that the requisite comparison
under the tandem rate rule is whether the [new entrant’s
switch is capable of serving a geographic area that is
comparable to the architecture served by the
[incumbent’s] tandem switch.
Id.
As the Seventh Circuit recently held, the Bureau’s
interpretation should be afforded deference and thus result in
affirmance of the decisions below. In Indiana Bell Telephone
Company v. McCarty, the Seventh Circuit, sitting en banc,
held that the decision of the Bureau outlined above is entitled
to deference as a decision of the FCC interpreting its own
rules. 362 F.3d at 386 (“We find the [Bureau’s]
pronouncement on this issue not only persuasive, given the
Act’s overarching goal of promoting competition and the
[Bureau’s] expertise in this area, but one requiring deference
as the voice of the FCC interpreting its own rules.”) (citing
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S.
837 (1984)). The Seventh Circuit acknowledged that the
Bureau’s decision was subject to review by the FCC, but held
that, “[w]hen, as here, Congress has expressly permitted
delegation of authority by statute, see 47 U.S.C. § 155(c), and
18 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
No. 03-3525
the agency delegates authority to a subdivision, ‘the decision
of the subdivision is entitled to the same degree of deference
as if it were made by the agency itself.’” Id. at 387 (citing
MCI Metro Access Transmission Servs., Inc. v. BellSouth
Telecommunications, Inc., 352 F.3d 872, 880 n.8 (4th Cir.
2003)). Accordingly, the Seventh Circuit held that it was
required to follow the Bureau’s interpretation until the FCC
ruled otherwise. We are not aware of FCC authority to the
contrary and we are convinced, as was the Seventh Circuit,
that the Bureau’s decision is not only persuasive, but also
entitled to deference under Chevron. See 47 U.S.C.
§ 155(c)(3).
Under this interpretation of Rule 711(a)(3), the district
court did not err in affirming the arbitration panel’s factual
finding that MCI’s switch covered a geographic area
comparable to SBC’s. MCI described its technological
capabilities to the panel and offered the testimony of a senior
manager from MCI who testified that MCI’s switches serve
areas equal in size, if not greater than those served by the
incumbents. Finally, PUCO relied on the fact that MCI had
obtained approval from PUCO to serve the three relevant
counties in Ohio. In light of the set-up costs and the
procedures that MCI had already followed, the panel
determined that MCI was capable and ready to serve a
comparable geographic area. Thus, PUCO’s decision was not
arbitrary and capricious and the district court correctly
affirmed PUCO’s decision.
V. CONCLUSION
PUCO and the district court applied the correct legal test--
whether MCI, the new market entrant, had the ability to serve
customers in the same geographic area as SBC, the
incumbent--and PUCO’s decision that MCI satisfied this test

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No. 03-3525 Ohio Bell Telephone Co. v. MCI
Telecommunications Corp., et al.
19
was not arbitrary and capricious. Accordingly, the judgment
of the district court is AFFIRMED.

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